How to Lead Through Difficult Budget Cuts
Budget Cuts Are Painful but You Can Learn the Winning Strategies
Welcome Leaders!
Remember the good old days when you were a manager who had to implement some budget cuts?
Sure, making the cuts wasn’t fun, but you always had someone to complain to (and to blame) - the CTO!
Now as the CTO, things are a bit different 🙂
Today we’ll give you the key tips and advice for how to lead through even the toughest budget cuts.
So, get yourself a beverage (or whatever it is that will help you overcome the trauma of budget cuts past) and let’s dive into it.
Cheers,
There’s not a CTO alive who hasn’t gone through budget cuts at some point in their careers — and its never something fun.
Budget cuts are frequently a grueling and painful process for everyone involved.
Leadership makes difficult decisions and as a result projects, products, people and even entire departments can be significantly impacted.
Unfortunately, for some sloppily-run companies budget cuts are almost a way of life. These organizations are bad at projecting growth and then properly matching that growth to expenses. Or, they just spend too freely and then realize they have to reign it in.
But at good companies budget cuts can be a useful tool to solve near-term struggles, reenergize the organization, and set it up for future success.
Budget Cuts & Engineering Departments
CTOs and their engineering departments are frequently a target for budget cuts. And this isn’t a surprise for a number of different reasons:
Engineering usually has the largest or one of the largest budgets in many organizations
Product & Engineering are typically not great at showing ROI on their efforts
Engineering frequently spends money on low-return projects
The optics of Engineering as a cost-center is common amongst stakeholders
Engineering is tempting to cut during a crisis since its results are typically delivered in the longer term (vs. short-term like Sales)
The complexities of engineering projects are sometimes misunderstood
These reasons hold true especially for companies without strong tech DNA. These are businesses that may not have a history of product or tech driving revenue. Or they might be investing little in Engineering overall, for example < 15% of revenue.
But even for businesses that invest 20% or more into Product & Engineering, as well as have a strong portfolio of products generating a substantial % of the revenue stream, budget cuts into Engineering can be quite common.
7 Challenges of Budget Cuts
To lead well through these budget cuts it’s important to understand the typical downsides around the process.
By understanding these common challenges as well as the various stakeholder perceptions of them you’ll be able to better navigate & lead.
1. Lack of Growth
Most if not all budget cuts signal to the employee base that the growth of the company is in question. Even if this is not true the perception is almost always there. This is natural since employees tend to think pessimistically about the future of revenue or headcount growth if budget cuts are expected on the horizon. Employees typically think that growth combined with financial reductions cannot possibly go hand-in-hand. Of course, the reality is that in many circumstances both can exist simultaneously.
2. Reductions in Force
A Reductions in Force (RIF) is quite commonly associated with budget cuts and represents possibly the most challenging aspect of the process for CTOs & other leaders. Partly this is because RIFs are not just difficult to execute on, but also have a certain psychological impact on everyone in the company. So, RIFs have to be handled quite carefully. But RIFs are also quite unavoidable. Payroll is usually the #1 line-item in terms of expenses in a company so headcount gets scrutinized a great deal during budget cuts.
3. Credibility Hit
CTOs and product leaders often take a credibility hit when it comes to budget cuts regardless of whether it was directly their fault or if the matter was simply a prudent business decision taken by stakeholders. The driver for the cuts might come from outside of Engineering but the CTO will often shoulder much of the blame because they are in the leadership position. This perception is fairly natural and a good leader assumes shouldering the blame as part of the job. But keep in mind that credibility is usually decreased or even temporarily lost during periods of budget cuts if you don’t lead well.
4. Loss of Influence
Budget cuts can create a loss of influence for the CTO or product leader. The perception might be that the CTO isn’t effective in fighting for their teams budget. Or simply that their peers are better at the “game” of maintaining investments. None of this might be factually true, but cuts can be perceived as loss of power in the organization for the leader (at least for a period of time). Staff may consider the leader “on the outs” with the rest of company management. Or, perhaps the technical leader lost a major budget battle to Sales or Support. In any case, this perception must also need to be clawed back over time.
5. Compromised Promises
Budget cuts often convert to broken promises to customers. Think about it: you’ve got a big product roadmap to execute on and product and sales have been talking about all the cool new toys to come to the customer base (they really can’t help it). If this is the culture at your organization then pulling back on the roadmap because of budget means telling customers they won’t get what was promised to them. I find this to be one of the worst parts of budget cuts because it kills the trust from company to customer which in turn can cause a lasting impact. Be very careful with this!
6. Infighting Between Leaders
When a Board, CEO or ELT decides on a budget reduction the functional leaders will usually go into some form of self-preservation mode. Even if the ask is just $3M on a $100M company budget nobody wants that $3M coming out of their budget. Because of this, infighting can develop between leaders that can subsequently spill over into their teams. The impact of this can very often rile up your team against other teams unnecessarily. I would suggest keeping the infighting contained as much as possible (I learned this lesson the hard way).
7. Process Nightmare
Out of 100 companies I would estimate that only about 10 will plan a good budget cutting process and then execute on it flawlessly. In fact, in my career I experienced it in only 1 company. I actually find it bewildering why companies approach budget cuts with such a sloppy style when cuts can really negatively impact the company for quarters to come if not done well. The 10% of organizations who execute on it well are extremely deliberate and careful with all aspects of cuts including employee communication, finding-the-money process, decision-making and so forth.
The above 7 challenges cover a big chunk of the difficulties of budget cuts, but of course there are some additional areas:
Public perception if customers find out you’re paring back
Morale impact during and after which can impact productivity & deliverability
Not being able to address technical priorities (tech debt increasing)
Product slow-downs impacting revenue or gross-margins
Critical partners or 3rd-parties who may want to change their relationships
Clearly there are a lot of challenges to the typical budget reduction process. But there are ways to handle the process well & lead your team through it successfully.
In fact, with good leadership & intelligent decision making there are organizations that turn budget cuts into a net positive for the business.
Leadership Formula for Tough Cuts
Here is my simple formula for successful leadership through tough budget cuts. I find that if you practice them it makes the process much easier & more effective.
But this list isn’t the easiest — it takes wisdom and experience to be able to implement these in the right way.
Never show too many negative emotions or frustration at the cuts — a lot of people may be going through much worse than you and they need your steady hand.
In fact, always stay positive. As a leader this is absolutely vital during troubling times. You must look for the silver linings and keep your team focused on the positive.
Communication is key during budget cuts. You need to be on point with how you speak, write, etc to your team and other stakeholders. Practice if you need to.
Framing & messaging is important to a budget reduction as well. Make sure you clearly understand how the company is framing the cuts & improve on it if needed.
Establish a good process for the budget cuts including coming up with the dollar savings, the potential RIF process (if that’s involved) and any other sub-initiatives.
Having hard conversations with people who are being let go takes skill. Go read & learn about how to do it well before wading into these conversations. Very important.
Definitely fight for budget. It’s a dog-eat-dog world out there so I’m not going to sugarcoat it. But be respectful and don’t fight with others.
Think through the post-budget cuts team state. What do you have to do to get back credibility, influence, morale and so forth? Build a plan for this. Be deliberate.
My personal philosophy is once you decide on a course of action in terms of budget cuts get it done and over with quickly — you don’t want that lingering in the organization.
Make sure to take care of your mental health through the process or you’re not going to be able to take care of others in your charge.
By following these tips you can help your business manage through the process with integrity, as well as reap some of the benefits of budget cuts to the org (yes, there are some).
7 Benefits of Budget Cuts
Believe it or not, there are some potential benefits to an engineering & product organization from budget cuts if done for the right reasons and handled properly.
Let’s take a look at some of the benefits below.
1. Brings Focus 🎯
Budget reductions can help focus the product roadmap & technology project list. There is often “fat” in the roadmap and budget cuts can introduce a healthy constraint that encourages engineering teams to focus on the higher ROI projects & reduce initiatives that may be too risky in terms of ROI. Without this kind of check roadmap scope tends to grow. That doesn’t mean you achieve roadmap focus ONLY through budget cuts, but it’s a positive side-effect if as a leader, you can leverage the cuts in the right manner. Of course, if your roadmap is already hyper-lean cuts won’t create more focus than you already have.
2. Reset Plans & Priorities 🗓️
Budget cuts are a perfect time to reset roadmap & project plans, priorities and expectations with stakeholders. If you weren’t under-promising and over-delivering before then this is the perfect opportunity to begin doing so. The psychology of most executives during budget cuts is that some adjustment to expectations & outcomes will be necessary depending on the depth of the cuts. So most stakeholders tend to be more malleable at this time. However, consider the customer ramifications of your big reset — how will they be impacted?
3. Streamlining the Team 🫂
Budget cuts can provide the perfect opportunity to address underperforming or misaligned team members who may not be adding value. Over time, organizations can become bloated with resources that are no longer the best fit for the business. A reduction in budget forces a reevaluation of every team member's contributions and can lead to a leaner, stronger, and more focused group. While letting go of team members is always challenging, this process can lead to a more efficient and effective workforce that is better aligned with the company’s future needs.
4. Level Setting with Partners & 3rd Parties 🤝🏽
It’s not just internal teams that benefit from the focus that budget cuts can bring; third-party vendors and partners also need to be evaluated. Over time, vendor relationships can become complacent, and performance can diminish. Budget reductions are a good time to renegotiate contracts, reassess deliverables, and ensure that partners are still delivering value. Cuts can serve as a wake-up call, encouraging external partners to step up their game and align better with your organization's needs.
5. Better Business Alignment 🏆
One of the often-overlooked benefits of budget cuts is the ability to more closely align your spending with business goals. Cuts can force you to rethink where you are investing in technology and product development, and how that investment ties back to revenue growth and overall company health. By cutting lower-priority or lower-return initiatives, you have an opportunity to focus your engineering and product resources on the projects that directly support business growth and profitability, ensuring a more sustainable future.
6. More Creative Problem Solving 📐
When resources are abundant, teams can sometimes fall into a routine, relying on the same old methods to get things done. Budget cuts often push teams to be more creative & resourceful. With fewer resources, the engineering department may have to find more innovative ways to solve problems, improve processes, and deliver results. Although it’s rare, budget cuts can sometimes lead to breakthroughs that wouldn’t have otherwise occurred.
7. Organizational Resilience 🏃🏽
Successfully navigating budget cuts can strengthen the organization’s ability to weather future challenges. Teams that emerge from these cuts are often more resilient, having had to adapt and overcome significant hurdles. This resilience can be a long-term asset, ensuring the company is better prepared for future downturns, market shifts, or other crises. Leaders and teams that have gone through tough times together often emerge more unified and capable of handling whatever comes next.
Conclusion
While budget cuts are undeniably difficult, there is a way to handle them well and show leadership as a CTO during a tough time.
One thing not to do is treat budget cuts like any other random initiative, since they can directly impact the lives of your team members.
I find the most important part of the process is communication & collaboration: how you talk to your teams, how you handle their frustrations, how you manage their concerns and so forth.
Next most important is the framing and messaging aspect. As a leader you must find the positive silver lining and turn coal into diamond for your organization — that’s your job.
Ultimately, I would look at budget cuts as an opportunity to thoughtfully reset your team/goals, create focus, and position the business for better long-term success while at the same time going out of your way in taking care of those in your charge who may have been adversely impacted.