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| David Cuykendall Click for Index Page |
Few understand that their annual planning and budgeting problems are only symptoms of a much bigger and more serious problem, anchored in traditions that do not square with real needs. That’s why companies need to move to a more continuous, rolling process and abandon annual planning and budgeting.
The ability to manage performance in today's business realities is actually quite limited
Most performance management systems involve plans, targets and resources that are negotiated, annual and fixed. Few managers know how to change their systems so that they become naturally responsive to change. This inability to cope with discontinuous change is rooted in an ingrained belief in “predict and control.”
Fortunately, there are a lot of other great things that can be done. For example, you could easily put in place a cost program instructing all business areas to reduce costs by a given number. But that would work against the intention of building a cost-conscious culture. If you want to become more fit, a crash diet does not work. It takes a change of lifestyle.
This means always working hard to reduce bad cost, while protecting good cost. The question to ask when making cost decisions is not: Do I have a budget for this? But: Is this really necessary? What is good enough? How is this creating value? Is this within my execution framework? Also, other questions to ask are: As things look today, is it affordable? Are the people available to do it? This information comes from real time information, not information embedded in the last formally adopted budget revision.
Many companies have management systems that in some form aim to create strategic alignment. But so many ignore or forget what is key for success: autonomy and agility, trust and transparency, ownership and commitment. If your own approach is nothing but a landing ground for instructions from above, both ownership and quality tend to walk out the door.
Alignment is not about target numbers adding up to a centralized control document. It is about creating inspiring clarity about which mountain to climb within highly defined boundaries for costs and the time required to accomplish a mission — and also the purposes used to guide it. Words are often more effective in making this happen, even if it is so much easier to let the numbers do the job.
Further, why should cost and funding decisions be made before they have to? Isn’t it better to make them as late as possible, when the best information is available — not only about the new project or activity up for decision — but also about the capacity to fund it or staff it?
Managers still rely too much on stale information to cascade authority
Unfortunately reinforcing centralized command-and-control is both tempting and easier if you only have a financially oriented budget available to do that job. Many managers (and finance people) also bring an accounting mindset with them into these important issues.
Also, many financial management systems seem to reserve transparency for the top. They boast about fancy drill-down functionality, allowing senior executives to monitor the smallest local detail. But why should these guys spend time investigating travel and entertainment cost in every local team? What is needed is much less of such drill-down, and much more of drill-across (what are those guys doing?) and drill-up (what was that strategy again?)
Instead, they need to ask, for instance, have we really moved towards our longer term objectives? Was there significant tailwind or headwind that should be taken into account? Are results sustainable, will they stand the test of time? These evaluation principles are examples of how to address the entire process, not just the “finance" part.
Cascading is about one unit instructing another on the basis of dated calendar driven documents. The role of documents in cascading belies their facilitative intent, being calendar and not event driven.
Annualized budgeting and planning drives the expenditure of huge amounts of energy, time and money trying to align and re-align the strategies, structures and systems to meet a changing business climate, based on annualized documents that are, in an information sense, one use only documents — that is, on a clock that is out of sync with natural business rhythms.
Professional accountants and finance people are reference document obsessed
Legal documents and reference documents are “enduring documents,” not “living documents.” Their operational role is compliance. They should not be substituted for documents implementing the working governance of process on live rolling basis, which change formerly unmanaged processes into self-sustaining mechanisms.
A living document or dynamic document is a document that is continually edited and updated with a framework for updates, changes, or adjustments. This is different from an evergreen document that is written in a way that is relevant to a specific audience over a long period of time, and does not change. This “evergreen” relevance comes from a universal acceptance or application of document contents.
However, a living document may evolve through updates, be expanded as needed, and serve different purposes over time. Living documents are changed through revisions that reference previous iterative changes. The rate of document drift depends on the structure of the original document, or original intent of such document, or guidelines for modifying such documents.
People conflate the idea of living working process documents (a document that specifies activities as assignable, discrete steps that help achieve specified objectives) with reference documents. Again, the role of reference documents be they legal or operational, is compliance.
Documents that live separately from hands on day-to-day management are nowhere near as valuable as living documents. It is so much better that everything you do evolve into a real thing, a tangible real thing that is relied upon day-to-day. If a document stops before it turns real in the sense of its day-to-day use, it's dead. In contrast, living documents convey information spontaneously to control the relations among humans, and between humans and their systems.
The goal is to use documents as assets. You invest in assets in order to enable you to do something you otherwise are unable to do. Assets are reusable infrastructure. What makes an asset any different than an expense, a consumable? It depends on how many times you use it. If you only use it once, it is an expense. If you use it continuously, with continually refreshed information, it is an asset.
The whole weight of training and professional education in the accounting and finance professions are oriented toward a compliance mindset, which is very counterproductive to the entrepreneurial aims of most businesses. They have an obsession with calendar-driven reference documents, while they have little training in recognizing the role of living documents in establishing advantageous efficiency patterns and skill in execution in internal accounting and cost control. The mechanisms of pragmatic organizational coordination are largely ignored by the accounting and finance professions. It is a big gap and a big deficit.
Any process that is undocumented by a living document is an unmanaged process
Unmanaged processes are like “feathers floating in the wind.” And conventional budgeting practices leave a great many “feathers floating in the wind” when it comes to achieving a real ability to tightly control processes and their costs.
Know without a doubt that the business side of life comes down to the effective management of scores of interacting independent linear processes. This is counter-intuitive to most people, who avoid establishing living documents as the primary coordination and control mechanisms they use in their enterprise because they consider the exercise to be bureaucratic. It is ironic that the very opposite is true. Living documents convey an organization’s coordinating mutualisms, whereas conventional calendar-driven budgeting and planning documents quickly become stale because they function as reference documents.
The test of a well-drafted living document is that an untrained person can rely upon them to rapidly perform a task, and that updates and revisions can be drafted and approved within a few minutes. They should be easily located and readily available to anyone needing them. A living document turns the human side of the human/system equation into a self-sustaining mechanism.
The singular goal of living documents is to improve the steps and sequences of individual systems until the functions they implement are working perfectly on a self-sustaining basis in real time. This is to furnish real information ON TIME.
Conclusion
Getting out of the calendar year for planning and budgeting will undoubtedly take time. The calendar is not just “hard wired” into our brains, it is also still highly present in statutory accounting as the obvious example. These will need to continue on an annual cycle. But this is not a showstopper.
Statutory accounting is compliance oriented and as such is a cost center. The rest of accounting, budgeting, and planning is entrepreneurial in character and as such is a profit center. Using the compliance oriented tools of conventional budgeting and planning for entrepreneurial purposes is a malfunction. The role entrepreneurial budgeting and planning is to improve an enterprise’s efficiency patterns, a source of skill in producing profits.
To abandon traditional budgeting and planning is to embrace the mechanisms that create tighter coordination, control, and unity of effort throughout the enterprise. These mechanisms eliminate processes by embracing the means for achieving a higher level of management, coordination, and control in the form of event-driven living documents for the governance of cost and decision making in the enterprise.
