Recently, we set a record with the formation period of our new government . By exceeding the previous record of 208 days, it is the longest in history of The Netherlands. Why is it that government formations take that long? After all, it is all about allocating money to the topics that are important for the different parties involved. This is a political game that keeps intriguing me, because in the end the total amount of available money does not change. Let alone that productivity targets are integrated in our country’s budget.
The parallel with the budgeting process within companies is obvious. Annually you set departmental targets and you allocate budgets, but in the end you only have one overall cost objective for your whole company. So why bother where you save it, as long as you save it. To be clear, I do not oppose the concept of budgets and I don’t want to challenge the budgeting process itself. With this blog, I like to address how to integrate productivity targets into your budgets and how to make a difference by realising it.
Budget as usual
During the formation period, I often see news article headlines like “€500M extra to the tax authorities”. Only in the article itself, it becomes clear that there are no underlying plans for this extra money and the benefits it will bring. To be honest, I think this is a strange approach for allocating money. However, most companies allocate budgets in the same way. All departments or sites get targets on the same subjects as last year. They only have to perform better. A strategy that works fine if you accept slack (e.g. waste) in your processes year-by-year, but it will never result in specific improvement plans related to costs.
Recent research by the Financial Times identified some other risks in this widely-used budgeting approach.
- Managers work on cost efficiency within their functional silo, leading to higher costs in other functions and an overall decrease in productivity.
- Process issues are tackled with investments, not solving the root causes of the problems, leading to higher overall costs.
- Management expects that focus on costs will lead to productivity increase, but in fact the organisation loses focus on the key business elements.
Are you experiencing those risks as well? Then it is time to change your view and create harmony within your organisation by using a cross-functional approach in setting your budgets. Three key actions that will help you in achieving this.
- Define your productivity targets top-down – Use one productivity target for the whole organisation as the starting point. Translate this into targets per department, supporting cross-functional cooperation. In my view, it is the board or management team who owns the processes. It is fair to expect that the organisation works on these processes to make them perform better with your support.
- Identify the improvement potential differently – Trying to identify new ideas with the same way of thinking as previously will be difficult. Use data driven approaches to assess the potential your processes still hold. It probably will be more than you expect.
- Develop supporting improvement plans bottom-up – Just setting targets without plans backing up these targets is an unrealistic approach. Define operational plans on productivity bottom-up. This creates focus on the key business elements leading to the defined overall productivity target.
A prerequisite for these key actions is that operational excellence capabilities are present within your organization. If so, integrate these elements in your upcoming budget period as soon as possible and experience the benefits next year. Only be aware that your budget period can’t afford to last as long as our formation period did, because then the year is already over before you can start executing your plans.
Aart Willem de Wolf is managing partner at R&G Global Consultants.