The Strategy Focused Budget - Fact or Fiction?

from October 28, 2009

One of the key elements of building a strategy focused organization involves aligning the organization with strategy. What does this element look like in action? Typical activities in most organizations include cascading their corporate strategy to all business units, departments, and teams, creating aligned resource plans (including strategy focused human capital plans, and tools and technology plans), and building a strategy focused budget.

Many organizations struggle to build strategy focused budgets. Why is this the case?

Well, historically, most organizations complete their budgeting process independent of their strategic planning process and activities. The result is that up to 60% of budgets are not linked to business strategy. Based on this legacy, building strategy focused budgets in our organizations requires process re-engineering and the integration of the strategic planning and budgeting processes.

I think that, frequently, practitioners believe that this new, re-engineered process should be, ideally, uni-directional with organizational strategy driving and informing the corporate budget. However, this is likely a simplistic (and largely idealistic) view of how the process should work. A better view is to create a process that begins with strategy but is bi-directional in nature - one that works like a feedback loop. That is, the corporate strategy drives a first cut budget that is revised as required, driving the associated adjustments to the strategy (likely in the form of adjustments to business activities and project timelines and/or scope). 

Here’s how the process should go. Corporate strategy comes first. The reality in many businesses is that the budget comes first and then operations must figure out what they will focus on and what they will do with the dollars allocated to them. Taking this approach results in annual operating plans and budgets, generally without strategic context.

Once developed, all of the planned activities detailed within the corporate strategy should be valued financially - both costs and expected revenue generation should be detailed. This information is then fed into the budgeting process and the resulting budget is given a "reality check". In most of the cases I have seen, this first cut budget does not fly as is for a variety of reasons, resulting in a series of activities focused on revising the budget. The next CRITICAL step is to go back to the business strategy and make the adjustments required by the revised budget. This usually doesn’t mean throwing out the strategy - it usually just requires making changes to the timing of strategy execution plans.

However, if budget adjustments are significant, elements of the strategy may have to be re-visited and modified and/or eliminated. When budgets drive this type of scenario, I guess you have to question whether an organization has crossed out of the strategy-focused budget zone.

The strategy adjustment feedback loop is often the step that practitioners forget to do. However, when not completed, budgets and strategy remain largely misaligned. This can breed organizational confusion and cause employees (and stakeholders) to question whether management is truly committed to strategy execution. The next progression is that employees become cynical about the level of organizational commitment to effecting change and making mission and vision achievement a reality. This scenario can be the first step in a drop in organizational enthusiasm for business strategy.

Introducing strategy focused budgeting into your company can be a challenge because we are generally dealing with a finance-centric paradigm in our organizations. However, it is critical that you begin taking steps in this direction if you hope to move strategy execution forward and build a strategy focused organization. Begin by building meaningful links between your strategy creation and management processes and your budgeting process. Progress as you can to solidify the bi-directional nature of the resulting integrated process. Your ultimate objective is to build a process that ensures that strategy informs the budget which then re-informs the strategy.

So, strategy focused budgets - fact or fiction? I think that the answer is somewhere in between.

Bottom line? Taking a realistic, two-way approach to aligning business strategy and budgets will move your organization forward effectively on its journey to becoming a strategy focused organization and achieving its strategic objectives.