Why, when everyone hates it, do we still have traditional budgeting? My tentative answer to this...
The Budget Problems - More than Irritating Itches
Over the twenty years that I have worked with Beyond Budgeting, I have asked tens of thousands of managers and Finance people all over the world about how satisfied they are with the budgeting process. I don’t need many hands to count those who are not unhappy and frustrated with this annual management ritual. It is not just the autumn stunt they complain about, equally all the damage it does the rest of the year.
But with so much frustration out there, how come this hundred-year-old management technology is still mainstream management? How come it is still taught at business schools around the world? Although more and more companies are rebelling, the Beyond Budgeting community is still small, although a rapidly growing one.
I believe a key reason is that few see behind the many “in your face” problems they experience. They struggle to see that these problems are more than just irritating itches; they are symptoms of a much more serious problem. A management concept invented in the 1920s with the best of intentions, to help companies perform better, is today doing exactly the opposite. This process has now become a serious barrier for getting the best possible performance in teams and organisations. That is more than irritating itches. That is a serious and sometimes even a deadly disease.
Let me share the most common complaints I hear. If you are in the ”itches” camp, I hope seeing them all at once not only will help you understand the disease but also want to do something about it.
Here we go:
- A very time-consuming process. This often comes first. The larger the company, the earlier budgeting has to start. For many that means well before the summer. No wonder it’s called the annual budget. It takes almost all year! The huge amounts of time and massive resources consumed definitely belongs on the list, but I will argue there are far more serious problems listed below.
- Weak links to strategy. Strategy and budgets are often developed in completely separate and isolated processes.
- Assumptions are quickly outdated. The only thing we knew for certain about our oil price budget assumptions at Statoil was that they were wrong.
- Stimulates unethical behaviours. The sandbagging, lowballing and gaming that budget negotiations stimulates are not the kinds of behaviours we want in our organisations.
- Provides illusions of control. The more uncertain and dynamic it is out there, the more comforting it feels to wrap ourselves in all those details and decimals.
- Decisions are made too early. The budget forces us to make way too many decisions way too early. How much on this, and how much on that? Actually, the later we can make these, the better. We then have better information, not just about what we shall say yes or no to, but also about our capacity to undertake it.
- Decisions are made too high up. Executives often end up focusing on what they understand best, shifting discussions and decisions to peanut issues like travel cost or mobile phones, where they shouldn’t be involved at all.
- Prevents the right things from being done. Sensible things which are not in the budget can’t be done, while other things that turn out to be less sensible are done because it’s in the budget. Spend it or lose it.
- The world ends December 31. A myopic calendar focus leads to all kinds of silly behaviours and activities, like “accordion forecasting”. Forecasting horizons become shorter and shorter throughout the year before they suddenly are back to twelve months because of its budget time again.
- A language ill-suited for performance evaluation. To define good performance as “hitting the budget number” is a narrow, mechanical and often a completely misleading way of defining performance.
That’s my list. I wouldn’t be surprised if yours is quite similar. Now, read it again, while looking for the forest and not just the trees. It’s a scary picture. You hopefully also see that it is about more than budgets. Blowing up the budget is necessary, but not sufficient. There are more problems, and more to do, both in leadership and in other management processes.
That’s the bad news. The good news is that there is an effective medicine. It has been tried, tested and refined over many years. It even comes over the counter, and it even comes for free. It’s called Beyond Budgeting.
The article was first published in Prevero Blog