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How to Tame Your Tech Budget

You’ve just rolled up your initial budget submissions, and your proposed technology budget is way off target. Ah yes, the joy of tech budgeting - infinite demand meeting the reality of finite capacity.

Budgeting for technology is a complicated exercise in managing stakeholder expectations and needs. Having a structured approach with “rules of the road” to make trade-off decisions that ultimately benefit the organization will help you through the inevitable budget negotiations. It’s helpful to look at a technology budget through five dimensions to focus the conversation with the management team:

  1. Business Strategy & Priorities – What are the organization’s key business priorities? How will those priorities generate revenue or savings? Having a common understanding of business priorities focuses the management team on where the next available technology dollar should go. It also informs where resources can be redirected.

  2. Ability to Influence Spend – Every leader inevitably is surprised by the discovery that much of the technology budget goes to maintenance and is therefore fixed. There is usually only 10-20% of the overall budget left to fund new initiatives or systems. Understanding whether your costs are fixed, variable, or “semi-variable” will help the organization understand where budget is available for investment.

  3. Critical Spend – There are almost always some pretty darn important things you must do before you can look at funding new, discretionary items. Infrastructure maintenance and regulatory compliance are non-negotiable. Cyber security needs are rapidly changing and require critical timely investment. Even within the category of “critical” there needs to be a prioritization exercise. Budgeting is a risk management as much as a strategic activity and deciding how fast to renew legacy technology, or how much is enough to spend on cyber security, or how much should be spent on a new capability are all important senior management considerations.

  4. Benchmarking - Technology is almost always a rate x volume budgeting exercise. Business influences the volume of service (demand), while technology influences the rate of the unit of demand (cost). Having benchmark cost data for technology services can help identify areas of opportunity for the technology shop to focus on becoming more efficient. For larger organizations, a good procurement team in partnership with the technology organization can do wonders for technology cost structures with enough time. In either case, the technology team should have a strong finance team they can rely on for projections.

  5. Capacity of the Tech Organization to Spend - Tech organizations can only process so much change without serious operational implications. For example, increasing the tech budget by 25% one year or cutting it by 50% the next year will have significant implications for operational stability. Having concrete KPIs on how long it really takes to hire and get a technical resource fully operational can inject some practicality into the proposed budget. Adding an army of consultants to fill an aggressive hiring plan is rarely effective and never cheap.

A word of warning to my fellow CFOs. Assigning the average 3% across-the-board “peanut butter” cut to close out the remaining budget gaps may feel like the right thing to do to spread the pain in the organization. Caution: this can be a lot worse than intended once you consider how much of the tech budget is actually influenceable in the next 12 months. That 3% cut could turn out to be an effective 15-25% cut and have a major impact on reliability.

Technology budget tradeoffs are probably one of the hardest conversations to have in the budget process given everyone needs technology but doesn’t always understand (or care about) the business of technology. All they see is cost. An effective CFO works closely with the technology leadership team to educate the stakeholder and bring them into the process, giving them real choices with clear risk implications as the budget is finalized.


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