Principled Innovation LLC

The greatest exercise in organizational fantasy

July 23rd, 2006

This is how a conference speaker I heard a few months ago described the budgeting process, and I could not agree more. That’s why I am so pleased that Scott Briscoe, Acronym’s co-blogger-in-chief, has audaciously pulled back the curtain and exposed the true nature of this mindless exercise in futility. In his post, Scott eloquently expresses the deep frustration with traditional budgeting practices that so many association executives feel but do not dare mention for fear of being branded as profligate, incompetent or irresponsible.

The basic problem with budgeting is the underlying and inherently false assumption that our goal should be to achieve the fixed dollar targets presented in the budget document itself. We must not forget, however, that budgets are nothing more than the numerical expressions of a leadership group’s theory-in-use about how its organization will perform financially over a given period of time. It is a theory based on a combination of assumptions and facts, thoughts and feelings, strategy and tactics. In the end, an organization’s budget represents a best guess at what the financial future might look like if everything goes according to plan.

Ah, and there’s the rub. When was the last time everything went exactly according to your organization’s plan? (If the answer is anytime in the last decade, your organization is not stretching itself and is in for a rude awakening in the very near future!) Given the dynamic nature of today’s strategic landscape then, we must look upon resource allocation and financial stewardship as a dynamic process as well and seek to maximize financial performance accordingly. In other words, we should stop managing to budgeted targets and lead toward the best possible strategic outcome for the organization as a whole.

How do we do this? Let me make three specific proposals:

• Let strategy drive resource allocation–By getting clear on your association’s 18-24 month strategy, you can make intelligent investment decisions across the board. Traditional strategic planning gives you a litany of tasks to accomplish, an approach that encourages non-strategic spending or investment choices that are inconsistent with prevailing marketplace conditions. Dynamic strategy demands dynamic resource allocation to capitalize on new opportunities and support innovation with an eye toward creating organic growth.
• Get rid of budgets and use a system of rolling financial forecasts–Budgets are unavoidably retrospective in their view, which is not an asset in a time of profound, accelerating and intensifying disruption and discontinuity. In their place, your association should develop rolling financial forecasts that match up with its strategy cycle. In other words, instead of building a budget for the next 12 months based on what happened in the previous 12-24 months, create a flexible financial forecast for the next 18-24 months based on where your strategy is designed to go and develop iterations of that forecast every three months. Do away with the annual budgeting cycle and create an on-going, future-focused resource allocation and financial stewardship framework that engages both staff and volunteer leaders.
• Identify and track no more than six critical financial performance metrics–If your association has a clear strategy, it should be possible for you and other leaders to identify the critical success metrics that must be consistently monitored. Scott identified one metric in his post that I would characterize as a universal indicator for all associations: cash flow. Other metrics will depend on the content of strategy and the nature of the investments made in executing it. It is hard to imagine needing more than six metrics in order to have a pretty good picture of how the organization is doing. And remember, the intention here is not to manage toward the reality of a particular forecast, but to lead the organization toward realizing its full financial potential.

Bringing about the end of traditional budgeting practices in our community will require a fundamental mindset shift among association leaders. Personally, I regard the creation of alternative approaches to association financial stewardship as a great opportunity to practice radical simplicity in our organizations, the kind of authentic innovation that will make a huge difference for our community in years to come.

Entry Filed under: Principled Innovation Blog, What's New?, Innovation, Associations, Extreme Makeover, The Association Innovator, Simplicity