Back in 2008 there was a huge liquidity problem in the market and there was a credit crisis, but the markets held up reasonably well and businesses were still operating as normal, though it was harder to get a mortgage. However, we knew if the problem wasn't fixed quickly, it was only a matter of time before it trickled down and businesses (and our clients) were going to feel the pinch. Well, that time came. The business outlook was gloomy, budgets were starting to be cut and employees are keeping their heads down thankful they had a job.
So how do you manage your business during uncertain times? Well, we know how one client does it as we were right in the middle of an engagement when their business lost 40% of their orders literally overnight. They were asked to cut $1.5M from their operating budget. When a request came in to spend $50K on a project, the response was big "No". This was their single most important project within the division of a Fortune 500 company - the project that is supposed to grow the business over the next 3 years. Does it make sense to stop spending money on your #1 project? Are there really no other projects, initiatives or skunk work projects that can be cut or put on hold? After all, they have over 80 projects in that division alone, and that's only what they've discovered to date.
This response is typical of many organizations. They are asked to cut the budget so they cut right across the board, affecting all projects. The problem stems form the fact that they don't have the tools or the methods to determine where to trim, so cuts tend to be ad-hoc and not linked to business needs or objectives.
Budget cuts are inevitably going to come to all companies, so the question is "where do you cut whilst optimizing your portfolio to achieve the maximum return given your constraints (budget, resources or otherwise)?". The answer, very simply, lies in a two step approach:
Prioritize the portfolio of projects vs. clearly defined and prioritized business and strategic objectives
Apply constraints (budget, resource, risk, must, etc.) and re-prioritize the portfolio.
The result is the optimum mix of projects to achieve the maximum benefit given the constraints. Those projects that fall down to the bottom get cut or put on hold (until the upturn), and resources are diverted to the more important projects.
Sounds simple? It is, if you know how to, but most companies lack the tools and methods to do it. Even asking for a list of business objectives and a current list of projects can be a challenge in itself.
We have been working with major companies, deploying this system. In most cases it's an eye opener as it's the first time they have truly had a prioritized list of clear business objectives and a prioritized list of projects aligned to those objectives. What is truly revealing is when the constraints are applied (resources, capital expenses, etc.) and a cost-benefit Pareto curve is generated. They can visually see they can still achieve 80% of their goals with only a fraction of their budget. The low value, high expense projects are exposed and cut. These organizations will survive both the good and bad times.
So, the next time you are asked to cut your budget, how are you going to make the cuts? Indiscriminately? We can tell you what the smart ones are doing...