This article in the February 28th edition of The Economist starts with an interesting quote from Jack Welch that reinforces what I have been thinking and saying for many years. He says:
Not to beat about the bush, but the budgeting process at most companies has to be the most ineffective practice in management.
There are a number of problems with the “traditional” budgeting process:
- It’s not dynamic – it is usually an annual event/ritual and tightly coupled with planning – the result being that planning also becomes an annual event/ritual.
- It’s not efficient – it is incredibly time consuming – I once heard a former CIO of Microsoft joke at a conference that Microsoft had to get all its work done in 3 months because the budgeting process took 9 months.
- It’s not focused on outcomes – when you cut through all the “window dressing”, people go into the process to justify keeping the resources they already have.
- It is far too detailed – as a result of point #3, enormous effort is spent on defining projects that might happen, to justify resources that might be needed for what might actually need to be done.
- It’s not objective – budget decisions are all too often emotional – the result of “relationship based ” or “decibel based” decision making rather than a rational, objective process.
- It’s not flexible/agile – once struck, the budget is hard to change – other than through “across the board” cuts.
Even before the current economic meltdown, the rate and pace of change makes annual budget cycles not just obsolete but downright dangerous. We certainly need some form of budgeting process, but we need a much more practical, pragmatic and dynamic process. The article discusses a number of alternatives , which I would summarize as:
An efficient and flexible/agile scenario based budgeting process, with contingency planning for each scenario, and dynamic rolling forecasts, at an appropriate level of detail, reviewed and adjusted regularly (monthly or when certain trigger conditions occur) by senior management, making objective, outcome-based decisions supported by relevant, reliable and up-to date information (as of today vs. last month/quarter).
Such an approach has implications for governance processes, for the information, and enabling technology required to support them, and for management behaviour.