WANT TO KNOW MORE ABOUT PERFORMANCE- BASED BUDGETING? Attend my course at the Texas Municipal League offices in Austin on February 20. For more information, visit www.tml.org.

The Game of Budgeting

November 2008

Savvy managers can figure out how to get their way with even the most stringent budget. Some call it “working the system”. I call it game playing. No matter how hard the budgeting department works to prevent games, eventually the managers will figure out a way to get what they want anyway.

For instance, a regional manager for a national postal carrier was awarded a hefty bonus for every year that he exceeded budget expectations. His budget was created on a three-year cycle. And his actual—not his projected—budget in the last of three years, became his budget for the next three years. See the game potential here? For the first two years, he knocked himself out in order to earn his bonus. And in the last year, he busted the budget wide open by underperforming. This way, the subsequent three years would be easier to deal with and more likely to generate bonuses. Smart.

The nature of budgets = natural human game playing

Every budget generates a game. Part of this is due to the nature of budgets, a budget’s inherent character. Budgets are designed to project the future, allocate scarce resources, and assign and ensure accountability. However, these inherent characteristics cause some pretty wacky behavior on the part of managers. Here are some common inherent characteristics of budgets and their resulting games:

Inherent characteristic: Budgets involve an uncertain future

Resulting game: A constant push/pull between the glass-is-half-empty folks and the glass-is-half-full folks. If the pessimists rule the budgeting process, the projections are likely to be overly conservative. If the optimists rule the budgeting process, the projections are likely to be far-fetched and unrealizable. In general, accountants and finance folks play the role of the conservative pessimist (or at least that is what they taught me in school—what they were teaching the Enron guys, I’m not sure) and salespeople tend to be optimistic because they listen to those tapes on the way to work that instruct them never to take no for an answer. Who is right? Depends on the year. Usually, neither of them is right, both of them are wrong. It would be ideal to find the true number in the middle, but who are we kidding?!? We are projecting an uncertain future and your guess is as good as mine.

Inherent characteristic: Budgets involve the allocation of scarce, precious resources

Resulting game: The schmoozers get more goodies. The gal who gets her way in your organization knows how to sell her ideas to management. What is her secret to getting her way? Playing golf with the boss on Saturdays, whining and crying on alternating Fridays, kissing-up every chance she gets? Effective schmoozing differs by organization. In an organization run by accountants, the winning schmoozers are those that can convert their desires into a multi-tabbed, complex spreadsheet. In an organization run by social workers, successful schmoozers will sell their budget by engendering empathy or emotion.

Inherent characteristic: Budgets measure performance

Resulting game: Whatever gets measured gets done—even if it is stupid. A classic example of this is the “use it or lose it” rule governing some budgets. The federal government is particularly prone to this wild way of measuring success. They reason that if you didn’t use up your budget this year, you won’t need as much next year. So if you don’t use it, you lose it. This focus on measuring the wrong aspect of budgets—basing budgets on some arbitrary calendar deadline instead of what people actually need—causes government managers to spend their remaining budget on silly things. When I was with the State Auditor’s Office in Texas, I was tasked with visiting small state agencies at year-end to make sure they weren’t wasting all of their budget on frivolous things in the last few months of their operation. One agency had actually spent its remaining budget for office supplies for reams and reams of paper. Everyone’s office was packed with boxes of paper because the supply room was too small to hold it all. People know that they are doing something stupid but they will do it anyway because the system is set up to punish them if they don’t.

Inherent characteristic: Budgets involve numbers and math

Resulting game: The accountant or budget analyst ends up creating the budget. I once met a woman who confessed to me that she got a rash every time she did math. Some evil math teacher had scared her away from numbers when she was very small. Not good. How does an aversion to math impact the budget process? Well, all those folks who say things like, “I don’t do numbers; I’m an artist.” Or “I have successfully avoided budgets all my life, no need to start now.” are going to make the accountant or budget analyst work out the numbers for them. And this means that the front-line manager—who is ultimately responsible for meeting the budget—can blame the accountant if they don’t meet the budget. All they have to say is, “Oh! We are over budget? I can’t believe that Suzy the Budget Analyst would create such a ridiculous projection. Of course, I’d never be able to live up to that!” Smart game. Very smart game.

A never-ending game of whack the mole

What do you do about these inherent weaknesses and games? Well, you can design steps into your budget creation and monitoring system that helps keep these games at bay. And you probably should do something about the more obvious ones or no one will take the budget seriously. But at some point, trying to outsmart the managers at every turn will be like playing the game of whack the mole. As soon as you take care of one game, another will pop up in its place. Why? Because people are smart and want what they want. And they don’t like budgets or restrictions.

So keep an eye out for craziness, name it, deal with it, and keep refining your process. But don’t be too hard on yourself if the occasional rogue mole pops up. Only someone obsessed with getting exactly what they want could have come up with that one!