How to Disappoint Your CEO—Budget Surprises

Effective budgeting requires predictability. Few things alienate leaders from their CEO and peers like budget surprises impacting company financial performance. Technology spend has become increasingly unpredictable as many vendors exploit tactics that would have seemed inappropriate not many years ago. I’m not implicating all technology companies, though it’s common enough to be a problem.

Let’s break this topic into a few pieces. First, let’s look at some of the motivations and tactics taken by those who exploit their position for maximum gain. We’ll review risk factors making companies vulnerable, then share specific actions to protect against unplanned cost increases. I considered naming vendors who are among the worst offenders for each tactic below, but decided to take the high road and focus on the principles.

Motivations and Tactics

Let’s begin with a very common situation, a large company acquires another company, which has a mature product and customer base. The purchase is particularly desirable if the acquired company’s customers can’t easily move off their product, which assures the purchasing company plenty of incremental revenue through price increases. These situations can be the most difficult to predict.

Both growing and shrinking vendor market share are triggers for surprises. Companies losing market share can act desperately to lock customers into longer deals even using questionable legal tactics to impose their demands. For example, I owned a contract requiring the vendor’s support to migrate to a new product at the end of a contract period, should we choose to. They tried to twist the terms to avoid assisting, which would make a vendor change difficult and risky. Earlier-stage companies, once they begin to mature, experience slowdowns in revenue growth. New leaders may be brought in to drive increases, which often come at the expense of existing customers.

Technology vendors may offer affordable and competitive deals to entice new customers. Once customers are deployed, renewals may carry stiff increases, especially when migration off of their products are disruptive, costly, or difficult.

Finally, customers may have difficulty tracking and managing product usage. Vendor audits may reveal unlicensed usage, which can generate costs not just for the future but retrospectively for past years. Multiple years’ worth of retrospective overruns can be particularly difficult to manage financially. Furthermore, many contracts don’t have pricing guarantees for overruns. I’ve seen vendors charge a unit price five times greater or more for unplanned license usage.

Risk Factors

Let’s review common risk factors that, when present, increase the likelihood of budget overruns. Risk factors are many, but we’ll focus on the top areas of exposure.

• Lack of contractual protections on pricing – Whenever possible, contracts ought to include limits on increases upon renewal, certainly extending beyond the initial contract period. Pricing agreements must cover all purchases, planned, unplanned, or even as the result of an audit.

• Poor renewal planning – If replacement of a vendor product or service would take 12 months, then renegotiation of a multiyear contract should begin more than a year in advance. Starting renewal discussions 6 months before the contract end date leaves the buyer without bargaining power.

• Ineffective asset and entitlement management – Companies will almost certainly have budget surprises in the absence of effective measures to track, authorize, allocate, reclaim, and plan for product or service usage.

• Unnecessary vendor lock-in – I wish it were so simple as to say that we ought never to be locked into a vendor. The truth is that there’s often business value in vendors’ services and offerings. However, we must have strong architecture practices leading to informed decisions on when the benefit of vendor lock-in outweighs the risk.

• Poor lifecycle planning – Most organizations have so many priorities that they may neglect deliberate management of the lifecycle of technologies and solutions. Budget ought to be planned annually to identify products and services that are ineffective, costly, or at risk of unsustainable cost increases. The allocated budget should be used to eliminate the worst offenders.

Steps to Avoid Surprises

Risk factors are many, yet, by taking the concrete actions below, we can greatly reduce the probability and impact of vendor cost surprises. These actions flow directly from the risks noted above.

1. Rock-solid contract management – Clear and unambiguous accountability must be vested in those who track and timely plan for contracting events. Responsibilities must include identifying contracts with pricing risk, proactive mitigation of such risks, maintaining schedules for contract renewals and advantageous lead times for renewal negotiations, and ensuring favorable pricing terms (e.g., price increase caps, remediation time allowances for overprovisioning, vendor accountabilities for tracking usage, etc.).

2. Rock-solid asset management – Similarly, clear and unambiguous accounting must be vested in those who will track, manage, optimize, and report on usage of products and services. Such individuals need not be the ones to directly manage license allocation for each product, but they must ensure that the appropriate people are assigned, take right actions, and provide timely and complete usage data. Such data must be aggregated and managed centrally.

3. Consistent technology lifecycle planning – Measures must be in place to regularly review platforms and services that are expensive, business critical, or increasing in risk. This work is often the responsibility of an enterprise architecture team, if one exists. An annually recurring lifecycle program must be in place to address or replace the riskiest.

4. A Strong Peer Network – I’ve always found great value in maintaining relationships with peer networks within and outside of my industry. In most cases, discussions give early insight into specific vendors and tactics, which helps in early identification and addressing of risks.

5. Effective corporate risk management and contingency planning – I wish it were the case that all risks I’ve noted above could be summarily eliminated. However, risks will always remain. For example, cloud vendors are unlikely to offer pricing increase caps for the foreseeable future. This is where effective corporate risk management is vital. Top unmitigated risks should be documented and regularly reviewed with the risk team and key stakeholders. If risks are high, they will likely be reviewed with the executive team, which is a good thing. This not only prevents surprises but allows compensating actions to be taken, notably, allocating contingency funds should a risk materialize.

In summary, vendors have become increasingly comfortable employing tactics that drive up costs resulting in budget overruns. By taking the five actions outlined above, we can avoid overruns and reduce lost productivity in disputes with our vendors.

I hope you found this article informative. Best of luck in attaining predictable and favorable spend. Contact me anytime if you’d like to speak further about this topic.