How to beat the budget blues

1、How to beat the budget bluesFinance & Performance ManagementHow to beat the budget bluesBy Herman R1. Heyns and Michael R. SutcliffIn todays turbulent economy, strategic planning that relies on industrial-age budgeting is bound to fail. But a number of companies are using technology to replace o

2、utmoded practices with efficient, flexible budget systems that can improve performance and boost shareholder returns.Outlook 2002, Number 167ew corporate undertakings corporations strategic planning, are more labor-intensive andthe budget often undermines it.Fexhausting than the annual ritualof prep

3、aring the budget. The averageWhat are the basic flaws in the billion-dollar company spends a stag-budgeting process as we have comegering 25,000 person-days a year onto know it? Can it be reformed? the budget, according to a study byOr should it be eliminated altogether,Hackett Benchmarking & Re

4、search.and if so, replaced by what? The largest companies often take sixmonths to prepare a budget. And oneDuring the first quarter of 2001 acompany used to spend twice thatteam from the Centre for Businessmuch time on its budget, making thePerformance at the Cranfield Schoolprocess, in effect, an e

5、ndless burden.of Management in the United Kingdom and Accentures Finance Corporations might find the expen-& Performance Management servicediture of all that time, money andline undertook a thorough review effort acceptable if they were con-of worldwide planning and budget-vinced it produced a r

6、eal benefit. ing practices. Team members But our research shows that fully studied the extensive academic and80 percent of companies are dis-other literature available on the satisfied with their budget processes;subject; to supplement this research,indeed, so displeased are financethey interviewed

7、executives from directors that they have made budget815 global companies in variousreform a top priority. industries, including financial ser-vices, energy, airline, automotive The disillusionment we encounteredand electronics.again and again in our conversationswith executives is captured in a The

8、research teams goal was tocomment from Jack Welch, GEsdetermine planning and budgetingrecently retired CEO, who once toldbest practices and to see if there colleagues with his characteristicwas evidence connecting them withforthrightness, “The budget is theincreased returns to shareholders.bane of c

9、orporate America . . . anOur conclusion: There is a strongexercise in minimalization. Yourecorrelation between companiesalways trying to get the lowest outapplying best-practice planningof people, because everyone is nego-processes and achieving better-than-tiating to get a lower number.” Janaverage

10、 performance. Wallander, honorary president ofSwedens Svenska Handelsbanken,A fixture of corporate life since theonce expressed his frustration with19th century, the traditional budgetthe whole process this way: “As is, of course, that periodic exercisesoon as you introduce a budget, by which organi

11、zations determinethe aim becomes to beat the budget.” their upcoming operating expensesand forecast income. Generally, it Dismay at the topis a top-down process: CorporateSuch sentiments are easy to under-headquarters sends budget packets stand. Budgets consume an enormousto divisions and operating

12、units,share of management time. Someaccompanied by forms to be filled companies have discovered that man-out and sales and operational fore-agers spend as much as 30 percent casts to be completed. Recipientsof their time on budgets. Even moredutifully complete the forms andtroubling, instead of supp

13、orting areturn them. A period of negotiation68.accenture4/Outlookoften follows, as headquartersthe companys revenues by 50 per-demands adjustments (sell more,cent and its profits by 70 percent.It is a mistake to spend less), and operating units But the company fumbled thecomplain and explain. Weeks,

14、 some-launch. Why? Because the strategicconduct budgeting astimes months, after those first pack-plan for introducing the drug gotets go out, there is an agreement.blindsided during the companysa separate process.operational budgeting process. TheSounds rational enough, right? But budget operatives

15、in sales thoughtit isnt. For a dozen reasons, the their colleagues in strategic planningconventional budget process iswere far too optimistic, so theyflawed. The budgeting and planningreduced the sales projections by systems in use at many companies50 percent. Meanwhile, the produc-today were develo

16、ped for an indus-tion people thought the folks in trial economy, which was relativelysales were dreaming, so they cut static and easy to understand. Todaysthe projections in half again. economy is much more turbulent;Finance then took a look andattempts to develop long-term, fixedknocked another big

17、 chunk out plans based on an outmoded businessof the budget.model and supported by obsoleteaccounts-payable procedures areAs a result, the product was launchedbound to fail. with less than 20 percent of the production capacity that the strategicOne of the most dangerous short-planners had indicated

18、would becomings of the budget process is thatrequired. Within six months demandit often ignores, and consequentlyfor the drug was soaring, just as sabotages, strategic planning. the strategic planners had anticipated.Sadly, supply trailed demand by aConsider the experience of one factor of four or f

19、ive. The opportunitypharmaceutical company. The com-cost to the company: about $10 bil-pany had a blockbuster new drug lion in revenues.in the pipeline. The strategic planconcluded that with sufficient pro-The company, moreover, may haveduction capacity and marketing lost an opportunity to show Wall

20、support, the new drug could increaseStreet that its strategic planning andEndless burden?Companies vary significantly in their approach to planning and budgeting, but theaverage billion-dollar company spends 25,000 person-days a year on the budgetand five months on the strategic plan.Upper quartileM

21、eanLower quartilePerson-days per billion $ sales6,07725,00028,592Months to develop strategic plans356Months to develop financial plans346Reporting resource (person-days)Line items in financial plan4090250SOURCE: THE HACKETT GROUPOutlook 2002, Number 169budgeting were smoothly integrated.b

22、ranch is to beat the competition,”To be sure, no single plan, whether Such a demonstration might havesays Jan Wallander, “no matterits Fords or Handelsbankens or anyincreased shareholder value. whether the competition is internalother organizations, can serve as aor external.” When a branch meetstem

23、plate that other companies canAs part of its research, the Cranfield-that goal a third of the additionaleasily adopt. Needs vary greatly byAccenture team asked more than 30profit is split evenly among staff andindustry, company size and other con-senior analysts from six major invest-added to their

24、pensions. siderations. What our research clearlyment banks and rating agencies toreveals, however, is that it is a mistakediscuss how they evaluate the com-For its part, Ford wearied of itsto conduct budgeting as a separatepanies they follow. A significant con-grindingly slow forecasting system,proc

25、ess. To be successful, it should besideration is strategy formulation andwhich each year began with a letterpart of an integrated procedure thatexecution; 85 percent of the respon-from the head office that cascadedincludes strategic planning, perfor-dents rated the execution of corporatedown through

26、 the organization. mance reporting and target setting. strategy as “very important.” None-At the bottom, low-ranking man-theless, the analysts regard the agers produced forecasts, whichThe effective integration of theseinformation on strategic plans andwould then begin a laborious ascent, functions

27、is, in turn, based on fourbudgeting provided by managementlevel by level, back up through underlying principles. as “generally of low quality.” the organization for review andapproval. Top-level executives SpeedIs there, then, an alternative to thatwould have to wait a long timeFirst, throw the spre

28、adsheet youcreaky, burdensome and often destruc-before they could get a look at have been using out the window.tive exercise known as budgeting?critical information like the range The logistics of spreadsheet budget-of vehicles that would be marketeding add days to the process. ThereYes. Some compan

29、ies have aban-in the coming year. are new Web-based tools that enabledoned the traditional budgetingyou to reduce administrative over-process altogether. Handelsbanken,So the automaker is introducing ahead as well as management timefor example, has replaced budgetssystem it has dubbed FST (finan-whi

30、le still providing the informationwith tables that compare the perfor-cials at the speed of thought), inthat for years has been contained inmance of branches with one another.which executives from top to bottoma spreadsheet (see “Rise of the digi-Every month, the bank measurescan call up and review

31、the revenuetal CFO,” Outlook, January 2001).profitability per employee on aand product assumptions as they arebranch-by-branch basis and circu-being entered. In addition to the timeCisco Systems has pushed the trendlates the data widely within thesaved, the cost reduction is likely totoward integrat

32、ion a step further organization. “The aim for everybe impressive as well. than most companies with its use of a common database. When thesystems maker takes over a new business, it encourages the acquiredSuperior returnscompany to adopt its finance sys-Companies with the best planning and budgeting

33、practices build substantially tems, even if doing so means replac-more shareholder value than their competitors.ing a newer system version with 373% change in share price over timean older one. Using a common Industry average versus best-practice companiessystem throughout the company280makes the in

34、tegration of data easy.221Hence Cisco is able to determine 167the financial health of the companyIndustry average116on a daily basis; indeed, it can carry 101Selected best-out a “virtual close” with as little aspractice companiesan hours notice.3 years5 years10 yearsAccuracySOURCE: CRANFIELD SCHOOL

35、OF MANAGEMENT AND ACCENTURE RESEARCH REPORTConventional wisdom holds that theway to fix the budget process is to70.accenture/Outlookinvolve fewer people, thus reducingthat of the other super majors, system, reforecasting in a crisis can the drag on management time. ExxonMobil and Royal Dutch/Shell.

36、be done very quickly because it is aConsequently, many companies staff process and does not requireturn much of the work over to theirAlignmentnegotiation. financial people. But as a result,Decision makers need to consistentlymany of the meaningful details thatmake the right management andCompanies

37、that keep these four provide a true picture of the com-investment decisions at their individ-principles in mind will be able topanys planssuch as the number ual levels to ensure that there isclear their desksand their headsof new product launchesget leftalignment across the organization. of conventi

38、onal budgeting proce-out. Only the managers down in theTo achieve this alignment, they needdures that are costly, cumbersometrenches can provide those kinds ofto be motivated, establish strong and destructive. What will replaceup-to-date specifics in an ever-target-setting and performance-those hide

39、bound practices are sys-changing environment.reporting processes, and help ensuretems that are efficient, flexible andthat managers are properly motivatedfocused on the organizations overallThe solution is to involve many to make the right decisions. strategy. Throughout the company,people in the pr

40、ocess, but for verymanagers and employees will get short periods. A German telecomTarget setting is also crucial becausethe message: The object is not to company changed its procedures toit keeps everyone moving in the samewin the “budget game.” The object do just that. Previously, it had relieddire

41、ction. It is much more aboutis to beat the competition. on about 80 senior managers to pro-human performance than about thevide budget information. Eventuallymechanics of the planning process. the company realized that it couldHerman Heynsis a London-based get a much more accurate picture ofTargets

42、should be set at the top ofpartner in the Accenture Finance &what was actually happening bythe organization. They should bePerformance Management service line,bringing 800 people into the process,ambitious and must be communi-in which he has global responsibility all the way down to junior manag

43、ers.cated clearly to those who arefor the budgeting and planning practice.expected to reach them. They alsoWith 10 years experience implementingThat may sound unwieldy, but itneed to be balanced. In other words,planning, budgeting and forecastingisnt. Those managers are notthey should cover more tha

44、n justsolutions for clients across variousrequired to fill out the 150- to 250-financial measures; they shouldindustries, Mr. Heyns oversees the com-line budget forms that are commonlyinclude specific operational measurespanys research programs in the areas presented to managers. Instead, theyand, w

45、here possible, they should beof planning and budgeting. are asked to provide only 10 piecesset in terms of the competition orof information, such as number ofsome other sales calls, number of new clientsand promotion activities, and theyThe last time Danish petrochemicalsare asked to report monthly. Ofcompany Borealis used a budget wasMichael Sutcliff is the global managingcourse, to handle this process 1995; since t