Part 6 in the 10-part Collaborative Enterprise Planning series
Collaborative planning recognizes that the business world is never static and that the future cannot be predicted with any form of accuracy.
Think about that for a moment. If you could see into the future, there would be no need to re-plan as the original plan would work.
In the same way that we adopt the strategy of “continuous steering” when driving a car, so it is with business. The faster you are going (and similarly the business environment), the greater the need for course-corrections to keep things on track.
But given that most plans take months to develop, how is it possible to adopt a continuous planning approach? That’s where feedback loops come in.
The budget straitjacket
Many companies see the budget as sacred—it can’t be touched, and performance is judged by it. This is crazy. The purpose of the budget—and all planning—is to direct activity toward achieving the ultimate goal. To do this, budgets should not be seen as a single number, but as a range in which performance can fluctuate and yet remain on track.
Having a single number is very inefficient. If a department doesn’t spend enough, then there is a real danger that either the activity isn’t being done well enough or any surplus is going to be wasted. Managers feel the need to spend the budget so that it doesn’t go against them next year. If, on the other hand, you overspend the budget, a typical response is to cut what you’re currently spending. That may prevent the activity it supports from working, which in turn could mean that future goals will be unobtainable.
Setting a budget range allows managers some degree of flexibility and curtails any knee-jerk reaction that is rarely in the interest of long-term objectives. As the limits are approached in any activity, managers are required to first understand the reasons why this is so, and to then re-plan what they could do in order to preserve or surpass overall goals. This re-plan is combined with existing plans to see how overall performance is affected. If this is adverse, then a dialog with the affected departments will need to take place before any changes are enacted.
Clearly, a continuous planning approach cannot be adopted with most traditional budgets that are focused on costs by department. Instead, it requires:
- Focus on the resourcing of activities that may well go across departments
- Measures for tracking activity as well as any associated income and expenditure
- Budgets set at a summary level of detail, although actual results are available in detail should future analysis be required
- Budgets set as a range with upper and lower levels acting as “trigger points” for re-planning.
This approach will almost certainly need to be supported by a modern planning system that includes exception alerting and some form of automated workflow. The exception alerts will draw attention to potential breaches of the limits, while the workflow can request users to supply more information and trigger a re-plan as required.