Four Early Indicators of Budget Variance

Annual budget variance causes turbulence for every IT organization. Actuals always vary from plan at some level (zero variance to an annual plan isn’t realistic), but IT finance teams need to be able to course-correct for variance during the financial year—and not be forced to do it at the end of the financial year.

Reconciling yearly variance at the end of a year leads to bad choices. Over budget and arbitrary cuts hit every cost center; under budget and ‘use it or lose it’ spend overburdens cost centers in Q1 of the next financial year.

Through historical precedence, cost center accountability, and bottom line focused KPIs, IT finance teams identify and course correct for budget variance.

Here are four steps to identify early indicators of budget variance:

 

#1 Review last year’s planning cycle

Even before the first invoice of the year is routed to accounts payable, last year’s budget cycle will provide a sneak preview of upcoming (planning) attractions. The people in the planning process are probably the same; spend levers to course correct won’t have changed; involvement and oversight from IT leadership will be the same.

You can’t escape the past (particularly if the ‘past’ has a 48-month depreciation schedule connected to it), but you can certainly learn from it. If you want to know how this year’s planning cycle will play, see how last year’s faired.

»Related content: Best practices to reduce your IT financial forecast variance

Different budgeting types have their own stress points. A zero-based budget (ZBB) requires re-justification of spend every year. When a planning system has hackneyed approval flow and poor version control, technical (IT Finance) and non-technical (cost center owner) stakeholders struggle to deliver ZBBs. Stakeholders may go beyond the call of duty and, despite technical limitations, produce the plan as intended, or they may cut corners and build their plan as quickly as possible with no heed to accuracy. In either case, the budgeting tool itself influences the outcome.

When a cost center owner (CCO) has little faith in the planning tool, they will add padding to their numbers.

It doesn’t matter whether their instinct is correct and others were wrong (cost center schadenfreude isn’t a thing) because it hides the larger issue (a broken process) and ties up spend that could be used elsewhere.

Before starting the planning cycle:

• Identify cost centers that have previously submitted tardy/incomplete budgets or have a history of budget padding.

 

#2 Drive engagement with IT leadership

IT leadership’s engagement in the planning process foretells corporate priorities. With strong c-level visibility, there is a clear message that the planning process matters. For example, have the outputs from forecasts reported directly to the CIO for business alignment meetings.

A planning process without accountability is a paper-tiger—governance, but toothless governance.

»Related content: Nailing your IT financial plan

Nothing sharpens the mind like scrutiny. Show me a cost center owner who knows they will be called to the mat to explain their numbers, and I’ll show you a cost center owner who is invested in the process.

Focusing on account level detail removes the context around variance. CCOs successfully plan around tangible things (e.g., people, assets, and contracts), and not lists of account numbers. If it’s merely a numbers balancing game, budget variance analysis becomes grade-school equation balancing (“If Johnny overspends on tier 2 storage, how much does Maria have to cut from……”). That’s not analysis. Variance analysis needs to root out where and why there is variance.

Before opening the planning cycle:

• CCOs should know the c- level visibility and scrutiny of their plans.
• The planning tool must identify levers to course-correct spend.

#3 Forecast effectively

Forecasting is the best tool for a CCO to identify early budget variance.

Organizations that rely on ad-hoc, manual spreadsheets for planning struggle to build IT budgets—never mind a quarterly forecast.

A robust forecast process provides:

• Alignment of IT teams, dollars, and plans to strategic business goals.
• Drivers of variance by cost center, account, project, vendor, cost pool, etc.
• Evaluations of cost center forecasts against IT towers, apps, projects, and services.
• Mapping of dollars to IT deliverables (e.g., towers, applications, services, and projects). Flexible, easily adjusted options for budget structure and hierarchy.

During the forecast cycle, CCOs should review their impact on strategic key performance indicators (KPI) (e.g., IT Spend by Business Unit). If the KPIs aren’t where they should be, CCOs need to analyze their contribution to that number. It takes the variance reporting away from account numbers and to areas that non-finance stakeholders care about: strategic goals and accountability (e.g., cost center, tower owners, and projects).

»Related content: Roll with IT: 5 steps for successful rolling forecasts

In many organizations, there is a close alignment between cost center budget responsibility and the IT resources they use (a cost center called ‘data center’ will be the responsibility of the data center infrastructure and operations (I&O) teams)—but not always.

Cost center mapping to IT resources is not a straightforward exercise. Variance can be driven by excess demand as much as by poor planning (e.g., when I&O provisions more data center capacity to accommodate demand, the cost center will immediately be over budget).CCOs can look for variance indicators by understanding the demand from the business (e.g., new projects, new customer segments, and digital initiatives).

During the forecast cycle:

• Identify variance by business decisions and accountability to connect analysis to people and decisions.
• Identify business demand that will drive variance.
  

 

#4 Track projects driving variance

Project spend is not directly controlled by CCOs—but they are impacted by the performance and size of the project portfolio.

In many organizations, projects are wholly funded from the existing IT budget. Scope creep, failing projects, and ongoing run costs—all of these impact the corporate IT budget. CCOs with a good understanding of the project portfolio (e.g., status, under/over budget, and priority) have an early view of budget variance. CCOs then engage with IT Finance and the project management office to push for action.»Related content: Apptio IT Financial Management Foundation

IT Finance needs to push back against unfunded project mandates. An innovation budget approved outside of IT will have ongoing run-the-business (RTB) costs once that project (data center build) has been converted into an IT resource (data center- enterprise data center).

Cost centers see an early indicator of budget variance with a view of unfunded project mandates.

When reviewing project spend:

• Identify unfunded RTB spend generated from the project portfolio.
  
• Review project status to identify project performance that impacts spend.

Read the executive paper Nailing Your IT Financial Plan for an overview on how you can overcome common IT budgeting and forecasting challenges.