The Bane of the Planned Enterprise
In recent years company executives have become noticeably dissatisfied with the practice of planning and budgeting — late compared to Scandinavia where leading companies* abandoned or radically reformed their planning & budgeting a long time ago.
This contrasts with Germany where excessive planning and budgeting is still commonplace, widespread reform has yet to come. So what must be done to overcome the apparent ineffectiveness of planning & budgeting?
Business planning should revert to its original purpose. Planning must be limited to methods and actions appropriate for achieving set goals. A suitable framework is provided by flexible action plans. Planning & budgeting should be done by those who can contribute most. As a rule that is business managers, and not planners, accountants and specialists.
The experience of agile companies shows the number of people concerned with planning & budgeting can be drastically cut.
Detailed planning that reaches down to individual cost-centers and uniform planning that goes beyond the short-term are counter-productive: they are precise and comprehensive and that is why they are unrealistic and false. Complex relationships — a feature of many problems in business management — cannot be planned, pressed into predefined plan formats and scheduled into a calendar. Planning that claims to project certainty onto the future is worthless because the future is unpredictable.
It is essential that companies enable a dialog in which opportunities, risks and responses are carefully considered. Useful reference points for action planning are internal benchmarks and comparisons with prior years and with outstanding competitors. Then decisions must be made and rigorously pursued until the situation changes.
To avoid the trap of mediocrity, planning & budgeting must be decoupled from incentive systems.
Corporate management that focuses on the personal responsibility, self-motivation and creativity of employees is the form of leadership best-suited to highly dynamic and complex business environments — it is a harbinger of success.
If, on the contrary, attention is focused on rigidly adhering to plans or periodical budgets, this is indicative of an old-fashioned, bureaucratic style of management. It is a typical sign of managerism.
Entrepreneurs characteristically take reasonable risks to reach set goals; managers are often risk-averse and stick to plans that are co-prepared and safety-proofed by staffers and consultants, usually at considerable expense.
Not to be overlooked: another building block to a successful reformation of budgeting & planning is a change in the language used, the semantics. This finding is based on experience of extensive change processes. Traditional terminology such as budget and annual plan should be replaced by action plan and project plan.
The distinction between strategic and operational planning can be dispensed with, as can budget versus actual reporting.
The age of non-budgeting and lean planning has arrived. Those who disagree must provide counter-arguments and present their case. Those who get the point must introduce changes now.
First steps for reform are explained and practical suggestions given. The common thread is companies with high agility.
Hoefle, Marquart, Schnopp, 2006, ISBN 978-3-00-024325-7
* Svenska Handelsbanken as pioneer, Volvo, IKEA, Ericsson