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ticl
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Planning and Budgeting—Easing the
Pain, Maximizing the Gain
Norman L. Frause, Rick Brenner, Paul E. Juras, Carl L. Moravitz, Steven P. Schreck,
and Alan J. Stratton
L
ike managers in
many organizations, you may
be feeling “pains”
when working with
your organization’s
planning and budgeting process. Consider
the following:
•
•
•
•
improve the planning
and budgeting
process. We have
embarked on an indepth, comprehensive
study to analyze why
these conditions exist,
and we are providing
recommendations for
improvements to min© 2009 Wiley Periodicals, Inc.
imize the overall frustration with the planning and budgeting
You are not alone. These are process. The end result is a
the issues that we have been
wiki, which provides discussion
researching for the past few
material and recommendations
years as an interest group in the to
Consortium of Advanced Manminimize some of the “pains”
agement-International (CAM-I). involved in developing your
CAM-I is an international conbudget, regardless of whether
sortium of manufacturing and
your process results in a singleservice companies, government
or multiple-year budget. Wikiorganizations, consultancies,
wiki is a Hawaiian word that
and academic and professional
means quick. Wiki Web sites let
bodies that cooperate in a preusers make additions or edit any
competitive environment to
page of the site. They often have a
solve management problems
common vocabulary and consider
and critical business issues that
themselves a “wiki” community.
are common to the group. Our
interest group is made up of
PROCESS
subject-matter experts representing a cross-section of these
The work we have done
various types of organizations,
focuses on several broad
all sharing a common goal to
areas, but the overall goal
In many organizations, one frequent outcome of
the planning and budgeting process is widespread
frustration. This article explains why some of
these pains exist and how to resolve them. Instead
of publishing a white paper or book with our
material, we chose a wiki due to its technical
capability of being able to interact with other interested parties to comment on our findings.
Are you experiencing long cycle
times, running
many iterations, and ending
up with outdated assumptions and inaccurate data by
the time your budget is
approved?
Is your process too complex,
planning at a low general
ledger account level yet
having to roll up the budget
within a complex/multilayered organizational
structure?
Are your planning and budgeting tools obsolete, causing inaccurate data and
many hours of overtime for
your Finance Department?
Does the budgeting system
leave you struggling to deal
with changing economic
conditions?
© 2009 Wiley Periodicals, Inc.
Published online in Wiley InterScience (www.interscience.wiley.com).
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of improved planning and
budgeting directly focuses on
Exhibit 1
eliminating, reassigning, reengineering, and streamlining existing processes used for planning,
Ten Pain Points
budget, and overall resource
management. We noted that
1. It takes too long.
improvements should center on
2. It does not help me run my business.
tackling such issues as:
•
•
•
•
•
•
•
3.
4.
5.
6.
integration into management
processes,
timeliness,
flexibility,
relevance,
responsiveness,
transparency, and
ability to be easily
understood.
Trying to narrow down
process components of such
improvement was difficult, but
our work centered on planning
and budgeting concerns highlighted in a 2001 IBM presentation of results from a survey of
people involved with planning
and budgeting. The presentation, in part, dealt with a general discontent with the flow of
planning and budgeting activities in organizations, which
came to be known as common
pains.
The “ten pain points” listed
in Exhibit 1 provide the focal
point for drilling down to root
causes and developing core best
practices to apply to those causes.
We used these ten pain
points as the jumping-off point
for exploration of process
improvement opportunities.
The group quickly found that
improving capacity and core
capabilities involves multiple
steps affecting people, process,
and technology. Exploration and
discussion of those multiple
steps allowed broader understanding of the improved
processes and best practices that
might allow organizations to
DOI 10.1002/jcaf
7.
8.
9.
10.
It is out of date before it is even finished.
There is too much game playing.
There are too many iterations.
It is cast in stone, although business conditions are always
changing.
It involves too many people.
It includes allocations that I cannot control.
By the time it is done, I do not recognize my numbers.
It does not match the objectives to which I am held accountable.
better define linkages between
these three crucial elements
of business.
Our exploration noted that
process improvement does not
erase political and policy concerns that are inherently part of
any planning and budgeting
process. Instead, efforts are
needed to highlight the steps
taken to shift the focus of discussion to those areas of
improvement that one has control over, while acknowledging
inherently political features that
drive effects on decision making
and resources. One of the most
difficult parts of the planning
and budgeting arena is the area
of process mechanics—what
does it take to keep things working well, while also being important to the real-life work of my
organization?
Delving into such concerns
reveals such issues as:
•
Data Access and Standardization: There is no single
data source accessible by all
people and staff for data
input, management, and
analysis. Because each unit
•
•
maintains a unique data set
for its organization, reconciliation among and
between unit information
sources is difficult and
time-consuming.
Process Standardization on
Guidelines and Formats:
There is often a general lack
of standardization in many
processes across an organization. In many cases, standard procedures are available
but are not known or followed. Nonstandardization
results in multiple requests
for the same information in
differing formats, creating
significant frustration
throughout organizations
that really do want to comply with requests.
Review and Approval
Process: The review and
approval steps in most
organizations and
processes—many of which
are in budget and planning—can be extensive, with
much back-and-forth
between different levels of
the organization. Because
these are many times done
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manually, a lot of time is
spent on the low-value
components of these steps.
REENGINEERING AND NEW
TECHNOLOGY OFTEN NEEDED
An important lesson learned
through our investigation was
that organizations must first
reengineer business processes to
enhance productivity and efficiency. Companies that have
developed new budget, planning,
and/or performance management
systems have learned that it is
best to first make changes to
their processes before trying to
install a new system.
Technology can play a significant role in organizational
improvements. If new or
improved processes are to be
implemented, technology
can be a significant change
driver. Technology, however,
is not a complete answer in
and of itself. Technology
should be viewed as a
process enabler, leading to
better performance by all
levels of an organization.
Business users should lead
the effort to develop the
specifications needed to
use technology in their functional roles. Only then can individuals truly benefit to the
fullest extent from the addition
of technology in the workplace.
Unfortunately, organizations
often turn first to technology
before fixing broken processes,
which in the long run may suboptimize the ultimate benefit
of technology investments, so
it means not achieving the
streamlining and cost savings
necessary.
Information and the need to
make timely decisions may be
risk antagonists. A clearer
choice among alternatives may
© 2009 Wiley Periodicals, Inc.
require a great deal more data
and analysis, and while technology investments may support
additional data collection and
analysis, they can delay decision
making while they are made
more robust. More information
incurs costs, and those costs
must be weighed against the
desirability of having certainty
in the ultimate choice. The stopping rule for each step of decision making is determined either
by the action-forcing ability of
an inflexible schedule or a
judgment about the marginal
benefits of the following:
•
•
•
obtaining and using more
information;
reducing uncertainty; and
pursuing additional communication efforts.
Companies that have developed new
budget, planning, and/or performance
management systems have learned
that it is best to first make changes
to their processes before trying to
install a new system.
One potential benefit of
technology, however, is the
ability to integrate more variables into the planning and
budgeting process. Our attempt
to forecast events and their
impact makes it possible to
react affirmatively to them
before valuable resources are
wasted. These added variables
may relate to the risk factors an
organization faces.
RISK
Planning and budgeting
exists not to manage risk but to
help an organization reach its
67
targets. But there’s always some
risk that unforeseen events may
hinder an organization’s ability
to meet its targets. The question
is whether the planning and
budgeting process fails to explicitly recognize what those risks
are, and how those risks might
impede achieving a specific
objective or the organization’s
overall target.
The past is fixed; the future
is yet unwritten. What is certain
is that change will come. Most
organizations operate in an
ever-changing environment and
with operations that have both
controllable and uncontrollable
factors. A clear understanding
of these factors and the influence they have on the organization will not only dictate how
relevant the budget can be to
begin with, but also how frequently budget assumptions will need to be
updated or changed. If
most factors are easy to
forecast and will only
change within an acceptable tolerance level,
“across-the-board” restrictions in spending, even in
the absence of flexible
forecasting tools, may be
an acceptable approach for
managing the budget in the short
term. Undoubtedly, this will not
be the case for most organizations, so “across-the-board” and
general restrictions in spending
should be done in concert with a
robust forecasting process that
allows for analysis and scenario
testing of assumptions with the
current or baseline budget.
To assume that the events and
their impact can be known and
locked down into a planning
and budgeting document is folly,
but failing to plan because of
uncertainty is an even greater
folly. Examples of such unforeseen events include:
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•
•
•
•
•
reorganizations;
catastrophic events (e.g.,
changes in the economy,
political unrest, or war);
mergers or acquisitions;
changes in leadership (e.g.,
a new CEO or top executive); and
acts of nature (e.g., Hurricane Katrina or a blizzard).
The planning and budget
process, through improved communications and systemic business operating guidelines in periods of emergency, can help
organizations better navigate
through such events.
FOUR STEPS FOR ADDRESSING
UNFORESEEN RISKS
The budgeting process needs
a mechanism to more effectively
address unforeseen risks. We
propose that a four-step process
described in Exhibit 2 be
adopted as part of the planning
and budgeting process.
Events are not the only risk
factors; assumptions are also a
point of vulnerability. Plans and
budgets are forward-looking,
which means that the assumptions will always be questionable
but necessary. In fact, no other
management process likely has
as much dependence on assumptions as does the planning and
budgeting process. Some major
categories of assumptions
include:
•
•
•
•
•
•
•
organization,
competition,
regulatory,
the economy,
customers,
suppliers, and
processes.
Assumptions in the planning
and budgeting process are essential simply because regardless of
how good someone’s crystal ball
may be, the nature of forecasting
always leaves something to the
unknown.
A major factor in the accuracy of assumptions turns out to
be time, which is driven in part
by the time required for the
planning process. Organizations
that take several months to
establish their budgets (three,
six, nine, or even more) may
find that assumptions originally
submitted with planning guidelines become obsolete by the
time the planning process is
Exhibit 2
Four Risk-Related Principles for Planning and Budgeting
Basic risk-related principles that should be incorporated into the
planning and budgeting process include:
1. Identifying the significant risks that might threaten the achievement of
the strategies and objectives;
2. Assessing the identified risks in terms of dollar impact and the related
likelihood the event will occur;
3. Deciding what action to take in response to the risks, ranging from
full mitigation to acceptance as is; and
4. Explicitly incorporating those decisions into the formal budget.
DOI 10.1002/jcaf
complete. Some assumptions
may be trivial and not worth the
effort to subject to risk assessment. The criteria for such
assessment should be driven by
the strength of, and reliance on,
key assumptions, and their
impact on alternative decision
choices. Critical assumptions,
however, should be periodically
reevaluated and updated in
order to remain in sync with
current business conditions and
other budget decisions before
the budget is approved.
Whenever there are clearly
defined goals and objectives,
there is some likelihood that
events will occur that would
impact the organization’s ability
to achieve them. So, broadly
defined, risk includes any event
or action that could adversely
affect an organization’s ability to
achieve its business objectives or
successfully execute its strategy.
The ability of an organization to
adapt to its changing environment is critical to ensuring optimal effectiveness over time. The
underlying objective is that the
planning and budgeting process
should accommodate reprioritization for unforeseen events via
existing budget mitigations and
shifting resources from less critical elements.
As we shall see in the next
section, effective communication
is important within any organization. For now, it is enough to
recognize that planning and
budgeting decisions have impact
on the organization when they
are either shared or communicated in some way. As decisions
are made, there will be people
who disagree with the decision.
While there are some people
who do not like disagreement,
disagreement is an essential part
of the process that brings out
risks, benefits, costs, and other
information.
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ACCOUNTABILITY
One of the objectives of the
planning and budgeting process
is to establish goals and objectives for the organization. Once
these are defined, individuals
can be held accountable to the
defined performance standards/
measures. As previously noted,
effective communication is
critical, as it can make a standard relevant to the individual
who is accountable. Standards—
particularly performance
measures—that the individual
cannot relate to will (at best) be
ignored or (at worst) create
dysfunctional behavior.
Establishing accountability
goes beyond determining who
is accountable; it also addresses
the standards that are used
for determining that
accountability. To gain
buy-in, managers must
ensure that those held
accountable have input
into objectives and related
performance targets. Such
involvement promotes
understanding of the
expectations and provides
a sense of ownership.
While there is little doubt
that establishing clearly defined
objectives and accountability
for the planning and budgeting
process is a key element to a
successful planning and budgeting process, there are some
suggestions to be followed
focused primarily on the development and management of
standards. Some key factors to
consider are:
•
Buy-in: Include participants
and stakeholders in establishing standards that dictate
both the objectives and
accountability to help ensure
buy-in to the process and
results.
© 2009 Wiley Periodicals, Inc.
•
•
•
Constant Standards: Seek
standards that can remain
mostly constant across several important dimensions.
(An example dimension is
time; because business operations are dynamic, organizations must set an appropriate time horizon.)
Clarity: While the standards
should be clear, they should
not be rigid, for having standards that are flexible and/or
dynamic enough to allow for
variations in the business
environment will extend the
life of the results.
Flexibility: A common complaint is that the budget is
“cast in stone” despite significant changes in the
operating climate. Such a
Establishing accountability goes
beyond determining who is accountable; it also addresses the standards
that are used for determining that
accountability.
complaint usually indicates
that either the time horizon
is too long for the organization’s climate or that appropriate update procedures and
schedules need to be added
to the process timeline to
ensure accurate assumptions
and estimates.
Standards do not require
that amounts be in absolute
terms. Standards may consist of
rates or ratios that are fixed but
then are applied to dynamic
bases, ones that are either internal or external. Appropriate
usage of fixed rates against
dynamic bases may be a valueadded answer to the “cast in
stone” complaint.
69
Accountability is a valued
principle for assessing an organization’s effectiveness, efficiency,
and success, and it is a good
lead-in to a final discussion on
integration of planning and
budget with performance, a
measure of true accountability.
COMMUNICATION
Effective communication is
important within any organization, and the planning and budgeting process can serve as a
tool to facilitate communication.
The planning and budgeting
process is an essential part of the
overall organizational communication process, as it provides context and a process to make and
communicate decisions and promotes alignment throughout the entire organization.
There should be twoway communications
between strategy development teams and the planning and budgeting
process early on since it
could impact people, facilities, capital equipment,
and other resource items
required by the planning and
budgeting process. For companies doing business with the
government that may require
them to submit a Cost Accounting Standards Board (CASB)
disclosure statement, the process
of getting annual accounting
changes reviewed and approved
can take a considerable amount
of time. This impacts the alignment of the accounting structure
that must be in place before
assigning resources within any
cost modeling process and can
prolong the cycle time of the
planning process. It is through
the planning and budgeting
process that organizational units
communicate their desired
plans/initiatives and the
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resources required to accomplish them. As budget requests
go up the chain for review/
approval, upper management
can consider these priorities
relative to those from other
organizational units. Funding
decisions are then communicated back down the chain to
communicate the priorities for
the organization as a whole.
This also communicates the
organization’s priorities to
external stakeholders.
To facilitate the communication, both internally and
externally, the process and
underlying information must be
transparent so all involved
understand the decisions
made. The process must
provide visibility to both
the decision process and
decision basis. The communication of processes
and steps taken to arrive
at a substantive decision
can be just as important as
the final decision, providing participants and subordinates a fuller awareness of additional
information, or considerations that the decision
maker had to address in
making final determinations on resources and policy. If
the process is robust, participants will gain trust in the
process and its results. In
contrast, if the process is not
sufficiently transparent, there
is greater likelihood of bad
decisions or that decisions will
not be made at all, or that decisions once made will not be
accepted by those who must
implement them.
Key assumptions related to
the overall strategy of the company should be included in the
planning guidelines and communicated to all participants in
the planning process. As noted
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earlier, assumptions should
span all operational facets of
the business, but, more importantly, management must help
ensure that a common set of
assumptions is used if it is to
allow them to work harmoniously throughout the planning
and budgeting process. To
ensure this commonality, some
communication mechanism is
necessary. One solution is to
implement a planning directive
via a recognized authority for
shared assumptions. This directive would communicate, before
each budget/plan iteration,
major guidelines, common
The communication of processes and
steps taken to arrive at a substantive decision can be just as important as the final decision, providing
participants and subordinates a fuller
awareness of additional information,
or considerations that the decision
maker had to address in making
final determinations on resources
and policy.
assumptions to be incorporated,
central overhead/planning rates
that are to be commonly used,
and elements that should be
included or excluded by all.
This will not only help communication, but also ensure the
elements are treated consistently across the planning and
budgeting system.
The final step is the robust
communication of decisions. As
decisions are made, there will
be people who disagree with
the decision. If there is sufficient visibility, they should at
least appreciate and respect the
basis for the decision. Also, the
choice expressed in the decision should be clear—not subject to varying interpretations
by others in the organization or
its stakeholders more broadly.
In this way, future decisions
can be focused on relevant
issues of concern and can be
made by relevant participants.
The negative aspect of robustly
communicating decisions, however, is that they can be perceived as being “cast in stone”
either when they should not be
or are, in fact, not meant to stifle discussion but to shape it.
Throughout this process,
significant visibility is gained
as operational and financial data, relationships,
and results are integrated
with each other. The
financial and operational
views represent specialized viewpoints into the
same data, relationships,
and results. These differing views of events drive
what appear to be two different languages: operating and financial. While
each of the different languages has its distinct
purpose, they also drive
some dysfunctional
behaviors when each
“speaker” fails to recognize the
other’s purpose and distinctive
features. For example, when
operational personnel fail to
recognize and appreciate the
financial consequences of their
processes, the entire business
suffers. Similarly, financial
measures that cannot be translated into operational terms
should be discarded or
discontinued.
A purely financial plan or
budget cannot attain the desired
degree of visibility or transparency, so an effective planning and budgeting process will
have to provide translation
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between operational and financial languages. Measures must
be relevant on both sides of the
“language” barrier. We must
also address when there is a
disconnect between financial
players and operational players
in the budget process. Both
views/parties must be partnered
for validation, feasibility, and
communication, which, in turn,
can promote accountability.
INTEGRATING PERFORMANCE
WITH PLANNING AND
BUDGETING
A final, but important piece
to improving business
processes is the step taken to
integrate performance into
improvement efforts. Although
the focus of most of the
CAM-I Planning and Budget interest group research
has been on the core business processes surrounding budget management
and budget building, we
have understood the critical importance of ensuring that performance and
the measurement of
results are part of the overall
effort.
Today’s philosophy of performance-based management
starts with a systematic approach
to performance improvement. It
requires an ongoing process of
establishing strategic performance objectives; measuring performance; collecting, analyzing,
reviewing, and reporting performance data; and using that
data to drive performance
improvement.
In the performance-based
management process, the first
step is to identify an organization’s strategic goals and performance objectives. This step
also involves the establishment
of performance measures based
© 2009 Wiley Periodicals, Inc.
on and linked to the outcomes
of the strategic planning phase.
Following that, the next steps
are to do the work; collect performance data (i.e., measurements); and analyze, review,
and use that data to drive performance improvement (i.e.,
make changes and corrections
and/or “fine tune” organizational operations). Lastly, management reports the data and
makes necessary changes or
corrections. Then, the process
starts over again.
Organizations regularly
collect timely and credible
performance information—
including information from its
program partners and contractors—and use that information
to manage the programs and
Performance management essentially
uses performance information to
manage and improve performance
and to demonstrate what has been
accomplished.
71
Our study noted the pursuit
of systematic uses of performance planning, budgeting,
and financial information as
essential to achieving a more
results-oriented and accountable organization and, therefore, recommends that this be a
valued part of any effort to
improve business processes.
Performance-based budgeting—
the integration of planning and
budgeting with performance
results—is just one component
of an organization’s total performance management that
brings together people,
processes, and technology
to leverage decision making
and resource management.
However, it is a major link to
overall performance management success. Pursuing
a systematic use of performance planning, budgeting, and financial
information is essential
to achieving a more
results-oriented and
accountable government.
WHAT YOU CAN DO
improve its performance. For
instance, this could include
adjusting program priorities,
making resource allocations,
or taking other appropriate
management actions.
Performance management
essentially uses performance
information to manage and
improve performance and to
demonstrate what has been
accomplished. Performance
measurement, in simplest
terms, is the comparison of
actual levels of performance
to pre-established target levels
of performance. Moreover,
performance measurement
is a critical component of
performance-based management.
We have actually implemented some of our recommendations, and they are proving to
be successful.
We are providing a forum
through our wiki for you to
help build on our research to
make this body of information
even more robust and to help
communicate our findings to
your peers and business partners, whether private industry
or government agencies. We are
also providing you with the
opportunity to comment on
and/or to add to our research
and recommendations. For access
to our wiki, please send an
e-mail to nancyt@cam-i.org
with Wiki in the subject line.
We welcome your participation.
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Norman L. Frause is a business manager supporting desktop systems in the Boeing Company’s Computing and Network Operations group in Seattle. He can be reached at Norman.L.Frause@Boeing.com.
Rick Brenner is a senior manager for Grant Thornton LLP in Alexandria, Virginia. He can be reached
at Rick.Brenner@gt.com. Paul E. Juras is a professor of accountancy at Wake Forest University in
Winston-Salem, North Carolina. He can be reached at Juras@wfu.edu. Carl L. Moravitz is a senior
managing consultant for IBM’s Global Business Services in Alexandria, Virginia. He can be reached at
moravitz@us.ibm.com. Steven P. Schreck is a finance manager for the Boeing Company in Seattle. He
can be reached at steven.p.schreck@boeing.com. Alan J. Stratton is with Stratton & Associates in
Tigard, Oregon. He can be reached at stratton.aj@gmail.com.
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© 2009 Wiley Periodicals, Inc.