While 2010 opened on a positive economic note, in the past five-working days, I have had difficult conversations with three different organizations about additional, mid-year budget cuts. In all three cases, these multi-national corporations have apparently decided that their economic outlook warranted a downward adjustment. All three have started doling out additional Operating Expense (OpEx) cuts. In one case, a mandatory headcount reduction was decreed; in the other two, business managers were given the flexibility to choose between staff and other operating expense cuts.

As a business manager, there was nothing that demoralized me more than serial budget cutting. It seemed as though there was just never enough time to pick up the pieces, put a new plan in place and get everyone moving again – before the next “realignment.” It can start to feel like running in place .  .  .

The reality though is that it is happening, and for clients that call seeking advice on how to reshape budget priorities, while commiseration may help a bit, what they are in search of is a kernel of wisdom; an insight that will help them position their organization more effectively.

Much of my research practice focuses on capital and its role in the business equation. In an attempt to gain further insights into the business capital plays in IT spending – both capital budgets and operating expense (or labor) budgets, a colleague and I pulled together a chart that compares quarterly IT capital spending and IT labor spending, per employee, for the entire U.S. economy, from 1991 through Q1-2010.

The exercise was a simple one. Economics 101 postulates that organizations will invest in capital goods to reduce operating expenses and achieve productivity growth. The chart, SHOWN BELOW, shows the long-term trend. The blue line shows IT capital investments per employee. Note that from 1991 through 2009, in constant dollars, these investments increased from about $800 per employee to over $2,500 per employee. Labor spending, in red, is much more volatile, but the trend line goes from some $2,000 per employee to $1,200.

So how is this relevant to a business manager faced with budget cuts? The reality of these cuts, at least in my experience, is that there are often some degrees of flexibility; some degree of horse-trading.

It is probably necessary to take the OpEx cuts now, but is there a possibility of angling for additional capital funding later in the year? The trend lines highlight the directions clearly. As an IT business manager, how do your budgets compare per employee – capital and labor? What are the trend lines? What are the business’s hiring plans? More people; more budget?

Being a business manager means having to translate resources into business results. It also requires having a strategy and building consensus among your colleagues and peers as to which department should receive a disproportionate share of future resources.

The data in this chart reminds us of the long-term trend, and that provides the foundation for a strategy; a plan. Confronted with the need to take OpEx cuts, is there the possibility of negotiating future capital spending increases? Or, at the very least, protecting the capital investment budget?

The outlook is for several years of moderate growth. This implies tight [OpEx] budgets. From a strategic point of view, are you and your team emphasizing enough projects which drive productivity improvements, and lower operating expenses? Are you on the right side of the trend line?

Motivating yourself and you team starts with a vision. From the vision, a plan must be crafted; a consensus built, and then steps taken. Investments in productivity, functionality and cost take-out have to be balanced with the need for budget expedience and cuts. 

Are you emphasizing these elements of your business plan and budget appropriately?