1. Introduction: Budgeting Woes

Your staff work nights and weekends,
and still can't keep up.

You are expected to trim your budget
in spite of an overwhelming workload.

Once you get your budget, no matter how big it is,
clients blame you when they can't get all they want.

The problem is not lack of budget. Throw more money at staff, and you'll have all the same problems on a larger scale.

The problem is not people. Working harder isn't an option.

The problem is not the overwhelming demands of the business. Clients' appetites always exceed available resources. They always have. And they always will until the root cause of the problem is fixed.

The Way Organizations Budget

The root cause of the problem is the way most organizations budget.

Put simply, budgets are generally presented in a manner that does not give clients an understanding of what they're buying.

Consider a budget spreadsheet, where the columns represent cost factors such as salaries, travel expenses, professional development, etc. The rows represent deliverables -- i.e., specific projects and services.

Figure 1: Budget Spreadsheet

Salaries Travel Training ...
Project 1 $ $ $
Project 2 $ $ $
Service 3 $ $ $
Service 4 $ $ $

This kind of spreadsheet is a common, and sensible, way to develop a budget.

The problem is this: After filling in the cells in the spreadsheet, most organizations total the columns instead of the rows, and present a budget for each of the cost factors. In other words, your budget is an estimate of how much money you'll need for various cost factors such as compensation, travel, training, etc.

What Happens Next

"Your staff don't really need training...."

In the budget negotiation process, executives point out that you could do without some of your planned travel and training, micromanaging you in a way they would never do to an external vendor. But what else have you given them to talk about?

The very nature of the budget you submit invites the wrong kind of dialog during the budget process.

Of course, you're asking executives to make decisions they really aren't qualified to make -- we call this "eating your seed corn." Only you know the kind of reinvestments you need. But as a result of this process, you may not gain approval for things you really need to do to keep your organization viable in the future.

The most common example is training, necessary to survival but a favorite target for cuts. If you're unable to acquire critical training, your productivity falls and turnover rises. After years of this, staff skills become perilously obsolete, and outsourcing is on the horizon.

"Cut another 5 percent!"

In the next budget meeting, you're asked to cut still further. Executives challenge you on the payoff of some client-requested projects, and these projects are cut.

Clients whose projects are cut are naturally disgruntled. They blame you for not defending them properly, or for being the villain who cut their hot projects. To them, you're a hurdle -- an adversary whom they have to convince of the merits of their needs -- rather than a customer-focused internal supplier who's their key business partner.

Later, if they can find funding for the projects that were cut from your budget, they're unlikely to spend it on you. Instead, they hire their own staff (decentralization) or hire vendors directly (outsourcing).

"Do more with less."

But still more cuts are needed. With the pressure on you to "do more with less," you're sent off to find a way to trim another few percent while still delivering on the remaining projects and services.

You voluntarily trim "discretionary" costs. In doing so, you forego critical reinvestments in your own capabilities. You do without some internal (overhead) services, making everybody less productive and vulnerable to outsourcing.

In the spirit of promising more than you have resources to deliver, you do all the key projects your clients want, but cut corners, reduce quality, and stretch timeframes. In doing so, you make promises you can't keep -- the Rolls-Royce for the price of a Chevrolet -- sacrificing your credibility and reputation.

These short-term decisions lead to a loss of your competitiveness, and ultimately a loss of market share. Over time, decentralization and outsourcing look better and better.

"Last year minus a few percent."

The right way to decide a function's budget is to fund all the good investment opportunities, and not those with poor return. But, without an understanding of the deliverables, executives cannot judge the return on their budget dollars. They can't even judge linkage to corporate strategies.

To make matters worse, since executives don't know what they're getting for their money, the function seems expensive and unrelated to corporate strategies. That just leads to further distrust and cost pressures.

So instead of analyzing investment opportunities, they set arbitrary targets, for example, basing budgets on meaningless benchmarks such as the prior year's budget plus or minus a few percent.

Of course, the prior year's budget has little to do with the coming year's investment opportunities. As a result, the corporation may over- or under-invest in a function, reducing its return on equity.

Although changes in the costs of ongoing services from year to year have to be explained, executives willingly deviate from this traditional approach when presented with the facts that allow them to make sound judgments on investments.

"It's your fault if you don't have the resources to satisfy us."

Even worse, executives lose any sense of linkage between the total budget and the deliverables they are to receive during the coming year.

Meanwhile, no one has any idea what your budget will and won't pay for. As far as your internal clients are concerned, it's your job to satisfy every request they make -- all for a fixed price! And since everything appears "free," it's no wonder demand outstrips supply.

Absurd as it may sound, the corporation gives you a finite amount of money in your budget, and, in trade, expects infinite services -- anything people might ask for throughout the year!

Entrepreneurs love demand -- as long as it's funded. But with the conventional approach to budgeting, staff have no basis for saying, "That wasn't covered in the budget; we'll need incremental resources."

"The 'stewards' of the corporation."

Obviously, staff can't do everything within their limited resources. But nonetheless, clients believe it's staff's problem to figure out how to fulfill their unlimited demands. They blame staff when they can't have all they want, and relationships deteriorate.

Staff in this situation are forced to decide what they will and won't do. They must evaluate clients' requests and set priorities. Judging clients in this way is the opposite of customer-focus.

Instead of working to please customers, staff come to believe that it's their job to control those unruly "users." As staff take on the role of controlling "stewards," relations deteriorate further.

Furthermore, the last thing staff in this situation want is more work. They are unlikely to suggest new, entrepreneurial ideas that might be high in payoff but will require more resources -- people and money that just aren't available.

Teamwork also deteriorates. While one group may want help from another, if the support function is over-booked, it cannot be trusted to deliver. So managers, who have a job to do, replicate each other's skills and "stovepipes" develop.

Thus, traditional budgets undermine customer-focus, entrepreneurship, and teamwork. Traditional budgeting takes an organization in a direction exactly the opposite of what most leaders envision.

Success in this situation is, of course, impossible. As hard as staff work, the organization gets blamed for both high costs and unresponsiveness.
 

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