It’s that time of year: companies are beginning their 2024 budget planning.
For many finance teams, 2024 budget planning will feel like a completely different assignment compared to 2022 and 2023. We’ve just lived through an unprecedented period of easy capital raising, as tech companies have enjoyed the benefits of record funding rounds and impressive stock prices. But since the beginning of this year, many teams have been directed by investors and their board of directors to plan to navigate carefully through this period of uncertainty.
For the time being, teams might need to double down on efficiency as opposed to turning to hiring or scaling for hypergrowth. In this environment, we must make sound decisions regarding where to invest our R&D resources. Some engineering leaders will be asked to work with a flat budget YoY, while others will be asked to do more with limited increases in headcount and budget. Engineering leaders need to focus on making the smartest decisions regarding where they are going to invest their very finite resources and reflect the impact of these decisions to the business.
For engineering leaders, going beyond gut feeling, and taking a more data-driven approach to priority setting and achieving strategic goals will be the difference between limping out of the downturn or coming out stronger and more streamlined than before. Here’s how engineering leaders can adopt a mindset of “efficient re-allocation” for 2024 budget planning.
The Role of the Engineering Leader in Budget Planning
Investors or the board of directors might set the overall tone for budget and spending in 2024, but it’s on executive leadership to apply a detailed understanding of each business unit to create the annual plan. Only engineering leaders truly know the resources at their disposal and how to effectively apply them to achieve strategic goals. Leaders need to understand where R&D is investing time and resources today, evaluate if this investment distribution will achieve desired outcomes, and act to make the changes necessary to achieve strategic objectives.
In other words, truly effective annual budget planning in 2024 is about setting up a data-driven approach that enables your team to repeatedly make the right strategic decisions for your R&D organization, year after year, regardless of whether budgets are tight or you’re in a phase of heavy investments for growth. Across all of senior leadership, we need to make rational, data-backed decisions that will deliver the maximum positive impact in the long run.
Three Steps to Better Align Engineering Resources
By following these steps, engineering leaders can ensure they’re making sound investments:
- Bring data to the budget process: An engineering team’s work should be aligned with the goals of the business. The best data to bring to planning conversations is understanding where your team has spent their time in the past, specifically what amount of their time was spent on roadmap work, bugs, customer support, or customer-specific deliverables. This will inform decision-making on the resourcing you need to accomplish the goals of the upcoming year. Understand how many people will be dedicated to the work of KTLO (keeping the lights on), or customer commitments and how many engineers will remain for new features work. Use the historical data of where engineers spent time to understand historical product-line contribution margins to inform future decisions on how to deploy resources across product lines. Historical engineering data also allows you to provide guidance about the future headcount needs of the engineering team to achieve company goals.
- Understand benchmark data: Look for similar types of companies in the same growth and maturity stage to provide guard rails in the budget process. You can look at other public companies or private company company’s comps for R&D spend as a % of revenue, or R&D spend compared to growth rates. In addition, using published allocation benchmarking data, you’re able to benchmark your engineering activity and allocations against industry peers. Your executive team will love to see this type of data-driven decision making.
- Game out different scenarios: Know how adding or removing resources will impact the timeline of the delivery of new product features. Use data to understand the costs and benefits of reinvesting the budget and headcount from certain initiatives into others. Make sure your business leaders have a clear picture and are aligned on the consequences of difficult trade-offs during this process. Scenario planning tools are great for this purpose, where you can understand how readjusting focus, increasing/decreasing headcount, or cutting scope will impact delivery timelines.
Engineering leaders have incredibly valuable insights to bring to the annual planning conversation. In 2024, let’s bring data into the conversation, in order to make the best decisions possible for our organizations. Annual budget planning is about priority setting, aligning on strategic objectives, and understanding everyone’s part in the big picture. Let’s use data in 2024 to improve this process, and come out of 2024 stronger than ever.
Want to learn more about 2024 Annual Budget Planning? Download the R&D Budget Planning in the Year of Generative AI.