Is Driver Based Budgeting Picking Up Speed?

In a recent survey of planning and budgeting practices, analysts Aberdeen Group, found that the ‘Best in Class’ - the 20% of respondents who had shorter budget cycles, more accurate budgets and who had actually improved their year-on-year profitability by 20% or more, were roughly twice as likely to use methodologies such as zero-based budgeting and driver-based budgeting – the majority sticking to tweaking the previous year’s actuals.

Driver-based budgeting is something close to my heart in that I wrote a book on it back in 2007 – Planning and Budgeting for the Agile Enterprise. Other than receiving a few metaphorical pats on the back from the folk who make their living by writing or lecturing about performance management, the book languished on the Amazon listings where it has stubbornly remained for the last few years, while I moved on to travel writing which is both more enjoyable and more lucrative. But clearly driver-based budgeting hasn’t gone away. In fact, Aberdeen found that the ‘Best in Class’ enjoyed some considerable benefits in that they were more able to perform ‘what-if?’ analysis and re-forecast as market conditions change. Given that many people talk about rolling re-forecasts, but few can actually achieve the frequency they desire it looks as though driver-based budgeting is on the ascendant; an idea whose time has finally come.

Now the interesting thing is that the Aberdeen research didn’t find much difference in the type of software used for budgeting between the ‘Best in Class’ companies and the industry average. So although enterprise applications may help improve productivity in finance and make the data easier to manage, it’s not the technology that is making the difference here. It’s the simple step of moving away from traditional budgeting, (little more than the collection and collation of line item expenses to my mind), and adopting a driver-based methodology that makes the difference.

Being a numbers business, telecoms is an ideal industry in which to implement a driver-based approach to planning and budgeting and I’ve written before about how I sat through a breakfast meeting at SAP Sapphire in Orlando earlier this year and was gladdened to hear to Sandy Rogers, Director of Financial Systems at Qwest Communications talk on their adoption of driver-based planning and budgeting that consulting organization Column 5 Consulting helped them implement in SAP BusinessObjects Planning and Consolidation. Sandy shared some of the benefits of the approach as well of some of the change management issues in helping financial analysts and business folk move away from the ultimately false security that comes from a traditional approach to budgeting with its endless line item detail. It was compelling stuff. Who knows; if this momentum continues then that book might just begin to pay back on the time and effort invested in writing it!

Reinventing the Ritual – Get beyond budgeting

Jack Welch, who ran General Electric, one of the world’s ‘Best Run Businesses’ for many years, wrote an inspiring book that is a must read for every manager- ‘Winning’. One of the chapters, called ‘Reinventing the Ritual’, is a critical discussion of how budgeting is often done in a company. He says ‘It (budgeting) sucks the time, energy, fun and big dreams out of an organization’. Jack mentions ‘Budgeting’ as the backbone of the management system - and getting it right in a non tradition way can get better results.

Jack’s two concepts that describes the traditional budgeting are:

Negotiated Settlement
What is this? This is the long drawn exercise of ‘bottom-up’ planning that takes several months to prepare before it gets reviewed by headquarters. But what do the numbers that make up the budget actually mean? In preparing the budget, every manager will be aware of setting goals and targets that jeopardize the prospect of earning any performance related bonus. As Jack put its ‘their underlying galvanizing mission is to come up with the targets that they absolutely, positively, think they can hit.
So what is the negotiated settlement? On the one hand, every business manager builds in sufficient buffers and cushions to produce a budget they are confident of delivering. On the other hand, headquarters are looking for growth in revenue and profits that will drive the stock price. The marathon budgeting meetings begin, finally resulting in a negotiated settlement that is acceptable to both parties. But typically the discussion never captures the potential opportunities the company may have; nor is there any explicit link between the strategy and the budget, (execution).

Phony smile
As part of the budgeting process, business managers may have identified some new opportunities and ideas that they have spent a significant amount of time to develop and are eager to discuss with head office. All too often, such new ventures are often greeted with the response ‘very interesting’ as head office staff have already decided where to allocate investment capital and have their own idea of what each business unit can deliver. So all the ‘very interesting’ comments are nothing but a ‘phony smile’.

The outcome of this is that the business manager becomes de-motivated and allocates the money assigned without any firm goals in mind or indeed any feeling of ownership, most likely felling little more than post room clerk passing budgets backwards and forwards. The biggest issue here is not about the allocation decided by the head quarters team, but the lack of transparency to explain why it was done in a certain way and not giving time to the review the proposals and ideas put forward by the business managers.

Jack recommends replacing all this with a planning and budgeting process that works towards common objectives, identifies opportunities for growth and thrashes out inherent obstacles (read risks) in pursuing them to come up with a plan that has stretch targets - but doing it all in a transparent way. For Jack, the planning and budgeting process should be structured to answer two fundamental questions – How are we going to beat last year numbers? How are we doing vis-a-vis competition and how are we going to outperform them? – The very things that drive total shareholder returns.
But successfully delivering on stretch targets requires a robust Enterprise Performance Management framework to be in place, particular in the area of strategy management so that objectives can be clearly set out and cascaded down the organization with well thought out initiatives identified at every level. Ideally these business critical initiatives need to be linked to detailed budgets that can be reviewed and amended whenever results start to drift off plan. So going ‘beyond budgeting’ doesn’t mean throwing away performance management solutions. In fact it’s the exact opposite. If you want to set the bar high and manage performance with stretch targets and dynamic resource allocation, having a robust performance management framework such as SAP Business Objects Enterprise Performance Management solutions that covers Strategy Management and Budgeting/Planning is imperative. These solutions help Best Run Businesses to reinvent the ritual by getting beyond budgeting.