The President Agrees: Stop Doing Dumb Stuff (II)

As I mentioned in my previous post, I am happy to see the President so eager to attack Dumb Stuff. I am, too.

President Obama's column on his regulatory review contained several points that double as guidance for business executives and managers reviewing their annual budgeting process for signs of intelligence:

Root out processes "that are not worth the cost": The Hackett Group reports that organizations spend 25,000 person days per $1 billion of revenue on their budgeting process. That's a lot of people -- and a lot of cost. Big chunks of that time are spent negotiating goals and arguing over assumptions. Budgeting can take 3 to 6 months to negotiate and gain the necessary approvals.

Is it worth the cost?

To answer that question, I participated in two research surveys – one with APQC and a second with Business Finance magazine. Given all of the effort that goes into creating budgets, I asked what the shelf life of their budget was: How long were budgets good for before the assumptions and targets they were based on become obsolete?

As expected, the market turbulence of 2009 caused a lot of budgets to be obsolete by the first day of the budget year (28 percent of Business Finance respondents said that this was the case for 2009). But the most startling statistic was that roughly two-thirds of finance-executive respondents said that their budget targets were obsolete 4 to 6 months into the year.

Root out processes "that are just plain dumb": It is dumb to jam more and more detail into budgets and forecasts in hopes of improving accuracy. The more detail you add, the “more wrong” you will be.

It is just plain dumb to build a detailed annual plan based on assumptions that are impossible to predict precisely. It is just plain dumb to pay incentive bonuses for reaching negotiated targets rather than targets that are relative to the actual results generated under actual environmental conditions.

In the words of Jack Welch, “Budgeting is an enervating exercise in minimalization.” He notes that “most companies succeed in spite of their budgets rather than because of them.”

What other dumb stuff is your finance organization doing that should be stopped?

Future Ready Friday (a quote from the book): Most organization realize that their forecast processes are not up to scratch only when it is too late to do anything about it. ###

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