Beyond Budgeting – welcome to the brave new world of planning & forecasting

The Momentum for Change

Like most executives, you are probably not a fan of the annual budgeting process.  It has been described as everything from ‘a tool of repression’ to ‘the bane of corporate life’. Those are not the words of a few crack-pots, but rather the COO of Chrysler and the former CEO of General Electric!¹ 

‘Bureaucratic’, ‘rigid’, and ‘slow’ – these are just some of the words executives use to describe the annual budgeting process. Others are ‘non-value adding’, ‘time-consuming’ and ‘political’.

Not only is the annual budgeting process unpopular, it is also expensive – estimated by Ford to cost $1.2 billion annually (at the start of the millennium)!².

The shortfalls of traditional budget-setting are nothing new – they have been spelled out in countless books and reports since the turn of the millennium³. Thankfully, there is a better way – to look beyond the annual budget. Called ‘Beyond Budgeting’ it seeks to look beyond numbers-driven centralized control to the requirements of performance improvement, value creation and strategic execution.⁴. More importantly, it makes it easier for you to tackle your priorities and run your projects and initiatives and can go a long way towards briding the gap between strategy and execution.

Beyond the Calendar

The pandemic has shown many CFOs that a more dynamic approach to budgeting is required in dealing with uncertainty. Moreover, fears of recession make it doubly so.

Scarcity of resources is emerging as a key organizational concern. Leaders are looking for greater clarity and focus in respect of business needs and priorities. But:

• How quickly can organizations shift resources to where they are most needed?
• How quickly can resources be taken from projects and initiatives that no longer make sense and re-allocated elsewhere?

For organizations that cling rigidly to traditional annual budgeting methods the answer is several quarters or longer. At best, moving resources requires a lot of paperwork and numerous committee meetings. Making changes outside the annual budgeting cycle isn’t easy.

Beyond Business Unusual

The annual budgeting cycle is a Business As Usual way of doing things. It is largely based on last year plus or minus a few percentage points and provides central management with high levels of visibility, predictability and control. 

All that is great for the core business and its short-term performance. But what about projects and initiatives in new and innovative. Applying business as usual methods to areas that are business unusual (e.g. emerging markets or technologies) is a real danger.

Traditional budgeting methods can stifle speed and agility, as well as collaboration and innovation. If you want these things you need to look beyond budgeting.

Beyond Budgeting

You know there is a change underway when the BIG consulting houses are saying ‘the perfect budget may not be achievable, but a better budgeting process certainly is’ (McKinsey Consulting)⁵.

Increasingly, leaders are being urged to ‘go beyond traditional budgeting’. Here is what that means:

• Move beyond the annual budgeting cycle to rolling budgets with regular reviews and updates
• Align resources with business priorities (adjusting as they change)
• Sever the link between organizational structure and resource ownership⁶
• Allow a percentage of budgets to be fluid – they can be moved around as required

‘Instead of the conventional predict, command, and control approach, companies are focus on learning, adapting, and growing — not on trying to predict the unpredictable.’ That is the message from consulting house Bane & Co⁷. They say it is time to ‘shift the focus from financial precision to strategic success’⁸.

Appreciating the Complexity

The case for ‘beyond budgeting’ is certainly building. But it is not easy. The budgeting process is complex – in part because it is linked to:

• Strategy: How well are resources aligned with performance as well as strategy (i.e. strategic goals, projects and priorities)? 
  
• Structure: How well are resources aligned with the organization of today and tomorrow (as opposed to yesterday)? 

When it comes to the modern organization things don’t get any more complex – or any more rigid – than strategy and structure. Despite the countless case studies and theories mulled over by MBA graduates for decades, these topics defy neat answers or simple solutions.

Any group of managers is likely to struggle to agree on a single definition of strategy, much less a set of principles regarding organizational structure, or a means by which it can adapt to change.

Given the link to strategy and structure, it is little wonder that resources allocation and alignment is a complex and challenging issue for many organizations. So, if you are facing challenges in respect of how your organization allocates resources, take heart.

Beyond Allocation

‘Beyond budgeting’ can seem like a scary message. Of greater appeal is the message ‘don’t just allocate resources, align them too!‘. ‘Allocation plus alignment’ is a slightly different ‘dual system’ message⁹.

It says keep your traditional systems and controls – those tried and tested budgeting approaches that work for your core organization. Don’t stop there, however. Add alignment to allocation, ensuring that resources can reflect changing business needs and priorities, as well as new market opportunities and challenges. By combining the two organizations have the potential for ‘agility without chaos’¹⁰. It is what we call balancing agility with rigor.

We say that ‘allocating resources is only half the work‘. The other half of the budgeting process is the part that matters most. It is also the most difficult in many ways. Called Resource Alignment it is the ongoing challenge of ensuring that resources are aligned with business needs and priorities, as well as market opportunities and challenges. The problem is that business needs and priorities are continuously changing.

A fast-changing business environment demands speed and agility in responding to change. This requires balancing annual allocation with dynamic alignment. That means that the job is never really finished.

Ensuring alignment despite changing business needs and priorities requires being able to fluidly move resources (assets, people, etc.) to where they are needed¹¹ . These ‘resource fluid’ organizations are prized to profit from change. They have an advantage when it comes to strategy and execution as they can ‘see aroud corners‘.

Allocation plus alignment

Alignment is one of the key challenges facing many organizations – maintaining clarity of focus and direction is a challenge when faced with so many opportunities (as well as challenges).

The table shows 9 ways in which organizations can add alignment to allocation – ways in which they can go beyond the limitations of traditional budgeting.

Going beyond traditional budgeting means adding alignment to allocation.  When this happens the budgeting process goes from being a bureaucratic exercise, to being about strategy and execution, performance and value creation.

It is not that visibility or control are no longer needed; indeed cost control and operational efficiency are more important than ever!  It is just that these cannot come at the price of speed and agility or collaboration and innovation.