Maybe this is not surprising, but it is certainly disappointing. Many budgeting systems are dysfunctional and create plans that are inaccurate and out-of-date before the ink is dry. They are strategically irrelevant, inflexible, and disconnected from operational reality. To say that managers do not enjoy or value the budget process is an understatement.

For those of us who are committed to the benefits of performance management, this is tough medicine to swallow. If budgeting is dysfunctional and so many people recognize it to be so, why is it so difficult to fix?

Let me take a stab at answering this question. Most of the methods referenced above focus on the effectiveness of the budgeting process. Are budgeted costs an accurate reflection of strategy, sales volume and mix, and process performance? Does the planned level of each type of resource reflect the likely demands on these resources? If you make a change to the efficiency of the process, is it easy to estimate the impact on budgeted costs?

These are important analytic questions, but it is difficult to answer them until a more fundamental question is answered. Is the current budgeting process reasonably efficient? Our experience suggests that budgeting processes are often highly inefficient and not susceptible to improvement in effectiveness until the inefficiencies have been addressed. 

Take the case of the parts manufacturer. This company prepared a quarterly rolling forecast that projected operational requirements and financial results. The planning process was labor intensive involving as many as 60 people working more than 90 days to complete. Given the need to do manual data entry, maintenance and consolidation of over 4,000 spreadsheets, it was not surprising that the new quarterly forecast started before the forecast for the previous quarter was complete. The process was poorly controlled, error prone and inaccurate.

What was the impact of this forecasting system on the business? There were significant costs associated with the manual process. Forecasts were late and unreliable.  Importantly, the analysts who were buried in data and spreadsheets had no time for analysis. Management could not fine tune their plans to better accommodate known changes and improve earnings. They blamed the forecasting system on their inability to adapt quickly to changes in run rates and product mix from key customers resulting in lower than expected quarterly earnings and reductions in the stock price.

I would argue that this experience prohibited any improvement in the underlying method until the inefficiencies and the high cost of planning were addressed. Importantly, fixing the inefficiencies of the system would free up the time of analysts to focus on cost and performance management rather than data churn and spreadsheet manipulation.

Does your experience support this view? Does your budgeting process lack discipline, accuracy, relevance and responsiveness? Is the inefficiency of the budgeting process the biggest barrier to improvement? If the process were fixed, could you successfully address the issues of relevance and operational responsiveness?

A real plus is that ABC is a natural for computing an ROI. The benefits are derived from eliminating the profit destruction associated with unprofitable products, services and customers, eliminating costs that don’t add value and other tangible and intangible factors. It is a compelling way to show that ABM is not the typical systems project that has no measurable ROI and often seems to go on forever. I can think of a customer that spent $500 million on an Enterprise Resource Planning (ERP) system. Once it was complete (after many years and the inevitable cost overruns) it was impossible to compute an ROI and no-one was using the system. Yes, the data was in good shape, but managers were still using spreadsheets and ad hoc analyses to make decisions. I am sure many of you have horror stories like this to share with us.

Each organization will have different business needs, and benefits from ABC that will vary with these needs. For example, a credit union might need to know the cost of acquiring and maintaining customers, so they could make optimal marketing decisions around profitability. If ABC reported product and customer profitability (ideally risk adjusted customer lifetime value) it would support this business need. We could develop a model of how this decision process would work, factor in the size of the marketing budget, and then make a reasonable estimate of the ROI. A government agency might want to replace equipment at the time that minimizes the total cost of ownership (maintenance plus ownership costs) over the expected lifetime of the equipment. Alternatively the agency might want to pinpoint areas of inefficiencies so resources could be migrated to fit budgetary needs. In both cases the financial impact of these decisions could be estimated and factored into an ROI computation.

I encourage you to share your thoughts on this important topic. In particular, it will be helpful to identify where you believe ABC can provide a positive ROI. It will be invaluable if any of you have specific sources of ROI you can identify from your own experience. Thoughts on overcoming difficulties computing ROI will also be very helpful. I look forward to your comments.