How do I defend a program's budget during cost cuts?

Put a number on what a cut costs in revenue, next year and in the years after, because everyone calculates the saving, while the revenue effect often nobody does. Make the numbers credible by showing a prioritized project list yourself that says where your program can be cut, and by being open about the uncertainty.

Does it help to ring-fence the innovation budget up front using 70/20/10?

In theory it's good. In practice the money still gets used where it is needed, and the fence rarely holds in a cost-cutting round. It helps more if you can show that the money does the most good in your program.

What should projects be cut by when savings have to be made?

By their remaining KPIs, meaning by forward ROI. No stop brings back what has already been spent, so sunk cost doesn't belong in the decision. What matters is that project owners can't exploit this, for example by dressing up a business case, spending the money and then pointing to the money already spent.

How do I build trust as a program owner before the cost-cutting round?

By being transparent all the time, backing everything with numbers and stopping projects that don't perform early yourself. Small projects that achieved what they were supposed to also give you backing for the big ones.

Defend your program budget during cost cuts

One million less budget is quickly calculated, but what the same cut costs in revenue is something nobody in the cost-cutting round usually works out. That is exactly where you defend your program: you put a number on what cutting it means (say one million less revenue next year and three the year after), and you make that number credible by showing yourself where your program can be cut.

A cost-cutting round is like a general election: people vote for whoever they trust to lead them out of the crisis, and most only start campaigning shortly before.

Why doesn't ring-fencing the budget hold?

The usual advice for making an innovation budget crisis-proof is the 70/20/10 model: a fixed share goes to the core business, one to adjacent areas and a small one to the truly new, and you ring-fence that share up front and don't touch it, even in a tough quarter. In theory that is certainly good. In practice, though, the money still gets used where it is needed, and when costs have to be cut, a fence like that doesn't hold for long.

So if the money flows to where it is needed, it goes to whoever can show it does the most good there. If you can show that an investment saves a specific amount within a few months, the question really becomes whose money gets taken away for those few months. That applies above all when you have no budget authority yourself and want to show that your program is one of the initiatives where the budget is best spent.

Why won't people simply believe your numbers?

You can basically only show that with numbers. Anyone defending their own budget with numbers is of course not neutral, and everyone at the table knows it. That makes trust all the more important: you have to show credibly that the numbers haven't been dressed up.

That can mean bringing a prioritized project list on which you show yourself where your program can be cut, so it's clear you aren't simply blocking the cost-cutting course on principle. And it can mean showing the uncertainty in your numbers openly, because that is exactly what builds trust. How to argue with uncertain numbers in front of finance is something Lukas described using a CFO meeting as an example.

What does it cost to cut a project?

A cut list says where cuts are possible. That raises the question of what each individual cut costs: if we stop this or that project, how does it affect next year and the years after? The cost saving is very easy to calculate (you get one million less), the revenue effect is much harder to calculate, and that's why budget owners often just don't do it.

You then have to help them along, for example like this: the cut means one million less revenue next year and three million less the year after. If the cut comes anyway, the program's targets should be adjusted accordingly and signed off. With Bayescase, program management software (for innovation, transformation or cost programs, for example), you put a number on what each cut costs in impact and how risky that is.

What do you cut by when cuts have to be made?

If the price of a cut is what will be lost in the future, then when cutting, only what is still to come counts: evaluate projects by their remaining KPIs and leave sunk cost out of it. What actually happens is often something else. Projects get cut because the ROI no longer works out, since less revenue is coming in than expected, even though the forward ROI does work out because the money has already been spent. That should be taken into account in prioritization.

What matters, though, is that project owners who absolutely want to push a project through can't game this (dress up a business case, spend the money and then say: we'll carry on, the money's already spent anyway).

You also shouldn't underestimate how much backing a small project that achieved what it was supposed to gives you, because then you are trusted with bigger projects too. Quick wins are therefore a good way to build trust. If savings really have to be made, you can also prioritize projects by how short-term they are, so carry out the quick wins first and possibly use their uplift to pay for other, longer-term projects.

What you can do differently before the next cost-cutting round

That backing, however, isn't built in the round itself. A cost-cutting round is like a general election: people vote for whoever they trust to lead them out of the crisis. Most people make the same mistake as the parties do, they campaign shortly before the election and don't make sure there is a generally positive feeling about them beforehand.

Applied to a program, that means: always be transparent, and you'll be believed when push comes to shove. Evaluate and back up everything with numbers, and stop projects that don't perform early yourself, even when no budget round is coming up. That also builds trust that you have your portfolio under control (how such a stop becomes traceable is covered in the post on prioritizing a project portfolio). Everything proposed in the cost-cutting round can then be put into context accordingly.

Frequently asked questions

How do I defend a program's budget during cost cuts?: Put a number on what a cut costs in revenue, next year and in the years after, because everyone calculates the saving, while the revenue effect often nobody does. Make the numbers credible by showing a prioritized project list yourself that says where your program can be cut, and by being open about the uncertainty.
Does it help to ring-fence the innovation budget up front using 70/20/10?: In theory it's good. In practice the money still gets used where it is needed, and the fence rarely holds in a cost-cutting round. It helps more if you can show that the money does the most good in your program.
What should projects be cut by when savings have to be made?: By their remaining KPIs, meaning by forward ROI. No stop brings back what has already been spent, so sunk cost doesn't belong in the decision. What matters is that project owners can't exploit this, for example by dressing up a business case, spending the money and then pointing to the money already spent.
How do I build trust as a program owner before the cost-cutting round?: By being transparent all the time, backing everything with numbers and stopping projects that don't perform early yourself. Small projects that achieved what they were supposed to also give you backing for the big ones.