Budgets are based on prior years and planned spending, not strategies and investment opportunities.

Challenge

The scarce resources of an enterprise should be allocated to the investment opportunities at hand based on returns on investments and strategic alignment.

But traditional budget processes don't accomplish this. Instead, budgets are decided based on past years' spending, current headcount, and what various departments would like to spend.

This gives little assurance that resources will be aligned with enterprise strategies.

In fact, traditional budget processes add little value to strategic thinking or execution. This is why many managers view budgeting as a bureaucratic nuisance at best, or at worst a game of building in "fat" and seeing how much of it you can retain.

Furthermore, traditional budget processes engage senior executives in micromanaging subordinates. ("Do you really need to do that much travel?") This is quite different from a dialog about what each business unit and supporting department will contribute to the key imperatives of the enterprise.

It's as if enterprise executives need to help subordinate executives with their tactical management responsibilities, or check up on them, rather than guide the firm. It's disempowering, a waste of senior talent, and takes attention away from the important issues.

How can you change the nature of the budget dialog to strategic issues, and ensure that resources are well aligned?

Solution

Consider every group within the enterprise as a small business, there to "sell" its products and services.

In this context, one group will be the "prime contractor" for a given strategy. That prime will subcontract with other groups for needed components and support services. Subcontractor may, in turn, buy what they need from peers.

Thus, every strategy (or ongoing operational process) engages groups throughout the enterprise, and all their deliverables together add up to the cost of the strategy or process.

Budgeting in this paradigm is a matter of deciding what the enterprise needs to buy from each group. Budgets aren't based on past years' spending, but rather on what the group is to produce in the coming year. This is termed investment-based budgeting.

As a result, resources are directly linked to strategies and operational processes. Even better, resources are linked to specific management accountabilities.

Implementing Investment-based Budgeting requires that every group submit a budget that forecasts the costs of proposed products and services.

Comprehensive solution....

Other Resources

Case Study: Re-inventing the Budget Process
the cost of success: interviews with CIOs on the benefits of budgeting for products/services

White paper for CFOs and Budget Directors: Investment-based Budgeting

Anecdote: The Necessary Evil
Why departments are not well aligned with enterprise strategies.

Story: Budgeting Is a Waste!
a short story on how standing up for the truth broke the cycle of misery and failure

Speech abstract: Investment-based Budgeting
why CFOs should mandate a new format for budget submissions