How to Budget for Development Projects
If you're a business owner about to go to a vendor about a development project, you probably have a few questions. However, before you go talk to the vendor you need to really understand what problem it is that you are trying to solve. Often, people come to an agency with a problem or scenario and say, "How much will it cost to fix that problem?" The reality is that it might not be that simple. It's not like a plumber looking at a pipe and knowing exactly what must be done to repair it.
How do you come up with a budget for a development project?
You need to look closely at the problem and see what's actually going on. What is this issue costing you? How did you create budgets in the first place to tackle problems like this? Do your homework before you make your way to an agency.
I have a big fulfilment team, a huge slice of my revenue is going toward that, and I want to reduce it. What do I do?
First of all, what steps have you already taken to address that problem? You don't want to go to an agency and have them suggest a bunch of stuff you've already tried.
If you say it's costing you too much, what are you comparing that to? Are you comparing it to when your company was smaller? Are you comparing it to a competing company? What are they doing to fix this?
Maybe you've talked to other people in the industry and discovered that they are running at around 15 percent for fulfilment costs, and you are closer to 30 percent. So let's quantify what 30 percent is, and what the dollar difference is between 15 and 30 percent. If we're talking about a $150,000 cost and we're saying that's twice as much as you think you should be spending, that's a quarter-million-dollar problem that is likely recurring every year. So if you know this is likely going to be a three-year problem, it's really a $750,000 problem.
If you only have $10,000 left in your budget to address this issue, you should probably be aware that $10,000 doesn't fix $750,000. The typical question we ask is: the last time you wanted to make $750,000, how much did you need to spend to make it?
In some cases, a business is really lean, and it only spends $150,000 to make $750,000. That's ambitious, but possible. And at least now you have a starting point: this is your problem, and this is what you believe your realistic fix is going to cost.
Going forward, you have to take that one step further and look at what is realistic to plan for that. We never want to engage in a project where you have this big problem and we just go, "Yup, $150,000 is going to fix it." We don't know that. We're just working on theories.
It happens all the time: a problem goes to RFP and an agency doesn't really know what the problem is or what the solution will look like, but says, "Yup, $150,000, sign here, and we'll fix X and Y." Maybe 20 percent of the time, that actually works. But the other 80 percent of the time, you end up with a faulty solution that doesn't actually meet the needs or fix the issue.
What happens if we go through the plan and determine that the problem isn't what I thought it was?
It could just be that the problem is something under the surface that you haven't noticed. If you're spending too much on fulfilment, there could be something in your supply chain that's broken that's actually causing the extra cost. Maybe your ecommerce site it taking in lots of orders that you don't have stock for, and that makes your fulfilment process tricky, but it's not your fulfilment process itself that's the problem.
So we would look at that process. Are you shipping within your country, or internationally? How does your warehousing work? Are your labels produced manually, or are they automated? Do you have an integrated system from ecommerce all the way down to shipping or is it people handing off labels to each other with a ton of room for human error? All those things have to be looked at.
No development agency is going to necessarily be an expert in your particular industry. So you have to put in the time and effort to facilitate that solution.
Ideally, you want to run through these steps:
- Identify your problem
- Calculate what that problem is costing you
- Determine a baseline amount that you had to spend to fix something similar in the past
- Come up with a figure you're willing to spend to get someone to help you create a plan for moving forward (typically 10 to 25 percent of your budget)
TL;DR: Don't go to an agency and say that you have a problem and a set budget to fix that problem if it doesn't actually match what you would invest to solve the problem. And make sure you have money, time, and energy to devote to planning.
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