"When you realize that the net you're building is 20 yards behind you, it becomes a lot easier to decide to fly without it."
So says Kurt Kuehn, CFO of shipping giant UPS. He's describing the company's new view of budgeting, planning, and forecasting. "Normally, we are very obsessive about building good and accurate plans," he says, but as the recession dragged on, "we realized that trying to build a forecast was almost a waste of time. We didn't have enough precedent or trends to do anything viable."
The past two years have turned budgeting inside out at most companies. As sales fell and markets dried up, spending levels had to be continuously revised, and visibility was almost nonexistent. Companies tried all manner of workarounds and improvisation, and most came away with the same conclusion: it was time to rethink the whole thing. How could budgets be made more flexible? Who should be involved? What could be included or left out? And how often should the effort be undertaken or revisited? Now, with the recovery under way, many finance executives say the changes they made to their budgeting-and-planning processes out of desperation are here to stay.
Flex Spending
That's music to the ears of Steve Player, founder of consultancy The Player Group and program director of the Beyond Budgeting Roundtable. He has long encouraged companies to abandon their budgets, so in a sense 2009 was, as he says, "a watershed year. A lot of people were de facto running their companies without budgets. They made the change out of necessity and found it isn't so hard."
Indeed, in 2008, Kuehn and his colleagues at UPS decided to essentially abandon their budget. Instead, they adopted a more flexible approach focused on operating leverage, urging every function and business unit across the $45 billion company to adjust their costs to declining revenues. Rather than tying people to budget numbers that were rapidly disappearing in the rearview mirror, "we sent a very broad message that the goal was to make sure that as revenues shrank, costs were also reduced," says Kuehn.
Managers committed to the dramatic change without much hesitation. "There was so much fear in the market that we got people's attention quickly," he says, although he acknowledges some challenges in helping people think through what spending could be cut or delayed. Eventually, however, "the fact that everybody was in it together made it less painful when we did have to make cuts."
UPS reported a strong first quarter that trounced analysts' estimates, but Kuehn hopes to preserve this new mind-set. "Rather than assuming a traditional budget increase year over year, now the assumption is that your expenses won't increase. We're going to continue to constrain expenses wherever possible," he says. Kuehn plans to watch for opportunities to invest in the business during the recovery, but, he adds, "we've got to make sure these are conscious decisions [to invest], rather than everybody going back to a given annual budget increase."
Higher Frequency
In addition to taking a more flexible view of what type of budget suits their companies now, many CFOs are stepping up the frequency of budget revisions and forecasts. "The idea of completing a budget cycle and then putting it to rest and monitoring to that set budget has become fairly passé, based on what we learned in 2009," says Janice DiPietro, national managing partner, consulting, at executive services firm Tatum. "The world is just changing too fast."
Player urges CFOs to adopt a rolling forecast that focuses on high-level numbers rather than thousands of individual line items. "One of the problems with budgets is that people try to jam a lot of detail in there. When you've got too much to do, it's best to take a step back and focus on the key drivers. By taking the forecast up a level, you have time to think about the important stuff."
DiPietro agrees, although she says too few companies have managed to make the switch. "There are organizations that do have a more rolling approach, but it's not mainstream. And frankly, that is the approach companies need to take," she says. "The process needs to be more frequent."
Player also advocates developing numerous scenarios. "If you can't predict the future, how can you at least be ready for it?" he asks. "You can do that by understanding the different possible futures — by constructing scenarios in a wide range." While most companies that engage in scenario planning construct three possible outcomes, Player suggests five to seven, including an upside "so good you couldn't possibly spend all the money you're making" and a downside "so bad that it threatens the company's survival."
Lisa Calise Signori, director of administration and finance for the City of Boston, says she has learned that it's never too early to start the planning process. In fact, "I would say we are in a perpetual planning cycle," she says. "There's no longer such a thing as budget season. It's year-round planning and year-round adjusting."
A Team Effort
Engaging employees throughout the company in the budgeting process — and making sure they understand its importance — are also critical steps to creating a more relevant and useful plan, says DiPietro. "You need a commitment from the most senior executives that this is a strategically important thing to do," she says. "It needs to be more than a financial exercise. If the organization thinks that budgeting and planning is something the CFO makes us do, that's not going to work."
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