Friday, March 2, 2012

Skip the Budgeting Process?

There was one last question at our webinar on Radical Management that still needs answering.

Dan DiCamillo asked: Have you found a suitable replacement for (or a pitch to delay) yearly budgeting and planning, to give a little breathing room to start customer delight based practices?

I passed this question to Franz Röösli, Director of the Beyond Budgeting Roundtable and co-Initiator of the Stoos Network. This is his response:
Very interesting, in my view the question indicates the relatedness and interplay that exists between Radical Management and Beyond Budgeting (BB).

It is not easy to answer the question without having any context. Furthermore I would suggest to the person to get familiar with Beyond Budgeting (e.g. via the The Leader's Dilemma) to really be able to relate his question in the light of the BB model. That is not done with a few sentences (just as you needs some time to really get an understanding of Radical Management).

Nevertheless, as a very short but certainly improper abbreviated answer I would like to mention that BB companies do not have this fixed yearly budgeting and target setting process. That’s why they have the breathing room to create customer delight by their very systems design. So going BB could be an answer to solve the problem that this persons is seeing to start with Radical Management/customer delight . (That’s another reasoning why the two concepts (RM and BB) have such a strong fit and do support each other in my view).
So here is the trade off: flexibility and the ability to respond to new challenges and opportunities vs. predictability. An management model which emphasizes predictability suffers from long lead times and high overhead costs.

If we were talking about physical inventory, it would be pretty obvious that having stuff sitting in a warehouse is bad thing. It costs money, rots, gets damaged, gets lost or stolen....  The market tastes can change, and so the risk of having to write off the investment in stuff increases. With intangibles, e.g. new product designs, new software, and other intellectual property, it's harder to see the waste because the inventory doesn't require any new space. But it still costs money, binds resources, and makes the company inflexible and unresponsive.

A phase driven development framework compounds the problem, because the way people are allocated to projects tightly couples projects to each other. Changing course after a project has started could mean throwing away work in progress for a zero return on investment. Not good.

So here is a radical approach to budgeting and financial controlling:
  • If you need a total number for R&D expenses, plan that on a yearly basis, but don't go down to the level of budgeting individual projects. Be prepared to revise that number up or down once or twice per year.
  • Focus on just a few projects at once. Prioritize primarily by sequencing, not by resource allocation. You'll be much more productive.
  • Plan your projects so that you get a minimum useful version of whatever you're creating within a few months. Strive never to more than one month away from a deliverable state there after. 
  • Never forget that customer delight is more important than the output itself. If you can't deliver something monthly, how can you delight your customer on a monthly basis?
  • Bring stakeholders together as it becomes clear that capacity is available. Answer the question, 'what should we do next?' Another way to phrase this is, 'what is the most valuable new capability that we should have three months from now?'