• Budgeting
  • McKinsey & Co.

Ten Techniques for Agile Corporate Resource Allocation

These tested ideas can help organizations overcome inertia and implement their strategies more effectively, says McKinsey & Co.

During these discussions, spend time on how you’re going to make the benefits tangible and visible for employees, since that’s what galvanizes support in organizations. A major Latin American oil-and-gas player reallocated 30 percent of its capital-expenditure budget in the first year of a new CEO’s tenure. She believes that when people started seeing where the money was going — new service stations, smart uniforms, and more product diversity — their initial resentment of the budget cuts turned into pride about the company’s fresh, service-oriented philosophy.

4. Develop a formal “counteranchor.”

One common cognitive bias, known as “anchoring,” is to base next year’s allocation uncritically on the previous year’s. Leaders can encourage debate by, for example, circulating independent analysts’ reports on the growth outlook for their different markets. One consumer-goods company uses external growth and profit-potential data, down to the level of individual cities, to create a hypothetical allocation of advertising expenditures. Often, it is so different from the company’s current allocation that it shifts debate from whether spending should be 110 percent or 90 percent of last year’s figure to whether it should be 200 percent or 50 percent.

5. Change your strategy-setting rhythm.

While companies rightly want their deliberations on strategy to influence resource shifts, too few allow sufficient time between the conclusion of the strategic-direction setting and the locking down of resource-allocation decisions. This approach leads to allocations that are very similar to the previous ones, because the planners then say, “Our bottom-up planning process has spoken, and it’s too late to change now.” Better to share unrefined strategic direction with the wider organization early on rather than wait to issue a more complete one that arrives too late to make a difference. One industrial conglomerate starts developing its strategy in May but doesn’t begin the budget process until November, giving businesses ample time to reflect any strategic-priority shifts in the way they allocate their capital-expenditure dollars.

6. Build flexibility into the process.

Opportunities — whether to nurture existing businesses with additional capital or to acquire new assets at knockdown prices — often pop up once annual allocations have been locked down. One large natural-resources group allows its CEO to allocate 5 percent (in practice, usually well over $1 billion) of its capital expenditures at his own discretion. A biotech company creates two budgets, red and blue: one based on business as usual, the other ready to be implemented quickly if a pending major clinical trial has a positive outcome. It’s also worth considering the creation of a separate “rolling” budget: a discretionary pool that can be allocated over the year rather than at a single point in the calendar. This flexibility is particularly important for volatile emerging markets and cyclical industries, where the benefits of moving resources quickly are often high.

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