Dynamic Budgeting - A Cultural Shift

In a recent article From a Maps to a Satnav world - the way boards are taking decisions is changing, I explored the shift that boards are making, when it comes to decision making and planning, from a more traditional “Maps” approach to a more agile “Satnav” world. The “Maps” world consisted of incredibly detailed and lengthy strategic plans and annual budgets, whereas the “Satnav” world, consists of strategic frameworks and parameters and dynamic budgeting.

Driven by the religion of the annual budget and detailed strategic plans, the “Maps world” has been the prevailing mindset for a long time. However, with an increasingly uncertain, volatile and more complex environment, the need for increased agility and optionality in decision making and planning has come to the fore.

As a result, for organisations large and small across a wide range of ownership types and stages of development, a “Satnav” world is now more clearly emerging. Here Boards and Executive teams, are taking decisions closer to “Junctions” or decision points with better and fresher information and are doing so as much to maximise upside as to increase resilience and manage risk.

In this “Satnav” world at the point we set out we still know where we want to get to have our preferred and favourite routes. Yet we are also prepared and indeed expect to course correct or even to end up in a different destination if fresh intelligence along the way suggests a higher upside or less risky alternative. ?

The application of more Dynamic Budgeting and planning, supported by the introduction of mobile and integrated invoice and expense systems are just two of enablers in this shift. The latter may often be viewed as simply a way to enhance operational effectiveness through better “Spend Governance” and to bring direct commercial benefit through reducing legendary friction points for customers, suppliers and staff. Together with budget management capabilities, the automation of these processes can also support the provision of real-time visibility on the key data around strategic variables as well as enhance predictive analytics.

It could be tempting to think that all of this is simply about a series of process improvements and refinements to a well-established way of doing things. That would be to seriously underestimate the shift that has been taking place. Especially in regard to what this means for the culture of organisations and their boards and the interaction between boards and executives.

Living the dream of better decisions, increased agility and having fewer frustrating moments enroute are the prizes but winning them is not without its challenges. Winning these prizes depends upon the supporting reality of the right systems, processes and governance. All of which in turn depend upon a shift in culture and mindset. Cultures with an open mindedness to change, a problem-solving mindset and where the board and the executive have a strong enough relationship are likely to find it easier. As are those with data savvy leaders who already combine well evidence-based decision making in an entrepreneurial way.

Many who have got into Dynamic Budgeting have done so incrementally. Perhaps starting with a lock step approach to spending. That is, we’ll only commit to that investment if other things are in place at the time, for example we have cash of X, gearing of Y or the capabilities in place etc. Revising budgets and forecasts every quarter or even month and taking a less rigid, decision tree rather than calendar based, approach to investment and resource allocation is the way many survived the pandemic. Unsurprisingly many smaller and high-growth businesses or those in more volatile markets were early adopters of this approach.?

Some have used Dynamic budgeting to seize market opportunities to try and balance upside and risk.?Then others have used it to help drive organisational transformation as well as to completely re-engineer business models and relationships with key stakeholders including customers, suppliers and staff.?

It’s hard to find any robust quantitative analysis of the benefits. In part I guess because it is being applied in a variety of ways. The uncertainty and volatility of the early COVID years forced many to adapt and enter this brave new world and to learn as they go. With a little more time, there is likely to be more research on how this has gone, which elements have been the most successful and which are becoming more common practice.

Adopting Dynamic budgeting affects culture. The big cultural wins are the success that comes with making better decisions and greater agility but getting there can result in some turbulence. Improved flexibility, freedom and opportunity combined with the entrepreneurial feel of being able to go faster not just slower when conditions suit can also provide an energising boost. As MIT Sloan Glassdoor, Mckinsey and others have shown through COVID, employees tend to value agility highly.

On top of this, many finance departments have changed what they measure as well. Data from Concur? Detect by Oversight, a solution which simplifies and streamlines auditing by automatically reviewing expense and receipt data to identify fraud, mistakes and policy violations, shows that employee spending patterns have changed dramatically in recent times. This means if businesses are still measuring their employee spend programmes in the same way they have always done, they may not be getting the answers they need. This means it is time to refresh the KPIs that finance measures to ensure they address modern issues.

For some execs and non-execs, the shift from the tight guardrails and predictability of the maps world can make them queasy and uneasy. Leaders and managers within the business may also feel less autonomy. High command and control cultures in what have been more stable markets can find this tricky, especially if they are public companies.

Another interesting cultural challenge is for those moving between boards or executive teams. Most of us have lived our lives in the maps world and the simplicity of judging on whether they are on budget or plan and the fact that most organisations have operated in a familiar way when it comes to budgeting and planning is comforting and provides, albeit sometimes illusory, the feeling of greater control.

Patrick Dunne

Experienced Chair and author of the award-winning book “Boards”.

This article has been sponsored by SAP Concur solutions – industry-leading technology that automates travel, expense and invoice spend processes. The fee will be donated to Warwick in Africa, a charity which supports teaching and training teachers in townships and rural areas in Ghana, South Africa and Tanzania.?