"Budgeting is such a waste of time," Janet sighed. Her fellow Directors in the IT department, Steve and Harry, nodded. They were meeting to discuss this year's budget planning, and none were particularly enthusiastic about the job ahead.

Janet continued, "We spend all this time preparing our budgets, including building in some padding that we know will be taken out. Then we send poor Casper in to negotiate with the executive committee."

"And dear Jack, our 'visionary' CFO, kills him."

"Harry, be nice."

"Well it's true," Harry replied. "Jack micro-manages Casper. He tells him to cut our training and consulting. He tells him we don't need to refresh our infrastructure. He tells him to just cut an arbitrary percentage. And he gives Casper the old 'do more with less' line."

"Happens every year," Steve agreed.

"Backbone. Guts. Moxie. You guys know that's not Casper's long suit."

"Harry, you're not being nice," Janet scolded.

"Maybe not, but you know I'm right. Casper always caves in. He says okay, and we're stuck with less money and more demands."

The Annual Dance

"Actually, Harry's right," Steve said. "It happens every year exactly that way. That's why we have to build in the padding."

"It's such a stupid dance," Janet sighed. "We build it in. They take it out. Like I said, what a waste of time!"

"I think it's worse than a waste of time," Steve added. "I think it's the cause of a lot of our problems."

"What do you mean?"

"Well," Steve explained, "if we could build in enough padding, we'd come out okay. They take out X percent, and we could still meet expectations. But we can't put in that much padding. It would be way too obvious."

"Hah," Harry laughed, "you don't think we could submit a budget that's 50 percent over last year!?"

"That's my point. We can't. So what happens is, they cut the padding and they cut some more. And every year, we end up with less than we need to run the business."

"And," Janet added, "in addition to keeping the lights on, they lay a bunch of new projects on us and expect us to deliver without incremental resources."

"That's right," Steve nodded. "And you know that's not possible."

The Consequences

"We get less money and more demands. So what's new!?" Harry grunted.

"Well, think about what happens," Steve said. "In my applications development group, we juggle our resources around to try to do everything, and everything comes in late."

"And they tell us we're unreliable!" Janet said. "And I'll add this: My account managers are out there talking to clients and coming up with some great ideas for new projects that could be really strategic. But Steve's staff don't have time to write the proposals, or even look at new projects. So we're missing strategic opportunities and I look pretty silly."

"Janet, you're setting yourself up!" Harry teased.

"Harry, restrain yourself! Steve, what else?"

"Well, because we're under such pressure to deliver more than we possibly can, we cut corners on quality. Of course, our clients see this, and we get a reputation for poor work."

"Steve, now you're setting yourself up!" Harry laughed.

"Harry, you know Steve has a point," Janet said. "We work so hard to do more with less, and they still say we don't deliver, do lousy work, and cost too much!"

Harry had to agree. "Maybe that's just because they haven't got a clue as to where their money is going. They call us the 'black hole' for money. Hah! If only they knew!"

"I wish they did know," Janet replied. "But let's be honest... We really don't explain very well what they get for their money. Look at that outsourcing study in your infrastructure area."

It was Harry's turn to sigh. "Yeh, the vendor comes in and says, 'We'll give you half of what you're getting now for 80 percent of the cost. See, we're saving you 20 percent!' I know their game, but I don't have the data on our costs per service -- or even good Service-Level Agreements -- to counter them. Hey Janet, weren't you supposed to work on SLAs?"

"Sure, Harry, as soon as you give me your product catalog and costs."

"Ah, yes, haven't had the time to do that. Catch-22!"

"Okay, Steve, I see that strange look on your face. What are you thinking?" Janet asked.

"In a funny way, maybe we do cost too much.... Hear me out. Sure, we're delivering this year's results at way too low a cost. But life-cycle costs go up when we don't do it right from the start. Harry, you know this."

"Yes I do. On my end, in the infrastructure area, we're cutting corners on security and business continuity. Now there's a time bomb! But what can I do? And another thing: We're not refreshing the infrastructure according to schedule, so we're running obsolete stuff at a higher cost. So much for 'do more with less'.... What a joke."

"And we had to cut the funding for architecture planning," Steve continued. "So we're not developing standards, and you know that's going to drive costs up.

"And what about our staff?" Steve went on. "We cut training and product research. We're not keeping our skills up to date. So we get a reputation for not being innovative."

"Is that why you guys are always bringing in those high-priced consultants?" Harry jabbed.

"That's right," Steve confirmed. "They've got the skills we should have but don't have time to develop. So they say 'do more with less' and we end up getting less productive and more expensive across the board!"

"You guys, this really is terrible," Janet cried. "We're destroying our people's careers."

"Janet, what about our own careers?"

The Way Out

"We're screwed. And there's nothing we can do about it."

"Harry, you're such a cynic," Janet replied.

"I may be, but I'm right. This is reality. Budgeting has always worked this way, and there's nothing we can do about it."

Janet sat up with a resolved look. "Steve, Harry, I don't know about you guys, but I'm fed up. It gets worse every year. We've got to do something. For once, I'd really like to try to break this vicious cycle. Steve, isn't there anything we can do?"

"Maybe we should try being honest for a change," Steve said. "What if we said, 'Here's the true cost to shareholders of all the things you're asking us to do. Now, if you can't afford it all, what do you want us to not do?'"

"Steve, I love it! Because it really doesn't matter if they cut our budget, as long as they cut back on what they expect of us. The problems all come from them demanding more than we have resources to deliver."

"That's right," Steve continued. "Everything has a cost. And we've got to stick to our guns and explain that cost. Then, we'll give 'em what they pay for. Just because they're top execs doesn't mean they can edict more hours in a day, or magically declare us more productive than we are!"

"This is right on," Janet said with enthusiasm. "They get what they pay for! All we have to do is tell them the truth and explain the full cost."

"Hang on, you two. Ol' Harry, the cynic, here.... How are we going to figure out that full cost?"

Steve thought for a moment, then said, "Harry, you're right. It's not simple. There are direct costs, of course -- people's time and vendor costs on projects and services. That's pretty easy. But we also have to spread our indirect costs -- stuff like training, vendor research, and client relations."

"And don't forget us managers!" Janet smiled.

"And stuff we do for one another," Steve added, "like when the systems programmers upgrade Harry's infrastructure. Or when Harry's group maintains our development environment."

"Steve, this is getting complicated," Harry objected. "Like you said, direct costs are easy. But in the infrastructure area, most of my costs are indirect, like vendor licenses and operators. But assuming we can come up with some way to spread it onto our services, there's another problem: I sell to you; you sell to me; we could be caught in a circle. Can't we just take all those indirect costs and allocate them to the business?"

"Yeh, and watch them cut that allocation to near zero while they keep all their projects and services in the budget -- at direct cost only!" Steve snorted. "Harry, that's a sure way to lose the funding for all the stuff we need to do to keep our business running."

"Steve, I hate to admit that you're right," Harry chuckled. "Okay, how about we put all that stuff in an overhead pool and allocate it onto all our services by some formula. That would be a lot easier than trying to get everything in the right place."

"I don't think that would work," Steve replied. "It would stick out like a sore thumb, begging to be cut. But beyond that, it would totally distort the price of our products and services. If my development hours had to absorb a share of your infrastructure licenses, you'd price me right out of the market. I'd be outsourced to India in a flash."

"Guys, this feels like the right direction. We've just got to figure out the details. Let me do a little research," Janet interjected. "We can't be the first to face this kind of problem. Somebody out there must have figured out how to do this and have a package to sell us."

"Good point, Janet," Steve said. "Let's just assume it's possible. It would still be a lot of work, especially setting up the cost model for the first time. Do we really want to do this?"

Do We Dare?

"I think it's a waste of time."

"Harry, the cynic, again!"

"I'm serious. We do all that work, and Casper takes it into the budget negotiations. Then, the first time Jack comes on strong with his 'do more with less' line, Casper will cave and we're back where we started."

"Steve, Harry, I've got an idea!" Janet said. "What if he does -- cave in, I mean? Casper comes back to us and says we've got to cut X percent. We don't have to roll over and play dead. What we could do then is propose which products and services get dropped. Now I know that's a decision clients should be making, not us. But if we come back with a strawman for what gets cut, maybe they'll get engaged. Maybe they'll say, 'No, cut this instead of that.'"

"Our sweet Pollyanna!"

"So, Harry, you got a better idea?"

"Humph."

"Hang on, Harry," Steve said. "Janet has a point. If we do this, what's the worst that could happen? If we stick together and stick to the truth, we'll accept the reduced budget and just explain to clients that their projects and services weren't funded."

"Yeh, Harry," Janet said defiantly. "What's the alternative? We keep the dance going, and things get worse every year. You're going to be known as the guy who presided over an infrastructure melt-down the next time there's a security challenge or a disaster. Steve will be known as the guy who can run a totally obsolete development shop that's still pushing COBOL. And I'll be known as a saleslady who makes hollow promises and can't get anything done. Sound like fun?"

"I don't know.... That is, I haven't got any better ideas. Maybe it'll work. But Casper's going to cave."

Steve looked at Harry with a hint of annoyance. "Hey, we're accusing our boss of lacking moxie. What about us??? How about we get brave enough to try something new. Then, maybe when he's got the truth on his side, Casper will stand up for us."

"We'll have to get Casper to approve this," Janet said, "especially if we purchase a package to do it."

"Let's go for it," Steve said. "Let's talk to him. Everybody in?"

"I'm in!" Janet said with enthusiasm.

"In," Harry said quietly.

"Cool. Let's go talk to Casper."

Casper's Reaction

They presented the idea of a budget for their products and services to their boss, Casper, in a meeting the next day.

"I love it! Believe me, it's not that I'm insensitive to the pain. I know what kind of damage the 'do more with less' demand has been doing. But I'll tell you, when Jack turns up the heat, I haven't had any way to defend our numbers. I couldn't say, here's what's going to give if you cut us. I just haven't had the facts."

"And the truth is, Casper, we did build in some padding," Steve said. "So of course you got challenged to take it out."

"Of course. But since I didn't have a handle on how much padding was in there, I didn't know when to stand up and say, 'That's it. We can't cut any more.' If you guys give me a solid leg to stand on, I promise you I'll do my best to focus Jack and the executive team on cutting demands with budget cuts."

"So we're still going to get budget cuts no matter what we do?" Harry challenged.

"Look," Casper replied, "if the corporation can't afford to spend as much on IT as they did last year, well so be it. That's just business. But the key is, if they spend less, they get less. No more 'take it out of hide' or 'do more with less.' We've got to set a price that includes what we need to sustain our business. Then, they have to decide what they're going to buy from us with their limited funds."

"That's it," Janet concurred. "We decide the indirect costs we need to run our business. That leads to a price. They decide what they buy."

"I agree," Casper said. "Now there's one thing I need from you three Directors. You have to be absolutely frugal about those indirect costs. Put in what you really need, but no frivolous expenses and no padding. Because if I say it's the true cost and then they find the padding, I'm dead meat and you're back to the old game. Can I count on you for that?"

"Pretty scary," Harry said. "No padding at all, eh?"

"That's right," Casper insisted. "I've got to have total confidence that the price is the price, and that's that. Otherwise I'm not going to risk my career standing up to Jack. Do I have your commitment to calculate the true cost to shareholders of our products and services with no padding?"

"In," Janet said immediately.

"In," Steve chimed in with determination.

"I'll give it a try," Harry said skeptically.

The Toolkit

"So, Janet, what did you find?" Steve asked.

"I researched the vendors, and there's a lot of people doing chargeback stuff -- data collection, activity-based costing, and invoicing. And a bunch of consultants offer help in rate setting and cost analysis studies. But I only found one package that does what we want -- budgeting for all our products and services, with all the amortization of indirect costs that we talked about."

"Is it any good?"

"It looks great. It's got a step-by-step method, like a cookbook. It incorporates ABC and ZBB, and generally-accepted accounting principles. It's got a whole range of tools for data input. It's got reports for Casper to get comfortable with our indirect costs. And it's got some really cool tools for budget presentation. We can tie our costs to corporate strategies, and to specific business units. And at the end of the process, we can upload the final budget right into our GL. It even produces chargeback rates right out of the budget data if we want."

"Wow!" Steve exclaimed. "Hard to use?"

"No, it's an application built on top of Excel. So it's really interactive and easy."

"Does it really work?" Harry asked.

"They say it's based on over ten years of research and Beta testing, and it's been implemented in a variety of organizations. The inventor is a well-known author and management guru. I'm telling you, it looks pretty good."

"Expensive?" Steve wondered.

"The toolkit isn't expensive at all. And we can either implement it ourselves, or buy as much training and support as we want. We could buy the entire package and full implementation support for about the price of that governance study we had those consultants do last year."

"So what's the downside?" Harry asked.

"Well, Harry, it takes work. The vendor pointed out the obvious: We can't do a budget for products and services without knowing our products and services, and without a business plan that forecasts what we'll sell in the year ahead. So this package walks us through a whole process for determining our product/service catalog, coming up with our operating plan, and then working the numbers."

"So the bad news is...." Harry challenged.

"It'll take us somewhere between six and ten months, depending on how detailed we want to get."

Steve wasn't put off. "Can we start simple in the first year, and then work in more detail next year."

"We can," Janet replied. "But the more we put in, the more we get out. The simplest implementation gives us cost transparency. It takes a little more work to get to fair allocations to the business units. We'd have to put in a bit more effort to get the level of detail down to specific products and services. And the full implementation gives us rates comparable to outsourcing."

Steve nodded. "Well, in our case, I think we need to go as far as products and services. Without that, we won't be able to manage expectations."

"Then I think we'd better give ourselves at least eight months to do the process."

"Eight months every year for budgeting?" Harry cried. "That's crazy!"

"Calm down, Harry. It only takes eight months the first time we do it," Janet explained. "Once we've got the cost model set up, I think future years will be easier than the stupid games we've been playing every year in the past."

"Do we have to wait until the next budget cycle to start?" Steve asked.

"The vendor had a good idea," Janet responded. "We could implement the toolkit now for the current budget, and reverse engineer the number we've been given. This'll tell us what our current budget does and doesn't pay for, and that should help us manage expectations this year. Then, we can fairly easily flip it into our budget submission for next year."

"I like that," Steve said, nodding thoughtfully. "We can tune the model to a scenario that we know pretty well."

"And we can learn the process without the hard deadline of a budget submission," Janet added.

"Harry, you willing to give it a try?" Steve asked.

"Eight months of work? Oh, heck, at this point things are getting so bad that I'll give anything a try."

"Okay," Steve said. "Let's propose it to Casper and see how much training and support he'll let us buy."

The Decision

"Janet, are there any alternatives we should look at?"

"Casper, I've done a pretty thorough look. I don't think anyone else is close. I believe this toolkit is the way to go."

"Then the only decision left is how much training and implementation support to buy." Casper smiled at their obvious relief.

"The more help we buy, the more we'll learn in the process," Steve said.

"And I think it cuts the risk of delays," Janet added. "We could waste a lot of our own time trying to figure things out, and that would be a false economy."

"But we can't afford the full consulting package," Casper said. "Will the vendor work with us on a mix of consulting where we most need it, and train-the-trainer for the rest of the process."

"They suggested exactly that," Janet nodded. "They're very flexible."

"Alright. Here's what we can afford. Janet, will you work with the vendor and put together a project plan?"

"I'd love to! Thanks, Casper."

A Year Later....

Note: The author apologizes to the CFOs of the world and begs their forgiveness for the portrayal of Jack as an adversarial curmudgeon. We hope you understand the need for a bit of drama and have a sense of humor!

Casper began his presentation of the IT budget to the president, Robert, to the CFO, Jack, and to his peers on the executive team, including Audrey, head of a rapidly growing business unit.

"Robert, Jack, folks, I'd like to approach our budget presentation a little differently this year. In addition to the usual budget view -- expense codes by manager -- we've done something new. We've allocated all our costs to our products and services."

"Casper, you know you can't just do your own thing when it comes to budgeting," Jack said. "My Finance folks have put together a standard budget submission form."

"Jack, I know that, and we can fill in your form using this data. But we can do more. We can look at exactly what the budget pays for, and what it doesn't pay for, by business unit."

"What's the point of that?" Jack barked. "We know what we can afford, and it's less than last year. And we know what we need from you. It's up to you to figure out how to make your department work."

"Jack, I know the game all too well. I submit a budget. You tell me to cut. Fortunately, we've built in a little padding, so we cut and we're still okay. Then you tell me to cut some more. At this point, we're cutting our ability to deliver, but you demand it. So we end up with less than we need to do what you need us to do. Then, we fail to deliver and you gleefully blame us. But what's this whole game doing for shareholder value?"

"Casper, you're on thin ice," Jack said menacingly. "I know you've got fat in there, and it's my job to drive it out."

"No, Jack," Casper said firmly. "It's my job to drive it out. And I've done so. We've gotten more productive every year."

Audrey smiled. "Come on, Casper. We know you've got some room in there. Be a team player. Take your hit like the rest of us."

"Audrey, I'm not the one to take the hit. You are. When my budget is cut, you get less of our products and services, less of the things you need to run your division. It's that, plus we cut corners on quality; we come in late on everything for lack of the proper resources; and you're the one who suffers."

"Casper has a point there," Audrey said. "I need that project we've been talking about for my product launch next year. I need to be able to count on Casper."

Jack smirked. "Look, Casper, I'll make it simple so that even you can understand," he said. "We need you to produce all the services you did last year, and we need some new projects. But we don't have as much money as we had last year. That's the reality."

Casper didn't cave in. In fact, he was firm. "No, Jack. The reality is, things cost what they cost. Everything has a true cost to shareholders. I'm presenting the truth -- no padding, no game playing -- the true cost of each of our products and services."

Casper continued, "Now, I understand that the corporation may not be able to afford as much of our stuff as last year. But I think this executive team should make the tough decisions about what the corporation will and won't buy from us, not pretend you can have a Rolls-Royce for the price of a Chevrolet and then leave it to my managers to figure out what to not do."

"Casper, you're not hearing me," Jack bellowed. "The reality is, you're getting less money, and you're expected to produce. If you can't do it, we'll find someone who can."

Casper Stuns Everyone

Casper, to everyone's surprise, just smiled. It helps to have truth on your side, he thought. He looked Jack in the eye and calmly said, "I'm sure you can find someone who'll lie to you, Jack. You can find someone who will say yes, and promise to give you everything you demand for less than the true cost to shareholders....

"But then they'll do the same thing we've been doing all these years:

"They'll rob Peter to pay Paul, and everything will come in late.

"They'll cut corners on quality, and you'll pay more later for life-cycle support.

"They'll cut corners on security and business continuity, and you'll just have to pray that nothing bad happens because your whole business is at risk.

"They'll let the infrastructure and skill-base rot, and you'll miss strategic opportunities for lack of innovation, or you'll be forced to use expensive consultants for new technologies just to stay even with our competition....

"Jack, don't you get it? You're not going to create more hours in a day by ranting, even though you are an EVP. You can threaten and intimidate me; but the truth is, you can't have a Rolls-Royce for the price of a Chevrolet."

[Silence.]

The President Speaks

"Ahem. I'd like to step in here." Robert, the president, paused and thought for a moment. Then he continued, "Jack, I appreciate all you've done over the years to manage our costs. That's exactly what I hired you to do."

Robert smiled at Jack warmly. Jack grinned triumphantly. Then Robert continued, "But I'd like you to calm down and listen for a minute or two....

"I want you to know, I've been as frustrated with the budget process as the rest of you. With our traditional haggling process, I can't make good investment decisions. I'm never sure what we're getting for our money.

"Perhaps worst of all, I see how strategic alignment falls apart when each of you absorbs cuts in your own way. What should happen is that we should make the tough decisions together -- which strategic initiatives we'll fund and which we'll have to forego -- and then we all should rally our scarce resources around the few we pick.

"But instead, we pretend we're going to do them all. Then each of us absorbs the cuts with our own sense of priorities, and for lack of teamwork, we put in a weak performance at everything.

"I'd like to commend Casper for calling us on this budget game. He's pointed out the proverbial elephant in the room, and that took a lot of bravery... especially in the presence of my favorite bull-dog, Jack! Thank you, Casper.

"Furthermore, it looks like Casper has been a real pioneer in putting together a model of true cost. Telling each other the truth, and attaching costs to products and services rather than expense codes, could be just what we need to better manage our resources, especially in tough times. This could have a huge impact on the bottom line.

"It all hinges on this: Do we believe the numbers? So, I'd like to take a closer look at your costing method, Casper. I'd like our outside auditors to check your model.

"Then, if it's validated, we'll have to make some tough decisions about what we will and won't spend on your products and services. And that's exactly the kind of discussion we ought to be having in the budget process. Jack, don't you agree?"

"Harumph." Jack looked away.

"Furthermore, assuming Casper's approach is validated by audit, I expect the rest of you to get on board for the next budget cycle."

With that, Robert stood up. "Now let's take a lunch break. Casper, will you join me?"

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