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Let Traditional Budgeting be a Victim of this Pandemic
October 21, 2020

By Knut Fahlén, PhD, Management Consultant at Ekan Management

The multi-faceted benefits of the Beyond Budgeting-concept has been proven time and again by a wide range of companies and public organizations around the world. It is lately described by Knut Fahlén (PhD, management consultant at Ekan Management) in the book Dynamic Management Strategy: A guide to management innovation and competitive advantage (BAS publisher, 2018)

Knut Fahlén's LinkedIn profile: https://www.linkedin.com/in/knut-fahl%C3%A9n-b6ba793/

FP&A Tags
Planning and Budgeting
Modelling and Forecasting
Beyond Budgeting
Risk-Adjusted Planning

budgetingThe COVID-19 crisis has created a new reality that required organizations to act quickly, to learn what worked, and to adjust as matters developed. The focus has been on what is the right thing to do rather than being dictated by an outdated plan and budget. 

FP&A is Becoming Proactive

This pandemic has uncovered several shortcomings in our way of planning, managing, and organizing societies and businesses. Now that the future looks predictably uncertain, there is a dire need to understand, react to, and learn from it and other unexpected events. 

Even if we will only be able to fully assess the situation in retrospect, we should increase our ability to proactively deal with the perpetual risk of disruptions and crises in the future. The value of increased ability to adapt are quick decisions and swift reactions, along with reduced cost and time spent on unnecessarily detailed annual planning.

Traditional budgeting based on annual forecasting and target setting not only adds little to no value – it also constrains organization’s adaptability. 

Real-Time Decision Making is Here to Stay

Instead of annual forecasts of things that cannot be predicted or controlled, with December 31 as the fictitious deadline, companies should monitor the reality on a regular basis and work more with trend analyzes and unbiased (mathematical) forecasts. 

Forecasts can then be adjusted based on new information and experience, adapted to the speed of the organization's responsiveness. In this way, many organizations have made decisions during the course of the COVID-19 pandemic. They have acted, analyzed and corrected in pace with reality. However, we will not know what the right decision was until we can follow up the consequences over a longer period of time.

COVID-19 Questions the Status Quo of the Budgeting Process

It may be perceived as a failure to abandon a plan (budget) that has been decided in due process, but so is indecisiveness in times of crisis. A traditional budget may work as a fixed plan when the future is certain, but it is inefficient in a reality of rapid changes. Excessive focus on numbers and cost centers impoverishes working prerequisites by fixating people, teams, and resources in silos, rendering the organization unable to act quick enough.

COVID-19 is not a one-off event. Rather, it points to the need to question the dominant planning process that surrounds the budget. 

The year 2020 is already lost from a budget perspective. The costs are taken and the value lost, but it is not too late to prepare for the future. Many of us understand what a waste this autumn's budget process will be, but it is not enough. Today, we may call it a radical change to be prepared for the unexpected events of the future, but tomorrow it will be business as usual.

Steps to Improve Your Budgeting Process

All that is needed is to develop the incompatible objectives of the budget process into three separate ones and improve each of them; (1) a process for decision-making and resource allocation, (2) means to follow up and monitor the business and make forecasts, and (3) how to set targets, evaluate and reward performance. This suggestion was first described by Bjarte Bogsnes and the implementations in Borealis and Equinor (former Statoil) in his book “Implementing Beyond Budgeting”. 

If the pain and vision is clear, you can start with monitoring your real numbers by looking at moving averages or moving totals. A 12-month and 3-month retrospective perspective is enough to start with and then adjust to your business rhythm.

Next try to identify value-drivers and cost-drivers and monitor how they are being developed. Either by benchmarking against peers or by following trends. When you know where you have been, and roughly can estimate where you are heading it is time to talk strategic resource allocation. 

One thing to abandon is unnecessary administration and internal invoicing. Another is defining true cost and profit centers. People and teams should only be accountable for what they have power over. Finally, work with your investment portfolios, i.e. products, services, markets etc., instead of focusing to much on cutting costs of setting unrealistic sales targets.

These steps based on the Beyond Budgeting concept has proven to be solid enough to withstand the ongoing pandemic. The question is if the FP&A community is ready to challenge traditional budgeting with this management innovation. 

Suggestion to the FP&A Community

Everyone says that we can expect COVID-19 to change individual behavior as well as companies and communities. Areas such as e-commerce, online education and public health investment are likely to develop. It is also likely that companies will change their supply chains away from risky dependence on a few suppliers and large factories only focusing on economies of scale. 

What is needed is risk diversification and organizational resilience. The question is whether the changes will also be about developing the way managers and FP&A manage and plan for the future. The need to look beyond traditional budgetary management has never been clearer.

I suggest that the FP&A community continue to discuss how various internal processes such as budgeting and business planning can be developed and what room for management and performance they provide. 

So, my suggestion to the FP&A community is to let traditional budgeting be a victim of this pandemic. Then you might be the hero in the near future. 

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