Source | LinkedIn : By Jack Welch
There are a good many of them, to be sure – but “delivering the budget” has got to be one of the most universally entrenched, uniquely counterproductive exercises in organizations across the world.
Look, some form of financial planning is obviously necessary: Companies have to keep track of the numbers. But the budgeting process as it currently stands at most companies does exactly what you’d never want. It hides growth opportunities. It promotes bad behavior—especially when market conditions change midstream and people still try to “make the number.” And it has an uncanny way of sucking the energy and fun out of an organization.
Why? Because most budgeting is disconnected from reality. It’s a process that draws its authority from the mere fact that it’s institutionalized, as in: “Well, that’s just the way it’s always been done.”
Budgeting doesn’t have to be that way. But before we suggest a better approach, think about what’s wrong with the usual process. It begins in the early fall when people in the field start the long slog of constructing the next year’s highly detailed financial plans to make their case to the company brass. The goal of the people in the field, of course, is unstated but laser-like: Come up with targets that they absolutely, positively think they can hit. After all, that’s how they’re rewarded. So they construct plans with layer upon layer of conservative thinking.
Meanwhile, back at headquarters, executives are also preparing for the budget review, but with exactly the opposite agenda. They’re rewarded for big increases in sales and earnings, so they want targets that push the limits.
You know what happens next. The two sides meet in a windowless room for a daylong wrestling match. The field makes the case that competition is brutal and the economy is tough, therefore earnings can increase, say, just 6%. The headquarters people look surprised and perhaps a bit irate; their view of the world calls for the team to deliver 14%.
Fast-forward to late in the day. Despite the requisite groaning and grumbling, the budget number will be square in the middle—10%—and the meeting will end with smiles and handshakes. Only later, when both sides are alone, will they crow among themselves about how they managed to get the other side to exactly the targets they wanted.
What’s wrong with this picture? First, what you see: an orchestrated compromise. More important, what you don’t: a rich, expansive conversation about growth opportunities, especially high-risk ones. That conversation is usually missing because of the wrong-headed reward system mentioned above. People in the field are paid to hit their targets. They get a stick in the eye (or worse) for missing them. So why in the world would they ever dream big?