Moving Beyond Budgeting: An Update
Companies in today’s marketplace have been forced, by a variety of factors, to reassess their planning, budgeting, and forecasting processes. These factors include globalization of our economy, increased competition, technological advances and innovations, volatility of the stock market, decreased supply of raw materials, environmental constraints, and political changes. These external factors coupled with the ever-present need to meet Wall Street’s expectations can make traditional budgeting a hindrance instead of an asset.
Jack Welch, former chief executive officer of General Electric (GE), wrote in his best-selling book, Winning, that the budgeting process at most companies “has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.”1 In fact, while Welch was at GE, the company did away with the term “budgeting” altogether.2
The end result is that everyone, from senior executives to front-line managers, commits to overly aggressive targets and fudges the numbers to meet expectations. In extreme cases, such as Enron and WorldCom, this led to outright fraud. But even in less dramatic cases, the ...