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The Last Mile

Why is it still so hard to engage line managers in budgeting?

Don Durfee
CFO Magazine

January 10, 2007

It's a warm November day on the plains of west Texas, and Dale Hosack, the 47-year-old CFO of bottle-maker Western Container Corp., has just finished an amiable conversation with two of the company's factory managers.

Hosack is in a good mood — surprising, given the time of year. At Midland-based Western Container, November is the heart of budget season, the annual endurance contest many executives and employees dread all year. It's understandable. The budgeting process is often a descent into frustration, punctuated by long conference calls, high-decibel discussions, and a tug-of-war between the finance department and business managers.

Indeed, until three years ago, executives at Western Container, a division of Coca-Cola Enterprises, grappled with a "monstrosity of a budget" that took the form of a 52-tab Lotus 1-2-3 spreadsheet. Operations managers dreaded the planning process — and it showed. The budgets they submitted were often unrealistic or riddled with errors. Worse, they believed that corporate finance didn't value their input. "We'd spend all this time on our budgets, but someone at a higher level would just stick in numbers they thought made more sense, without any dialogue with us," says Bill McDonald, the company's director of operations and formerly the general manager of Western Container's Hattiesburg, Mississippi, factory. "It was their budget, but we were held responsible."

That began to change when Hosack was hired as finance chief in 2003. He bought a new budgeting system from Microsoft (Forecaster) and changed the process to give general managers more say over the final numbers. Today, finance spends less time fixing broken spreadsheets and more time talking with operations about its needs and assumptions. And as general managers see finance more willing to listen, they take the process more seriously.

As a result, projections are more accurate and operations budgets contain fewer mistakes. Moreover, because the final document reflects their input, plant managers take ownership of the targets, says Hosack. "I no longer hear, 'That's not my number.'"

A thousand miles away, in the icebox known as Richfield, Minnesota, North America's largest consumer-electronics retailer is attempting a similar feat. Managers at Best Buy are currently flipping their top-down planning process to glean greater insight from store managers. "Two years ago, if you asked any of our 850 store managers how the budget was created, they would have said that finance just sequestered itself and came up with the numbers," says Marc Gordon, vice president of finance at the $31 billion retailer. "Now they have visibility and an opportunity to understand the assumptions. They feel like the budgets are theirs."

Western Container and Best Buy are achieving what CFOs have attempted for years: relevant and accurate budgets. Most corporations still don't come close. For all the talk about better budgeting, the budgeting process remains a terrifically flawed pursuit, one that benchmarking outfit APQC says takes the average company 60 days to complete.

In the typical budget tango, executives push hard for revenue and profit goals — in theory to challenge operations, in practice to please shareholders. Then line managers push back — in theory to reflect the reality of the market, in practice because bonuses are so often linked to budget targets. And so it goes, until everyone involved in the dance is as mistrustful as they are exhausted.

Every finance chief has run into this problem, says David S. Smith, CFO of Standard Microsystems. "No one likes to talk about [the lack of input from line managers]," he says. "With all the advanced technology we have, you would think something that sounds so simple would, in fact, be easy."

What's Going On
It isn't, a fact that can be seen in a new poll of finance managers conducted by CFO and The Buttonwood Group, a performance-management consulting firm. According to the survey of 150 finance executives (see "Minimal Engagement" at the end of this article), fully 57 percent say line managers at their businesses do not personally key in their budget data. Further, very few have managers who provide variance explanations without help from finance.