The Situation

The vast majority of all organizations engage in some form of annual budgeting. Since this is done every year, since it determines the amount of resources available for each department and since its value goes unquestioned, budgeting usually exerts more influence on what gets done than a strategic plan. This is one reason why most strategic plans do not achieve their goals. There is no organizational mechanism to drive the strategic plan through the budgeting process. The strategic (bigger picture-longer term) thinking and the tactical managing (shorter term-narrower picture) of the organization are disconnected. As always the tactical is more specific, more immediate and more tangible in its urgency and its payoffs. For this reason the tactical tends to usurp the strategic. Without strong linking mechanisms between these two worlds, the strategic drifts out of focus and becomes less relevant.

Another reason the tactical tends to take center stage is that creating and controlling the budget is a responsibility assigned to an individual—usually someone who pays attention to detail and follow through; someone who is primarily concerned with the budget balancing. Most organizations have no comparable strategic role. A team creates the strategic plan, but no single individual is assigned the responsibility of implementing it. The budgeting process, on the other hand, is the heart of the CFO’s responsibilities.

You might think the CEO would be the strategic leader in the budgeting process. This at times does happen, but too often the CEO does not fulfill this responsibility for several reasons:

• The CEO is distracted by the "next new thing," and the next new thing often undermines the budget and the strategic plan.

• The CEO is a good strategic thinker, but is not at home with the type of systematic follow-through needed to achieve implementation. The CEO’s natural management style is not strong in detail and follow-through.

• The CEO has ultimate responsibility for financial performance and gives in to budgetary constraints and gives up on strategic goals.

• The CEO is sufficiently uncomfortable with the numbers, and so delegates the budgeting process to the CFO.

• The CEO is uncomfortable with the conflicts that arise in budgeting, has no process to resolve them and thus avoids them. By default the CFO resolves conflicts, or they become a battle whose outcome is determined by force of personality or seniority.

The result is that strategic thinking does not drive budgeting. Departmental objectives are not sufficiently driven by broad institutional objectives and strategies, and are too responsive to the budgeting process.

The Opportunity Driven Enterprise

Another disconnect occurs when the organization is largely opportunity driven. A vision and/or mission may exist, but these allow a broad if not unlimited range of activities. Overall objectives and grand strategies may exist, but experience reveals that these are regularly added to or modified to such an extent that they are unfocused, unclear to all, and often poorly understood.

This type of disconnect is typical of the entrepreneurial led, often high growth organization where the leader is continually scouting for new opportunities to tame. Taming often consists of fitting a new wild animal into the operating plans without concomitant increases in resources. This somewhat undisciplined process contributes to the statistics that attribute over 70% of failure at the CEO level as failure to implement strategy—not failure to think strategically. Opportunity driven organizations regularly dilute their resources and lose their people because they do not engage in deciding what not to do, only in what to add. Thus money and people are spread thin and burn out.

The Need to Connect the Strategic and the Tactical

An organization may have all of the elements that make up good strategic thinking:

• Vision and Values: An inspiring long term picture of our future.

• Mission: Key opporthreats, our markets, their needs, our products/services.

• Objectives: Organization wide targets to satisfy our constituents (visitors, donors, the community, etc.) this year and long term.

• Grand Strategies: How to achieve the Vision, Values, Mission and Objectives; especially how to provide unique value in our constituents’ eyes.

We refer to this combination of elements as the organization’s VVMOS.

The organization may also have the elements of effective tactical management:

• Resource Allocation: budgeting of money, people, space and equipment for each function or department

• Measurement: measuring the key indicators for each organizational and departmental activity.

• Action: Doing the work and producing results.

• Review and Action Planning: ongoing review of results and adjustment of activity.

The challenge is to connect these elements in a way that the VVMOS drives the work of the organization, and that the work, in turn, produces results that move the organization in the direction of its VVMOS. Many good strategic plans fail because there is no process to link them to work that actually gets done.

Cascading a Plan to Monday Morning Actions

Being able to convert a strategically thought out plan into the specifics of Monday morning actions is one of the hallmarks of a successful organization. Creating departmental objectives is the key. Departments or functions create their own objectives in response to the organization’s VVMOS. It is valuable to consider the CEO as a function so that the CEO behaves as a department in deriving objectives. This helps to better integrate the opportunity driven CEO with the other departments. The objectives developed are then rigorously tested:

• Will these departmental objectives in sum accomplish the VVMOS?

• Do we have the best balance of departmental objectives to achieve the VVMOS?

• Have we created departmental objectives that are full drivers of the VVMOS, rather than simply being justifiable under the VVMOS?

This process invariably generates conflicts. This is the time for the leader to model the process of openly addressing conflicts through a collegial dialogue. This is also the time when the organization’s leaders come to fully understand the VVMOS and their implications. The CEO plays a key strategic leadership role in resolving conflicts and educating everyone. This whole process prepares the departmental leaders for the next step—budgeting. Without this preparation the departments will budget in a vacuum. They will focus on their own needs rather than the organization’s needs as expressed in the VVMOS. And since they have not addressed their differences constructively, conflicts will go unspoken, underground or be addressed indirectly. All of this will drag out the budgeting process, which will fill in with tactical input.

High Speed Budgeting

The many month agony that many organizations go through to negotiate a budget has become archaic. If you spend too much time serving the budget, it is clear that you become a business of the budget. You lose focus on your VVMOS and the work that is done to drive them. Here is how a few organizations have changed their budgeting process to speed it up. A top team announces or reaffirms the VVMOS and then asks each department to identify the most important things it must do to achieve the VVMOS, and the cost of doing those things. Each department has a maximum of 25 budget lines. This is done in a week. Then all the unit leaders and the top team sit together for 2-4 days and work out the objectives and the budget. Conflicts are resolved on the spot. This level of speed lays a foundation for responding to any changes in real time, not bureaucratic time. This process collapses the departmental objective setting, described under "Cascading A Plan" above, and the budgeting process into a very fast and dense activity.

Stretch Budgeting

In a typical situation, budgeting might be characterized as a series of one to one negotiations, usually between a department leader and the CFO, or whoever is in charge of budgeting. The process is iterative as each negotiation impacts future ones. Sometimes an end run occurs, when a department leader appeals directly to the CEO.

Some potential side effects of this process are:

• The CFO is focused on the budget and may not drive the strategy.
• The departments are in competition for resources.
• Undue attempts are made to influence the CFO or Director.
• There is a sense of arbitrariness in the decisions.
• Game are played.

Stretch budgeting works in a different way. All the players meet in one room so everyone hears everything. They receive information and negotiate in real time. Here is how it goes. Each department prepares its budget. The CFO sums the budgets and says ‘expenses are 20% over projected income’.

The facilitator of the meeting—helpful if its not the CFO or Director—asks those who generate income what it would take to produce 5% more income. The development director says:

• The curators and exhibit developers must involve me early on in each exhibit and keep me up dated as the exhibit evolves.

• I want Bob, Cynthia and Harold to be available for say 20 hours a year to visit donors at the donors' convenience.

• I need a new software system.

• I need more contact with the board and support from the director in pushing the board.

Each of these implies time, money or behavior change from others in the room. The facilitator opens a dialogue with these folks to explore, then negotiate agreement on the development department’s requests.

If no agreement is reached, it is clear that the budget will have to be reduced by 20%. If this is the case, it is a self-imposed constraint because the team could not or would not agree to the items needed to raise more income.

In the vast majority of cases the team agrees to the requests of the development department. Now the challenge is only a 15% cut.

Nest question: "what would it take to generate 10% more income?" Same process. Now they are down to a 10% cut. Eventually, they reach a point where all agree they can’t go further in increasing income. So they must cut the budget by, say, 5%.

Now they begin looking at the strategic plan and weighing what drives it more and what drives it less. They work at this analytically and strategically, seeking voluntary reductions given in good spirit. Sometimes a department says "we will reduce our new equipment budget, but would like your support in expanding this next year." When the team agrees to this there is more likelihood the item won’t be neglected next year. In other cases creative financing and the timing of expenditures will save the 5%.

If they get stuck, the director says ‘o.k. if we can’t think our way to saving 5%, I’ll take everything I’ve heard and give you a decision about what gets cut. But before I do that shall we give it one more try?’

The net results of Stretch Budgeting include:

• Start the year with a balanced budget.
• High commitment that it is the best you can do.
• Performance commitments are to one another, not just to the CFO.
• Participants understand how their various efforts link and interact.
• Reduction of departmental infighting.
• Significant increase in team work.
• Done thoughtfully, not arbitrarily: I understand how and why we did it this way.
• Establishes a process and intellectual understanding which becomes the foundation of future budget reviews and any adjustments during the year.

Focused Budgeting

Often the budgeting process is compounded in difficulty because new objectives are added and old ones are never deleted. Staff become expert in justifying all historical activities under the current VVMOS. The following details an in depth process for refocusing and cleaning up departmental objectives, activities and budgets.

This analysis should be completed for each program, activity, exhibit, special event and facility in the museum. By and large, every item which requires more than about one or two percent of the budget should probably be analyzed this way. In total, when the analysis is done, you want it to have covered 90-95% of the activities which consume staff time, which consume 90% of the space, and which consume 95% of the budget.

1. Make a list of all the separate items in all of your current vision, values, mission, overall objectives, and grand strategies, against which this analysis will be tested. These should be written out and agreed upon by all staff, and eventually by all board members and the CEO.

2. As you analyze each activity state specifically the extent to which it supports the VVMOS items listed in #1 above. Specifically connect each of the items in #1 with each of the elements of the activity you are analyzing. Thus, if your mission says, "Expand our range of services" you should specifically point out how the area you are analyzing does or does not support this. You should be prepared to quantify its strength of support. In other words, you could say that a particular program or project is focused on expansion of services to a specific degree: "peripherally, somewhat, modestly, or strongly."

3. Indicate which of your chosen market segments this activity supports and to what degree, i.e. "peripherally, somewhat, modestly, or strongly." You should specifically identify the value/need for the market segment from their point of view, and provide your best guestimate of how strongly and how well that value is delivered. If you do not have any data from your market to support what the need is, or how strongly or well it is received, you should begin creating plans in the next year on how to assess these areas.

4. List the direct income that is generated specifically because of this activity. This should be listed in hard dollars that can actually be counted. If there are soft dollars or in-kind benefits, those should be listed specifically, but separately.

5. List indirect income that might be derived from this activity. For example, circulating your newsletter may produce no direct subscription income but it may produce indirect income by retaining clients, or inducing new people to your organization. These indirect relationships should be tested, however. Often the hoped-for connection does not exist.

6. List all of your ideas where this activity may have potential for generating direct or indirect income in the future. Specifically list your ideas, the cost of implementing those ideas, and the expected income.

7. List the full cost of this activity. This should include dollars expended for materials, equipment, labor, including benefits, and a pro-rata cost share of facilities/utilities.

8. List the competitors for this particular activity. In some cases there may be none. In other cases there may be other organizations or activities that compete directly. In addition, there may be indirect competitors for the time and money of your customers who meet their needs with different products or services than yours.

It's probably appropriate for every department head to draft up at least one analysis on a major activity and then sit together and compare notes to see if they were evaluating things in about the same way. This should help them go back and create further analyses with more uniformity across departments. An interesting alternative would be to have someone from department "A" actually do the analysis of department "B." This would provide some objectivity while at the same time provide a specific opportunity for cross-departmental learning and training.

Remember, the whole purpose of this activity is to decide which activities most help you achieve your mission and objectives. This then lays the foundation for prioritizing and budgeting.