Article: Budgeting...the game is up
As you read this, hundreds of thousands of managers in most organisations, from junior to the most senior will be in the middle of an annual ritual that will dominate their lives for the rest of the year and perhaps beyond, for little tangible benefit.
The ritual is traditional budgeting.
It is difficult to find anyone who enjoys the process; at best it is regarded as a necessary evil. But in these years of Brexit and COVID chaos the exercise has a particular futility since it depends on maintaining the pretence that it is possible to predict the future with sufficient confidence to enable managers to rationally allocate resources and set meaningful performance targets.
But there was a time when it did work. When a young Chicago University professor called James O McKinsey published ‘Budgetary Control’ in 1922 he provided the first wave of professional managers with a tool to maintain financial control of large divisionalised organisations without the communications and computing technology that we now take for granted.
Today it is different. Budgeting no longer helps organisations to perform better. On the contrary. It prevents organisations from performing to their full potential, because given the level of volatility, uncertainty and ambiguity in the world only thing we know for sure is that we don’t know. “The future ain’t what it used to be”, as the American baseball player Yogi Berra once put it.
Why then, nearly 100 years later when we have the ability to sense and respond to what is going on in our organisations in close to real time do we continue to perform this archaic set of practices?
Part of the reason for continuing to perform what the management theorist Russell Ackoff called ‘The Corporate Raindance’ is the fear of something bad happening if we stop. Like all rituals, it requires sacrifices for its potency to be believed and thrives where the link between the act and the outcome is opaque.
Another reason is ignorance of the alternatives. Well established, sober companies like the Swedish bank Handelsbanken who have not used traditional budgets for nearly half a century while consistently delivering above average returns testifies that robust alternatives do exist. And starting in 1997 the Beyond Budgeting Institute has codified the practices that enable pioneering companies like Handelsbanken to react and adapt to a rapidly changing world without the bureaucracy and gaming behaviour associated with budgets.
Managers need to look up from their spreadsheets reflect on what they see going on around them, explore the options and have the courage to do something different.
But perhaps a more fundamental reason for the lack of progress is that the traditional model of management, of which budgeting is one manifestation, is built on a deeply ingrained assumption that is rarely surfaced. The assumption is that people cannot be trusted to do the right thing, either because they are not competent or because they do not have the best interests of the organisation at heart. If this is what you believe, their ability to act needs to be constrained and they need to be incentivised to ‘perform’.
Ironically, this often has the opposite effect to that intended. People are either incentivised to game the system by negotiating tame targets that they are careful never to beat or to hit their targets whatever the consequences as almost every one of the corporate calamities and scandals that we read about almost daily testify.
We don’t tame anti social behaviour with budgets. We create it.
We live in a bizarre world where we trust strangers that we buy things from over the web more than the people with whom we share offices.
It is time to call a halt to the annual budgeting charade.
Our uncertain world won’t allow it. The new generation of workers won’t tolerate it. And our organisations can’t afford it.
The game is up.