Many organisations are stuck with a budget process that doesn’t make sense and yet to make radical change is fraught with danger. In this article, Michael Coveney, FSN writer and author of ‘Strategy to the Max’, suggests five easy steps to help organisations make a start.
The concept of budgets as a way of controlling an organisation was well established by the 1920's and documented by James McKinsey in his book 'Budgetary Control'. Its purpose was to set standards of performance, and, as the means of coordinating activities between departments.
Marvin Bower, former CEO of McKinsey & Company, in his book Perspective on McKinsey, said that the concept of their top-management approach was based on the budget as '… a statement of policy, expressed in terms of future accounts delegated to units of an organisation.'
The trouble is that budgeting today has become primarily a numbers guessing game that has more to do with maximizing bonus payouts than helping an organisation to achieve corporate goals. Jack Welch, former CEO of GE, described the budgeting process at most companies as ‘the most ineffective practice in management’
It's because of this complete failure of budgeting to add value that some organisations have chosen to abandon it all together. However, this doesn't make sense, as there still needs to be some process by which resources can be allocated for the organisation to accomplish its mission.
The Beyond Budgeting movement was built around the desire to radically change this key, yet misdirected activity. But as with so many management innovations, organisations can't change their processes overnight, as the many years of accumulated bad practices have to be dealt with first. However, there is no reason why they can't make a start in restoring budgeting’s original aim.
Step 1: Admit there is a problem: restate the purpose of the budget
Most people agree that the budget process takes too long and is of little value. Senior managers set, in the eyes of operational managers, unrealistic targets to which operational managers, in the eyes of senior management, retaliate by suppressing revenues and inflating costs.
What is required is an agreement by all involved as to the real purpose of budgeting. For most this is to ensure that adequate organisational resources are assigned to agreed initiatives in order to achieve corporate goals. It is this purpose that all content and the activities involved should ultimately support.
Step 2: Identify strategic initiatives
The second step is to detail departmental activities and how they directly implement organisational strategy. This can be done by creating a strategy map that shows key objectives, the strategies required to achieve them, and the activities that implement each strategy.
The essence of any strategy is change and can include initiatives to improve certain activities, or the introduction (and phasing out) of others. It is these ‘changes’ that will become the focus of the budget.
Step 3: Make the budget strategic
The budget and its associated process should be split into two parts – ‘the base' and ‘strategic initiatives’. What this means is that departments should set a budget – as they do today – for all current activities except those initiatives that have been designated as ‘strategic’. For each of these they should itemise the resources that will be required and milestone measures that show if those initiatives are being implemented.
To begin with, just pick one or two strategic initiatives and treat the rest in with 'the base'. Adding both parts together will give the total budget situation. In future years the number of strategic initiatives can be increased until the majority of the budget falls into this area.
By doing this, senior managers can now decide, should the budget be too costly, which part is to be reduced, while still preserving organisational strategy.
Step 4: Monitor budget performance in relation to the achievement of strategic goals
Budgets are part of an overall management approach. When reporting actual results, the budget needs to be presented in the context of strategy. i.e. were the resources spent on the right activities; did those activities implement strategy; and did those strategies lead to achievement of corporate goals.
Without this context, budgets can be meaningless as there is no way to see if resources were spent on the right things and whether it makes sense to move resources from one area to another.
Step 5: Move towards a continuous budgeting process
In his book Best Practices in Planning and Performance Management, author David Axson found that high performing companies recognised “Aspects of strategic planning are not once-a-year events but a continuous process. The pace of change is so great that management needs to monitor the strategic implications of new developments on a continuous basis.”
For budgeting to be effective it must be a continuous process where initiatives are planned and re-planned based on exceptions and events, rather than on an arbitrary date on a calendar. By focusing on initiatives and how they impact strategic goals, the way is open for these to be planned on a continuous basis.
The role of software
The role of budget software is to support the right content with the right process, but all too often it is the other way around. With today’s advances in technology this should not be the case. Rather than conform to a GL view of the budget, organisations should create budget templates that reflect strategic initiatives.
This means that each initiative should have its own 'page' that includes a description of what the initiative is trying to achieve; the corporate strategy or objective it supports; the milestone measures that will be used to check it's progress; the responsibility of the person(s)or department(s) in implementing it; and the resources (e.g. the budget) that will be required to implement it. It should also have space for any comments that the budget holder may wish to add.
These initiative pages should then be consolidated according to department and the objective it supports, along with the 'the base'. With today's multidimensional technology this should be quite easy. The same format can then be used to monitor budget spend and its impact on strategic goals.
The important point is to make sure technology works for you and supports a budget timeline and framework that makes sense. It is only then that organisations can go beyond ineffective budgeting to a process that forms a valuable part of corporate performance management.
