From the June 26th edition of Business Week, The Welch Way by Jack and Suzy Welch was called Stop the B.S. Budget (need subscription to read).
I probably will not get much argument from people on this: budgeting as it is currently practiced is probably one of the most universally unlean processes that can be found. It’s fraught with every single one of the seven wastes and at the end, doesn’t produce something meaningful or useful to most of its intended customers. I don’t believe budgeting is inherently bad. Jack Welch has been known to chime in on the practice before and did so in this week’s column. Here are a couple excerpts from his statement:
“The budgeting process as it currently stands at most companies does exactly what you’d never want. It hides growth opportunities. It promotes bad behavior -especially when market conditions change midstream and people still try to “make the number.” And it had an uncanny way of sucking the energy and fun out of an organization.”
“What’s wrong with this picture? First, what you see: an orchestrated compromise. More important, what you don’t: a rich, expansive conversation about growth opportunities, especially high-risk ones.”
So, what’s a manager to do? First, let’s acknowledge that few feel very powerful to change it, INCLUDING CEOs and CFOs who lack options. Imagine if a company that lived with budgets just took them away cold-turkey. It would be like taking the stop light away from a busy intersection and relying on “good driving.” Chaos and financial disaster would probably rule. People set themselves up to be able to get what they need in order to game the system. I remember my own gaming of the system. I was a young supervisor and needed some new cabinets for parts that was critical to my strategy of improving parts availability and hence uptime. The absolute amount was greater than my signing authority and I could wait for the system to put it through, so I broke it up into small chunks just shy of the ceiling limit since I would still come under the overall budget and would have dramatic approval. As they say, it is easier to ask for forgiveness than approval. If people are used to gaming the system and you take the system away, there will be no balance.
That leads to a second key issue. Budgeting is not just a system. It is wrapped in the blanket of the corporate culture. What’s the culture of an organization? How do people behave in regards to the budget and its supporting processes? If you have the right culture, the system hardly matters. In one company in which I am an investor, there is a culture of frugality, top to bottom. Don’t fly when you can drive. Don’t get separate rooms when you can bunk up. Don’t buy a new piece of equipment when you can refurbish the old one. To this company, which does have a budget, people are much focused on their performance in regards to provide, down to the individual, than gaming the budget.
I believe the most important question that you must ask yourself in regards to budgeting is “who is the customer?” Who is the customer of your budget? Who uses it, and for what? Is it the baseline for incentives? A tool to plan your actions? A guideline for those making incremental investments? If you don’t have a clear customer, or have too many, it will be impossible for you to have a system that delivers something of value. Ask this question before asking “what’s the solution?” I do not believe there is one solution. I don’t believe there is a “thing” called LEAN BUDGETING just as there shouldn’t be a thing called LEAN ACCOUNTING.
But instead, apply lean principles to the accounting process. Who is the customer? Where is the waste? What are the guiding principles, the culture? What are the activities, connections and flows designed to deliver?
There hasn’t been much written about lean and the budgeting process. One book, called Beyond Budgeting, is being promoted as lean budgeting. It was not written by a bunch of lean folks who then asked ‘what about budgeting?’ It was developed outside of the world of budgeting but there has been a connection made to those promoting lean. To be honest, I don’t agree with everything in the book and I also think this solution is only right for some companies. But I do think it is worth a read. It has some challenging and intriguing thoughts and good case studies. You can check out the Beyond Budgeting Roundtable or check out the book Beyond Budgeting here.
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