Budget Remorse & Sandbagging

You manage a budget. You rarely overspend, showing slight, but noticeable savings year after year. You’re a professional manager, say, a Business Owner of an outsourced service.

What if you could end the year with significant savings from budget (>10%) , would you?

Experienced managers typically don’t. And they have good reasons not to. In most organizations there’s a penalty for being too good at saving money.

Budget Remorse

You work hard and come in under budget. During budget season your manager and Finance say “Well, they obviously had too much money for what they needed. We’ll make their next year’s budget that lower amount”.

Save money one year, penalized with less spend the next.

As a result, you’re going to spend all you’ve got this year, so you’ll have the same amount next year. Public agencies (city, county, state and federal) have this down to a fine art.

It still takes skill to stay in budget, but the organization may not get the most value for their spend. And if its a very static, stable spend, the Business Owner can pretty much coast through the year. Again, thinking about some public agencies.

Sandbagging

Of course some Business Owners work to overstate their annual needs during budget season just to create a layer of fat.

Then during the year they generate enough savings to earn their personal bonuses and look good. But organizations miss out on the big wins of real cost savings, because they don’t reward them.

And their bosses, having done the same thing themselves, often catch the Business Owner’s sandbagging when budgets are created.

Not Cashing Out Savings

Savvy Business Owners work around budget remorse and sandbagging by getting more from their budgets. They’ll manage costs downwards and then take those savings from budget and invest them in improvement projects within that year.

One manager told me he looks at a 3-year improvement window and figures out how to get there. Then he takes his under-budget funds and invests them in projects towards that 3-year vision. He gives his organization more value for their budget, and he’s given himself an upwardly mobile career path.

The Variables

Inflation, cost of living, scope change, and industry economics are all variables that require massaging budget and spend to fit.

The above aren’t the only two budget/spend scenarios. As you know, life is about infinite variety. But it’s interesting to think that a management goal, saving costs, should have a built in constraint.

How do you get and give the most for your managed spend?

~~~~~~

Chris Arlen
President, Service Performance

Technorati: budget, budgeting, cost savings, spend management

Add comment June 3rd, 2008