11-planning and budgeting-easing the pain,maximizing the gain (pages 65-72)

Like managers inmany organiza-tions, you may

be feeling “pains”when working withyour organization’splanning and budget-ing process. Considerthe following:

• Are you experienc-ing long cycletimes, runningmany iterations, and endingup with outdated assump-tions and inaccurate data bythe time your budget isapproved?

• Is your process too complex,planning at a low generalledger account level yet having to roll up the budgetwithin a complex/multilay-ered organizational structure?

• Are your planning and bud-geting tools obsolete, caus-ing inaccurate data andmany hours of overtime foryour Finance Department?

• Does the budgeting systemleave you struggling to dealwith changing economicconditions?

You are not alone. These arethe issues that we have beenresearching for the past fewyears as an interest group in theConsortium of Advanced Man-agement-International (CAM-I).CAM-I is an international con-sortium of manufacturing andservice companies, governmentorganizations, consultancies,and academic and professionalbodies that cooperate in a pre-competitive environment tosolve management problemsand critical business issues thatare common to the group. Ourinterest group is made up ofsubject-matter experts repre-senting a cross-section of thesevarious types of organizations,all sharing a common goal to

improve the planningand budgetingprocess. We haveembarked on an in-depth, comprehensivestudy to analyze whythese conditions exist,and we are providingrecommendations forimprovements to min-imize the overall frus-tration with the plan-ning and budgeting

process. The end result is awiki, which provides discussionmaterial and recommendationsto minimize some of the “pains”involved in developing yourbudget, regardless of whetheryour process results in a single-or multiple-year budget. Wiki-wiki is a Hawaiian word thatmeans quick. Wiki Web sites letusers make additions or edit anypage of the site. They often have acommon vocabulary and considerthemselves a “wiki” community.

PROCESS

The work we have donefocuses on several broad areas, but the overall goal

65

© 2009 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI 10.1002/jcaf.20549

Norman L. Frause, Rick Brenner, Paul E. Juras, Carl L. Moravitz, Steven P. Schreck,

and Alan J. Stratton

Planning and Budgeting—Easing the

Pain, Maximizing the Gain

featur

e artic

le

In many organizations, one frequent outcome ofthe planning and budgeting process is widespreadfrustration. This article explains why some ofthese pains exist and how to resolve them. Insteadof publishing a white paper or book with ourmaterial, we chose a wiki due to its technicalcapability of being able to interact with other inter-ested parties to comment on our findings.

© 2009 Wiley Periodicals, Inc.

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of improved planning and budgeting directly focuses oneliminating, reassigning, reengi-neering, and streamlining exist-ing processes used for planning,budget, and overall resourcemanagement. We noted thatimprovements should center ontackling such issues as:

• integration into managementprocesses,

• timeliness,• flexibility,• relevance,• responsiveness,• transparency, and• ability to be easily

understood.

Trying to narrow downprocess components of suchimprovement was difficult, butour work centered on planningand budgeting concerns high-lighted in a 2001 IBM presenta-tion of results from a survey ofpeople involved with planningand budgeting. The presenta-tion, in part, dealt with a gen-eral discontent with the flow ofplanning and budgeting activi-ties in organizations, whichcame to be known as commonpains.

The “ten pain points” listedin Exhibit 1 provide the focalpoint for drilling down to rootcauses and developing core bestpractices to apply to those causes.

We used these ten painpoints as the jumping-off pointfor exploration of processimprovement opportunities. The group quickly found thatimproving capacity and corecapabilities involves multiplesteps affecting people, process,and technology. Exploration anddiscussion of those multiplesteps allowed broader under-standing of the improvedprocesses and best practices thatmight allow organizations to

better define linkages betweenthese three crucial elements of business.

Our exploration noted thatprocess improvement does noterase political and policy con-cerns that are inherently part ofany planning and budgetingprocess. Instead, efforts areneeded to highlight the stepstaken to shift the focus of dis-cussion to those areas ofimprovement that one has con-trol over, while acknowledginginherently political features thatdrive effects on decision makingand resources. One of the mostdifficult parts of the planningand budgeting arena is the areaof process mechanics—whatdoes it take to keep things work-ing well, while also being impor-tant to the real-life work of myorganization?

Delving into such concernsreveals such issues as:

• Data Access and Standard-ization: There is no singledata source accessible by allpeople and staff for datainput, management, andanalysis. Because each unit

maintains a unique data setfor its organization, recon-ciliation among andbetween unit informationsources is difficult andtime-consuming.

• Process Standardization onGuidelines and Formats:There is often a general lackof standardization in manyprocesses across an organi-zation. In many cases, stan-dard procedures are availablebut are not known or fol-lowed. Nonstandardizationresults in multiple requestsfor the same information indiffering formats, creatingsignificant frustrationthroughout organizationsthat really do want to com-ply with requests.

• Review and ApprovalProcess: The review andapproval steps in mostorganizations andprocesses—many of whichare in budget and plan-ning—can be extensive, withmuch back-and-forthbetween different levels ofthe organization. Becausethese are many times done

66 The Journal of Corporate Accounting & Finance / November/December 2009

DOI 10.1002/jcaf © 2009 Wiley Periodicals, Inc.

Ten Pain Points

1. It takes too long.2. It does not help me run my business.3. It is out of date before it is even finished.4. There is too much game playing.5. There are too many iterations.6. It is cast in stone, although business conditions are always

changing.7. It involves too many people.8. It includes allocations that I cannot control.9. By the time it is done, I do not recognize my numbers.

10. It does not match the objectives to which I am held accountable.

Exhibit 1

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manually, a lot of time isspent on the low-value components of these steps.

REENGINEERING AND NEWTECHNOLOGY OFTEN NEEDED

An important lesson learnedthrough our investigation wasthat organizations must firstreengineer business processes toenhance productivity and effi-ciency. Companies that havedeveloped new budget, planning,and/or performance managementsystems have learned that it isbest to first make changes totheir processes before trying toinstall a new system.

Technology can play a sig-nificant role in organizationalimprovements. If new orimproved processes are to beimplemented, technologycan be a significant changedriver. Technology, however,is not a complete answer inand of itself. Technologyshould be viewed as aprocess enabler, leading tobetter performance by alllevels of an organization.Business users should leadthe effort to develop thespecifications needed touse technology in their func-tional roles. Only then can indi-viduals truly benefit to thefullest extent from the additionof technology in the workplace.Unfortunately, organizationsoften turn first to technologybefore fixing broken processes,which in the long run may sub-optimize the ultimate benefit of technology investments, so it means not achieving the streamlining and cost savingsnecessary.

Information and the need tomake timely decisions may berisk antagonists. A clearerchoice among alternatives may

require a great deal more dataand analysis, and while technol-ogy investments may supportadditional data collection andanalysis, they can delay decisionmaking while they are mademore robust. More informationincurs costs, and those costsmust be weighed against thedesirability of having certaintyin the ultimate choice. The stop-ping rule for each step of deci-sion making is determined eitherby the action-forcing ability ofan inflexible schedule or a judgment about the marginalbenefits of the following:

• obtaining and using moreinformation;

• reducing uncertainty; and• pursuing additional commu-

nication efforts.

One potential benefit oftechnology, however, is the ability to integrate more vari-ables into the planning andbudgeting process. Our attemptto forecast events and theirimpact makes it possible toreact affirmatively to thembefore valuable resources arewasted. These added variablesmay relate to the risk factors anorganization faces.

RISK

Planning and budgetingexists not to manage risk but tohelp an organization reach its

targets. But there’s always somerisk that unforeseen events mayhinder an organization’s abilityto meet its targets. The questionis whether the planning andbudgeting process fails to explic-itly recognize what those risksare, and how those risks mightimpede achieving a specificobjective or the organization’soverall target.

The past is fixed; the futureis yet unwritten. What is certainis that change will come. Mostorganizations operate in anever-changing environment andwith operations that have bothcontrollable and uncontrollablefactors. A clear understandingof these factors and the influ-ence they have on the organiza-tion will not only dictate howrelevant the budget can be tobegin with, but also how fre-

quently budget assump-tions will need to beupdated or changed. Ifmost factors are easy toforecast and will onlychange within an accept-able tolerance level,“across-the-board” restric-tions in spending, even inthe absence of flexibleforecasting tools, may bean acceptable approach for

managing the budget in the shortterm. Undoubtedly, this will notbe the case for most organiza-tions, so “across-the-board” andgeneral restrictions in spendingshould be done in concert with arobust forecasting process thatallows for analysis and scenariotesting of assumptions with thecurrent or baseline budget.

To assume that the events andtheir impact can be known andlocked down into a planning and budgeting document is folly,but failing to plan because ofuncertainty is an even greaterfolly. Examples of such unfore-seen events include:

The Journal of Corporate Accounting & Finance / November/December 2009 67

© 2009 Wiley Periodicals, Inc. DOI 10.1002/jcaf

Companies that have developed newbudget, planning, and/or performancemanagement systems have learnedthat it is best to first make changesto their processes before trying toinstall a new system.

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• reorganizations;• catastrophic events (e.g.,

changes in the economy,political unrest, or war);

• mergers or acquisitions;• changes in leadership (e.g.,

a new CEO or top execu-tive); and

• acts of nature (e.g., Hurri-cane Katrina or a blizzard).

The planning and budgetprocess, through improved com-munications and systemic busi-ness operating guidelines in peri-ods of emergency, can helporganizations better navigatethrough such events.

FOUR STEPS FOR ADDRESSINGUNFORESEEN RISKS

The budgeting process needsa mechanism to more effectivelyaddress unforeseen risks. Wepropose that a four-step processdescribed in Exhibit 2 beadopted as part of the planningand budgeting process.

Events are not the only riskfactors; assumptions are also apoint of vulnerability. Plans andbudgets are forward-looking,which means that the assump-tions will always be questionable

but necessary. In fact, no othermanagement process likely hasas much dependence on assump-tions as does the planning andbudgeting process. Some majorcategories of assumptionsinclude:

• organization,• competition,• regulatory,• the economy,• customers,• suppliers, and• processes.

Assumptions in the planningand budgeting process are essen-tial simply because regardless ofhow good someone’s crystal ballmay be, the nature of forecastingalways leaves something to theunknown.

A major factor in the accu-racy of assumptions turns out tobe time, which is driven in partby the time required for theplanning process. Organizationsthat take several months toestablish their budgets (three,six, nine, or even more) mayfind that assumptions originallysubmitted with planning guide-lines become obsolete by thetime the planning process is

complete. Some assumptionsmay be trivial and not worth theeffort to subject to risk assess-ment. The criteria for suchassessment should be driven bythe strength of, and reliance on,key assumptions, and theirimpact on alternative decisionchoices. Critical assumptions,however, should be periodicallyreevaluated and updated in order to remain in sync with current business conditions andother budget decisions before the budget is approved.

Whenever there are clearlydefined goals and objectives,there is some likelihood thatevents will occur that wouldimpact the organization’s abilityto achieve them. So, broadlydefined, risk includes any eventor action that could adverselyaffect an organization’s ability toachieve its business objectives orsuccessfully execute its strategy.The ability of an organization toadapt to its changing environ-ment is critical to ensuring opti-mal effectiveness over time. Theunderlying objective is that theplanning and budgeting processshould accommodate reprioriti-zation for unforeseen events viaexisting budget mitigations andshifting resources from less criti-cal elements.

As we shall see in the nextsection, effective communicationis important within any organi-zation. For now, it is enough torecognize that planning andbudgeting decisions have impacton the organization when theyare either shared or communi-cated in some way. As decisionsare made, there will be peoplewho disagree with the decision.While there are some peoplewho do not like disagreement,disagreement is an essential partof the process that brings outrisks, benefits, costs, and otherinformation.



Four Risk-Related Principles for Planning and Budgeting

Basic risk-related principles that should be incorporated into the planning and budgeting process include:

1. Identifying the significant risks that might threaten the achievement ofthe strategies and objectives;

2. Assessing the identified risks in terms of dollar impact and the relatedlikelihood the event will occur;

3. Deciding what action to take in response to the risks, ranging fromfull mitigation to acceptance as is; and

4. Explicitly incorporating those decisions into the formal budget.

Exhibit 2

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ACCOUNTABILITY

One of the objectives of theplanning and budgeting processis to establish goals and objec-tives for the organization. Oncethese are defined, individualscan be held accountable to thedefined performance standards/measures. As previously noted,effective communication iscritical, as it can make a stan-dard relevant to the individualwho is accountable. Standards—particularly performance measures—that the individualcannot relate to will (at best) beignored or (at worst) createdysfunctional behavior.

Establishing accountabilitygoes beyond determining whois accountable; it also addressesthe standards that are usedfor determining thataccountability. To gainbuy-in, managers mustensure that those heldaccountable have inputinto objectives and relatedperformance targets. Suchinvolvement promotesunderstanding of theexpectations and providesa sense of ownership.

While there is little doubtthat establishing clearly definedobjectives and accountabilityfor the planning and budgetingprocess is a key element to asuccessful planning and budget-ing process, there are somesuggestions to be followedfocused primarily on the devel-opment and management ofstandards. Some key factors toconsider are:

• Buy-in: Include participantsand stakeholders in estab-lishing standards that dictateboth the objectives andaccountability to help ensurebuy-in to the process andresults.

• Constant Standards: Seekstandards that can remainmostly constant across sev-eral important dimensions.(An example dimension istime; because business oper-ations are dynamic, organi-zations must set an appropri-ate time horizon.)

• Clarity: While the standardsshould be clear, they shouldnot be rigid, for having stan-dards that are flexible and/ordynamic enough to allow forvariations in the businessenvironment will extend thelife of the results.

• Flexibility: A common com-plaint is that the budget is“cast in stone” despite sig-nificant changes in theoperating climate. Such a

complaint usually indicatesthat either the time horizonis too long for the organiza-tion’s climate or that appro-priate update procedures andschedules need to be addedto the process timeline toensure accurate assumptionsand estimates.

Standards do not requirethat amounts be in absoluteterms. Standards may consist ofrates or ratios that are fixed butthen are applied to dynamicbases, ones that are either inter-nal or external. Appropriateusage of fixed rates againstdynamic bases may be a value-added answer to the “cast instone” complaint.

Accountability is a valuedprinciple for assessing an organi-zation’s effectiveness, efficiency,and success, and it is a goodlead-in to a final discussion onintegration of planning andbudget with performance, ameasure of true accountability.

COMMUNICATION

Effective communication isimportant within any organiza-tion, and the planning and bud-geting process can serve as atool to facilitate communication.The planning and budgetingprocess is an essential part of theoverall organizational communi-cation process, as it provides con-text and a process to make andcommunicate decisions and pro-

motes alignment through-out the entire organization.

There should be two-way communicationsbetween strategy develop-ment teams and the plan-ning and budgetingprocess early on since itcould impact people, facil-ities, capital equipment,and other resource items

required by the planning andbudgeting process. For compa-nies doing business with thegovernment that may requirethem to submit a Cost Account-ing Standards Board (CASB)disclosure statement, the processof getting annual accountingchanges reviewed and approvedcan take a considerable amountof time. This impacts the align-ment of the accounting structurethat must be in place beforeassigning resources within anycost modeling process and canprolong the cycle time of theplanning process. It is throughthe planning and budgetingprocess that organizational unitscommunicate their desiredplans/initiatives and the



Establishing accountability goesbeyond determining who is account-able; it also addresses the standardsthat are used for determining thataccountability.

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resources required to accom-plish them. As budget requestsgo up the chain for review/approval, upper managementcan consider these prioritiesrelative to those from otherorganizational units. Fundingdecisions are then communi-cated back down the chain tocommunicate the priorities forthe organization as a whole.This also communicates theorganization’s priorities toexternal stakeholders.

To facilitate the communi-cation, both internally andexternally, the process andunderlying information must betransparent so all involvedunderstand the decisionsmade. The process mustprovide visibility to boththe decision process anddecision basis. The com-munication of processesand steps taken to arriveat a substantive decisioncan be just as important asthe final decision, provid-ing participants and sub-ordinates a fuller aware-ness of additionalinformation, or considera-tions that the decisionmaker had to address inmaking final determina-tions on resources and policy. Ifthe process is robust, partici-pants will gain trust in theprocess and its results. In contrast, if the process is notsufficiently transparent, there is greater likelihood of baddecisions or that decisions willnot be made at all, or that deci-sions once made will not beaccepted by those who mustimplement them.

Key assumptions related tothe overall strategy of the com-pany should be included in theplanning guidelines and com-municated to all participants inthe planning process. As noted

earlier, assumptions shouldspan all operational facets ofthe business, but, more impor-tantly, management must helpensure that a common set ofassumptions is used if it is toallow them to work harmo-niously throughout the planningand budgeting process. Toensure this commonality, somecommunication mechanism isnecessary. One solution is toimplement a planning directivevia a recognized authority forshared assumptions. This direc-tive would communicate, beforeeach budget/plan iteration,major guidelines, common

assumptions to be incorporated,central overhead/planning ratesthat are to be commonly used,and elements that should beincluded or excluded by all.This will not only help commu-nication, but also ensure theelements are treated consis-tently across the planning andbudgeting system.

The final step is the robustcommunication of decisions. Asdecisions are made, there willbe people who disagree withthe decision. If there is suffi-cient visibility, they should atleast appreciate and respect thebasis for the decision. Also, the

choice expressed in the deci-sion should be clear—not sub-ject to varying interpretationsby others in the organization orits stakeholders more broadly.In this way, future decisionscan be focused on relevantissues of concern and can bemade by relevant participants.The negative aspect of robustlycommunicating decisions, how-ever, is that they can be per-ceived as being “cast in stone”either when they should not beor are, in fact, not meant to sti-fle discussion but to shape it.

Throughout this process,significant visibility is gained

as operational and finan-cial data, relationships,and results are integratedwith each other. Thefinancial and operationalviews represent special-ized viewpoints into thesame data, relationships,and results. These differ-ing views of events drivewhat appear to be two dif-ferent languages: operat-ing and financial. Whileeach of the different lan-guages has its distinctpurpose, they also drivesome dysfunctionalbehaviors when each

“speaker” fails to recognize theother’s purpose and distinctivefeatures. For example, whenoperational personnel fail torecognize and appreciate thefinancial consequences of theirprocesses, the entire businesssuffers. Similarly, financialmeasures that cannot be trans-lated into operational termsshould be discarded or discontinued.

A purely financial plan orbudget cannot attain the desireddegree of visibility or trans-parency, so an effective plan-ning and budgeting process willhave to provide translation



The communication of processes andsteps taken to arrive at a substan-tive decision can be just as impor-tant as the final decision, providingparticipants and subordinates a fullerawareness of additional information,or considerations that the decisionmaker had to address in makingfinal determinations on resources and policy.

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between operational and finan-cial languages. Measures mustbe relevant on both sides of the“language” barrier. We mustalso address when there is adisconnect between financialplayers and operational playersin the budget process. Bothviews/parties must be partneredfor validation, feasibility, andcommunication, which, in turn,can promote accountability.

INTEGRATING PERFORMANCEWITH PLANNING ANDBUDGETING

A final, but important pieceto improving businessprocesses is the step taken tointegrate performance intoimprovement efforts. Althoughthe focus of most of theCAM-I Planning and Bud-get interest group researchhas been on the core busi-ness processes surround-ing budget managementand budget building, wehave understood the criti-cal importance of ensur-ing that performance andthe measurement ofresults are part of the overalleffort.

Today’s philosophy of per-formance-based managementstarts with a systematic approachto performance improvement. Itrequires an ongoing process ofestablishing strategic perfor-mance objectives; measuring per-formance; collecting, analyzing,reviewing, and reporting per-formance data; and using thatdata to drive performanceimprovement.

In the performance-basedmanagement process, the firststep is to identify an organiza-tion’s strategic goals and per-formance objectives. This stepalso involves the establishmentof performance measures based

on and linked to the outcomesof the strategic planning phase.Following that, the next stepsare to do the work; collect per-formance data (i.e., measure-ments); and analyze, review,and use that data to drive per-formance improvement (i.e.,make changes and correctionsand/or “fine tune” organiza-tional operations). Lastly, man-agement reports the data andmakes necessary changes orcorrections. Then, the processstarts over again.

Organizations regularly collect timely and credible performance information—including information from its program partners and contrac-tors—and use that informationto manage the programs and

improve its performance. Forinstance, this could includeadjusting program priorities,making resource allocations, or taking other appropriatemanagement actions.

Performance managementessentially uses performanceinformation to manage andimprove performance and todemonstrate what has beenaccomplished. Performancemeasurement, in simplestterms, is the comparison ofactual levels of performance to pre-established target levelsof performance. Moreover, performance measurement is a critical component of performance-based manage-ment.

Our study noted the pursuitof systematic uses of perfor-mance planning, budgeting, and financial information asessential to achieving a moreresults-oriented and account-able organization and, there-fore, recommends that this be avalued part of any effort toimprove business processes.Performance-based budgeting—the integration of planning andbudgeting with performanceresults—is just one componentof an organization’s total per-formance management thatbrings together people,processes, and technology to leverage decision makingand resource management.However, it is a major link tooverall performance manage-

ment success. Pursuing a systematic use of per-formance planning, bud-geting, and financial information is essential to achieving a moreresults-oriented andaccountable government.

WHAT YOU CAN DO

We have actually imple-mented some of our recommen-dations, and they are proving tobe successful.

We are providing a forumthrough our wiki for you tohelp build on our research tomake this body of informationeven more robust and to helpcommunicate our findings toyour peers and business part-ners, whether private industryor government agencies. We arealso providing you with theopportunity to comment onand/or to add to our researchand recommendations. For accessto our wiki, please send an e-mail to [email protected] Wiki in the subject line.We welcome your participation.



Performance management essentiallyuses performance information tomanage and improve performanceand to demonstrate what has beenaccomplished.

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Norman L. Frause is a business manager supporting desktop systems in the Boeing Company’s Com-puting and Network Operations group in Seattle. He can be reached at [email protected] Brenner is a senior manager for Grant Thornton LLP in Alexandria, Virginia. He can be reached at [email protected]. Paul E. Juras is a professor of accountancy at Wake Forest University in Winston-Salem, North Carolina. He can be reached at [email protected]. Carl L. Moravitz is a seniormanaging consultant for IBM’s Global Business Services in Alexandria, Virginia. He can be reached [email protected]. Steven P. Schreck is a finance manager for the Boeing Company in Seattle. Hecan be reached at [email protected]. Alan J. Stratton is with Stratton & Associates inTigard, Oregon. He can be reached at [email protected].

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11-planning and budgeting-easing the pain,maximizing the gain (pages 65-72)

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