Fundamentals: Internal Economy (Resource Governance)

The internal economy encompasses all the processes related to the management of money and time -- the various resource-allocation and investment-decision processes within an organization that determine how much of each product line to make, what specific products and services are produced, and who gets them.

Resource-management processes include budgeting, rate setting (pricing, e.g. for chargebacks), project approval (priority-setting), and tracking processes. In essence, these processes define an "internal economy" that determines how resources flow through an organization and to its clients, i.e., what gets produced, for whom, when.

These resource-management processes are often viewed as accounting systems. However, accounting only reports past events. Viewing these same processes as an economy reveals how decisions about the future are made.

NDMA has pioneered the application of market economics within organizations to put into perspective a wide range of controversial corporate governance issues, including: budget processes, chargebacks and allocations, project approval processes, strategic alignment, investment portfolio management, cost controls, and managerial metrics.

"In today's volatile business world, firms can no longer allocate their precious resources based on yesterday's budgets. To compete, companies need their capabilities well orchestrated and aligned with business strategies. The Internal Economy sweeps away old thinking about managing resources. Bringing the tonic of the marketplace to bear, it provides a breakthrough approach for planning and budgeting." Don Tapscott Author, The Naked Corporation, Paradigm Shift, The Digital Economy

There are two aspects to the design of an effective internal economy:

* Budgeting and pricing: the once-per-year business and cost planning processes.

* Resource-management systems and processes: the ongoing governance of money and time.

"An excellent systems approach to governance." Dr. Michael Zisman Vice President, Corporate Strategy, IBM

Sadly, most organizations use top-down, bureaucratic processes that disenfranchise internal clients, undermine strategic alignment, discourage customer focus and entrepreneurship, and reduce shareholder value.

A market-based internal economy does not necessarily require chargebacks. Whether or not money actually changes hands, market mechanisms empower clients to make purchase decisions, balance supply and demand, and ensure an appropriate rate of reinvestment in the business (e.g., in training and product development).

Our research has defined a series of stages of evolution, from "centrally planned" to a free market. With each stage, the quality of financial decision making improves. But each stage requires more staff education, client education, policies, business processes, and accounting systems.

The Internal Economy process first helps leaders understand the current resource-management processes in light of market economics. This analysis identifies the problems to be addressed.

Based on the needs of the organization and its current systems and processes, Camelot Consulting then identifies the optimal target stage, and describes the changes that would be required to achieve it. The study also documents what policies, processes, systems, and education are needed.

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