August 8, 2023
The summer is coming to the end and with that a tech leader’s mind often turns to matters of budgeting. And this year it is likely that you are either going to be asked to do more with the same budget or cut it. These are the times we are in. You will likely have your favored approach to budgeting, but in this article we want to make the case for adding a more data-driven outcome-based approach to budgeting. We believe outcome-based technology budgeting is a valuable and impactful way of aligning budgets to business strategy while also helping to better communicate technology strategy and investment.
The challenge of budgeting for many technology leaders in industry is that the common perception around Information Technology departments is that they spend too much. Or that they are simply a large unavoidable and rather irksome cost line.
This is, of course, a mistaken perception but it is irritatingly persistent amongst senior leadership. This is often due to lack of understanding of just how technology creates value for business. And it’s not helped by a traditional lack of sufficiently granular data and insight on technology investment and ROI. With such a negative perception and lack of data, budgeting can be tricky.
This is, sadly, the starting context for many IT budgets. And traditional approaches to budgeting tend to reinforce this poor perception. Traditional technology budgets need to do strategically different things and need to be resourced accordingly:
First and foremost, they need to support ‘as is’ business operations. These are the basic technology functions that support business as usual.
Strategically, an IT budget also needs to support increasing operational efficiency of the ‘as is.’ Leaders need to invest in things that improve existing capabilities, business models, and markets. This can be about internal digital transformation initiatives, reducing headcount, or just doing more with existing resources.
The other main focus of the budget is around how to support the development of new business models, new markets, and new business capabilities. This is about budgeting resources for new products, services or markets that generate net new revenue.
Traditional budget approaches tend to be rather blunt tools that roughly try to address these three elements. Let’s take a high-level look at the traditional budgeting approaches:
For all of the talk of strategy and outcomes, the truth of the matter is that most tech leaders will get a budget that adds or subtracts a percentage to what they got last year. The problem with this approach is that it is not really strategic. It does not really encourage leaders to optimize spending. And, it may actually encourage tech leadership to overstate their budget requirements. It’s doing more of the same, now matter how good or bad that is. It’s BAU – plus or minus.
Another common approach, especially in these difficult times, is to start with nothing and ask the tech leader to justify each and every line of their budget. This model is often imposed to drive cost reduction. In this case only things that are critical and valuable to successful and profitable operations get approval. And, as all technology leaders know, what they see as critical and valuable and what the business sees as critical and valuable are not always aligned. Things get cut that shouldn’t get cut.
A more ambitious and increasingly-common approach is to do top-down budgeting. In this case the business sets targets and the tech leader estimates what’s required to support those targets. This approach is popular because it seeks to align planned IT spend with organizational strategy.
However, this budgeting approach tends to assume targets which are not always valid. In addition, the efficiency with which targets can be achieved is often ignored. And, of course, many things that we want to achieve and are important don’t always have clear outcome KPIs.
In recent years, more and more tech leaders have started to approach their IT budgets from an outcome-based approach, also known as “Customer Value Budgeting.” That is, they are looking to build budgets that ensure IT spend and investment is focused on delivering value and outcomes.
It’s not about budgeting more or less than last year, but looking at what the budget is actually trying to do. How is technology investment creating value for customers, staff, or stakeholders? And, more importantly, rather than starting at zero and agreeing costs, this asks the better question: ‘is this technology investment actually worth it?’
Outcome-based budgeting is about building technology budgets that drive business outcomes not outputs. KPIs and targets will help monitor success to outcome, but the broader outcome is what is important.
Outcome-based budgeting has wider strategic benefits too. It ensures that technology initiatives are directly aligned with the organization’s strategic objectives and business goals. This alignment helps prioritize projects that contribute the most to increasing margin or growing revenue and away from those that are not adding significant value.
And there’s wider mindset change too. By emphasizing outcomes, technology leaders shift the focus from simply completing projects and tickets, to delivering tangible value to the organization. It encourages data-driven decision-making by requiring clear and measurable metrics for success – from across the organization.
While this approach offers clear benefits, it also comes with challenges.
Clearly defining and quantifying the outcomes of technology initiatives can be challenging. In truth, this is less about technology and more about the need as a tech leader to collaborate with business stakeholders to identify specific and measurable outcomes. Outcome-based budgeting requires a clear framework for accountability across the org. That requires a shift in mindset and culture. Consequently, shifting to an outcome-based approach may face resistance from teams accustomed to traditional input-based budgeting.
Of course, measuring outcomes accurately can be complex, especially for initiatives with long timelines or indirect impacts. In complex projects involving multiple teams and interdependencies, it can be difficult to attribute outcomes to one or more teams or initiatives. What’s more, not all outcomes are directly tied to financial metrics. They may require correlative measures such as customer satisfaction or employee engagement.
Outcome-based budgeting also requires better data around engineering investment. You need to understand your technology performance over time, per team, per initiative and start mapping it to outcomes. But tech leaders in industry still tend to rely on the very imperfect investment data of agile reports, project estimates, and lagging metrics. You need real time engineering metrics on each outcome.
The cost of doing all this data can be significant. And, in the absence of outcome-based budgeting, it’s going to be difficult to justify. There are plenty of engineering metrics solutions like our own Implement.io that deliver these metrics. Thousands of startups and product-first enterprises have long seen the benefits of metrics tools like this.
But, let’s be honest, just as large enterprises struggle with building in house tools, they have similar challenges scaling and getting value from self-service SaaS tools. It’s understandable: large enterprises often have complex and customized IT environments. They may have established practices, workflows, data models, and cultures that are not easily adaptable to standardized SaaS solutions. They might prefer on-premises solutions or private cloud deployments. All of this points to the more fundamental challenge with outcome-based budgeting: tech leaders in industry need help and expertise to get started and derive value at speed.
Here comes the sales bit. That’s exactly why we created Implement Partners. Our service brings our successful Implement.io data platfrom and provides cost-effective resources and expertise to help tech leaders get rapid insight on the performance of their technology delivery and outcomes. We help ensure that appropriate metrics are defined, data collection is robust, and begin the shift toward outcome-based budgeting. We’re your on-demand technology performance operations partner.
Clearly there are huge benefits to outcome-based budgeting. But it does come with challenges. We’d argue that all of these challenges are actually opportunities. Outcome-based budgeting requires more accountability and collaboration across an organization. That’s a good thing.
It fundamentally requires clarity on what those outcomes are as well asthe data and metrics to measure them. That’s a good things too. And it requires tech leadership to become more data-driven and create budgets and strategies that better align to business outcomes. And that’s a good thing.
It’s a challenging move for tech leaders in industry. But you can see how it can also help to transform the role and impact of technology leadership in the org. Rather than simply budgeting for outputs, IT leaders can help to shape business success by asking the wider leadership and functions to clarify what they want to achieve, how they will measure success, and whether the investment is worth it. It puts technology leaders at the center of business strategy. It helps tech leaders transform organizations for the better. And it helps build transformational technology leaders.
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