Budget Kills

Why Budgeting Kills Your Company

HBSWK Pub. Date: Aug '1 1, 2003

Why doesn't the budget process work? Read what experts say about not only changing your budgeting process, but whether your company should dispense with budgets entirely. by Loren Gary

The average billion-dollar company spends as many as 25,000 person-days per year putting together the budget. If this all paid off in shareholder return, that would be fine. But few organizations can make that claim. In fact, many firms now question the ROI of traditional budgeting altogether and are looking for alternatives that reduce time and better align spending with strategy.

Look at your own company's budget process: Has it really helped you do a better job of belt tightening during the current slowdown? Many companies have reverted to more centralized command-and-control procedures to keep a tight rein on costs-but the dynamics of the budgeting proc3ss ofter rmder.rqine this effort.

"In tough times like these, any signifrcant real cost growth feels imprudent and is hard to justify for most businesses,"

writes Mike Baxter, a partner in the consulting firm Marakon Associates (f{ew York City), in a recent company publication. "Business units have used their budgets as a bargaining chip, bidding high to get a larger slice of the pie while keeping their cards close to their chest.

"The CEO has had no choice but to get them back into shape, though he lacks any clear line of sight for identifying and challenging the least valuable resources," Baxter continues. All too often, the CEO must opt for across-the-board cuts-even though he knows that this approach penalizes the high-performing units and props up the underperforming ones. The result is a decoupling of the company's resource allocation process from the highest-value strategic

opporfunities. The answer, some experts say, is to dispense with budgets entirely-and replace them with a system of rolling forecasts and key performance indicators that...