Who doesn’t love the fall season? The leaves are falling off the trees, football season is in full swing and budgets are up in the air. What would the fall season be if it weren’t for questions like, “Can’t you just squeeze it in?” or “Can’t we just do that in-house” or my personal favorite, “Do you really need all of that money and all of those IT people?”
As at most companies, my past several weeks have been largely focused on preparing our budget for next year. There are three major challenges that a franchisor faces when creating an IT budget: Franchisees are not involved in the budget process; a franchise chain has additional responsibilities over and above a traditional IT shop; and in many companies, the budget process (and the associated project prioritization process) is broken.
Challenge #1: Franchisees aren’t involved in the budgeting process.
Maybe franchisees are involved in some chains, but in my experience the yearly budget covers only the expected corporate IT spend. I believe most chains look to prove out any expected franchisee spending through business case presentations or “sell-in” meetings. Those meetings often start with a statement like: “We are proposing moving to a new POS platform and here is the business case that outlines the costs and benefits of this new system.”
Although that approach is good, I believe each franchisee should have an expectation of a yearly allocation of dollars toward IT spend. Large, up-front purchase costs make the spotlight in the pro forma (due to the size of the expense), but the ongoing expenses often do not. I can’t tell you how many times franchisees have complained to me that they had no idea that their IT systems were going to cost so much to maintain.
Another part of the equation is that I do not believe many franchisees plan their IT spending in advance. Even if a franchisee isn’t directly involved in the process of determining what will be done each year, I think it is important that they allocate some amount of spending for IT systems. “I am going to budget about 1.2 percent of my sales for IT costs. I know that it will cost me about 0.7 percent of sales to support my existing IT systems. Based upon experience, I expect the chain and franchisee leadership body will propose additional IT systems that will cost another 0.5 percent of sales.” Or how about: “I understand that the average lifespan of my IT systems is about 5 years and, because my POS is that old, I should plan on having to purchase new equipment this year.”
I believe franchisees should plan their spending in this fashion. The chain’s leadership should educate their franchisees on the reality of IT spending within their system and help franchisees plan their IT spend for the year, even if no specific projects are planned or business cases presented. This way it is not as much of a surprise when that sell-in meeting happens.
Challenge #2: Franchise IT groups have additional responsibilities over and above their enterprise peers.
When it comes to setting IT budgets, most companies try to benchmark IT spending as a percentage of revenue. Companies often use this metric to gauge whether their IT spending is appropriate. Depending on which analysts you speak with, and what spending is classified as “IT,” most companies spend between 1 percent and 5 percent of their revenue on IT projects.Although this number might be a good benchmark for “traditional” IT organizations, many franchisors’ IT groups also have some accountability for franchisee systems. Even if the majority of retail IT is outsourced between the franchisees and different service providers, the chain is often held accountable for managing the service providers, managing the deployment of technology, or dealing with escalations when a franchisee does not feel the service provider is meeting its expectations.
This approach may not seem like a lot of work, but those of us who do this for a living can tell you that it adds up fast. As a simple example, I have had as many as three people 100 percent allocated to dealing with franchisee escalations alone.
Knowing this fact, it is important to consider these additional resources and costs when you are determining the budget necessary to operate a franchise-based IT team. If you don’t, either your corporate systems or your franchisee support systems may not get the adequate amount of funding and attention. It is also important for the chain’s executive leadership to understand these needs and not simply allocate their IT spend similar to other non-franchise-based systems.
Challenge #3: The budget process in many companies is broken.
There are exceptions, but almost every company that I have worked for has used a broken budgeting process. Most IT people are familiar with a drill similar to this one:
- Step 1: Solicit your business partners on which IT projects they would like to do next year.
- Step 2: When few, if any business partners respond, create your own list based on your understanding of their needs and priorities.
- Step 3: Take a wild swing at what these projects will cost and which resources will be allocated with no information beyond that of the project title.
- Step 4: Create an arbitrary line in the sand of what projects can be done for the expected budget and resource constraints.
- Step 5: Review the list with your executive committee or IT steering committee. Emphasize the fact that the limited resources and budget will mean that not all IT needs can be addressed. Know that no matter how big it is--or what color it is--your business partners will likely be unable to see the line you draw between what will get done and what will have to wait.
- Step 6: Don’t worry too much when your budget is cut but expectations remain the same. You know that they were only wild guesses to start with and that the business will change its mind a dozen times about what it does or doesn’t want to do before the end of next year.
- Step 7: Try to figure out how to execute a different set of projects (from those that were budgeted) within the confines of resources and budgets set when life was different.
Clearly, this process is broken. I’m not sure what can really be done to address this problem. The obvious answer is to apply more discipline and accountability to both the budgeting and the prioritization processes. That being said, I don’t believe many companies have the DNA to support that level of discipline. For those that do not, are they doomed to deal with this type of process? I will open it up to readers for their advice. How have you improved this process? What can companies do to reduce this “churn”?
What do you think? Love it or hate it, I’d love to gain some additional perspectives. Leave a comment, or E-mail me: [email protected].