What if budgets are the problem rather than the solution?
That doesn't necessarily mean that the CFO is wrong. Nor does it mean that the CTO/CDO/CIO/CMO/CRO or any of the other rapidly expanding universe of CXOs are wrong.
But the approach to budgeting and resource allocation is wrong.
Tradition, silos, budgeting approaches based on adjustments to last year vs. zero based, and a profound lack of leadership vision are the root causes which are manifest through dysfunctional budgets.
IT or a Business issue?
A recent article in Fortune, Why CFOs should play a bigger role in digital strategy, drew on recent work by KPMG & EY. Several key highlights included:
- number of digital marketing teams that have exclusive control of digital strategies is shrinking
- there's greater demand for outside talent to supplement skills rather than simply save money
- most CFOs still tend to view IT as a cost center
- analytics and data management which can empower CFOs decision making is growing in importance
EY captured the essence "Most firms are still lacking a good digital strategy...the firms that are struggling most with this are those who see it as predominantly an IT issue, as opposed to a larger, business one."
Bigger than digital marketing
This is a strategic challenge for companies throughout their organizations. Internal operations are in play, along with external interactions and even product road map (how many companies are serious about IoT?) What's interesting is the role of digital marketing in bringing the debate to a fever pitch.
Companies implemented email and ERP systems a decade or two ago. They've evolved those in many cases to cloud based solutions to reduce internal server (and related expenses) requirements but also to avoid the pesky upgrade challenge. But those decisions fit the traditional corporate decision mode - evaluate options, select one, invest and run with it for 5-10 years. So they were "digital" decisions, but according to a traditional model.
Digital marketing is challenging that model because the demands of marketing (e.g. the expectations of customers and evolution of tools and habits) are so fluid that there is no analog to classic capital investment. Rather this is the "sharing economy" equivalent for CXOs who are poorly suited to envision that environment.
Websites as an example
Luke Summerfield (@SavvyLuke) got me thinking about this recently during a presentation on website development. Was it early technical limitations or mindset of executives that established the expectation that a website was a discreet project which resulted in a product which then sat there for a usable life of 5 years? Not sure. But it's dysfunctional, and a perfect example of how the budgeting process needs to change.
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Today technology, search engines and buyer behaviors change so consistently that it's negligent to take the traditional approach. After all, would you sign a five year lease based simply on today's requirements without consideration for headcount and activities you expect for your company in three years?
And yet that's precisely what companies still do. An arduous project, almost always late, and often over budget is finally delivered and with a sigh of relief everyone goes back to their real work.
Far more appropriate is the model Luke is exploring - a continuous process which builds a viable base, incorporating lots of detailed and nuanced understanding of buyers and behaviors, and then continuously adapts based on data and gradually grows based on requirements. It's a living, breathing website development model that actually addresses real world challenges.
Yet that's contrary to the way executives have been conditioned to envision technology investments. And it's tough for them to embrace.
Depreciate or deduct your website??
Maybe the key is to present the decision in the business context. Rather than an artist that sees an opportunity to evolve their art in a process of continuous self expression, consider:
- typical site cost
- time to identification of additional requirements
- MTB search engine algorithm updates
- rate of change or buyer expectations
- frequency of technology shifts
There's a compelling business case to be made for an ongoing web development effort - analogous to ongoing product R&D.
And then present it in terms which the CFO will intuit. For instance, is a $75K website project something which should be expensed or capitalized? This is likely a contentious topic, but there's interesting guidance from both FASB and according to GAAP (resources here and here) there's a general consensus that the bulk of the site building work would be capitalized under reasonable interpretations. For typical pass through entities that may be undesirable (cash outlay is only deductible gradually through depreciation.)
In contrast an ongoing, monthly cost (with regular monthly work - not simply an installment payment plan) would likely be an operating cost, and deductible during the period incurred.
So the site would be vibrant and evolving; the cost would be known and fixed; the expense would offset profits for tax calculations; and the business impact would be enhanced.
Some may disagree (even strongly) with this treatment, and everyone should rely on their financial advisors to treat their website investment in the appropriate way for their situation. Regardless of whether you agree with the accounting premise, however, the business point remains valid.
An evolving business environment requires adaptable management approaches. Finance, perhaps the most structured management discipline can recoil, or embrace the opportunity. It's up to the team collectively to create a positive from the change - and it's up to the finance folks to be open minded to not only what requirements they should support, but what unexpected benefit they may derive.
Download our eBook - The Financial Execs Guide to Inbound Marketing Investment for more information.