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.

How to win?

Sky British Cycling, the first UK team to compete in the Tour de France for nearly a quarter of a century, is managed by David Brailsford, who carried away a hoard of eight gold track medals from the Beijing Olympics in 2008. Brailsford intends to put a British rider on the podium by following his already proven philosophy of the aggregation of marginal gains. Put simply that means being as good as you possibly can in as many areas as you can so that cumulatively 1-2% improvements in areas that matter add up to a considerable gain in performance.

In practice this means digging into the detail to identify all the elements that drive performance then experimenting to deliver improvements. For Sky, this resulted in using fabrics in the team’s cycling jerseys that minimize the weight of perspiration absorbed in the fibres and developing cycling helmets with less air vents giving less drag and an advantage of about one second per kilometre. I guess when you know exactly what you want to achieve, there is less ambiguity about what needs to be done to get there. Brailsford also knows about risk management too bringing along a team chef and their own food to minimize the chance of riders picking up a debilitating stomach bug from eating hotel food – and carrying every rider’s favourite duvet and pillows so they get a good night’s sleep.

No doubt Brailsford would get on well with Drs. Kaplan and Norton, who developed the concept of the balance scorecard to help companies become more effective in communicating and executing their strategy. But having spent last week listening to how some of Europe’s largest companies are rolling out performance management, it’s clear that all too often strategy management is the one piece of performance management that companies choose to ignore leaving the organization without a map of the margin improvements that would accumulate into a superior performance.

Having a good strategy management process and a solution such as SAP BusinessObjects Strategy Management in place to deliver it will not automatically guarantee success as team Sky discovered on the opening prologue when they misread the weather and sent out their star rider Bradley Wiggins during what turned out to be the worst rain of the entire afternoon. Now four minutes adrift, he is facing an uphill task to get back among the leaders. But knowing Brailsford, they’ll know how and when they're going to close the gap.  

Prioritizing and Investing in Performance Management

At SAPPHIRENOW today SAP customers including Steelcase, Forest City Enterprises, Dow Corning, Under Armour and USDA came together with leading industry analysts from IDC and Aberdeen for a lively and interactive debate about the performance management market looking at why EPM is important to them, how it helps drive value and what the future holds for this exciting growth market.

One element of the debate focused on the economic climate with customers focusing on why they invested in EPM during a period of economic uncertainty. Steelcase, a manufacturer of office products open the debate explaining how their business is one of the first to be impacted and last to recover from an economic downturn. They explained how their investment in SAP BusinessObjects Spend Performance Management was the only software investment allowed during the recession as part of a wider project to increase visibility and lower costs. Dow Corning, a joint venture between Dow Chemical and Corning, implemented SAP BusinessObjects Planning and Consolidation to insure greater visibility which was critical for them during this period. Under Armor who was seeing huge growth chose to implement SAP BusinessObjects Planning and Consolidation version for SAP NetWeaver to drive greater visibility and model new business opportunities. The US Department of Agriculture (USDA) added that for all federal government organizations the key words are “accountability” and “transparency”. This has become even more important where funding is at a premium in a tight economy but also where government mandates increase the focus on these areas. They explained how SAP BusinessObjects Profitability and Cost Management is used to help them comply with the mandates and demonstrate value to key stakeholders.

Aberdeen’s Cindy Jutras commented on the importance of investments suggesting that organizations are showing greater optimism and that is now feeding back into their planning processes. She cautioned that the recovery may take longer than people think which may require them to be ready adjust plans and have the mechanisms to cope with this if and when required.

IDC’s Brian McDonough took the debate one step further to look at how companies are looking to expand beyond a point EPM investment into a broader portfolio of solutions. Forest City Enterprises suggested that this is about doing things in the right way for the business. Moving beyond SAP BusinessObjects Planning and Consolidation they see their EPM expansion moving toward SAP BusinessObjects Spend Performance Management and SAP BusinessObjects Strategy Management. Dow Corning added that today it’s even more important to bring together investments as part of a broad EPM and BI strategy and see how these assets can be leveraged together. This prompted a quick survey of where investment priorities lie and the results speak for themselves – expanding beyond planning to support Strategy Management and Profitability and Cost Management, the continued inclusion of BI and a new focus on sustainability. All good news for SAP then.