How much should we budget for non-discretionary spend?

budgetWith Christmas in our rear-view mirror, planning our family budget for the next year is a New Year’s Day present which I don’t relish opening. Sure, it’s fun to plan for exotic vacations or for that latest gadget, but the bulk of our budgets usually get allocated towards non-discretionary spend such as tuition or home maintenance.

Whether your company performs portfolio planning annually in alignment with budgeting cycles or more frequently, the challenge of how much to budget for non-discretionary spend is as painful for governance committees as it is for us personally. In an ideal world, 100% of portfolio spend could be allocated to discretionary spend but it’s quite unlikely that risk management and IT operations will encourage that!

In some organizations once allocations have been made towards non-discretionary spend, there’s very little left to fund strategic, discretionary initiatives. While this might be tolerable in monopolistic segments, for most companies (regardless of their profit or not-for-profit motives) this risks their becoming a very safe but increasingly non-competitive player.

Different strategies have been used by governance committees and finance departments to find the sweet spot between putting their organization at risk by minimizing non-discretionary spend or wrapping it in miles of costly bubble-wrap. Some examples of these strategies are:

  • Requiring project sponsors to focus their business cases on the minimal scope required to meet regulatory or other mandatory requirements. This decree is usually accompanied with some independent review of the proposed scope & costs to ensure gold-plating is minimized. The challenge with this strategy is that it pits sponsors against governance committees and encourages gaming of the system.
  • Setting ceilings for non-discretionary spending using industry benchmarks. The difficulty with this approach is that it doesn’t account for the specific context within a firm – it could help with setting reasonable budgets for regulatory compliance spending, but it won’t help right-size spending to reduce high levels of technology debt since that is very organization-specific.
  • Alternating the emphasis on a rotating basis between discretionary and non-discretionary spend. While it is a good practice to periodically adjust spend targets for portfolio categories, it might not be possible to achieve strategic objectives or to sufficiently funding requirements for large non-discretionary projects with such a scheduled approach.
How about incorporating opportunity cost into the evaluation of expected gain or loss? It’s common to use expected monetary value when formulating business cases for non-discretionary projects as a means of justifying the costs of such initiatives. But shouldn’t we also consider the opportunity cost of investing in those same projects?
Good portfolio management isn’t limited to making decisions about which non-discretionary projects to invest in – it’s also about governance committees getting comfortable that they can live with the impacts of what they are saying “no” to.




Categories: IT Governance, Project Portfolio Management | Tags: , , , | Leave a comment

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