Rising Tides

How does a CIO explain and prove they are managing their budget, showing efficiency gains and greater business engagement even though total technology costs are rising ?

At a surface level, if total technology costs are rising, it doesn’t look  good for an embattled CIO.  Being an accountant and having deciphered budgets and variances, the answers are available, but you have to dig a little.

I remember asking the question to a colleague shortly after I joined a company a few years ago, “why have salaries increased more than expected ?”  The response was that more people had been hired than planned.

Groan… I could see that from the FTE numbers.  I rephrased the question – What were these people hired to do and why ?

A deafening silence… nobody knew or even anticipated such a question.

Before you ask, we did find out the ‘why’ after a bit of investigating.

It is the same with technology spend.  How many times will a CIO feel the wrath of the CFO when there is an overspend ?  How does a CIO defend their position ?

The Narrative

Focussing on run the business costs or business as usual costs – these are driven by demand.  If there are more users then the total cost base will increase.  E.g. more users may result in the need for additional user licences which will increase the total cost even if each extra licence is the same price or cheaper than the one already owned.

From a CFO’s perspective they see total costs rising, they might not be interested in user numbers.  For the CIO this doesn’t look good.  Total costs are rising without an obvious explanation.

Changing the Narrative

Here’s where basic accounting helps.

Total Cost = Quantity x Unit Cost

The number of users, i.e. the quantity, has been increasing so the total cost has been increasing.

Changing the conversation from total cost to unit cost changes the perspective.

Unit Cost = Total Cost / Total Quantity

The CIO can show unit cost over time and how they have made efficiencies in delivering more units and a lower average cost.

Bumps can be explained by the need to buy more licences or other items to manage the increased unplanned usage.

Why Revisited

Going back in time…

As asked earlier, what was causing the increase in salaries ?

The budgeted salaries amount was a single number but it was composed of two elements.

1.      The cost of an individual or the price of an individual

2.      The number of individuals or the quantity of individuals

Peeling back the layers of the onion we could see we had more team members than originally expected which was driving the overspend.  By identifying this we were able to find out what the extra people were doing and explain the cost overrun by linking the new additions back to a business initiative that was causing the unplanned salary expenditure.

Summary

Budgeting helps the prioritisation of projects and initiatives to meet investment returns and support organisational goals.

However, overspending more than you budgeted doesn’t mean you are inefficient.  If you are selling more of your product at a lower cost price then you are doing the right thing.  This is what all businesses want to do.  The question is, can you prove it ?