A colleague at work the other day was trying to help me understand how the budget process works, specifically the process involving companies with in-house IT departments. I have been more involved with budgets in general these days and I was looking for some insight into how best to be effective and efficient.
“I am trying to understand how budgets are typically set and agreed upon, can you help me make sense of the process?” I asked my colleague, Linus.
“Sure!” Linus responded, seeming a little to happy to tell his story. “See, it really is simple. Every year the business tells IT they need something, let’s say an apple.”
“An apple?” I questioned.
“Yeah, sure, an apple. It doesn’t matter what we call it, but let’s just say it is an apple. So, the business says they need an apple and then IT will spend time figuring out how much the apple will cost.”
“But, it’s an apple. It costs less than a dollar. How long do they take to figure this out?” I asked.
“Usually a week or more. Listen, it’s not about the apple, there are extra costs with that apple. For example, how many people will it take to administer the apple?” Linus responded.
“Administer an apple? Besides eating it, what more is there?” I asked.
“Oh, LOT’s more” Linus continued. “Anyway, IT comes back and says the apple will cost $10.”
“Where the hell do they buy their fruit?” I demanded to know. “Is the apple wrapped in whale bacon?”
Linus pressed on, gaining steam. “But the business decides that $10 is too much and responds by saying ‘We will give you $5’, as if IT is trying to pull a fast one and overcharge their own company for that apple.”
“But they are overcharging their company!” I exclaimed.
“Not so fast,” Linus cautioned, “you are not pulling a fast one, you are giving an honest assessment. So, after they offer you $5 you go back and tell them that for $5 you can give them a pear.”
“A pear?” I asked, becoming more confused.
“Yes, a pear. To which the business then will ask things like ‘Does it taste like an apple?'” Linus explained.
“What do you tell them?”
“You tell them no, it tastes like a pear, but it is still a fruit that comes from a tree and it is all they can afford.” Linus replied.
“Does that really work?” I asked.
“Yes, it does. You give them the pear and they go away until next year.” Linus assured me.
I was quite confused by now, but needed to know more. “What happens then?”
“Next year they come back and ask for another apple, and this time they say they definitely do NOT want another pear because the last one tasted awful and they cannot believe we would sell them something like that for $5 when they really wanted an apple to begin with.” Linus explained.
“OK, but they could have bought the apple the first time, right?”
“Yes, but they did not want to spend the money. So, this time they ask for another apple and, being the smart businessmen that we are, we tell them it will now cost $20.”
“Seriously, where do you buy your fruit? Who the hell would pay $20 for an apple? Does it taste like bacon? And no wonder they think you are overcharging them, because this time you are even admitting you are overcharging them” I quickly fired the words out of my mouth, shocked to hear that this is somehow considered a normal process.
“No, you tell them it costs more because last time they tried to get you to cut your price in half. So, this time you charge double. You tell them $20 and they may come back and offer you $12, which is $2 more than what you needed, so now you are going to make a profit and you agree but only after putting up a fight because you don’t want them to think that they are overpaying for anything. Everyone is happy.” Linus stated.
“What about the pear?” I asked.
“Don’t worry about the pear, it was just something put together as a stop gap to get us to the apple.” Linus explained.
“But, isn’t the pear a waste of time and money that could have been better put to use the first time around? I mean, I see a pear for $5 and an apple for $12, right?” I started to wonder.
“Right….” Linus said, but could clearly see I was heading somewhere with my questions.
“So, the business could have had an apple for $10 for the past two years. Instead, they had a pear for one year at $5 and an apple the second year for $12, spending $17 for one year’s worth of apples when they could have spent $10 for two year’s worth of apples” I stated.
“Clearly you have a lot to learn.” Linus remarked and with that my lesson on how the budget process works was over.
Very amusing, but unfortunately, that is probably a little too close to how the budget process often works at too many places.
Unfortunately I see the sense in his story.
Being a lowly engineer, though, I hate to see the wasted $7, not to mention the time and energy adjusting to a pear then to an apple. It seems to me that it would be best to buy the apple in the first place, too.
Sometimes people need to experience for themselves the cost of settling for what they are willing to buy rather than getting what they really need.