Once the budget is set and the fiscal year begins, a demand-management process is needed to adjust priorities throughout the year. This keeps your organization aligned with ever-changing business needs, while keeping expectations within available resources.

The Problem

Let's use IT as an example to illustrate this challenge....

Imagine this: You go to the grocery store and hand its manager $50, saying that's all you can afford for the week. You then explain that you're hosting a dinner party for 12, and you want to serve caviar, steak, and chocolate truffles.

What happens in the real world? The manager laughs and walks you over to the hamburger!

But isn't this exactly what many companies expect of their IT departments?

IT is given a fixed budget for the year; then, its internal customers feel free to ask for anything they think they need all year long. They demand virtually infinite products and services for a fixed price. And they consider it the CIO's fault when the IT department can't deliver!

Hence, the CIO feels the need to "manage clients' expectations" downward so that IT can succeed at a feasible set of projects and services.

Managing Expectations

Of course, "managing expectations" can't really mean controlling other people's feelings. It refers to the processes that reduce internal customers' demands to fit within available resources.

"Demand management" is a good name for those processes. They're also sometimes called an "intake and priority setting" process, or "resource governance."

Demand management is not just a matter of rank-ordering a list of major projects. Someone must decide which proposed projects and services are worth funding, and which are to be postponed or not done -- within the bounds of available resources.

Investment Portfolio Management

Demand management is really a form of portfolio management. Why?

When "portfolio management" is applied to projects, it means coordinating numerous (sometimes interdependent) projects that staff are to deliver, to ensure that resources are allocated optimally.

When the term is applied to investments, "portfolio management" means allocating your finite funds (resources) to a set of investments (purchases). It's managing a set of investments such that there are synergies -- the return on the portfolio is greater than the sum of the parts. The greater benefits (returns) may take the form of lower risk (diversification), or investment synergies (they help one another).

In demand management, choosing that select list of projects and services (within the bounds of available resources) is like managing a portfolio of funds (IT's resources). That's why it's appropriate to think of demand management as a form of investment portfolio management.

Root of the Problem

So let's get to the root of the problem.... Unreasonable expectations are created when we give IT a budget and then leave it to IT leaders to decide what to spend it on.

From customers' point of view, everything is free. And it's IT's job to satisfy their needs.

As hard as IT leaders try to make the right priority decisions, it becomes their fault when they can't please all their customers all the time.

Steering Committees

Many organizations have tried forming a steering committee to prioritize major projects. This generally helps. But for a number of reasons, it's far from a satisfactory long-term solution.

For one, it's a leaky filter on demand. Many requests are small projects (e.g., enhancements) that don't go through the steering committee. These small projects consume a significant portion of the organization's resources, and their value is rarely scrutinized. These are resources that might be better spent on strategic projects.

Note: Some IT organizations have even codified this dedication to small projects of questionable value. Under the guise of Agile frameworks like SAFe, they assign staff to existing products, where they enhance those projects (with input from lower-level customers) indefinitely. Perhaps this is a good way to optimize staff productivity. But it's certainly not a way to optimize returns on the portfolio or the value of IT.

Another problem is that the typical steering committee is not positioned to question existing services -- the "keep the lights on" services. Maybe some of those lights should be turned off, with resources redirected to strategic projects. But that's not in the scope of most steering committees.

Finally, a simple rank-ordering of major projects doesn't actually mitigate demand. The steering committee goes on expecting it all, in that order! They have no way to know what they can realistically expect of the internal support organization in a given year -- where to draw the line. It's like putting together all your screaming customers so that they can scream at you in unison!

The Solution: Business Within a Business

The key to an effective demand-management process is to view every group as a business within a business, working in a marketplace of diverse customers with unlimited needs but finite spending power.

In this context, a group's budget is really pre-paid revenues -- money given to it at the beginning of the year in order to buy its products and services throughout the year.

Essentially, an organization's budget creates a "checkbook" representing the service-provider's staff and all other expenses.

Who's owns this checkbook?

As per internal market economics, customers decide what they buy, not suppliers. Instead of the support organization's leaders writing the checks, internal customers should decide what they will and won't buy from an internal support function. That's how market economics works.

Internal customers (business units) appoint "pursers" to represent them and make these decisions. Typically, this takes the form of a committee of business executives. But it's not a general-purpose "steering committee" that oversees the supplier. It has a very specific purpose: It's only job is to decide priorities within those limited funds (i.e., to write checks).

Pursers manage that checkbook (the organization's budget) as one would manage a portfolio of financial investments. They "buy" the right mix of products (projects) and services from internal staff to optimize the benefits to the enterprise. And they have the right to cancel existing services which are no longer worth funding in order to free resources for more strategic purposes.

Multiple Checkbooks

One problem with this approach is that executives don't have time to consider all the detailed small projects that are being proposed, a long list which risks consuming all the organization's resources (and more).

The solution is to channel the organization's budget into multiple checkbooks.

• Some checkbooks are given to specific business units.

• Checkbooks may be assigned to committees representing constituent groups (in health care, for example, the various clinical specialties).

• Some may go to consortia of customers who share the organization's products and services (in IT, for example, an ERP steering committee). The small projects are decided at that level.

• A checkbook is also given to the organization itself, for two things: corporate-good services (like policy setting and safety), and investments in the organization itself (infrastructure and innovation).

• Meanwhile, a significant portion of the budget is reserved for the executive-level purser committee that decides major enterprise initiatives.

Of course, it's a fixed-sum game. All those checkbooks add up to the organization's total budget, and no more.

The appropriate pursers are assigned to each checkbook. And they all must live within their means. They cannot expect more of a support organization than they can afford -- more than the organization has resources to deliver.

"An excellent systems approach to governance."

Dr. Michael Zisman Vice President, Corporate Strategy, IBM

Benefits of Portfolio Management

When customers manage the checkbook, they don't blame their suppliers when they can't afford all they want. The supplier organization is not the constraint; it would be happy to sell customers anything and everything. The constraint is the size of the customers' checkbook. Hence, expectations are in keeping with available resources.

Note that in addition to managing customers' expectations, this gives business leaders an incentive to defend internal suppliers' budgets. This is as it should be. Customers are in the best position to know the value to the business of an internal suppliers' work. And the budget is (for the most part) for their benefit, not the supplier's.

Beyond mitigating demand, customers naturally buy what they most need. In this way, internal services providers like IT are aligned with business needs and strategies.

This doesn't occur just once a year when considering the organization's budget proposal. Pursers meet regularly (typically monthly) to decide what to do with resources which are becoming available. This way, the process dynamically keeps the internal supplier's priorities with ever-changing business strategies.

Market-based demand management also enhances a culture of customer focus and entrepreneurship. It reinforces the business-within-a-business paradigm and a shared-services model.

Prerequisite: Investment-based Budgeting

Getting internal customers to decide the priorities of internal suppliers has benefits in any organization. However, to optimize returns -- for demand management to work as an investment portfolio management process -- pursers need to know how much is in their checkbooks, and what the supplier's products and services cost.

This tells pursers what they can afford with their finite checkbooks. That way, they can decided the optimal mix of investments, and expectations are within the bounds of resources.

Understanding the numbers (amounts in checkbooks and costs) begins with an investment-based budget which estimates the full cost of each product and service -- each deliverable.

Investment-based budgeting is the beginning of optimizing returns on investments in a support organization. Instead of deciding each department's budget based on prior years, executives allocate funds based on the investment opportunities at hand.

But budgeting is just once a year. Budgeting fills up checkbooks. Then, a demand-management process is required to dynamically adjust priorities throughout the year.

So, why is investment-based budgeting prerequisite to effective demand-management? The data coming from an investment-based budget is needed for two things:

• An investment-based budget tells you how much to put into each checkbook. Simply total the approved deliverables for each business unit, constituency, consortium, and the organization itself (each purser), and you'll know how much of the organization's budget to put in each checkbook.

• It also calculates fully-burdened rates used to estimate the cost of projects and services that arise mid-year.

The data from an investment-based budget is the key to move from rank-ordering major projects to monetized investment portfolio management.

Implementation

Implementing a demand-management process involves a number of tasks, for example: deciding the various checkbooks and channeling your budget into them; appointing and training pursers for each checkbook; communicating to clients the process for getting their requests approved; and communicating to your staff that they mustn't work on projects without a purser's approval (i.e., without funding).

Here's a high-level checklist:

• Intake: Creating the master list of requests
  • Differentiated channels for maintenance/support, emergency projects, normal projects

  • Sponsorship to filter requests

  • Phase-gating

  • Rough cost and time estimates (entire project and next phase)

• Priority-setting: Business-driven purchase decisions
  • Checkbooks (filled by budget) and pursers (committees and subcommittees)

  • Decision process, purser facilitation

• Communications: Keeping requestors informed
  • Pursers' decisions

  • Project status

• Execution: How suppliers respect pursers' decisions
  • Execution sequencing (waiting for availability of prime and all subcontractors)

  • Closing the "back door" (no work without funding)

• Reporting: Accounting systems
  • Invoicing (consumption times published rates)

  • Checkbook maintenance

Beyond these basics, the implementation of demand management processes may trigger other positive developments.

Pursers may request business cases (from the requestor, not the supplier). An internal supplier may help, if it learns methods of benefits estimation that include both cost savings and strategic value (although that's more difficult to measure).

Setting up this process is also a trigger for the supplier to implement better contracting and commitment tracking. To ensure delivery on every commitment, the internal service provider records all its "contracts" (eg, service-level agreements and project charters). Its staff are trained in the discipline and skill of contracting. Systems are implemented to track contracts and progress made on their delivery.

Project management methods and tools may augment a simple database of contracts.

It's also a good time to start working on better cost estimation.

There are also some minor accounting changes that can support demand management. The internal supplier's budget is held in a "checkbook" account (rather than distributed among a supplier organization's managers). As work is delivered, an invoicing process moves money into supplier managers' revenue accounts to offset their expenses. Rates (without actual chargebacks) are extracted directly from the budget to ensure consistency and avoid redundant cost analysis.

Thus, internal customers (specifically, their pursers) manage a budget that dwindles to zero by year end. Suppliers are measured by their revenues versus expenses -- not the traditional "actual versus planned expenses" which are a function of what clients choose to buy from them.

The Result

Demand management constrains internal customers' expectations, and dynamically aligns internal support functions with their customers' business needs and enterprise strategies.

The key to effective demand management is this: Design a comprehensive set of resource-management processes based on the business-within-a-business paradigm and market economics.

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