The Great Dysfunctional Corporate Budgeting Process

A former colleague hit an old nerve the other day, sending me the following message about budgets and budgeting.

A question for you  — I just saw a typical idiotic internal email about budgets yesterday, and to my recollection [at our last company], you tried to make the system less dysfunctional, but didn’t really make much headway, and almost earned yourself some finance team enemies [in the process].

Now that you’re CEO, do you still have those feelings about budgets, or have you now seen the other side of the coin?   Do you have any tips for somebody who still gasps at how bad it seems to be, but wants to understand?

I still find it incredibly hard to imagine that this is the best system possible for using money strategically.

Best,
Joe

Since it's currently planning and budgeting season for most corporations -- including mine -- I thought I'd share a few thoughts as a former budget rebel turned CEO.

First, let's review my problems with the classical corporate budgeting process.

• It rewards negotiation not performance.  The division manager who negotiates a 30% growth plan and who delivers 33% is a hero, while the one who negotiates 75% growth and delivers 60% is a zero.

• It ends up a trending exercise. Budgets end up tweaked extrapolations of prior years. Well-intentioned zero-based budgeting exercises end up expensive re-creations and re-justifications of the status quo.

• It ends up a budgeting, not a planning, exercise. What's supposed to be a planning process that includes generating a budget as one part ends up a budgeting-only exercise. In marketing, I call this the "buckets of money" problem. Which tradeshows have we decided to do based on what strategic criteria? Dunno, but I have $500K allocated to tradeshows next year. Which analysts? Dunno, but I have $250K allocated. What are our key themes? Dunno, but we can figure that out later. All those questions should be answered in the marketing planning process, but they get lost in budget-myopia.

• It encourages convergence to the norm, ironically in the name of "best practice." CFOs and boards benchmark the company against competitors with keeping up with the Joneses logic. This drives everyone's P&L to look the same. For example, at Business Objects, we consistently decided that we were underspending in R&D and overspending in sales and marketing (S&M) relative to industry averages. So every year, we'd cut S&M and increment R&D expense by a few points. I'd argue that we were good at S&M and bad at R&D and ergo we should reinforce our strengths and perhaps acquire (not develop) technology to dump into our excellent S&M engine. This argument repeatedly lost to the normalcy one, reminding me of the Vonnegut story where ballerinas have sash-weights and bird-shot tied to them so they can't jump and geniuses have noises blasted into their ears so they can't think. One person's best practice is another one's sash-weights and bird-shot.

• It is, ultimately, not strategic.  Somehow benchmarks, trends, negotiations, averages, and politics end up trumping strategy.  Instead of strategically deciding what the organization needs to accomplish and then building a budget to accomplish that, the process gets hijacked by these forces along the way.

The problem is, of course, there's only one thing worse than having a budget;

Much as the marketing VP should be automatically fired if the company ever launches a new product without an updated website, so should the CEO (and CFO) be fired if the company ever enters a time period without a board-approved operating plan.  I remember when I was a first-line marketing manager at (the original) Ingres and we went into June of a year without an approved budget.  It was a study in how

to run a company.

So what can we do to improve things?  Well, it's not easy.  If you're really interested in this area, you can read the book Beyond Budgeting.  It goes into great depth on the sorts of problems I've described and how to solve them.  One key concept is to reward absolute performance (e.g., growth or growth in relative market share), as opposed to plan performance which is more gameable.  The problem is that getting good data (e.g., relative market share for an emerging category for every country in Europe) can be very hard to come by -- particularly in enterprise software.

I will tell you -- and Joe -- what I've done at Mark Logic to try and avoid and/or mitigate these problems.

• I try to derive budget from strategy.  We start the budgeting process with a strategy meeting.  We end the strategy meeting writing down 10 -12 goals for the coming year.  As we make, review, and iterate the budget, I keep checking and revising the goals to keep them top of mind and synchronized with the budget.

• I stay aware of the endemic budgeting problems and try to keep an eye out for them.

• I tend to rate people, whether I want to work with them, and how I help them in their careers by whether I think they're gaming me in the budget process. So either don't game me or be very good at it. I prefer hard-working people who are all about the company to a group of all-about-me mercenaries flying in greed formation.

• I track metrics and benchmarks but refuse to be enslaved by them. I never assume that because the average family has 2.5 kids that I should, too. I want to know how many kids the average family has, and I want to use that information as part of the equation for how deciding how many kids I want to have.

• I drone on endlessly on the difference between planning and budgeting.  I try to find buckets of money (or buckets of people) and blow them up, asking for supporting detail.  So, we have $250K for tradeshows -- which ones and why?  So, we want to hire X sales people -- what will their territories be?  If you don't know, you have a budget, not a plan.  I want both.

• I remind people that happily, as a company gets some size, some budget issues are purely emotional.  Those few people I cut might amount to a rounding error in a manager's quarterly budget.  I advise them to go ahead and do what they think is right, just checking with me once with me and finance before doing it.

• I also remind people during the year to closely track their spending on both the high and low side.  I remember one career-defining moment at Business Objects when a VP pleaded, begged, and moaned for money, saying he was under-staffed, complaining that the company was myopic and refusing to invest in his area.  The CEO responded:  "you spent only 85% of your budget last quarter; do not ask me for more money when you are not spending the money you have."  Ouch.  Oddly that VP disappeared not too many weeks later.

• In same vein, I remind people that the plan's a plan.  While I am a big believer in planning, I also remember the famous Eisenhower's quote:  “in preparing for battle I have always found that plans are useless, but planning is indispensable."  What we actually do will be a function of how things go once the year starts and we are free to spend more or less than plan as we go along.  Think:  uncertainty.  Think:  empowerment.

• I try to be pragmatic.  Decisions need to be made.  Targets need to get set.  In the end, getting the budget done trumps getting the budget done perfectly.

In the end, I don't claim to have solved all the problems with classical budgeting, but I hope these measures take some of the usual insanity out of the process.

If you have ideas to share on how to improve the corporate budgeting process, please share them.