Repairing the budgeting process: the budgeting process often gets in the way of successful strategy achievement.

• Author: Cokins, Gary
• Position: BUILDING

Organizations cannot succeed by standing still. If a company is not improving, then its competitors will soon catch up. This is one reason why Professor Michael E. Porter, author of the seminal 1970 book on competitive-edge strategies, Competitive Strategy: Techniques for Analyzing Industries and Competitors, asserted that an important approach option is to continuously differentiate products and services to enable premium pricing.

Yet, strategy execution is considered one of the major failures of executive teams. Dr. David Norton, coauthor of The Balanced Scorecard: Translating Strategy into Action, says that executives can formulate good strategies, but a formal process should be in place to manage them.

One of the obstacles preventing successful strategy achievement is the annual budgeting process. In the worst situations, accountants administer the budgeting process as a fiscal exercise that's typically disconnected from the executive team's strategic intentions.

A better scenario, but still not a complete solution, is one in which the accountants consider the executive team's strategic objectives, but the initiatives required to achieve the strategy are usually not adequately funded in the budget.

In addition, the budgeting process tends to be insensitive to changes in future volumes and mixes of forecasted products and services. The next year's budgeted spending for each cost center is typically incremented or decremented by a few percentage points from the prior year's spending.

Many managers are wise to this practice. As they approach the last quarter of the fiscal year, they say: "Use it or lose it." This is both sad and laughable. Imagine a primitive budgeting method using spreadsheet software where the first line item of actual expense, typically wages, is multiplied by a percent increment. Next, copy-and-paste that formula into a budget column for every line item of spending below it. Look familiar?

Two components of the performance-management framework, strategy maps and activity-based costing principles, can be drawn on to resolve these limitations. Ideally, the correct and valid amount of future spending for capacity and consumed expenses should be derived from two broad streams of workload that cause the need for spending: demand driven and project driven.

Demand-driven expenses are operational and recurring from day to day. In contrast, project-driven spending is strategic and nonrecurring, and the projects' time duration can be from days to years.

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