How To Budget A Digital Transformation Initiative Despite Unknown Risks

Author

Peter Bendor-Samuel

April 7, 2017

Imagine you’re the CIO tasked with driving change in a digital transformation at your company. You and other leaders have marshalled the organization toward the intended goal, and everyone has voiced commitment to achieving the breakthrough performance you expect. You’re at the start of year two of the initiative, but it’s not playing out the way leaders had hoped. The folks holding the purse strings aren’t on board with funding additional investment for more technology and want to pull the plug on the planned change. Sound familiar? The problem is all too common. What many executives don’t realize is this situation indicates a trust problem, not a budgeting problem.

Herb Kummer, a CIO who has led digital transformation at several companies, learned firsthand how the budgeting process can negatively impact the chances of success in a transformation initiative. He told me about a situation where a company ran into a transformation roadblock due to major budgeting delays.

“We were on a discovery mission in terms of what would be needed to make the transformation work in an agile or DevOps fashion. So, we needed some budget flexibility for investing in technical infrastructure to give us the leeway to try some things that were unpredictable,” said Kummer. But the company wanted precise numbers of servers that would be necessary and wanted more certainty around other aspects of IT. There was no flexibility.


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Kummer recalls that the budget approval process took longer than it should have. First came a series of discussions with the folks holding the purse strings, making presentations up the ladder and going through various approval boards.

Analyzing the situation in hindsight, he points to two factors common in large companies:

  • Capital budgets for IT components such as infrastructure, servers and storage are planned at least six months to a year in advance.
  • The IT capital budget was handled by the centralized IT group rather than the business units.

Kummer says if he had the opportunity to do that transformation differently, he would insist that the CEO’s mandate for change include up-front budget approval and the necessary flexibility for unknown factors before embarking on the transformation mission. “We could have avoided unnecessary delays in getting things done if we had had approval up front.”

The Problem with Funding Transformation

There are many factors and challenges surrounding transformation that are not possible to know at the outset. Many transformation initiatives fail because leaders develop detailed plans (and associated budgets) before they understand the realities of the adjustments they will need to make over time in a multi-year initiative. Yet, it’s too risky to not have control over the funding of the initiative.

In addition, budgeting needs to shift from legacy operations to the new environment and the new business model. Keep in mind that changing a business model requires significant capital reallocation across business and functional units. It may require rethinking many cost-component aspects embedded in the company’s existing business model.

Moreover, executives cannot know at the outset how to price the new service or product the company will create or what costs may be involved in delivering it to customers. But at the outset of the initiative, leaders will have developed their strategic intent and thus will have a general sense of resources and direction. With this, they can determine the components of the change and have a basis for where budgeting/investment flexibility will be necessary over time.

An Iterative Approach Is The Solution

Where I’ve see the greatest success in dealing with the problems surrounding funding a transformation initiative, the companies take a page from Agile methodology for big systems implementation. Major technology implementations face a very similar dilemma to transformations in the following aspects:

  • The need to move fast
  • The need to have fixed goals but also flexibility
  • Recognition that a plan is good, but plans can be developed only for the foreseeable events.

My advice is to take an iterative approach to the transformation journey like the Minimum Viable Product (MVP) approach that is so successful today among software start-ups and venture capitalists. They start with a vision, fund a software development project (Series A, Series B, and Series C funding), manage it cost-effectively and develop compelling new technology products. They achieve these objectives despite not knowing up front the exact nature of the product, nor how much time or money it will take to develop the product and take it to market. How do they achieve this?

Instead of having a detailed road map up front, they break a project down into a series of gates (or milestones or phases). Gates are phases the company will go through as the transformation journey evolves. They develop a detailed plan only for the range of where the company currently is up to the next gate. And they associate funding per gate.

Each gate is also a goal, and the leadership team will build confidence and commitment to each new gate before moving on to the next one – thus avoiding roadblocks. After achieving a goal, they develop a plan for the next gate/goal and get funding for that next leg of the journey.

A key to success is recognizing that digital transformation and business model changes are a multi-year journey and leaders will not be able to anticipate the obstacles or the terrain until they get to them over time. However, despite the many unknown factors at the outset, they can control risk by funding the journey flexibly, gate by gate.

 

This article was written by Peter Bendor-Samuel from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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