Traditionally, IT budgeting takes more of an accounting approach that merely adds funds to the prior year’s budget for undetermined uses. The IT group is then left to rank both business and internal IT needs against the allotted funds. Doing so requires justification for only variances versus results from the preceding year based on the assumption that a “business-as-usual” budget is automatically approved.
Create a Highly Efficient IT Budget Aligned with Your Business Goals
Rather than budgeting as usual, zero-based budgeting is a decision-making approach requiring every line item of the IT budget to be approved. The ZBB method opens with no assumptions about what level of funding it will take to run and grow the business for the next twelve months. The budgeting process is therefore entirely independent of whether the budget or specific line items are increasing or decreasing.
ZBB creates full transparency by ensuring IT INVESTMENT is adding meaningful value. By adopting this approach organizations have the potential to reduce operating expenditure by 10 to 30%. Companies are provided with a deeper understanding of how their IT budgets are being spent, enabling them to flag opportunities and free up cash for investment, and enable business growth.
This transformative approach better aligns the technology cost structure allowing investment to accelerate business strategy.
Adopting a ZBB approach for your IT department may seem like a daunting task, but when weighed against the strategic value of having IT fully integrated with business objectives, the effort is justified. When looking at your in-flight projects today, would (or should) any of the organization’s strategic initiatives make one of the selected IT initiatives obsolete?
Each organization must take an honest assessment of whether or not the planned (or “obligated”) IT initiatives align with and support the organization’s strategic objectives. Should any initiatives that weren’t selected for the budget be reconsidered?
When reviewing initiatives, an organization should think of the IT department budget as three distinct components: run, grow, and transform.
Source: Gartner Run, Grow, and Transform Model
Leveraging the Zero-Based Budgeting Method to Allocate IT Dollars
Implementing ZBB for an IT department will involve four key steps: identifying business objectives, evaluating alternative ways to accomplish each objective, agreeing on funding sources, and setting priorities.
Whatever the question, the main activity will constantly be asking “why.” The purpose of the process is to drive intense focus on key objectives and eliminate activities no longer relevant to those objectives.
Step 1: Identify Business Objectives
The direction setters, and with them their directives, of the organization must be isolated for analysis and decision-making. He or she must explain the concept to all levels of an organization and present guidelines to individual managers so that they can begin to collect proposals.
After that exercise is complete, much like a traditional budget water line, proposals will be sorted whereby the more important packages shift upward for more intense study and judgment by top managers. The primary difference in this process is that every dollar of IT spend will go through the same review process and accompanying rigor.
Step 2: Evaluating Methods to Accomplish Each Objective
Each proposal must be formed in a way that can be understood across the organization without requiring in-depth initiative knowledge. Only in this manner will managers be able to formulate meaningful alternatives. Managers must look at all methods, and choose the alternative method of achieving the objective they prefer best.
Step 3: Evaluating Funding Levels
Managers will establish a minimum level of effort and then break out additional levels of funding as separate proposals to be decided upon. The result of a review of all funding levels may lead to a modification or a redirection of selected proposals. This effort helps push managers to dial-in their estimates upfront and add validity to the process.
Step 4: Setting Priorities
Ultimately, a cost-benefit analysis will help identify the priority of the proposals on the basis of their utility. The ranking process combined with a final cost-benefit figure will provide management with a technique to allocate limited resources effectively.
Zero-Based Budgeting Advantages
- Drives managers to identify and find alternative means to success. By forcing the development of alternative ways to perform each activity, managers can find cost-effective ways to improve
- Removes budget waste. Tying expenditures to activities makes an artificially inflated budget easy to
- Increases business and IT ZBB should start a debate among the business and IT management teams about the mission of an IT department and how it is to be achieved.
- Eliminates non-key activities. Identifies and eliminates wasteful IT infrastructure, applications, and
- Resource Because it is based on needs and benefits rather than past budget cycles, it makes the allocation of resources more efficient.
Zero-Based Budgeting Disadvantages
- Managerial time. ZBB requires a significant amount of time due to the focus placed on every dollar requested and the required operational review.
- Making the case for the intangibles. Justifying every line item can be problematic for departments with intangible outputs or managers who struggle with the concept
Key to Reaping the Rewards of Zero-Based Budgeting
To reap the rewards of Zero-Based Budgeting, companies are required to adopt a cost-conscious mindset that permeates throughout all functions of the business. Companies who succeed view ZBB as a cost management philosophy rather than a once-off cost-cutting tool.
Organizations must be willing to devise alternative ways of thinking and cultivate new behaviors to release resources and reinvest in growth. Organizations are expected to foster a zero-based culture that fuels continuous improvement and innovation.
A shift towards this zero-based culture integrates a cost-conscious mentality into the fabric of the organization’s decision-making process. Only with this transformation in culture will the enduring power of ZBB be unleashed, bringing sustainable positive change not only to the P&L statement and IT department but to all aspects of the organization.
Liberty Advisor Group can help radically redesign your cost structure and drive Business/IT alignment
Liberty is a business and technology consulting firm that solves the most complex business issues and improves enterprise value by maximizing return on IT dollar spend. Our goal is to yield meaningful operating results and gain the information high ground. Each of our consulting engagements shares many of the same outcomes: a reduction in business risk while maximizing business value, and an overall business and IT alignment with your long-term goals.
About Liberty Advisor Group
Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Learn more at libertyadvisorgroup.com and on LinkedIn and Twitter.