The Holiday season; we just finished another one. A season to think more celestial thoughts, aim for a higher purpose. Spiritually, but also financially. In the last months of the year, companies faithfully draft a budget based on which their will be assessed for the following year.
Bosses remunerate their teams based on them. Line Managers manage their headcount based on them. Shareholders plan their portfolios based on them (or rather, on the projections based on them) and fund managers base their “buy” and “sell” recommendations on them.
From the sound of it, its pretty impossible to do away with them, right?
Look a bit closer and the practices surrounding budgets appear less rigorous and start looking more like the rituals a baseball player may perform in order to get Lady Luck’s on their side.
First let’s look at the starting point for next years budget; this is typically derived current year’s budget and actual performance. If we have underperformed versus budget, we will argue for a top and bottom line that are below current year budget but slightly above actual. Have we overperformed, we will inevitably have to accept a budget which extrapolates the current growth path in a linear manner.
This means there is something inherently flawed about these budget settings: the past is only a good predictor for the future in very stable environments. Such environments are increasingly hard to find these days; it seems that almost every industry is being disrupted in some form or way.
Next, we recognize that in every budget planning correcting factors are applied to last year’s numbers, based on external circumstances that can’t be controlled, as far as they can be predicted. But these factors are notoriously hard to quantify and the biggest impacting factors are the unexpected disruptions, which by definition cannot be planned for.
Finally, we need to talk about the politics involved in reconciliation. Inevitably, when a budget is not met, the request for a budget revision is mooted. Sometimes that is justified, in cases of a reorganisation or the unexpected discontinuation of a product line. Often a budget adjustment is the result of tougher than expected external circumstances and clever lobbying on behalf of the department not meeting their budget.
Lets face it, rarely does anyone accept defeat vs the budget because they didn’t try hard enough or didn’t read the tea leaves well enough. There is a great deal of personality at play in those adjustments. If someone is liked as a reliable performer, or someone people have known for a long time, they have a higher chance of getting the adjustment approved. They get the benefit of the doubt, are being cut some slack. When someone is unknown or unliked, underperformance is sometimes welcomed as an opportunity to hire someone else instead.
Adding all of this together, the budgeting “circus” is typically more about who you know and how well you play your hand of poker, than about real business aspirations. It would be a delusion to think the budget provides insight into further performance. (Or are we budgeting for some delusion?)
So what’s the alternative? As a starting point, a few practices should be followed:
· To begin with, a budget should start with aspirations.
· A budget should END with NUMBERS not start with them.
· These numbers should ONLY be used for resource allocation, not for performance measurement.
· Aspirations (for for-profit companies) should be based on the overlap between a) what the world needs b) what the world is willing to pay for c) what the company is good at and d) what the human resources in the company (and market) are passionate about.
· Likely, at board room levels, a number of companies have the previous point worked out reasonably well. This freedom of aspirations thinking should be DELEGATED further down to even individual Product management teams. This a rarer to find.
· And lastly, performance SHOULDN’T be measured against budget, but rather peers and aspirations. Have we been able to outperform our peers, all things being equal? Have we achieved what we set out to do, such as become the market leader in region X for product Y? This kind of performance management is far more aligned with how financial institutions typically assess their borrowing clients.
These practices are slowly emerging in a world that is ever faster changing. The global economy seems to be heading for another catalyst, the size of the emergence of the Internet. Old laws of corporate physics seem to no longer apply and new values are/need to be introduced.
These values will redefine what people we attract as a company, how we remunerate them and how we expect them to work together. (More on the latter in my next article) Exciting times, in which we have a change set the next paradigm.
This requires brave minds; count me in.
Original Article Posted on LinkedIn HERE.
