The Run, Grow, Transform (RGT) budgeting strategy has been around for a long time. In is an easy to understand method for grouping IT costs into appropriate buckets. This of course gave businesses a way to create different strategies for investments based on the different risk and reward profiles of each budget segment. The problem however is the RGT methodology was created well before the true impact of digital transformation was fully understood. Today’s IT strategies requires a different approach that is more holistic to the overall business, and more inline with transforming companies into digital leaders. The RGT model is showing signs of its age and is no longer supportive of strategy, but instead impedes it.
Where RGT breaks down
The Run portion of RGT has remained consistent and is still relevant. There will always be a component of spend allocated to keeping the lights on. Something that encompasses the standard operations necessary to keep the business running. But the Grow and Transform budgets have become almost inseparable in todays business. As technology continues to get more intertwined in every aspect of a business, it becomes almost impossible to separate out what technology initiates are for growth, and what are for transformation. In fact, most investments in IT related to growth require transformation. New systems, new training, new people. Trying to differentiate has become an almost impossible task, which is leading to the creation of complex systems for managing investments. This makes reporting difficult, and budget determination almost impossible. And ultimately it slows down advancement. Businesses need to ditch the old system and look at one that better connects the necessary finance and reporting structures to the businesses IT strategy.
An Updated Way to Look at IT Budgeting
Technology serves one very clear purpose in business today – creating competitive advantage. To do that, your IT strategy needs to be focused on making your technology use a strength in the organization and relentlessly leveraging IT to create business advantages. Only when these things are accomplished can you become a digital leaders and benefit from the clear advantages inherent in that position. To do this the budgeting model needs to be reshaped and refocused. We suggest one that is similar to RGT, but also one that is structured in a way to advance today’s IT strategies. Run, Return, Re-Tool.
As mentioned earlier, the “Run” portion of RGT model has not changed much, nor does it need to. But there needs to be some more clarity added around what should be included in this portion of the budget as IT related expenses are starting to get consumed by corporate budgets. It is no longer common for IT to control all the costs associated with technology, but instead different departments are responsible for a portion of the budget for the systems and tools they use. There are a ton of benefits to decentralizing the IT spend, but you need to make sure to track what the expenses are and add them to the correct IT bucket for accurate reporting. Almost all your IT related expenses will be added to the Run budget, which makes the Run portion the largest percentage of your overall IT expenses. Everything related to technology that is not specifically identified by the Return, or Re-Tool budget segments will go into Run. Think of it as your default bucket for all IT expenses, and only move something to another bucket when appropriate to do so. Although this is the largest expense, the goal is to reduce these costs over time without negatively affecting your business operations.
Or more commonly referred to as Return on Investment (ROI). These are the initiatives that have a tangible and realizable, ROI. All system optimizations that result in saving time, all new tools that eliminate unneeded processes, all training initiatives that result in more productive team members, all hardware purchases (like dual monitors) that increase productivity. Even efforts aimed at lowering employee churn or increasing employee engagement. Anything and everything that you can build an accurate, and honest ROI to justify the investment. Keep in mind some of these may be realized as soon as the work is complete (like eliminating a purchasing barrier that has been restricting sales), and some are realized as you grow (like increasing productivity to reduce labor costs as a percentage of your COGS). But all have a return, and a timeline for the return defined.
Of course, you will not always see every single initiative return what you expect, but over time your experience will get you closer to the desired results, and make your estimates much more predictable and accurate. The key is these are the expenses incurred in IT that create iterative improvement opportunities for the company, but only if there is a way to financially justify the initiative. If it is something you really want to do, but can’t justify with an ROI, it would either go into the Run budget, or the Re-Tool budget. Nothing goes into Return, unless it has a defined Return. In general, the more you can allocate, the more operational profit you can create.
These are forward facing initiatives. Think of them as R&D and strategic directional adjustments. Anything that is initiated for the purpose of a future direction, product, or opportunity for the business. These are initiatives that are strategic and will hopefully provide a future financial or competitive opportunity but have no way to predict or define an accurate ROI. These expenses will be the smallest portion of your budget initially as it they have the highest risk of not providing any return. Depending on how comfortable your business is with that risk, and how innovative your industry is, this portion of the budget can grow. All technology, tools, and technology training associated with each of these strategic initiatives would go into this budget. Some industries, like financial services, are more inclined to spend on R&D as they are in the middle of a digital transformation. Where other industries, like construction, have traditionally shied away from these types of investments as transformation has been much slower to perpetuate in those industry.
Take a Way
By following the Run, Return, Re-Tool model (R3), companies are better able to decentralize the control of IT expenses, while still accurately using the budgets to drive their IT strategies. This, as well as the refinement of the budget categories, helps to reduce the challenges of the Run, Grow, Transform model, but also remains simple to understand and easy to roll-out within the organization. The point of a budget is to help the business achieve their strategic initiatives, so if your IT strategy is to make the company a digital leader and hyper-competitive, the Run, Return, Re-Tool model is much more supportive of those efforts, and much more scalable as you grow.