|"Fiscal responsibility" as seen by the enlightened company,
is radically different from the way it is viewed currently in the business
world. In fact, the current methods of controlling fiscal activity are
actually counter-productive. Any method designed to control fiscal activity
must have as its ultimate goal increased profitability and therefore increased
ROI. This is not true of the budgeting process now in use by the vast majority
of businesses in the United States.
If you are not aware that I am the inventor of computer solitaire...well
I am. The comment I get most often when someone discovers this fact is,
"So you're the one that has been responsible for the all that lost
productivity." I reply, "Computer solitaire isn't even in the
same league as the budgeting process when it comes to wasting productivity."
Not surprisingly, most often the person responds, "I can't argue
with you there."
The reason I don't get an argument is that most people are aware of the
wisdom in my comment, realize the truththat the budgeting process is badly
broken, costing billions of dollars annually while wasting millions and
millions of hours of productivity.
Why do we create the massive budgets? There are many reasons:
1) So the organization will have a plan for the future.
2) So top management will believe that they have control over the
3) So shareholders will believe that top management has control over
4) So that members will be committed to the financial goals resulting
from the plan for the future.
5) So that spending will not get out of control.
6) So the organization will have a plan to fall back on when things
So, what's wrong with this picture? Well, quite a bit, and it all starts
with the supposition that managers can accurately predict the future. This
is what is meant by a plan for the future, that individual managers will
predict the future and then make plans that will assure that the future
is realized. And, heaven help them if they're wrong!
The major rationale for the current process is that it helps management
prepare for the future, minimizing the impact of surprises. The question
is, "Does it work?"
Arie de Geus, in his book, The Living Company, discusses the necessity
of preparing for the future, and how our current methods are failing us;
he is talking about the Royal Dutch/Shell company.
"Each year, after countless meetings and reports, and an enormous
amount of thought and effort, the board finally reaches its approval. Each
year, the Unified Planning Machinery delivers its estimates of future activity,
and each year, the group as a whole bases its investment decisions on those
estimates. There's only one problem, whenever times are turbulent,
and anticipating the future
|is most critical, the Unified Planning Machinery
is wrong. Dead wrong."
This is the current state of affairs in regard to the budgeting process
for one of the oldest, largest, and most successful companies in the world.
If they can't get it to work when it's most needed, how can we
expect younger, more immature companies to.
Since the current method is obviously not working, organizations are
going to have to plan in more effective ways; ways that
don't steal the productive hours of their management people, limit the
flexibility needed to deal with the ever increasing surprises. The current
budgeting process is an albatross around the neck of management, an anchor
strapped to the back of our leaders, one they can't afford to carry around,
not if they are expected to get the job done in the 21st Century.
De Geus says it very clearly, "The future cannot be predicted.
But, even if it could, we would not dare to act on that prediction."
The only hope we have as managers is that there won't be any surprises.
Some managers actually make that a mantra, "No Surprises."
They don't want their plans disrupted, they don't want to go to the boss,
or the Board of Directors, or the investors, and tell them that things didn't
work out as planned. What a delusion! When have things ever
always worked out as planned? Anything we do as leaders that depends on
all of our plans working out, that depends on "no surprises,"
is counter-productive. We have to assume that there will always be surprises,
and we have to be prepared to handle them, even take advantage of them.
What else is wrong with this process?
1) It takes up an inordinate amount of management time.
I estimate that the average manager in most large companies has a major
focus on budgets about two months out of every quarter, with one month off
before the process begins again. For a process that is basically broken,
that's a lot of wasted effort, wasted productivity.
One of the major reasons the current budgeting process exists is for
the investor community, so, in essence, one of the biggest problems regarding
the resulting loss of productivity lies in the laps of the investors themselves
and their demands.
2) It lacks flexibility and therefore hampers efforts to meet unforeseen
Often in companies a manager will have an unforeseen need; if it isn't in the
budgetforget it. You are committed to that budget, there are precious few
This reminds me of a story.
When I was a young manager of a menswear store in Mountain View California,
I had the pleasure of being mentored by the manager of the Sears store next
to mine, Joe Kipper. He had a commitment to help young leaders mature and
I was the lucky recipient.
I had gone over to his store to see if he could discuss an issue with
me. His office manager told me he was, "Out watching a guy paint our