For several years, I’ve argued that performance management is more than just budgeting. I’ve also pointed out that the term planning was often misused by software vendors whose products were mostly limited to financial planning (aka budgeting), rather than end-to-end resource allocation and management. And finally I’ve advocated outcome-based budgeting, rather than activity-based budgeting, so that the financial plan was more explicitly aligned with the strategic plan. After all, the budget isn’t really the plan; instead, it’s how you intend to invest to achieve your objectives.
A critical assessment of the current market suggests that things have improved. Most people acknowledge that performance management extends beyond budgeting to strategy management, profitability management and other performance considerations outside of finance. Most planning products support financial, headcount, and other forms of operational planning. Unfortunately, outcome-based budgeting is still rare and many organizations still don’t tie planning and strategy.
In “How chief strategy officers think about their role” in The McKinsey Quarterly, Dan Simpson, vice president, office of the chairman, at Clorox and the head of strategy and planning for 16 years echoes my sentiment:
People commonly confuse strategy and planning. Planning is primarily internal resource allocation and budgeting, which is clearly tied to finance. Resource allocation has to be tied to strategy but isn’t strategy in and of itself. Strategy should be focused on the marketplace and on customers and consumers.
One way to remove this confusion would be to use the phrase ‘resource allocation’, rather than planning, but I suspect that this change is impractical. Dan suggests another way:
At Clorox, we try to separate those conversations. One of the things we’ve done in the past is to bar financial components and exhibits from the first rounds of strategy meetings. That way, the conversation focuses on market competitiveness, rather than on internal resource allocation.
I like this idea insofar it makes sure that financial issues don’t bog down strategy development too early in the process. However, I’m not sure it goes far enough. How do we ensure that financial plans are explicitly tied to our objectives? Outcome-based budgeting seems a natural answer but, other than in public sector, it seems to have limited popularity. Software vendors are starting to tie strategy management products with planning products but that only supports the concept, rather than enforcing it.
Anyone have any good ideas on how to ensure budgets are tied to strategy?