I recently talked to a controller about the state of budgeting. He said that budgeting is a dysfunctional process and little has occurred over his long career to change that view. He has seen many methods come and go including programming planning budgeting systems (PPBS), zero-based budgeting (ZBB), activity-based budgeting ABB) and performance-based budgeting (PBB). He commented that each one of these methods over-promised and under-performed. None are widely used as replacements to traditional budgeting.

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 Many budgeting systems are dysfunctional and create plans that are inaccurate and out-of-date before the ink is dry.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?