Alternatives to Budgeting Process Reviewed


Traditional budgeting can provide disincentives to business, and firms should look at moving toward developing targets and adjusting to meet those goals, according to Steve Player of The Player Group.

 

Mr. Player, who presented Stop Budgeting and Start Running Your Business at the Mid-Year Workshop, has been involved with an industry group working on research into the next generation of budgeting.

 

He said traditional budgeting has five planning steps: setting targets; providing incentives to reach those targets; developing action plans; allocating resources; and coordinating plans among the various departments.

 

"What's wrong is that in traditional practice, what happens is that this morphs into a performance contract, a fixed performance contract," he said. "If there is one thing that takes budgeting and makes it a perverse process, it is that negotiations tie incentives to hitting a budget. When you pay people to hit a negotiated target, you change from pay for performance to pay for negotiated results."

 

He said that this method encourages people to negotiate targets that are easily met rather than ones that deliver outstanding performance. As a result, current budgeting processes can encourage people to do the wrong things, such as selling at a wrong price to increase total sales.

 

Mr. Player said the traditional budgeting process has seven problems: it takes too long to prepare; it costs too much; it is based on assumptions that are almost always wrong; it can cause gaming of the system; it triggers unnecessary spending; it gives an illusion of control; and it brings out unproductive behavior.

 

One of the biggest problems is that people base budgeting on assumptions that are difficult to determine, Player said. As an example, he reviewed the swings in the price of oil over the past year from $100 a barrel to $140 and eventually to $40.

 

"Think anyone predicted that?" he asked.  "There are things you cannot predict."

 

Mr. Player suggested that organizations stop wasting time in budget discussions and instead create an adaptive plan for running the organization and constantly adjusting the organization based on the latest and best information.  He compared it to developing a flight plan for a plane, where the pilot, after taking off, makes adjustments to situations as they arise.

 

Mr. Player said options are to develop plans on where the organizations are going and then review how they are working to meet those objectives. He said the three common keys to success are: a move to continuous planning and adaptive controls which requires enlightened leadership; a commitment to change culture and behaviors as well as processes; and utilizing fast, open information systems.