Away with the budgets
The agile answer for finance is often referred to as “lean budgeting”. The approaches are derived from extrapolating agile methods from project level to the overall organisation by budgeting epics at portfolio level or value streams. Thus, the implementation of agile thinking in the finance context appears as a natural effect of agile scaling supported in the methodological framework.
I have never seen anything like this in practice. Nor do I believe in the blueprint-like transfer of methods to new systems to bring about transformation. In finance in particular, a key condition for change to succeed is often missing: the disruptive feeling that something is wrong.
It is missing because these departments often hide in a silo with a powerful theoretical superstructure without deeper knowledge of the business model. In this world, value streams or epics ultimately replace only the project cost centres (and only those).
A look at budget management in 2022
What will budget management look like in many companies in 2022? I’ll try to outline it in a few sentences. The following process might sound familiar:
The budgets set in the previous year go into the “administration” of the respective managers at the beginning of the period. In practice, this means that necessary expenditures are made and buffers are pushed. Spending more money than allowed is forbidden. The further the year progresses, the higher the costs in the forecast, because the buffer amounts pile up. At some point, either the attentive central controlling will strike and collect the budget, or the budget manager will take the opportunity to spend the money himself. And the game starts all over again at the end of the year.
Even without being an advocate of agile organisational structures, it is obvious that this typical manifestation of a sworn-in, classical system of budget management and control only serves its purpose on one level: The organisation knows – if it is lucky – on an annual basis how much money is to be spent on a topic. At the same time, it is not necessarily ensured that the use of funds will actually unfold entrepreneurial benefits. If deviations from the plan cannot be concealed, the budget manager must show courage, question his own planning, justify the deviation and derive a new justification for the next year’s planning. This action requires courage because budget compliance enjoys top priority in these structures.
The attitude must change
“… the human image of the organisational approach to be chosen should be based on the human being making a planned effort with bounded rationality …”¹
The reasons for the structures described above have a lot to do with the conception of man in classical controlling. The human being is only capable of “endeavouring” and accordingly it is necessary to establish safeguarding and control instances. The budget is an important tool here. In this world, the interaction of employees and control instances is the basis for high-quality work.
“An integral part of digitalisation scenarios is the possibility for managers to obtain the information they need comprehensively, conveniently and up-to-date from the systems themselves. Superficially, this removes a task for the controllers. However, they then have to analyse more precisely which information managers use for what and how. The technical possibility of self-controlling does not automatically mean that managers can adequately handle this possibility.”²
It is not only the employees who lack these competences. Management also has deficits here and needs support. Who can hear Winfried Taylor murmuring in the bushes besides me?
“For us, a budget is a formal goal-oriented plan formulated in value terms, which is given to a decision-making unit for a certain period of time with a certain degree of commitment.”³
This is the root of all evil and also manifests on the basis of doctrine our concept of budget at the definitional level. I described the result of this understanding in the previous section.
Budgets reflect an unconditional belief in predictability – short, medium and long term. This has always been difficult, but is almost anachronistic in a world of upheaval such as we are currently experiencing. Classical controlling assumes an exact knowledge of the state of the system and an analytical deduction of the future based on known regularities. This approach no longer does justice to complex systems in volatile environments. Software developers, faced with the same challenge, have turned to agility in the last 20 years to cope with it….
The discussion of the above-mentioned quotations, whose genesis does not date back too far, makes it clear how massively the financial world is still shaped by a mindset that is diametrically opposed to the agile mindset.
Living a positive image of humanity and empowering people
To meet the challenge, change is needed at different levels. A first step is to develop and embed a positive human image in the organisation. How do we deal with the budget concept, assuming that people will do the right thing, provided they have all the necessary information and skills? That people want to take responsibility, are creative and self-initiated?
In such a world, the people who are responsible for budgets do not need an externally controlled “certain degree of commitment” to historical planning, but freedom of action. Budgets are the opposite of entrepreneurial freedom of action – in a hierarchical logic, they point the freedom of action towards the omniscient corporate management. And even they do not really have this freedom – as long as they have to justify the planning and its adherence to shareholders.
If I entrust people with money with real freedom of action, then I have to be sure that they have all the necessary information and competences to make decisions on utilisation. This is then a second change for organisations that were previously classically set up: transparency must be created and people must be empowered to understand entrepreneurial contexts. And ideally, this means as many people as possible in an organisation!
The introduction of a “transparency principle” helps here: All information that does not have to be withheld for legal reasons is public. This then applies in particular to the financial figures.
This step is very salutary for the organisation: the finance department has to open up and explain the actual economic situation as well as its forecasts. Where before I as an employee did not even have the right to a debt of fetching regarding relevant contextual information, now a debt of bringing is created for the finance area. Both sides benefit from this: The broad staff develops economic competence, the finance department frees itself from the ivory tower and faces up to operational reality.
All this takes a lot of time.
Language creates reality
Once empowerment and the will to freedom of action are anchored, the implementation of the latter is not far away.
A primary means to this end in our organisation was the abolition of the concept of budget. Teams that spend money to achieve any means (regardless of the team’s professional character) do not manage budgets. They are making expenditures.
This may seem like labeling fraud, but it is not. The budget term is poisoned by its established professional meaning and decades of ingrained practice, even for open-minded minds. Thus, the thought of “budget” triggers the association of a pot of gold whose filling level must be guarded. This image stands in the way of the intention to introduce a different practice in dealing with “budgets”, a practice that promises freedom of action, because it results in a self-restraint of those dealing with money. A relapse into old patterns is pre-programmed.
Planning becomes efficient and beneficial
How is expenditure handled in practice? In the near field, teams indicate which expenses they know, everything else is extrapolated on the basis of past values. The latter step remains important in order to have a medium- to long-term planning framework that allows opportunities and risks to be identified.
If less money is spent than expected, there is no redistribution into the future. We do not look back.
If the actual costs incurred exceed the formulated expectations, this is not a problem up to a threshold value. If this threshold is exceeded, there is an interdisciplinary committee to which the person who wants to make the expenditure explains the purpose of the same.
For the system to work, the establishment of psychological security is crucial here: the staff must have the confidence that sensible approaches and good ideas will also be rewarded and that the release of expenditure does not seem absurd from the outset.
Due to the preparatory work described above, especially transparency, the risk of confused ideas reaching the committee is actually low. The employees are fully informed about the overall economic situation, which could have a restrictive effect if necessary – right down to the liquidity. And they are always the better specialists.
In this way, we plan expenditure on a rolling monthly basis, with a three-month time horizon. Everything else is extrapolated in the long term, possibly enriched by the team’s special knowledge of necessary expenditures in the distant future.
The benefit is obvious:
- Budget mountains in the update can no longer arise.
- Planning in the near field is as exact as it can be – without black funds and buffer positions.
- The planning process itself is simple.
- If one continues the extrapolation up to a 15-month time span, the process in autumn to produce the annual budget for the following year becomes a trifle for the external stakeholders.
- Future strategic approaches that suggest a deviation from the expenditure extrapolation can always be incorporated.
Finally, the most important thing: although good planning can be produced this way (this thesis is not just theory!), the people who spend money have entrepreneurial freedom of action!
Notes:
[1] Horvarth, Gleich, Seiter: Controlling, 15th edition 2015, p. 35
[2] Schäfer, Weber: Personal survival strategies for controllers in the face of digitalisation, from: Special Issue Controlling 09/2017, p.57
[3] Horvarth, Gleich, Seiter: Controlling, 15th edition 2015, p.119
Dr. Stefan Barth has published another article in the t2informatik Blog:
The desire of managers to create
Challenges when replacing legacy IT systems
Dr. Stefan Barth
Dr Stefan Barth is COO of Qvest Digital AG and is driving the agile transformation of the organisation. Previously, he worked as a consultant, start-up co-founder, member of the management board of a TecDAX company and sole proprietor. Initially coming from the world of classic leadership, he changed his attitude and gained experience in agile transformation processes and the management of agile organisations through various mandates. He shares his expertise in consulting projects, lectures and articles.