• Strategy
  • CFO Magazine

Budgeting in the Real World

More companies are writing budgets that reflect strategy and reduce frustration.

To integrate the process, each business reviews its strategy, proposed changes, and investments at the end of every second fiscal quarter with CEO Steven A. Ballmer. The third quarter begins with a “deep midyear review” that examines operational trends by geography, business lines, and channels. And based on this “bottom-up view of what the next 18 months might look like,” says Chardon, the corporate office begins setting targets for each group. That process, he says, “basically culminates in a conversation between [Ballmer] and each business group CEO about the ambition for the next year. And that ambition frames the budgeting process.” Only then does the actual budgeting — roughly an eight-week effort — begin at each of Microsoft’s businesses.

Less Is Always More

Of course, the simpler the budget, the easier it is to tie to strategy. Companies have had a surprisingly difficult time accepting that less is more, but those that do often see dramatic results. Such was the case at Erickson Retirement Communities. “We’d try to load the data into our ERP, and a third of the spreadsheets would get kicked out because something was wrong,” recalls Craig Erickson, vice president of financial planning and analysis at the private, family-controlled company.

But when new, Web-based budgeting software was introduced in 2002 (in this case, Hyperion Planning and Essbase XTD), the project manager resisted the temptation to simply replicate the existing spreadsheets. Instead, the budget itself was revamped to capture less detail.

“That was a dramatic process change,” says Erickson. About 90 percent of the participants at 11 different retirement communities now use the same basic 15 accounts. “Before, our dining departments would probably budget 50 different accounts — amount of frozen fish, fresh fish, baked goods, and so on,” he says. “All we really care about is what the food cost per meal.”

Likewise, the company replaced more than 20 position types in the dining department’s labor budget with just four categories: a low-paid and high-paid category for both hourly and salaried workers. Instead of looking at 20 specific positions, says Erickson, the company now measures the number of full-time employees (FTEs) needed to support 100 residents. “A metrics focus is now driving the budgets: when you have 900 residents, you should have X number of FTEs,” he says.

In both cases, the result was less work and better metrics for comparing communities. (It takes an average of seven years for each retirement community to reach a mature level of 2,500 residents.) Once the new system was in place, says Erickson, it quickly became apparent that one campus with 900 residents was paying 25 percent more per meal than another of the same size. “Our use of metrics allowed us to see that this was entirely due to staffing ratios. The way we were budgeting before, we couldn’t see that, because everyone’s head was in the details,” he says. “Our budgets were very precise. But that didn’t mean they were accurate.”

Making Managers Accountable

“Simplification also leads to greater accountability,” observes Serven, adding that “there are fewer places to hide.” Indeed, performance reviews at Erickson Retirement Communities rely heavily on whether managers exceeded the average performance metrics for their size facility, though equal weight is also given to resident- and employee-satisfaction surveys. “In the past, managers had a tendency to pad their budgets a bit so they would be likely to come in under budget,” says Erickson. “With a metrics-based comparative approach, someone who tries to pad their budget is essentially saying, ‘I cannot perform at the same average level as my peers.’”

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