by James T. Berger , November 2005

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With yearend approaching, many companies are thoroughly immersed in the annual rite of autumn - the sales and marketing budgeting process. Increasingly, experts are challenging the conventional wisdom of undertaking this time- and money-consuming process.

Loren Gary, a frequent contributor to various Harvard Business School newsletters, observes "The average billion-dollar company spends as many as 25,000 person-days per year putting together the budget. If this all paid off in shareholder return, that would be fine. But few organizations can make that claim. In fact, many firms now question the ROI of traditional budgeting altogether and are looking for alternatives that reduce time and better align spending with strategy."

He adds that many companies have reverted to more centralized "command and control" procedures to keep tighter control of costs.

Gary points out that some experts advocate dispensing entirely with the budgeting process by replacing traditional budgeting with a system of rolling forecasts and key performance indicators that shift strategic decision-making to customer-facing edges of the organization. Other alternatives include:

• Housing the budgeting and strategic planning functions in one office or department.
• Establishing top-down goals three to four years out.
• Requiring all business units to explore the budget and allocation implications of developing several strategic alternatives.

In an article entitled "Why Budgeting Kills Your Company," which appeared in Harvard Business School's WORKING KNOWLEDGE, Gary explores some of these budgetary alternatives.

One alternative, advocated by Jeremy Hope and Robin Fraser, authors of Beyond Budgeting: How Managers Can Break Free of the Annual Performance Trap, involves setting goals based on longer-term external benchmarking instead of internally negotiated annual targets. They suggest adopting goals based on "industry best-in-class" performance measures of direct competitors and give teams extended periods, like two or three years, to meet them.

Hope and Fraser also suggest evaluation and rewards based on "relative-improvement contracts." This involves setting and meeting a range of performance benchmarks over some extended time period. "Performance is then evaluated by a peer review group (using relative measures) with the benefit of hindsight," they write. They add that it is the uncertainty of this relative-performance approach that drives its success. Each manager knows from the outset "what has to be done to improve his or her usual performance, but it is only in hindsight that they know how well they have performed relative to the other managers."

Another budgeting technique presented by Gary is continuous and inclusive action planning. This technique is based on the development of a five-quarter rolling forecast that provides projections for each of five subsequent quarters. This helps eliminate the distortion caused by having financial incentives to meet fixed targets for a single fiscal year.

At the Swedish bank, Svenska Handelsbanken, budgets on the basis of resources made available as needed instead of budgeting in advance. "To make its central services more responsive to market demands, Handelsbanken conducts an annual round of negotiations in which cost estimates and services underpinning them are discussed by all the involved," writes Gary.

Several experts see using the budget as an agent for strategic alignment. Harvard Business School Prof. William J. Bruns, Jr. suggests maintaining budgets but restructuring compensation programs so that managers no longer favor short-term growth over the long-term health of the firm.

Mike Baxter, a partner in the consulting firm Marakon Associates, New York, believes in changing the linkage between strategic planning and resource allocation.
"Budgeting and performance are typically by the finance department," says Baxter. "Whereas planning is coordinated by a strategy department. Often the processes aren't well integrated, resulting in strategies that are often dictated by the budget process instead of vice versa." He suggests the CEO take the lead in setting the strategic planning goals and the review alternative and linking resources to the delivery of those outcomes that produce the highest values to the firm.

Resource allocation for the marketing function as well as the whole firm clearly is crucially important to the long-term success of the business. However, the traditional time- and money-consuming budgeting process often continues to repeat the mistakes of the past. This process very well might be irrelevant to new circumstances within the company and its external environments. Companies of every size need to continually examine the budgeting and allocations processes so that changes can be made that will enable the firm to operate more efficiently and effectively in fast-changing times and global markets.

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Author
James T. Berger, Managing Editor of The Wiglaf Journal, specializes in both finance and marketing and has spent a number in both the investor relations field as well as an account manager and officer at several Chicago advertising agencies.

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