I just wrote about the failings of the Budget Tyrant CEO. Here’s a real-life example of the consequences of this fiscal autocrat’s policies. I served as an IT manager at a large Fortune 500 company in the late 90s. As part of my responsibilities, I managed the large number of vendors that sold to the IT organization. Having owned an IT business, I understood how vendors operated and knew the company was wasting a significant amount of money in their IT operations.
After a few weeks on the job I noticed a group of IT providers I commonly saw in the halls who had contractor badges instead of employee badges. One day I stopped one of them to find out what they did. He told me they provided desktop support services for the company and were employed by a local vendor. I went back to my desk and found the invoices for the vendor. I was shocked to see that the company was being charged $75 per hour for all of these desktop technicians. I knew at the time that the most expensive of them was probably making at most $20 per hour and the vendor was pocketing the difference. These workers weren’t temporary help hired to get through a particularly busy period, but were the everyday IT support for the employees.
I felt like I had just found a gold mine. There were roughly 25 of these contractors, and I figured we could save at least $50 per hour per person. That equated to around $2.5 million in savings every year if we simply converted these contractors to employees. Even for a Fortune 500 company, that was a significant savings for such an easy change. I quickly made an appointment with the director in charge of the group to present my brilliant plan. After exchanging pleasantries I immediately cut to the chase, “Do you know that we pay $75 per hour for the desktop support contractors?” I asked.
“Yes,” he said somewhat proudly, “We used to pay EDS $150 per hour.”
Undeterred by that surprising piece of news, I plowed on, “Well we could hire all of those people as employees and pay them $20 per hour. I’ve talked to a few of them as well and they would rather work for us.”
“But that wouldn’t save us any money,” the director countered.
At this point in my career being young and naive, I almost walked to his white board and did the simple math of 75 minus 25 times 2000 hours, but I was so shocked by the answer that fortunately I just said, “What?”
Sensing my confusion, he began to explain the intricacies of corporate budgeting to me. Since the budget was already set for the current year, making this change wouldn’t save any money because money not spent from a given bucket would just disappear from his budget and not be available to be spent anywhere else. Also, my plan would require adding headcount that wasn’t planned for in the budget, so it would look like he was requesting more resources during the year, which would be perceived as bad planning on his part. He closed by saying, “We can look at making the change for next year’s budget.”
I stumbled out of his office dazed and confused. I had just presented someone with an opportunity to save the company money at a rate of $2.5 million per year, and this seemingly sane person had come to the conclusion they should wait solely because of the budget process!
Some people may dismiss this story as just a case of a bad decision made by a weak employee, but I would argue differently. I would argue that it was a bad process that produced certain incentives that caused otherwise competent employees to act in a way that was bad for the company.
The budget process had conditioned this director not to make any changes during the year regardless of the big picture benefit for the company. This was a learned behavior; not something that an employee would come up with naturally.
So what is a CEO to do? Am I advocating getting rid of budgets? Not at all. The real problem was lack of direction to the employees. The budget was the only tangible guidance that the director – as well as the rest of the organization – had to make decisions. With no other guiding principles, the budget became the bible by which all actions were judged. The fundamentals of the business, making and selling computer chips, never entered into the conversation. How do you prevent this? I’ll cover that in my next post.