Money & Planning

On budgets

Friends,

Over the months that Strategy in Praxis has now existed, I have attempted to take an unbiased and critical look at strategy in order to detail its inherent but seldom acknowledged flaws. As expected, given how much some people have invested in various methods, my analyses have occasionally touched a few nerves.

To be clear, I do not mind the debate, on the contrary. Although some mistakenly interpret my critique as belonging to ‘the other side’, whichever side that happens to be, it does not follow - I genuinely have no horse in the race. I am merely (albeit perhaps foolishly) doing my best to improve strategy as a discourse by broadening perspectives, not least my own.

By no means am I alone in this endeavor. The list of other practical thinkers doing the very same is exhaustive, and many (if not most) on it are much smarter than I. But there are also those entirely stuck in their ways, firmly believing that they are right and everyone else is wrong, regardless of context or evidence to the contrary.

Case in point, my latest piece for MarketingWeek – in which I argued that the imprecision of language in marketing leads to organizational inefficiencies – did rather well on the whole but was met by some with scorn.

That strategy is normally defined as one of four things (a plan, a pattern in actions over time, a position or a vision) is rather well established; I wrote about it Strategy in Polemy and Mintzberg dedicated almost an entire chapter to it in The Rise and Fall of Strategic Planning. Alas, in the world according to LinkedIn, it is somehow considered controversial to the point of required ridicule (though even a non-native speaker such as myself is able to casually observe that, in the English language, a plan and a vision are doubtlessly two different things).

Consequently, I am almost expecting an avalanche of insults to come my way after this newsletter. If it is contentious to point out that there are many interpretations of the word strategy, what I am about to argue might just be taken as a metaphorical declaration of war:

There exists a case for not having a budget.

I know, I know. If you are a subscriber, you will likely take this with a shrug. Partly because I said last week that I would discuss metrics (fret not, it is in the pipeline), but also because of the overall argument in the newsletter in question. After all, if there is less of a need for strategic planning than commonly perceived, it follows that there might also be less of a need for financial planning. And yet, in practice, the suggestion that budgets might not be as important as almost all companies believe is normally met with the kind of faces required for, I would imagine, defecating on the boardroom table.

Budgets have been one of most dominating instruments for vertical management in organizations for a very long time. Although their use has not been without criticism (see, for example, Hansen et. al. (2003), Segun (2011), Wallander (1999) or Hope and Fraser, (2003)), they remain standard practice, not least because few attractive alternatives have been presented (Ekholm et. al. (2010)). Of course, one might also note that beauty lies in the eye of the beholder. Budgets increase the intraorganizational power of the financial department which otherwise by and large is limited to saying ‘no’ – meaning that there is an obvious incentive for their continued use.

But just as traditional strategic planning suffers from a problem of inertia, so too does traditional financial planning. The processes involved are typically slow and time-consuming, leading to a lack of responsiveness. Companies can almost grind to a halt during ‘budget setting season’ – even though the market could not care less – and once the budgets are set, they can both act as a barrier to change and limit value creation (Higgins (2005), Østergren and Stensaker (2009)).

To make matters even worse, budgets are rarely informed by strategy (Radonić (2017)), instead developed in isolated processes in a language ill-suited for performance evaluation (Bogsnes (2016). This means that rather than act as a support for the business, they ultimately become an impediment to success, preventing organizations from reaching their full potential.

Clearly, it would be silly to suggest that companies are deaf and blind to the issue. But, as Bogsnes notes in Implementing Beyond Budgeting, the common response is generally to increase the current modus operandi; longer budget processes, more analysis, more number-crunching, tougher targets, tighter follow-ups and so on. Or to put it differently, to do more of the old in order to control the emergent new. The problem, just like in strategy, is that it tends to lead to higher inefficiency and more, not less, of that which we are trying to prevent.

Further, while I would not go so far as Bogsnes and call financial planning a display of mushroom management – ‘keep them in the dark and feed them shit’ – it is noteworthy how often budgeting is used as not much more than a thinly veiled control mechanism. Contrary to popular narrative, however, this actually lessens accountability by decreasing transparency; as long as something is ‘within budget’ it is usually fine. 

But ensuring that no more is spent than has been decided to be handed out can act as a floor as much as a ceiling. As most people who have working experience can attest to, cost budgets tend to be spent even when the underlying assumptions change (which they inevitably do). After all, if they are not, one can rest assured that next year’s sack of silver will be considerably lighter. In reality, more likely than not, some departments should have spent more while others should have spent less, but while it is possible to adjust departmental budget splits, giving someone more money is a lot easier than taking someone else’s away.

In other words, we find ourselves facing an all too familiar problem. Through planning, we have effectively set the limits of what we can do during the lifespan of the plan, regardless of what risks or opportunities may appear along the way. This is perhaps particularly troublesome when the budget is inconsistent with the strategy, as people are expected to align to the latter while adhering to the former.

And yet, when was the last time you, as a strategist, took time to speak to the financial department?

I will leave you to ponder that question until next week, when paying subscribers will receive my follow-up note on the topic: what to do instead and how.

Until then, have a lovely weekend.

Onwards and upwards,
JP