How To Control A Run Away Budget

czvthlrnlnq-will-van-wingerdenWhere you are today is the sum of every choice you have ever made.  If you don’t like where you are, start making different choices.

I recently participated in an interesting discussion with an elected official on the best way to control rising budget expenditures. My position was to adopt a zero-based budget approach and require justification of each line item in the proposed budget (ideally based on a documented positive ROI). The opposing view (advocated by an elected official) was to adopt a fixed percent across the board cut. “Defining an ROI on spending is often impossible, with an across the board 20% cut everybody shares the pain” was his rationale. Knowing I disagreed, he joked – “I hope you don’t write a blog about this”. Of course, after that comment I had no choice.

Managing run away budgets is a major challenge we all face. It is a fact of life that costs increase far more frequently than they decrease. “You simply need to do more with less” is becoming a standard message from Boards of Directors.

I have often wondered why the typical approach to run away budgets at work is different than home. With your personal budget, the knee jerk response to overspending is to decide what you can do without and cut it from your budget. At work, Management’s knee jerk reaction is to cut spending across the board. Why are we perfectly willing to make the tough calls at home, but not at work?

Here are some pros and cons of an across the board (ATB) budget cut that you may want to consider about as you think about how you are going to manage your budget at work.

Pros of ATB cuts:

  • It is Simple—ATB cuts are simple to explain and communicate. There is no ambiguity about what a 10% ATB cut means.
  • It Appears Fair— “Everyone is taking the same hit and sharing the pain equally.” Optically it is easy to defend when people affected push back.
  • It Hides the pain of cuts—Advocating ATB cuts keeps the discussion of cuts at the general level of spending. It diverts attention from the pain inflicted by a reduction in services that result from the cut.
  • It Forces tough cuts— ATB cuts force efficiency choices for all programs supported by the budget.

Cons of ATB cuts:

  • Missed opportunity to cut ineffective programs— ATB cuts do not discriminate on the basis of the effectiveness. By definition, all programs are kept in place but just reduced in size and scope. If some are delivered poorly as a result, a round of selective budget-cutting is required to eliminate them.
  • Unequal policy priorities—ATB cuts not only ignore differential effectiveness between programs, they also ignore differences in policy priorities. ATB cuts are agnostic as to what you really ought to be doing. ATB cuts perpetuate the status quo. Changes in priorities are ignored, as are considerations about whether a minimum level of spend is needed in a given area. ATB cuts may reduce spending for a program below a minimum necessary level, while leaving other less-vital programs funded above their minimum level.
  • Fixed programs—Certain programs are not amenable to reduction by a small percentage. For example, cutting 10% percent on an advertising campaign may result in the loss of preferred page placement or advertisement size.
  • Economies of scale—Economies of scale may be threatened by ATB cuts. The result is a higher cost per transaction.
  • Consumption vs. investment—A given year’s budget includes some spending that is to support existing program utilization and eliminates the opportunity for expansion

Conclusion

My point-of-view is across-the-board budget cuts are a cop out. They let Board of Directors and Managers off the hook by allowing them to skirt the harder task of separating wheat from chaff. There is no doubt zero-based budgeting is harder. It requires you to define measures to determine program effectiveness. It also holds people accountable for their spending, and of course they often don’t like that. If you are interested in continually improving results, I think zero-based budgeting is the best approach. If politics make it hard to totally cut ineffective programs, then across-the-board cuts are certainly the easier choice to enact.

In my opinion, there are only four categories of programs:

Effective and efficient – If upside potential exists, invest more heavily.

Effective and inefficient – Focus efforts on building efficiencies.

Ineffective – Cut completely and do a post mortem to document learning on why the program failed.

Uncertain – Focus on finding reasonable measures to determine effectiveness.

If you approach you budget with the four categories in mind, it will make it easier to implement a zero-based budgeting approach.

Given the choice of ATB cuts or zero-based budgeting, I encourage you to consider making the harder right choice of zero-based budgeting.

 



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1 Comment so far

  1. Neil Arthur

    June 13, 2016

    Good advice Ed. Hard work and very much worth it. I ask my clients, “where do you want to go?” The answers are not always easy but they are rewarding.

One Response to “How To Control A Run Away Budget”




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