What I Learned... When Budget Cuts Made the Backup Fail

Michael Hugos, Principal, Center for Systems Innovation | 7/26/2013 | 25 comments

Michael Hugos
Yesterday I wrote about the long moments of panic and dread I felt when the power went out and our back-up generator did not come to the rescue.

Although crisis was averted when the electric company repaired the problem in a few moments, I immediately drew up a capital expense request for a newer, larger generator and some related upgrades. And that's when I got a lesson in the language of finance.

As the saying goes, people spend money for two reasons: to acquire a benefit or avoid a penalty. And acquiring a benefit is a lot more glamorous reason to spend money than avoiding a penalty. And maybe with a little finagling, one can avoid spending the money and still avoid the penalty.

The CEO wanted to find a way to make do with what we had. It was suggested that since the weather was supposed to cool down soon maybe we wouldn't need a new generator after all. One executive even related a story about how the generator light in his new Cadillac had recently come on, and the dealer wanted him to spend a lot of money to fix it, but he had just ignored the advice, and the problem went away.

I was learning a lesson in the logic and politics of capital expense investments, or capex, as the finance people say. It wasn't that people didn't appreciate the importance of having proper backup for our systems. It was just that they weren't personally responsible for it, and they also had bonus incentives and other reasons to resist and question the need to spend a big chunk of money at that particular time.

I was the guy on the hot seat. Since our off-site disaster recovery project was also not fully funded, it could easily take a couple of weeks to restore all our systems and data. In addition, several of our most important customers had begun using systems of ours to support their own operations. We had, of course, promised that everything was properly backed up and covered in the event of power or equipment failure.

The money for a new generator was finally approved and there were no further power blackouts, but I don't wish to go through something like that again. During that time I learned valuable lessons about business decision making, and the roles of IT and finance in making those decisions.

Given what I knew about our IT infrastructure, I could vividly imagine the sequence of events caused by a sudden power outage. It kept me up at night. It gave me the willies. But the finance people and others did not see things quite so vividly. In working with them I came to appreciate some basic financial concepts that have served me well ever since.

Several years earlier when business was booming, I had no problem requesting and getting even larger amounts of money for capex investments. I had built out the datacenter, added more gear to support the growth of our e-commerce business, and hired more people to run the expanded operation. But now I found that asking for capex to do unglamorous things like disaster recovery, data backup, air conditioning, and emergency power generation was a much tougher proposition.

Capex investments come from company earnings or bank loans. Finance people like to give earnings to owners and shareholders instead of spending it on overhead like IT infrastructure. They also like to minimize bank loans because that debt changes balance sheet ratios and can affect bonus payouts. So in tough times when it's hard to predict what your real needs will be, it's better to pay for what you need when you need it as operating expense, or opex, and avoid using capex.

Next time, in a similar situation, I would give myself more options by redesigning my IT architecture. Instead of building everything as in-house infrastructure, I would create a hybrid cloud infrastructure where I connected the internal system to cloud systems. I would put many of those unglamorous things like disaster recovery, data backup, and extra servers in the cloud and keep my in-house operation as small as possible. I would pick a reliable cloud vendor and pay a bit more for high levels of service. I would do that because all my cloud operations could be paid for as opex, not capex.

Then, when business was booming, I could expand my infrastructure and capacity, and when business wasn't booming I could shrink my infrastructure and my costs. My expenses would rise and fall with business activity. I wouldn't need to ask for capex to buy hardware and handle all those unglamorous things that are needed to keep hardware running.

Finance people like opex in uncertain times because opex gives them flexibility where capex does not. And since finance is the language of business, it pays to speak the language if you want to become a senior executive in IT or any other area of business.

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Susan Nunziata   What I Learned... When Budget Cuts Made the Backup Fail   8/2/2013 1:39:57 PM
Re: All about language
@Michael: Thanks for elaborating, all really sound advice. You're right to suggest that compared to the knowledge required by IT professionals, learning financial-speak needn't be intimidtating.

Perhaps a new product line for Rosetta Stone might be courses that help us learn to speak the language of finance (in your native tongue). 
Michael Hugos   What I Learned... When Budget Cuts Made the Backup Fail   8/1/2013 11:13:01 AM
Re: All about language
Hi Susan,

The first thing IT pros need to keep in mind when talking about finance is that (unless you are trading derivatives) it is not that hard. We IT folks deal every day with MUCH more complicated stuff. So don't be intimidated by financical jargon.

Take a Finance 101 course at any college or find a continuing education course in the evenings or even online. Learn the basics of business finance and learn about 20 finance jargon terms and what they mean - terms like: Assets; Liabilities; capex; opex; ROI; Net Present Value; balance sheet ratios etc. You can read a good book on the subject too. But (sort of like learning a new language) it's probably better to take a class and practice speaking the language with others so you start to feel comfortable with it.

In IT we use IT jargon as a way to show how smart we are to other IT pros and we use IT jargon to intimidate outsiders; finance people use jargon to do the same thing. Don't be intimidated by finance jargon. Instead just learn the jargon and start using it in your own speech - especially when you talk to business people. You'll be surprised at the respect it gets you in the rest of the company.

 
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Susan Nunziata   What I Learned... When Budget Cuts Made the Backup Fail   7/30/2013 2:33:19 PM
All about language
@Michael: Thank you for sharing this incredible story, and great lessons.

This jumps out at me as being absoltuely essential for everyone working in IT to learn: 

Since finance is the language of business, it pays to speak the language if you want to become a senior executive in IT or any other area of business.

Do you have any advice on how IT folks can go about learning to speak the right finance language? Are there courses to be taken? Or would you recommend other methods instead?

Susan Nunziata   What I Learned... When Budget Cuts Made the Backup Fail   7/30/2013 2:31:14 PM
Re: Rarely needed but badly missed.
@Adil, @Toby: Great parallels indeed between that kind of home investment and the kind of investment Michael is talking about.

I would guarantee that the finance people who would not give the OK for the Capex needed to protect the company in Michael's blog would most certainly have made the same investment Toby did when it came to investing in something that would protect their homes without asking for an ROI analysis.

How do you put an ROI on disaster recovery?

 
adil   What I Learned... When Budget Cuts Made the Backup Fail   7/30/2013 11:33:48 AM
Re: Rarely needed but badly missed.
That was a very interesting story Toby with a great example of how precaution which seems to be an expensive solution initially, how they turn out to be life saver at the end. This is not only true for article you have quoted but for the implementation of security as well which is always debated for ROI. In this case the return was the hassle you saved and got back your stuff operational again in minimum time.
Hospice_Houngbo   What I Learned... When Budget Cuts Made the Backup Fail   7/29/2013 12:02:30 PM
Re: Rarely needed but badly missed.
The lesson from the story is that "prevention is better than cure". It is like a car assurance you may never use if you never have an accident. But when an accident happens you just rejoice for having contracted that assurance.
Toby   What I Learned... When Budget Cuts Made the Backup Fail   7/29/2013 9:59:08 AM
Rarely needed but badly missed.
I once owned a house with a basement that was prone to flooding. I spent a lot on a generator to pump the basement and then renovated it. The generator did nothing for years as it was not needed...then one day Hurricane Floyd hit town and I fired her up. End of the week I had a dry basement while the neighbours spent weeks cleaning up and repairing theirs....it's the kind of thing you only need once, but when you need it you really need it.
Gigi   What I Learned... When Budget Cuts Made the Backup Fail   7/29/2013 8:03:49 AM
Gigi
Re: cost cutting
"but they should be more careful when they decide to cut down the budgets since there are certain areas where the budget should be strong"

Saji, such budgetory constrains may not be in a planned way. So such situation, other than prioritized areas, they used to shortcut the expenditure by controlled allocations


Gigi   What I Learned... When Budget Cuts Made the Backup Fail   7/28/2013 12:08:10 PM
Gigi
Re: cost cutting
Shakeeb, normally such non budjected or unexpected expencess are accounted under miscillanious or contigency account
a.saji   What I Learned... When Budget Cuts Made the Backup Fail   7/28/2013 9:25:34 AM
Re: Very well written explanatioin of the difference.
@andkarena: But there are alternatives if you want it to be done somehow.          
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