In the preface to The Gathering Storm, Volume I of VI of Winston Churchill’s World War II memoirs, Sir Winston writes that when then United States President Franklin Delano Roosevelt asked him for suggestions about what this world war should be called the British Bulldog quickly replied, “the Unnecessary War.” To find a business process that might fit that same perception you need look no further than an organization's budgeting process.
That's perhaps a little extreme to say the budgeting process is completely unnecessary because the budget does serve one purpose: to enforce strict fiscal adherence across the entire organization to predetermined annual targets set forth by the executive team in advance of the fiscal year in question. It's trickle-down target setting! These commanded-from-the-top targets don't reflect what is likely to happen, which would be gleaned from a bottom-up-driven process (errr...forecast), are instead what the executives need to happen (top down). These executive-stipulated targets become the individual commitments for the coming fiscal year via what's often called a performance contract. Because of this commitment to a target defined by other parties, budgets tend to have somewhat of a Machiavellian power over the workforce to meet these commitments despite what present conditions might suggest as the better course for the business.
As a result, budgets can drive the wrong behavior where managers do things like hoarding their budgeted dollars as entitlements and not scarce resources that should be allocated across the business based on need and potential ROI. Budgets have been derided by most management experts as worthless and weak. Indicative of the potential problems that can arise in budgeting, Bernie Ebbers, former WorldCom CEO, famously used to tell his department heads that no matter what they had to finish the year 2% below their budgeted expense numbers.
Still, not all companies budget processes are wasted efforts. For some companies, the budget has its place in the executive suite but, as a tool to manage the business more efficiently and effectively, it fails to deliver. Why is that, you ask? I’ll answer with a military maxim:
“All plans are great until the first shot’s fired”
The problem is that business conditions which guided the budget’s target setting process are no longer the same. Things have changed. The budget’s assumptions were made months ago by the executive team and no longer reflect the present business environment. As a result, the budget can only be used as a target to reach but nothing more. For most companies there are no other enterprise-wide practices in place to support the depth and breadth of cause-and-effect impact that’s needed to fully appreciate the consequences of each decision a business manager makes throughout the business year. A forecast implemented properly can solve this need.
Churchill has been one of the most often quoted statesman of his age and for very good reason. One other famous quote by 'the Last Lion' is in regards to the men and women who fought on behalf of the Allied Forces which is, "never before have so many owed so much to so few". Those "few" in the budgeting and forecasting realm of business and government are Finance and IT departments that facilitate and manage these processes from defining the scope of the practice to evaluating its business value thru to executing this end-to-end process. WIthout these departments leadership and involvement in implementing a world class budgeting and forecasting process budgeting will remain a static, out-of-touch practice that continues to absorb too much time from the workforce providing little or no strategic or tactical value.
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