Or: how to make finance follow business instead of the other way around...
“We didn’t actually overspend our budget. The allocation simply fell short of our expenditure.”
To be honest, I have always been fascinated about the phenomenon.
Not surprised, because we know a little something about organizations, but fascinated nonetheless. Because time and time again, you can see and hopefully not experience, how the development of an organization in almost all cases eventually leads to a stalemate situation that needs to be actively overturned.
An organization grows because of a damned good idea and a consequent product. The very intuitive structure of the startup, if you can even call it that, ultimately causes the need for changing it. As it grows, that initial structure was one of ultimate trust, flexibility and communication, but also one of inefficiency. And while growing, the pioneer with the idea automatically starts recognizing the need for change. This change embodies the reorientation from a horizontal to a vertical organizational structure. From a growing chaos of trusted generalists to a structure of increasingly anonymous specialists.
And don't get me wrong, both stages of development are essential for the growth of an organization. The first part of the stage of the functional role culture increasingly contains pillars of professionals, like administrative officers and HR specialists that do the same thing. The reasoning is that if we do 130% of our business last year, and this is not unfeasible, because it is still a damned good idea, we need 130% of the people we needed last year.
Now, no one is consciously making this decision. It is an inherent consequence of vertically managing the company, instead of horizontally leading it. I find it funny that used in this context, the organization is more and more managing it, as in just barely managing...
And, no one needs to be ashamed or embarrassed, as long as the signs are recognized in time. Because this organization is growing faster in supportive functions than in core processes. More in overhead, than in revenue. More in people, than in business. And it has to change.
A huge consequence of the functional role culture is that budgeting is traditionally done with a number of basic underlying assumptions.
Budgets are usually heritages; they are produced on the basis of the figures of the year before. Activities in the organization are less and less connected to effectiveness of the core business processes, but to the efficiency of specialist support functions. Furthermore, they often are not based on actual activities and strategic and operational planning, but on simply cutting or increasing the figures of the year before. “Allocations falling short of expenditures” are a direct consequence of these downsides of budgets.
Zero based budgeting is a reversed approach of traditional planning and budget decision-making. In traditional budgeting, managers start with the budget of last year and correct income and expenditures on the basis of expectations. Last year’s budget is seen as the baseline, the starting point.
In ZBB, managers are compelled to account for all budgeted expenditures; not just the changes in the budget of the year before. In ZBB, the baseline is not last year’s budget but ‘zero’. ZBB requires a lot of documentation and accountability. However, the idea of starting each budgeting period with a clean slate and reorient on the organization’s activities provides for an activity based and fresh financial budget and planning, which is based on effectiveness of core business, instead of efficiency of support functions.
That is why we recognized the need to help organizations changing their orientation back to effectiveness. We developed our Zero Based Budgeting Boot Camp.
Be aware, recognizing the signs not just affects budgeting. The signs are part of something bigger. There is a growing concern in the organization of ineffective processes, shady links between support activities and core business processes and an inapparent, but irreversible decrease in clients, projects and market share. This means that sounding the alarm bell means action. Action not just in budgeting or even finance, but an awareness that it is at least a quarter to twelve for the organizaton as whole.
The purpose of the bootcamp is to implement ZBB in the organization to support reconnecting budgeting to core business activities. The ZBB Bootcamp project usually consists of three phases.
In the first phase, the hard backgrounds and goals and soft desires and commitment are determined by a steering group. It is built up from all key professionals involved in the effectiveness/efficiency imbalance. General requirements and guidelines are determined and cascaded to the level at which the actual process will be taking place. Following is the second phase: the ZBB Pressure Cooker.
The ZBB Pressure Cooker consists of number of steps that create ultimate involvement of participants, who are responsible for the budgeting of core business and support activities within the organization. We like to turn the heat up in this Pressure Cooker, because in 5 days, we are accomplishing amazing things. The result is an implementation plan for the ZBB methodology,completely tailored to the organization. And that implementation obviously is phase three.
The implementation plan includes composing the project team, definition of objectives, results and risks, activities, everything guaranteeing results.
And as much as the cause for this processes keeps amazing me, the commitment, passion and change after the ZBB Bootcamp is finished and the results can be reaped keeps astounding and satisfying me even more Ultimately, the organization is now ready for further growth and development.