Why Being in Engineering Management Means You Need to Understand Finance: It’s Not All About Technology

It’s an exciting time for engineers. Innovations in cloud computing, infrastructure automation, networking, and other areas of focus ensure ever-evolving opportunities. One of today’s challenges is that engineering tasks and decision-making requirements are expanding beyond traditional responsibilities. To achieve an engineering management or corporate leadership position within your organization will require you to have a deep understanding of how your company does business in addition to knowing the underlying technology the company offers.

In this post, I will focus on some of the financial and business responsibilities of engineering leaders and ways in which you can better position yourself to take on a leadership role within your organization. 

What’s Required of Engineering Management? You Might Be Surprised at What Engineering Leaders Actually Do.

As you might expect, working on technology is the most common answer to the question, “What does an engineering leader do?” The primary role of many engineering leaders is, in fact, to own and drive the execution of product development, architecture, and infrastructure. This includes working with their teams to make architecture and technology decisions, design and build new products, design and build platforms and APIs, define implementation plans, create and manage delivery schedules, work with other departments to set priorities, provide work estimates, and respond to customer escalation requests.

In addition, engineers often see their managers setting departmental goals, coaching members of the engineering team, organizing and assigning work, encouraging camaraderie and positive team culture, recruiting new engineers, providing performance feedback and assisting individual engineers in growing their careers. 

What’s often overlooked is the amount of time engineering leaders spend on financial-related matters. This includes budget planning, ongoing management of departmental expenses, and more wide-ranging responsibilities. Let’s review a few of these non-technical engineering responsibilities required to be an effective leader. 

The Budget Process

It’s important to realize that the budget process is not an activity which only takes place once a year.It’s ongoing – with budgetary reviews taking place monthly, quarterly and annually.In addition to the annual plan, regular assessments are also required to ensure you meet your departmental, financial and company goals on an ongoing basis.

• Engineering leaders should implement a monthly review of spending with their executive manager and/or the finance team to ensure the engineering budget is on track to meet stated objectives and the team is not overspending. 
• A budget is developed at the end of one year for implementation the following year. It is the best estimate of anticipated programs, expenses, and goals. As a result, you will need to stay on top of things by regularly evaluating whether you are over or under budget and notify your manager and other appropriate executives as necessary.
• A budget is also not static. It changes frequently based on a number of different factors and these changes can have a direct impact on other teams – for example, when revenue goes up or down or when costs across other departments go up or down, proposed projects are often reevaluated. It’s common for departmental leaders to regularly increase or decrease their budgets throughout the year based on the changing needs of the business.  

Departmental Expenses

An engineering leader’s budget typically includes:

Employee Salaries

This includes salaries of all full-time engineers and other team members as well as part-time employees, compensated interns, and others.

Bonuses

While the types of bonuses vary from company to company, they may include a hiring bonus and additional bonuses for a share of performance, patent development and completing a design under budget.

Software Licenses and Maintenance Costs

Software license costs historically refer to traditional box software. While this is still the case, today it also includes the monthly user and maintenance fees for applications, platforms and other subscription-based SaaS tools such asdevelopment and deployment tools, monitoring software, communication tools, business applications, and more.

Infrastructure Costs

Infrastructure costs include much more than simply server hardware. You must also include costs such as storage, networking, heating and cooling, and electricity, as well as the expenses associated with the location in which you choose to store your data. This may include your own on-premise data center, a colocation provider, or a cloud provider such as Liquid Web, Amazon, Microsoft, Google, or others.

Vendor and Contractor Payments

It requires a number of different partners to develop and implement a technology solution that meets the company’s sales, financial and business goals. External IT consultants, independent contractors, third-party service providers, and a community of resellers may each play a role. Initial business relationships need to be developed, financial agreements signed, and ongoing payments made to each of these business partners which necessitates continuous management.

Discretionary Funds

Travel expenses, new laptops, recruiting fees, conference attendance, training courses, team outings, and employee lunches are all examples of discretionary funds. While each of these may comprise a small portion of the overall budget, when added together, discretionary spending can get out of control quickly if not kept in check.

Effective Engineering Management Means Having a Leadership Position Beyond Your Individual Department

While the engineering budget focuses primarily on the finances of the engineering department, the engineering leader is also responsible for costs or activities that may be related to product development initiatives which impact other departments or have significant financial implications company-wide.

These include:

Cost of Goods Sold

An engineering leader is an active partner with product management and the company’s executive team in determining the total cost of a product, fine-tuning that cost and the margin to ensure profitability, as well as ensuring that it meets all other company goals. Expenses up for review can include the infrastructure cost to build and maintain the product, third-party software licensing fees, labor costs, and support costs. Costs vary with every new product development initiative due to changing requirements and changes in the type of product being built. 

Contract Negotiations

Let’s face it, negotiating contracts is complex. It can be a long, drawn-out process and takes a great deal of experience to do it well. While it may seem difficult at first, you will become a better negotiator over time by learning from previous hurdles you have had to overcome. To be a successful engineering leader, you will need to have experience negotiating a wide variety of contracts including agreements with large enterprise vendors and elaborate infrastructure deals, as well as smaller negotiations including employee salary discussions, IT consulting rates, and software licensing agreements. 

Invoice Review and Approval

Reviewing and approving invoices is more involved than blindly signing off on expenses from an approved vendor or contractor. It requires you to review previously signed contracts or statements of work to ensure that the work completed, and corresponding expenses match the expectations and requirements written in that document. It must fall within the guidelines to which you both agreed. Failing to effectively review and approve invoices on an ongoing basis may also impact your accounting team who are required to settle all accounts and close their books in a timely manner as well as your contractor or vendor who requires timely payment.

Company Goals and Financial Objective

Today’s CEOs require every department to have a positive impact on the company’s growth whether they have traditionally been tasked with that responsibility or not. Understanding both the company’s business goals and financial objectives will enable the engineering leader to make daily business and budgetary decisions which support the company’s plans. Understanding costs and revenue requirements are important but being able to educate their team on the implications of specific decisions as well as answering questions on the state of the business will ensure that all team members are aligned and working together to achieve the company’s larger growth objectives.

Having a Solid Financial Foundation Will Better Position You for a Career in Engineering Management

As you can see, whether you work for a small start-up or a large enterprise, managing the finances of an engineering team is complex. It requires experience and knowledge beyond traditional engineering to do it well. In order to advance in your career and take on a leadership role with broader responsibilities, it’s important that you maintain a balance between technical expertise and financial knowledge. This will enable you to be an active contributor within your company’s leadership team and the business decisions they implement. 

Here are four tips to gain a deeper understanding of the finances across your organization. They will enable you to have a positive impact on the position of your engineering team as well as the competitive position of your company well into the future.

1. Reach Out to Finance

It is not uncommon for an engineering manager to be so focused on completing urgent projects or solving technical challenges that they forget to regularly interact with other departments. Develop relationships with your company’s CFO, director of finance and other members of your finance team. The finance team is eager to share their knowledge and help department heads or organizational leaders understand the financial effects on their department and the company as a whole. A strong, collaborative relationship will help lay the foundation for positive future growth.

2. Review the Engineering Budget

Take an active interest in your department’s budget. Ask your manager if it would be possible to review the budget and for him or her to explain what is included, how it is adjusted as finances or requirements change, and what the goals are for the next month, the next quarter and the rest of the year.

3. Understand Common Financial Terms

Your company’s executive management team may hold monthly or quarterly meetings to report to employees on the past month’s financial results, sales numbers, go-to-market strategy, and future objectives. They will use terms like gross margin, net profit, EBITDA, cash flow, compound annual growth rate (CAGR), operating income, and more. These are common financial terms which are critically important for you to understand if you want to be an effective leader. They will enable you to evaluate how the information provided in the meeting affects your departmental decisions and can inform your team on shifting requirements and responsibilities.

4. Take a Course

Taking financial courses online or at a local college or university can go a long way in not only exposing you to a deeper understanding of your company’s financial situation but also demonstrate to the executive management team that you are proactive and interested in being an effective leader within the organization. Does your company offer tuition reimbursement? This can be additional motivation in helping you get started.

As technology plays a larger role than ever before in driving a company's value and competitive advantage, it's not only critical that you as an engineer understand the financial impact that it will have but, by enhancing your skill set and expertise, it's an opportunity for you to better equip yourself to meet changing corporate and market demands and take on a leadership role within your organization.

Liquid Web Drives Effective Leadership by Empowering Its Engineers

In this age of technology, we know that while Liquid Web delivers the best hosting solutions to power today’s business, our clients choose us and stay with us because of our team, not our technology. Our commitment to our managed hosting and enterprise hosting customers begins with our commitment to our Liquid Web engineers. 

I am proud that our engineers are integral not only to technical innovation but to Liquid Web’s direction and growth. We encourage and empower each member of our engineering team to grow beyond their perceived boundaries and take on a leadership role. The technical, financial, and business expertise of our engineering leaders forms the foundation of excellence we employ at Liquid Web and provide to our customers. 

Are you an engineering leader who is passionate about technology and delivering the best business solutions for Liquid Web customers? We’d love for you to join our team.