Courion Corporation

Creating Budget Where None Exists

In my last Blog I mentioned that that many customers had no formal IT budget.  In these volatile economic times, budget has become irrelevant as CFO's and other business executives are doling out money spoonful by spoonful, just as Captain Queeg doled out strawberries on the ill-fated USS Caine (yes, I realize that referencing a Humphrey Bogart movie dates me!).

Some customers adapted to this new reality by finding ways to continue to improve the security of their business operations via "self-funding" access provisioning and compliance automation projects.  One such organization - let's call them Customer X - recently executed a $1 million+ program with Courion to "get ahead of auditors" in access control and improve service to the business that will not use a single budget dollar!

This was possible because the customer's staff

• were very smart about how they structured the project
• knew their "provisioning and compliance attestation" operations deeply
• were willing to make and execute some difficult decisions
• worked with a vendor (Courion) whose product and services could deliver concrete business results - and that was willing to sign up to achieve operational milestones

I can understand that this may be difficult to believe....one million dollars spent, but no budget dollars spent?  It might be even harder to believe knowing that this customer had already automated provisioning for 30,000+ end users across 100 applications and in support of hiring, termination, promotions/role changes, and acquisitions.  This new project called for the addition of some provisioning and attestation workflows - and the development and implementation of 50 connectors (software) to industry-specific third party and homegrown systems which managed access to 210 applications.

So, how did they "make budget" where none exists?  They used a 4-part formula:

1. Understand the Budgets

The first thing that Customer X understood was that there wasn't one budget...there were multiple budgets.  They, like most organizations, had an Expense Budget which outlined the areas in which the IT organization would spend during the year.  Often called the IT Operations Budget, this is typically what people view as "The Budget", and it sets Financial Executives' expectations on what expenses from IT will be reflected in the organization's Income Statement. 

They had a Capital Appropriations Budget, which identified investment in assets which would benefit the organization beyond just one fiscal year.  Items on the Capital Appropriations Budget are reflected in the IT Operations Budget, but the costs are "capitalized".  That is, the value is amortized (spread out) across the useful life of the asset.  So what might appear as $120,000 in the Capital Appropriations Budget, would be represented by $60,000 in the IT Operations Budget for an asset with a 2 year useful life.

And finally, they had a Capital Expenditure Budget, which details the expected outflow of cash throughout the course of the year.

Most importantly they understood that their organization's goals and time-frame of relevance were different across these budgets. When they first approached executive management about this project, the response was "we have no budget."  What that meant was that there was no placeholder in the Capital Appropriations Budget.  They had made their plans for the year 6 months prior, and they were not willing to change priorities to place these 50 Connectors higher on the list.

But the sponsoring Executive did not let the effort stop there.  He knew that the company was focused on the overall Income Statement, and not on the Cash Balance or Capital Budget.  He told the team:  "bring me a plan that has a maximum hit on the IT Operations (Expense) Budget of $20,000 in 2009, and a net positive effective on that budget and cash flow neutral by mid year 2010." 

This Executive understood that cash is different than expenditure (agreement to pay) which is different than expense.  For example, if a company licensing $600,000 of software that is delivered immediately and has a useful life of 3 years, with an agreement to pay 50% on signing and 50% 18 months after signing (for this example, we will assume no maintenance or services costs), the resultant impact would be:

	Year 1	Year 2	Year 3
Capital Expenditure Budget Impact	-$300,000	-$300,000	$0
Expense Budget Impact	-$200,000	-$200,000	-$200,000
Capital Appropriations Budget Impact	-$600,000	$0	$0

The moral:  keep reminding yourself that cash isn't agreement to pay which isn't expense.  And make sure that you understand the varied goals and management time-frames your organization puts around the Expense Budget, the Capital Appropriations Budget and the Capital Expenditure Budget.

LINK TO PART 2  -   The rest of the formula (Steps 2-4) to Create Budget Where None Exists - Understanding your operations, Understanding your firm's accounting rules, Extract the cost!