Financial Planning for Digital Transformation

Both Finance and IT work towards the same goals for the company—create growth and value. But the way both functions want to achieve the goals differ, which inherently leads to a conflict. Finance wants to control its SGA expenses and relate it to revenue trends while IT expenses tend to follow the quickly changing technology marketplace.  But as Gartner managing vice president Barbara Gomolski said very rightly “IT (Cost Optimization) also means that simply cutting the IT budget and waiting until the economic environment is more favorable to make digital investments is a flawed approach to remaining competitive.”[i]

So how should the IT department work with finance to better plan for its expenses.   Let’s examine this in the context of top-down and bottom-up budgeting processes. A lot has been written about both the budgeting process and the pros and cons of it.  Applying the top-down approach singularly to IT expenses would lead to a number based on previous year trends.  Adjustments will be based on revenue trends to maintain a specific target of IT expenses as a percentage of revenue.  While this process would be faster and aligned with company goals at a high level it would miss the details and the needs of the IT department itself. This process would also not take into consideration the innovation and modernization investments that might be needed in specific areas.   The investments would be dependent on the current economic environment—if the revenue trend looks good, IT expenses might be increased and vice versa if revenue trends are not positive.   This in turn might increase the technical and competitive risk of the company as digital investments are becoming essential to maintaining competitiveness in any industry. 

In a bottom-up budgeting scenario, the IT function would do a detailed analysis of needs and put together a budget that aligns very well with the goals of the IT function. All the participants would need to coordinate with each other to understand the cost impacts of various projects/changes. It would also foster the innovation and reduction of technical risks with investments based on the changes in markets.  With this method, the IT function may be aligned internally regarding the investments but it might not be fully aligned with the goals of the company since the company must balance the needs for investments in IT vs. investments needed in other functions.

To make sure budgets and financial plans are aligned across functions and there is commitment from leadership, there must be a step of goal alignment with budgets between the top-down and bottom-up approaches. Goal alignment meetings should be conducted with a comparison of investments and budgets to the goals of the company and the function to make sure that prioritization of expense and investment is done based on the strategic goals of the company while keeping in the mind the needs of the functions too.  This prioritization exercise is imperative to make sure the functional goals are aligned with the strategic goals of the company and that the budgeting exercise mirrors this.  

As stewards of the company’s finances, financial planning & analytics (FP&A) analysts should guide the process of alignment of budgets to goals and prioritization of investments within the company and functions. FP&A should partner with business to help them make appropriate decisions regarding the best use of limited resources based on data and analytics.  

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[i] https://www.gartner.com/smarterwithgartner/how-cfos-can-tackle-the-cost-optimization-equation/