As part of our study of trends in budgeting, we identified the trend of Budgeting to Strategy. I think it’s been a long time coming, and the good news is that technology has finally caught up to make it easier to accomplish.
A little background. CFO Magazine ran a reader survey on budgeting and planning, and I actually worked with them on that. Here’s what really stunned the editors. 2/3 of all readers said their budget was driven more by politics than by strategy. And when asked for the top reasons for lack of value in the planning process, #1 was a lack of a well-defined strategy and #2 was a lack of a clear link between that strategy and the budget.
So there is a growing recognition that if you’re not budgeting to strategy, you’re budgeting to history… in which case you’re just taking last year’s numbers and inflating them. If you’re doing that you’re adding a lot of fat and cholesterol to your budget. Or maybe you’re budgeting to the politics of the organization… or to just who shouts the loudest. In today’s competitive environment none of us can afford to do that. And if you’re not budgeting to strategy you’re not properly resourcing the strategy — and you won’t get the results that the strategy promises. That’s the connection between strategy and budgeting.
Let me come at that from a slightly different angle. There are three reasons why organizations miss their numbers. There’s poor execution of the plan. There are economic trends that work against you. And then there’s poor budgeting.
What captures the media headlines are sweeping economic trends and poor execution. But very often it’s the case that the budget itself is to blame. After all, the budget is where resources get allocated, and if your organization isn’t doing an EXCELLENT job of allocating your scarce resources today, you’re at a major competitive disadvantage. So people pay attention!
Now, why is this trend of budgeting to strategy so disruptive? Well, that should be fairly obvious. If you’re not doing it today it means some pretty big changes. Let’s start with the fact that not every organization has a strategy that people actually know about… it might be in the head of the CEO but nowhere else. So getting a good document, clearly communicated strategy disseminated across the organization is going to be a new and big change for some of you. Actually, if you go by the CFO Magazine survey results, it’s going to be a big change for most of you! And in order to budget to the strategy, you need to break strategy down into actionable initiatives, and we’ll be talking about that in just a minute. If that’s something you’re not doing today, getting your organization to do it tomorrow will be disruptive, no doubt about it.
But those are mechanical changes and we can help you make them. But the biggest disruption of all is that you’re changing the rules of the game — and some people have won by the old rules and don’t want to see new ones imposed. That’s true in your case if you’re among the 2/3 who say their budget process is driven more by politics than by strategy today.