If you have not read it, you should. Jack Welch’s book ‘Winning’ should be part of everyone’s book shelf in the corporate world. The most practical management book written ever. Warren Buffet’s comment on the book ‘No other management book will ever be needed’ is very true. I thoroughly enjoyed reading every bit of it, and can use it a guide/hand book throughout my career.
Lets now get to the crux of this blog, where I want to highlight the aspects of budgeting that he has covered in his book and how that should be adapted as mantra by every company carrying out the budgeting exercise – the dos and don’ts guide of budgeting
REINVENTING THE RITUAL
Jack Welch’s chapter on budgeting carries the above heading. Very apt. Budgeting as I pointed in some of my earlier Budgeting Best Practices with SAP Business Planning – Part IV , is often carried out as a ritual without the potential benefits that it can bring to the company. Jack Welch who ran the most diverse business enterprise of the world has a very similar view on budgeting. He says ‘It (budgeting) sucks the time, energy, fun and big dreams out of an organization’.
Jack Welch points that budgeting is the backbone of the management system. Getting it right and in a different way would ensure winning so much easier.
What is the wrong in the traditional budgeting?
Jack introduces two awesome concepts that makes traditional budgeting sucks and ensures companies (especially the large ones) are not challenged perform above expectations.
- Negotiated Settlement
- Phony Smile
Jack definitely knows to give names (brands) to concepts.
What is this? This is the long drawn exercise of bottoms up planning that runs through several months, before it gets reviewed in the headquarters. The number covers everything that has financial impacts. What are these numbers and what is the goal. Every company person’s goal is to minimize risk and maximize his or her or his/her teams bonus. As Jack put its ‘their (business managers) underlying galvanizing mission is to come up with the targets that they absolutely, positively think they can hit. Why do they do it this way, since most of the companies reward people based on achieving the budgets. So budgets that are constructed with minimal risk can ensure rewards that comes easy either on meeting or exceeding it.
So what is the negotiated settlement. On the one hand, every business manager builds enough buffers and cushion, and builds a budget that ensures they are very confident of reaching the targets. On the other hand, the Headquarters, looks for a number that can grow the revenue and profits. The marathon budgeting meeting begins, and both negotiate. Finally they come to negotiated settlement, with both sides moving up and down to reach a consensus. But the discussion never captures the true potential opportunities the company may have, nor there is a link between the strategy and the budgets.
This dynamic is to do with the amount of collaboration that different stakeholders have within a company. Phony smile is a discussion around new opportunities and ideas, that are put together comprehensively by business managers and discussed with great eagerness in the budget discussion. And you often hear the phrase ‘very interesting’ by the headquarters folks for the various great ideas and suggestions put forth by the business managers. But the headquarters is beyond all these and they have already decided the investment allocations and what is expected of each business. So all the ‘very interesting’ comments are just but a phony smile. Whats the result of the this, the business manager becomes less interested and allocates the money assigned without concrete goals, as he or she feels that they are doing a post office job of passing the budgets. The biggest issue here is not about the reallocation by the head quarters team, but the lack of transparency to explain why it was done in a certain way and not being upfront in the meeting about the right ideas generated by the business managers.
Companies have survived on the above approaches and delivered, so why change this. What is the problem? The problem that Jack highlights is that the process only allows companies to perform to a fraction of what they can perform.
Jack recommends a system of budgeting that allows field and headquarters to work towards a shared goal – to use the budgeting process to ferret out every possible opportunity for growth, real obstacles in environment and come up with a plan that stretching imagination to the sky. A system that is not internally focused but goes beyond looking at the outside and benchmarking against market. The budgeting system should be structured to answer two questions – How are we beating last year numbers, How are we doing vis~a~vis competition and how we can beat them.
This opens up the discussion to be more meaningful and allows operating plans that can be based on the external drivers than the internal drivers. One of the most important part of this plan, is that the plan needs to be adaptive and more frequent that an annual exercise.
Now the other question that may arise in everyone’s mind is, how are we going to be paid bonus with this system. The answer Jack provides is ‘Bonus are to be linked to performance against last year or vs. the general market i.e. competition. Compensation should not be against budgets.’ This would allow the business managers to think more about the strategic elements and forget about budget being a guiding number to increasing or maintaining their compensation.
The above is very relevant especially in the economic recession times that we are in. In this challenging situation, performing better than market or competition would be great, since it would be very difficult to predict the budgets.
As we relate it to the SAP customers, many of the things highlighted would need a robust product, that can be built with flexibility and adaptability. SAP BusinessObjects Business Planning and Consolidation (BPC) comprehensively handles the needs of such capabilities. It also provides a clear indication of how the Strategy /objectives/initiatives in SAP BusinessObjects Strategy Management alongwith BPC would make a clear combination to manage the planning process effectively,and under a clear enteprise performance management approach. Check out an earlier blog that hightlights how Beyond Budgeting – A concept that best run business are adopting can be realized with SAP BusinessObjects products.
Once again, please read Jack Welch’s book on Winning, highly recommended for everyone in the corporate world