“When you realize that the net you’re building is 20 yards behind you, it becomes a lot easier to decide to fly without it.”
So says Kurt Kuehn, CFO of shipping giant UPS. He’s describing the company’s new view of budgeting, planning, and forecasting. “Normally, we are very obsessive about building good and accurate plans,” he says, but as the recession dragged on, “we realized that trying to build a forecast was almost a waste of time. We didn’t have enough precedent or trends to do anything viable.”
The past two years have turned budgeting inside out at most companies. As sales fell and markets dried up, spending levels had to be continuously revised, and visibility was almost nonexistent. Companies tried all manner of workarounds and improvisation, and most came away with the same conclusion: it was time to rethink the whole thing. How could budgets be made more flexible? Who should be involved? What could be included or left out? And how often should the effort be undertaken or revisited? Now, with the recovery under way, many finance executives say the changes they made to their budgeting-and-planning processes out of desperation are here to stay.
That’s music to the ears of Steve Player, founder of consultancy The Player Group and program director of the Beyond Budgeting Roundtable. He has long encouraged companies to abandon their budgets, so in a sense 2009 was, as he says, “a watershed year. A lot of people were de facto running their companies without budgets. They made the change out of necessity and found it isn’t so hard.”
Indeed, in 2008, Kuehn and his colleagues at UPS decided to essentially abandon their budget. Instead, they adopted a more flexible approach focused on operating leverage, urging every function and business unit across the $45 billion company to adjust their costs to declining revenues. Rather than tying people to budget numbers that were rapidly disappearing in the rearview mirror, “we sent a very broad message that the goal was to make sure that as revenues shrank, costs were also reduced,” says Kuehn.
Managers committed to the dramatic change without much hesitation. “There was so much fear in the market that we got people’s attention quickly,” he says, although he acknowledges some challenges in helping people think through what spending could be cut or delayed. Eventually, however, “the fact that everybody was in it together made it less painful when we did have to make cuts.”
UPS reported a strong first quarter that trounced analysts’ estimates, but Kuehn hopes to preserve this new mind-set. “Rather than assuming a traditional budget increase year over year, now the assumption is that your expenses won’t increase. We’re going to continue to constrain expenses wherever possible,” he says. Kuehn plans to watch for opportunities to invest in the business during the recovery, but, he adds, “we’ve got to make sure these are conscious decisions [to invest], rather than everybody going back to a given annual budget increase.”