A basic knowledge of Excel includes formulas, formatting for readability, using multiple worksheets and importing external data. More advanced Excel knowledge includes use of macros, pivot tables and pivot charts.
Some operations folks use other Excel-like programs such as OpenOffice or LibreOffice spreadsheet programs. Use caution when using something that the senior leaders do not use. If the whole organization has adopted LibreOffice as the standard spreadsheet application, that works. The problem occurs when the boss wants to share the spreadsheet with some of the organization’s senior leaders and the file format doesn’t translate exactly or the file is unreadable to them. In this case, try to bridge the gap between operations and the executive suite by using the same tools. Formats do not always translate between two different spreadsheet programs.
Building a basic budget requires institutional knowledge. How is employee labor computed? Understand operations’ income and where it comes from. Are any employees billable to other projects? Is there a flat budgetary structure with a single cost center for all labor or are there multiple cost centers. Is there any income that has special restrictions? How are purchases handled: things such as parts, services, software, contractor services? Does operations have to account for overages or money not spent at the end of the fiscal year?
Generally, organizations have financial people who can provide reports for various cost centers. If operations fits neatly within one or more cost centers, these reports can help build a budget. If operations is combined with other projects or business units, then the work of separating operation’s budget becomes a bit more complex. Starting with these reports is a good first step.
To really understand how these reports work, understand how operations is paid and how it spends within the organization.
How is operations funded?
Where does operation’s base funding originate?
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Is Operations billable or do they have constant funding from year-to-year?
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Does someone need to request this money or is it always there?
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How are pay increases funded?
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Is there only one source of money or are there multiple income streams?
Does everything come out of one cost center or are there multiple cost centers?
- If multiple, are they broken down by project, type of expenditure (labor, contractors, services, supplies)?
Is any of the money special?
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Does it expire?
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Does it come with strings/hooks to specific projects or billables?
How does operations spend?
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How are employee salaries computed to include benefits and overhead?
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How are contractors paid?
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Are there special rules for obligations? In some organizations, some kinds of money must be allocated up front and cannot be reclaimed even if not spent until after the contract or service has completed or the fiscal year has ended.
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How do operational purchases work within the organization (parts, services, software, training, travel, supplies)? Who pays for these purchases? Who tracks these expenses?
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Does the organization have a CapEx process and where does that money originate? Does depreciation impact the budget?
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Are there any hidden costs?
- Service fees from internal organizations?
Answering these questions and looking at reports from within should provide most of the answers. Operations may have to implement tracking to get some answers if they aren’t easily identified in the reports.
Why would any sane operations person want to go through all of this to assemble a budget?
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Operations is understaffed and wants to ask senior management to hire more people
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There has been staff turnover and operations needs to fill those positions. How much is available and what opportunities exist to do something different?
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Senior management is asking hard questions about the operations budget (e.g. why do we spend so much on operations, where does the money go?).
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Operations is considering a student hire or contractor to help with some short-term work but operations cannot move forward until demonstrating that they are spending wisely.
Budgeting for impact
Just putting numbers in a spreadsheet isn’t budgeting. What do the numbers show? Is operations spending too much on senior people? Equipment? Vendor maintenance? Where is the majority of spending (commonly it is labor)? An easy to present budget can also help to understand if operations is well managed.
Take that same view of the budget that gave visibility into operations and use it to support a request or a claim to senior management.
As an example: consider a senior person leaving the organization. Operations needs to fill that slot with a new person to avoid getting overwhelmed.
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Does this vacant position present an opportunity?
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Does operations need to hire someone with specialized experience in a new area?
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Could operations benefit from hiring two junior level people using the same salary slot as the former senior person? Does that work mathematically within the organization’s hiring rules?
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Could operatoins reduce the overall cost of operations to help the organization by hiring one junior person and growing that person?
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Could operations hire a junior person and use the remaining money to refresh hardware or invest in a new technology to help the organization?
See how to make some of these arguments mathematically in a spreadsheet. The part that is missing is the “why” and that’s where the impact comes in. Senior management may believe that operations needs to reduce overall costs. This is when operations needs non-numerical supporting evidence to persuade management that operations does need to hire a specialist or make the case for an apprentice that would achieve a cost savings but would reduce capabilities until the person came up to speed within the operations team. Budget decisions have consequences: make sure those impacts are clearly illustrated within the numbers but also be prepared to explain the non-monetary impacts. This includes risks to the organization such as reduction in capabilities.
When preparing for a big budget presentation where operations is asking for a decision that will impact operations, consider the following supporting strategies:
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Enlist customer support. Customers are asking for improved capabilities, better response, new technology. How can they provide input to management that operations needs more or different resources to serve them better?
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Find out if there are any new initiatives within the organization that would rely on specific expertise or additional operations resources. This demonstrates a tangible need (e.g. Project X will require 50% of someone from operations to implement their technical plan).
Using these additional supports requires knowing the organization and having a good relationship with the customers. Ideally, customers come to operations in the planning stages of new projects in order to get feedback on potential technology issues before they begin work. That makes this step a bit easier. If not, then begin reconnaissance by talking to project leaders or middle management within the organization.
When researching organizational needs, start with some basic questions:
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Planning anything new in the next year?
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What projects is the group starting?
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What technologies are not in use that would make the unit more productive?
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Does operations provide the right level of support to the division?
Exercise:
Choose a budget scenario from above or make up your own.
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How would you build a basic budget to persuade senior management on your issue?
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What would be important to highlight?
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What non-monetary supporting information would help your cause?
The cost-benefit analysis
The cost-benefit analysis, or CBA, provides senior management with concise proof that operations has done its homework when proposing a solution.
The first step in the CBA process is to know the audience. The higher up the organizational chain, the less detail required. Before presenting a CBA to management, prove that the solution is the best one.
Before detailing the cost of a solution, operations needs to know existing expenditures without it. What is the cost of not doing anything? This is where the benefits of performing a solution would need to outweigh the status quo.
Building a case
Everything in a CBA should be represented in the same units, the most common being money. Consider benefits to the solution in terms of savings, efficiency, increased income to the organization.
Cost should include anything that explicitly adds to the total cost of the solution:
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Employee labor
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Contractor costs
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Maintenance fees
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Up-front costs and licensing
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Hardware
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Depreciation
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Facilities costs (outfitting a space)
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Provisioning or migration costs
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Networking
Benefits should include anything that is an outcome of the solution:
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Increased productivity
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Increased organization efficiency
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Increased income to the organization
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Increased capabilities that enhance the organization in another way
Putting it all together
Todo
Might give an example here. Need to write more explaining how to assemble the pieces.
Exercise
Put together a CBA for a recent project or task you worked on or encountered:
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How would you estimate costs that are not known?
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How do you monetize benefits that are not explicitly monetary?
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What does the result tell you?
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How could you sell this idea to non-technical people using the CBA? Capital Expenditure (CapEx)