Robert Kugel's Analyst Perspectives

I think one of best epigrams attributed to Mark Twain is, “Everyone talks about the weather but nobody ever does something about it.” This also has relevance to the situation with corporate planning and budgeting. Bemoaning its lack of value and calling for some sort of change goes back a long way, but few companies have matured their process. In the 1970s something called “zero-based budgeting” was all the rage in business and accounting periodicals. It was energetically advocated by President Carter to counteract the incremental budgeting that made it so difficult for the U.S. Congress to cut spending. (Of course, nothing changed.) Efforts to reform budgeting gathered steam in the 1990s as software vendors began offering dedicated applications designed for planning and budgeting. Even if one doesn’t fully embrace the idea of going budgetless, the book Beyond Budgeting is full of sensible management approaches (such as using league tables for internal benchmarking or using relative rather than fixed measures of performance). Of course, unlike the weather, people can change company practices. Yet when it comes to budgeting and planning, the same old stuff persists even as people like me continue to point out how using the right software can help transform the process into a valuable business tool. I’ve discussed why it’s important to adopt integrated business planning from my research, in which the budget is an automatically generated end product of the process, not the objective itself. And I’ve explained why driver-based planning produces better results. If it were just me advocating change, I might take its absence personally, but there have been scores of people, libraries of books and years of webinars focused on this topic for decades. Why has so little changed? 

I believe the sad truth is this: While budgeting is centrally important to the career of people in charge of financial planning and analysis (FP&A), and is a core process for controllers and CFOs and a staple for consultants and business writers, it hasn’t mattered enough to anyone else in a company to energize them to want to change. A budget is something you have to do; it’s an organizational ritual. People expect it and don’t wish to take the risk of change or have to learn to game some new process to their advantage. And there isn’t a lot of empirical evidence that companies that do a better job of budgeting always achieve better results than those that don’t. But I believe this is so largely because few companies have adopted advanced planning and budgeting methods. Indeed, companies that waste time performing poorly designed budgeting processes can also be recording record revenues and profits. Moreover, some corporate cultures even sneer at planning, believing that their success is based on rapid innovation and the ability to be opportunistic. (How these traits aren’t better enabled through an effective planning process is beyond me.)  

I believe that another factor preventing companies from adopting better planning and budgeting methods is that they confuse and conflate corporate-wide planning and budgeting. Budgeting is done company-wide yet the detailed planning processes are performed on a silo-by-silo basis (often in desktop spreadsheets). The results of these planning efforts at best are shared only at a summary level. When these plans change, it’s usually too time-consuming to assess the impact of those changes on a broader company outlook. It’s difficult for those working in one part of the business to understand the underlying assumptions going into another business unit’s plan. Likewise it’s difficult for senior executives to see how changes in one part of the company will affect another. I assert that companies need to expand the focus to enterprise-wide planning, where individual business units’ plans are integrated into a single coherent model from which a budget can be derived almost automatically. This is what I call integrated business planning. 

While little progress at maturing planning and budgeting has been made, I suspect that attitudes toward planning (and budgeting) are beginning to change, though it’s not yet a groundswell. The reason the needle is moving is the high degree of volatility in businesses and the world economy over the past three years. Both in the downturn and in the recovery, assumptions made when annual budgets have been put together have turned out to be laughably wrong just three months later. With commodity prices and currency exchange rates continuing to go up or down by percentage points on a weekly basis, businesses are learning that they need to do more contingency planning, use predictive analytics more effectively and speed their planning cycles. All of these efforts can help executives and senior managers achieve greater agility and – very likely – better results.  

In a nutshell, companies need to plan more and budget less. A more effective planning process can help senior executives manage better. Integrated business planning, rather than budgeting, enables them to mediate the competing objectives of individual divisions and business units. As those running a company recognize that more effective planning produces superior results, planning will become more important and change will occur. But as long as the company-wide activity focuses on budgeting, it will remain unimportant to the company as a whole. 

Regards, 

Robert Kugel – SVP Research