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8 Reasons Why Budget Portfolio Management Fails in Large Organizations

IT IS WIDELY AGREED THAT BUDGET IS A CRUCIAL PILLAR IN STRATEGIC PLANNING.

Without careful and methodical accurate budget planning, the execution phase of a strategic plan is bound to fail. Obviously, a budget should reflect and support whatever strategic changes are planned for the organization.  However, there’s a more harmonious relationship between planning the budget and strategy execution, and that is the degree of agility in a budget plan. What happens if there are changes in the strategic plan during the year? Is your budget planning process agile enough to follow suit or will the budget drag down the execution?

Every large organization has a strategy. Every organization wants to execute its strategy successfully.Every organization has a budget planning process, most of which are long and somewhat painful. Over the course of a few months, there is much time spent on passing, approving, revisiting, signing, reapproving and re-everything – now starts the real challenge;how it manages change once approved?

Here are some of my principles in developing a budget that can manage and support change:

  • Planning the unplanned – even at the initial plan stage, large organizations acknowledge the fact that many inevitable events will occur, yet they lack the tools to plan for them. They accept the fact that these events are “must-have” scenarios. I believe, there is some degree of absurdity in concocting a plan, knowing it’ll will change without the tools to plan for implications of that change. Perhaps some planners simply disregard the changes factor despite the knowledge that their original budget is only set for the moment. But why not manage future changes from the beginning?

Expectations and the ability to control the changes allow every organization the ability to oversee and take command of its strategy and allow for efficient strategy execution. Moreover, efficient change management capabilities act as preventive medicine to a budget sickness about to come (but that’s for a different topic).

  • Short-blanket syndrome – organizations don’t possess the adequate resources to deal with a demand. (If resources weren’t an issue, there wouldn’t be any reason to write this blog). Every large organization has large expectations. It is often associated with a result driven operation which expects the best from every unit. Problem is, resources are never split accurately (at least at the eyes of employees). This situation leads to the short blanket syndrome. The demands are far greater than the supplies and that is why it’s difficult to find correlation between the two.  
  • Cross-functional prioritization – who decides on budget? Every organization has a different prioritization between business units and silos. Even if we are dealing with an organization of 20 employees, very often the priorities aren’t certain, and as consequence the budgeting priorities arenot clear. It is not an issue of micro management, it is a simple matter of the diversity of resources inside an organization. Many times the hierarchy and organization’s structure prevents managing changes of budgeting, by overloading difficulties on the executives and managers.
  •  “Inventing jobs” – a common and sad fact is that very often, when the fiscal year is at its end – there is a rush to “burn” all the resources to justify them for the next year. In case you thought your organization is special in going through this procedure, you’d be surprised to know how common this is in every vertical, size and geography segmented organization. Events such as a BU deciding to invest half of its budget in one month on “outside consultancy” or other questionable actions.  Money tends to lose its value  as we talked about before, while money tends to be spent only to justify its existence in the next quarter/year it creates a false culture where it has no value what so ever.
  • The color of money” – oddly enough, in every organization, the money that pays certain things, will not pay for other things inside the same BU. For instance, if the marketing department received a budget, and decided to differ a third of it to events, but eventfully moved only a sixth, it will not be able to move this budget to a different silo. Meaning, once the money gets in a silo, it better stay there, and it be better well be spent/invested or worst – wasted.
  • Top down Vs. Bottom up – Budget comes from only one direction – up.  Decision makers   are making decisions based on many variables, but usually don’t communicate with the most important people, those who get the budget. Or its purpose is not clear, why is it X and not Y is not clear, and even sometimes, its necessity is not clear. Sadly, the opposite scenario might be even worse. Once the budget is “down sized” due to constraints, projects in the making might become an awful loss of money, time and motivation for the team.
  • Multiple participants/interests/ systems/ previous constraints/ organizational politics process – the rule of thumb is simple and obvious – as many as there are more players and silos, the more its likely to have budget managerial difficulties. The same goes for a clash of interests. The more there are (interests), the more it’s likely to suffer from inefficient budget.
  • Big organization? Big plans – it might be obvious to me, but I should mention it. Every large organization wishes to employ large and long term business plans. These business plans, resulting by a larger strategy work frame, rely on budget alignment. You can imagine how difficult it is to a handle a quarterly budget, so you could only imagine how it is to manage a five year work plan and align the plan with long term strategy.

Do smaller organizations suffer from these symptoms? I think less so. Small organizations have easier and more efficient collaboration and communication as fewer people are involved and the process is more manageable. Cross functional issues pop-up less as many employees fulfill various positons and titles.  They don’t suffer from money color issues since usually the divisions boundaries are clear, and to be honest, they don’t have that much to begin with. Which leads me to the final difference, since they don’t have much to begin with, they won’t find them self-spending just to justify – in other words. Every penny is well used. On the other hand, small organizations suffer constantly from the short blanket syndrome since their demands are almost 100% of the times larger than their resources.

In conclusion, while it is essential to have a proper budget plan, the ability to manage change and the implications of change on the organization are as crucial as having a plan to begin with. In case an organization doesn’t realize that defining a strategy is only a first step, and in the planning, it expects to an efficient strategy execution and results to follow without much effort, it must manage its budget at every moment. It must be aware of the build in liabilities and risks, and willing to accept change as a fixed factor.

Make sure you follow up and read my next post on how to manage change.