Despite the tremendous disruptions COVID-19 had on our economy and American businesses of all sizes, it has had less of a dampening effect on enterprise innovation initiatives than you might have imagined. Business leaders have remained firm on the value of technology and workflow innovation to allow our organizations to remain competitive and survive in the face of stay-at-home quarantines and market downturns. Despite challenges, how can executive leadership rethink budgetary processes that support innovation within the enterprise?
What’s wrong with traditional budgeting?
New rule: Traditional budgeting can’t survive the pressures from a global pandemic, let alone the demands of digital transformation. Forbes labels the traditional budgeting process as “one of the last — and largest — stumbling blocks to creating a truly Agile organization.” The process that most chief financial officers (CFOs) have adopted for decades hasn’t changed much in many organizations; and as a result, our budgets are often inaccurate and wasteful, hampering the agility necessary to react to tumultuous markets. Today’s budgets are bloated and unwieldy — and efforts to make decisions within these parameters can feel like a square wheel, making it difficult and cumbersome to keep things moving forward.
We recognize the controversy inherent in these statements; however, these realizations are nothing new. In fact, Harvard Business Review called out archaic budgetary processes as far back as 2003. The differences today are twofold: first, our business agility hinges on technology innovation; and, second, our very survival requires the ability to respond quickly to market shifts. These two facts alone call for a new budgeting methodology that cuts red tape and speeds business agility.
Applying Agile thinking to the budgeting process
Agile methodology gives CFOs a way to balance the changes necessary to fuel innovation. Traditional budgeting is a waterfall approach; budgets are based on the previous year with some educated guesses based on end-user requirements. Ironically, this is the generally accepted best practice, particularly when the pace of markets is digitized and lightning fast. How can you predict budgets accurately in a market environment affected by a global pandemic? There is simply no data to provide that kind of insight.
An agile budget discards the annual budgetary process and adopts distributed and variable budgets with rolling forecasts and key performance indicators. Organizations such as the Beyond Budgeting movement champion this budgetary process as the only logical way to stay one step ahead in a world that sometimes seems illogical. An agile budget allows us to create more accurate and flexible budgets in short-term increments, eliminating the challenge of trying to plan an approximation for the long-term when so many variables are in-flight.
Unlike a static traditional budget, agile budgeting enables the kind of action that empowers innovation while allowing enterprise organizations more leeway to capitalize on market trends or retract, as necessary, to protect the bottom line.
Three practical ways to balance control vs. innovation
Not to be too black and white, but the issue seems to be one of control versus innovation. We would argue for a more agile approach because the reality is, traditional budgeting does not allow accurate performance evaluation. Enterprise budgets often go off-cycle from the marketplace, which shifts much more quickly. Given that an annual budget is an interlocking snarl of complexities, making mid-stream changes, even if they are necessary, is highly painful. These realities create the illusion of control with a traditional budget, but that isn’t the reality in the majority of cases.
While IT operations are likely growing increasingly nimble in your organization, being saddled under a traditional budget only stymies the efforts of your technology teams to embrace innovation. This has placed unnecessary tension between finance and IT. Leaving this issue unaddressed will hamper the true digital transformation championed by your chief innovation officer (CIO) and chief technology officer (CTO). The result? IT departments spend 56% of their budgets just keeping the lights on and only 18% on building new technology-driven business models. This opens the door for startup innovators to continue to disrupt your market share. As an alternative, enterprise organizations should:
- Tailor the budgeting, funding, and reporting processes to meet the value of the technology project.
- Organize IT around outcomes and consider innovation for its value to the bottom line.
- Find more ways to creatively fund IT innovation projects with co-investors or other alternatives.
Agile budgeting can support innovation at the point where finance and IT come together around your corporate strategy. We recognize the difficulties inherent in putting these tools in place, however. That’s where the Windsor Group Sourcing Advisory can help your team. We help global companies restructure their processes for the pace of today’s world. Talk with our team today about how our expertise can help you cope with what’s next.