Whether you are planning a budget for you and your family, or you are tasked with allocating resources at your job, budget planning can be arduous. In a post at his blog, Kiron Bondale delves deeper into this conundrum to evaluate just how much should be allocated for non-discretionary spending.
Weigh All the Values
It does not matter how frequently your organization develops or revises a budget–non-discretionary spending will always be a hot topic of debate, and difficult to reach a consensus on. Unfortunately, most organizations leave little money left over for more strategic, discretionary endeavors. In a perfect monopolistic industry, this may not be such a big deal, but for most organizations it will cause huge problems.
There are different approaches organizations can take in order to find the equilibrium between no and too much non-discretionary spending. This is one such example: “Requiring project sponsors to focus their business cases on the minimal scope required to meet regulatory or other mandatory requirements. This decree is usually accompanied with some independent review of the proposed scope & costs to ensure gold-plating is minimized.” However, this approach can cause a competitive environment in which sponsors and governance committees are on opposing sides.
Another strategy an organization may choose to utilize is to establish a ceiling for non-discretionary spending that is based on the industry’s practices. Benchmarking can sometimes cause problems for an organization because it is selecting what works best in the industry rather than taking into account what will work best in the actual organization.
Perhaps the better solution is to take into account opportunity cost. Most organizations will take into account the cost of a non-discretionary project, but most do not also weigh the benefits. An important aspect of portfolio management is to get the governance committee comfortable and aware of the projects they are saying “no” to.
You can read the original post here: https://kbondale.wordpress.com/2015/12/28/how-much-should-we-budget-for-non-discretionary-spend/