So, I’ve always intensely disliked the ‘budget’ thing. Not the basic idea of thinking ahead, about what might happen, and attempting to do sensible things to cope with this – don’t worry, I’m not about to advocate ‘sticking your head in the sand’ – but the management belief that we can and should carry out a grand planning exercise (usually annually) in which we attempt to predict ‘what will be’ in great detail, and then watch for, and attempt to explain away, any and all deviations from it.

Utter madness…and I believe that, underneath it all, many (most?) of you will likely agree with me – yet we carry on worshipping at the altar of the ‘Great Budget God in the sky’.

So why do I dislike it so? I’ll start with the following quote:

“If you cannot know what your customers will want or your competitors will offer next year – or even who your customers or competitors will be – you cannot develop an effective plan for achieving targeted levels of sales and profits.” (Stephan Haeckel)

Creating a detailed budget for the next year and then holding people to it is nonsense. Now, you might respond with “yeah, it’s not perfect but it is useful.”  I would respond that it does more harm than good, and that there is a better way.

I’ll need to explain my response in 2 parts. This post (part 1) deals with the ‘doing more harm than good’ part. Watch out for ‘there is a better way’ in part 2.

The (painful) grand planning exercise:

Picture the Chief Financial Officer (CFO) at the end of the multi-month annual budget setting exercise sat in his/her executive suite with that warm, fuzzy feeling:  A glorious projected profit figure as the bottom line in a sexy spreadsheet before them, carved out of much toil and pain (and wasted activity). Quick, load it into the accounting system as the ‘baseline’ before it gets away!

So how did that glorious budget come about?

Each manager was likely sent a (really annoying) financial template to fill in that was devoid of operational reality…

…which, after many iterations and re-runs (“because the #@$! numbers won’t save properly!”), was then sent back to Finance and ‘rolled up’ into a single view of ‘exactly what is supposed to happen next year’…

…to which the CFO responded “oh no, THAT won’t do, fiddle with it some more until it says what I want to see”…

…and his/her accounting subordinates oblige, ‘rolling down’ their well intentioned meddling back to the unsuspecting ‘budget holders’ to catch and deal with…

…which only becomes transparent to these managers a few months later (i.e. once the year is well under way in a “hey, where did these numbers come from? They’re not what I sent in!” kind a way) and, despite their protests, they can do nothing about because “sorry about that, but it’s ‘locked and loaded’ now”.

And so, the year is off and running. Finance send out the following memo (often weeks after the period close):

“Here are your variances (actual from budget) for Period X.  I need specific reasons (by which I really mean ‘believable stories’) for each deviation from budget and an action plan as to how you are going to get back on track…please provide by return and good luck!”

Each manager then spends hours deciphering the numbers in a desperate attempt to reconcile and ‘explain away’ the differences. And, unsurprisingly, this task becomes more bizarre the further the year progresses as the budget predictions become more divergent from reality.

So, what is a budget?

Here’s a narrow definition, relating to the output of a budgeting process: “An estimate of income and expenditure for a set period of time” (Oxford Dictionary) i.e. a financial plan, usually annual.

However, a budget doesn’t come out of thin air and isn’t for filing away once drawn up. We must see and consider the much broader definition that encompasses what a budget is for, and about i.e. “The performance management process that leads to, and executes, a plan.” (Hope & Fraser, ‘Beyond Budgeting’)

This process involves “agreeing upon and co-coordinating targets, rewards, action plans, and resources for the year ahead, and then measuring and controlling performance against that agreement.” (Hope & Fraser)

This has, with good reason, been labelled as the “Fixed Performance Contract” because, once negotiated, it forms a contract between each level of management as to what is required for the year ahead. But such a contract is cumbersome, inflexible and (most obvious to all) gamed.

Command-and-control by another name:

Very early on in my blog writings, I linked the ‘cascade component level objectives – set targets – dangle incentives – judge performance – provide rewards’ as the core components of the command-and-control management system (I often verbally refer to them as the management instruments of torture)…but the budget word hasn’t come up to date.

So it was a nice surprise for me when I read Jeremy Hope and Robin Fraser’s highly regarded book called ‘Beyond Budgeting’ (2003) and found their ‘Fixed Performance Contract’ label. It encompasses much the same meaning/ thinking.

I have always disliked the budget game and seen it as related, but I hadn’t formulated it as being one and the same.

The games being played:

You might think that the fixed performance contract is necessary, and mainly benign…

…but walk your way through the following ‘fixed performance contract’ games that are understandably played by budget holders and their teams (as identified in, and with quotes from, ‘Beyond Budgeting’):

1. “Always negotiate the lowest targets and the highest rewards.” Each manager will attempt to ‘agree’ a target that is inwardly comfortable to them yet appears outwardly difficult to their supervisor.

2. “Always make the bonus, whatever it takes.” Any actions you can take are fair game if they help you reach your maximum bonus – even though they might stuff up another team elsewhere in the organisation (e.g. sell services that you know will likely lead to problems later down the line)

3. “Never put customer care above sales targets.” Everyone wants to satisfy customers… but that’s not how they are rewarded. Let’s ‘persuade’ customers to buy what we want them to.

4. “Never share knowledge or resources with other teams – they are the enemy!” The main competition is not the external market, but every other team who are all trying to obtain a higher share of the central resource pool than you!

5. “Always ask for more resources than you need, expecting to be cut back to what you actually need.” This is simply anticipating the negotiation process that you know will occur….and this can only get worse as time goes by through bluff and double-bluff.

6. “Always spend what’s in the budget.” If you don’t use it, you will lose it because higher management will reason that “if you didn’t need it this month/year then you obviously won’t need it the next!”  Not spending your budget therefore becomes the act of a ‘nutter’ (being either mad or eccentric…or both!)

7. “Always have the ability to explain adverse variances.” Financial variances tell management nothing about real causes. All you need is a ‘believable story’ to get them off your trail…and you should learn to blame plausible causes beyond your control…of which there will always be some.

8. “Never provide accurate forecasts” Don’t share bad news (you will be berated for poor performance) whilst there’s still time in which your fortunes might miraculously reverse. Don’t share good news (you will be expected to sustain higher results going forward) whilst there’s still time for unwanted surprises that might wipe the slate clean. In short, tell your superior what he or she wants to hear.

9. “Always make the numbers, never beat them.” Manage the results: if you are doing better than budget, find some way of holding it back to feed in later in the year when needed.

10. “Never take risks.” If it’s not in the budget, why would you take the risk! No one is expecting it and if it doesn’t work out, your job might be on the line!

Now you might look at the set of games above and cry out that this is a grossly exaggerated picture…and, yes, if every person was playing every game all of the time, we surely wouldn’t have a business! At least not for long…and it would be a hellish place to work in the meantime.

But it’s worth considering that:

• I have seen every one of these budgeting games being played at some point in my working life so far, many of them openly, repeatedly and regularly …how about you?

• the vast majority of people are decent human beings and don’t want to play such games…and yet the fixed performance contract induces them (to some degree) to do so – this mental strain is a very unhealthy place for a human to find themselves.

So where do we go from here?

So I’ve written enough on the problem.

‘Part 2’ (coming soon to a blog stall near you) will set out a different philosophy and, by revisiting the budget games played, will show what this ‘new way’ enables.

…over and out for now.