February 2002
Overview
In today’s turbulent economy, strategic planning that relies on industrial-age budgeting is bound to fail. But a number of companies are using technology to replace outmoded practices with efficient, flexible budget systems that can improve performance and boost shareholder returns.
Background
Few corporate undertakings are more labor-intensive and exhausting than the annual ritual of preparing the budget.
The average billion-dollar company spends a staggering 25,000 person-days a year on the budget, according to a study by Hackett Benchmarking & Research. The largest companies often take six months to prepare a budget. And one company used to spend twice that much time on its budget, making the process, in effect, an endless burden.
Corporations might find the expenditure of all that time, money and effort acceptable if they were convinced it produced a real benefit. But our research shows that fully 80 percent of companies are dissatisfied with their budget processes; indeed, so displeased are finance directors that they have made budget reform a top priority.
Key Findings
We asked more than 30 senior analysts from six major investment banks and rating agencies to discuss how they evaluate the companies they follow.
A significant consideration is strategy formulation and execution; 85 percent of the respondents rated the execution of corporate strategy as “very important.” Nonetheless, the analysts regard the information on strategic plans and budgeting provided by management as “generally of low quality.”
Analysis
There are alternatives to that creaky, burdensome and often destructive exercise known as budgeting.
Jan Wallander, honorary president of Sweden’s Svenska Handelsbanken, once expressed his frustration with the budgeting process this way: “As soon as you introduce a budget, the aim becomes to beat the budget.”
So the company has replaced budgets with tables that compare the performance of branches with one another. Every month, the bank measures profitability per employee on a branch-by-branch basis and circulates the data widely within the organization. “The aim for every branch is to beat the competition,” says Jan Wallander, “no matter whether the competition is internal or external.” When a branch meets that goal a third of the additional profit is split evenly among staff and added to their pensions.
Recommendations
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First, throw the spreadsheet you have been using out the window. The logistics of spreadsheet budgeting add days to the process. There are new Web-based tools that enable you to reduce administrative overhead as well as management time while still providing the information that for years has been contained in a spreadsheet.
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Conventional wisdom holds that the way to fix the budget process is to involve fewer people, thus reducing the drag on management time. Consequently, many companies turn much of the work over to their financial people. But as a result, many of the meaningful details that provide a true picture of the company’s plans—such as the number of new product launches—get left out. Only the managers down in the trenches can provide those kinds of up-to-date specifics in an ever-changing environment. The solution is to involve many people in the process, but for very short periods.
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The executives responsible for planning and budgeting should be held fully accountable for results, and their compensation should depend on those results.
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Decision makers need to make the right management and investment decisions consistently at their individual levels to ensure that there is alignment across the organization.