Priority 1: Appropriate Sufficient Budget Reserves
Financial resilience would be top of mind for business leaders for 2021. You would be harried to find an IT department which did not have to reassess operating budgets by mid-2020 – that is, so long as they were not forced into some flavor of impromptu Digital Transformation project due to pressing customer and/or staff demands.
IT budgets are expected to decline in 2021. But why is a budget reserve a priority? Its because all statistics point towards an exacerbated economic recession that will impact IT budgets – and those budgets are also going to need to withstand uncertainty and market swings.
Signals of Change:
- The world economy is forecasted to shrink by 4.4% overall this year. In Europe, the economy will contract by 8.3%. Only China’s economy is expected to expand (by 1.9%) (IMF).
- The impact on major economies from the pandemic has been four times worse than that of the 2008 global financial crisis. G20 governments have already spent an unprecedent 7.6 trillion (and counting) on fiscal stimulus packages (WEC).
- From December 2019 to December 2020, labor force participation in the United States dropped from 63.2% to 61.5%. The number of “discouraged workers” (those outside of the workforce and no longer counted as unemployed) shot up from 590,000 in October 2020 to 663,000 in December 2020 (BLS).
- The impacts of the pandemic and the global uncertainty will cost the American economy $16 trillion over the next decade (JAMA).
- At the end of 2020, IT budgets will have decreased by 2.5% and will face an additional 0.4% decline in 2021 (CIO Dive).
As the statistics above show, 2021 appears bismal from a socio-economically context. And perhaps 2021 may not prove to be as turbulent as last year, however the impending economic recession, unclear and untested logistics of the vaccine rollout, the post Brexit trade environment, and numerous other factors sets us up for a melancholic 2021.
And where are we working from? Home? Work? Both? Digital nomad status perhaps? We have seen firsthand the incredible flexibility that in-house, outsourced, and co-managed IT departments must demonstrate regarding remote work strategies. Most IT departments are clandestinely yearning to fire up the HVAC systems to prepare users to return to the office.
The hard truth is this: a lot of IT departments just got through 2020, keeping the business running without addressing or dealing with any technology challenges. As work-from-home persists into 2021, problems associated with the 300% rise in cybersecurity incidents in 2020, aging and decaying devices, hardware, systems, etc., become harder for IT leaders to predict and prepare for.
Inflation could further impact economic woes in the coming years. Monetary inflation in 2020 dwarfed the already staggering levels of currency debasement seen in the past 20 years. Albeit the impossibility in forecasting inflation, it does reduce the difficulty to imagine prices declining.
Not all stakeholders will be happy about this. Following through on this priority will entail having difficult conversations with stakeholders about what can and cannot be accomplished in 2021. Inevitably, not all sponsors and business units will like what they hear. Our advice is to prepare those staff with the knowledge and scope of what is happening at the departmental level to elucidate context.
We are coming through a paradigm where competition is the law of the market – and the sole function of the business is to make profit. This idea of saving financial capital for a rainy day does not necessarily sit neatly within that. We advocate leaning on a structured business prioritization approach to ensure your spending is in the pursuit of the most viable and value-driven opportunities.
While our efforts to advocate for reserves of financial capital will not necessarily win us any organizational awards, the attentiveness demonstrated through uncertainty and times of crisis will set IT leaders up as a source of organizational resilience, reveal mastery in mitigating business risks, and reveal responsibility in management of the organization’s resources.
Call to Action
- Adopt a Zero-Based Budgeting Approach. We are building client budgets using zero as the starting point. Generally, no previous expenses are assumed to reoccur; every dollar forecasted needs to be justified by being tied to a specific project, IT asset, or service. This creates a highly defensible, more accurate budget, where all non-recurring items are eliminated, and forecasts are data driven.
- Set Clear Priorities. If you have not reassessed and optimized your approach to project and initiative prioritization since the global health crisis began, you should revisit and revise now. We have employed an objective standard for assessing new ideas and value which drives better decisions and helps improve conversations with stakeholders.
- Enhance Estimation Techniques. To help inform how much of a budget reserve is required, we have revisited estimation techniques. Expected monetary value (EMV) remains the most sensible approach thus far, with ample formality around how we describe and estimate “probability” and “impact.”
ISM Grid develops a program of repeatable, data-driven IT engagements – demonstrating commitment to our client’s continuous improvement and success. Email firstname.lastname@example.org for assistance in implementing recommendations observed within this CIO Priorities series or for general assistance with enhancing your organization’s IT Management program.