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Taking Small Steps Toward a More Strategic Budgeting Process

Posted April 5, 2012 10:28 AM by Mark Cutler

Recently, as we were helping a client design and implement their balanced scorecard, they asked us for helping in aligning their budget to their strategy. The thinking was that if they were going to take the time and effort to implement a strategy management system across a large organization, they wanted to ensure they were funding strategic initiatives.

They explained their budget as "cost-plus," meaning that each year the finances are divided up the same way as the previous year, with any additional dollars added on top of that and that no unit's budget varied by more than +/- 5%. In this budget environment and as they were beginning their budget cycle, the client wanted to know what they could do to make their budget process more strategic.

The StratEx Concept

While expecting a large organization to overhaul its budget process in a matter of weeks to align to a still-in-design-phase balanced scorecard was not an option, we introduced the concept of Strategic Expenses, or StratEx--an investment category that treats intangible expenses with the same discipline as operating or capital expenses.

We then suggested looking for the areas of the budget where there is traditionally some flexibility. The theory being that after the traditional budget allocations for ongoing programs that have to be funded as well as overhead and other fixed costs, there should be a pool of funds set aside every year for new projects. Even if this pool of funds is a mere 3%-5% of their overall budget (or less), it is still a good place to start applying the StratEx concept.

An organization with this small funding pool could revise their evaluation criteria for allocating funds to projects. Rather than funding projects based on managerial whim or who argues for their project the loudest or most persistently, they could use the strategy map as a lens through which to determine what projects to fund.

Key projects that support strategic objectives and will help move measures toward their targets would be given priority as strategic initiatives. For projects that don't align to strategic objectives, the organization could start to have the conversation about if and why they are necessary. In either case, implementing this type of analysis would move an organization toward a more strategic budgeting process.

Filed Under Balanced Scorecard