Interview with Bob Paladino for The Performance Journal:
PPJ Q: Why do most traditional budgets fail? Is it from poor planning?
BP: Most traditional budgets fail because their exercises and activities don’t link to strategy, but rather extremely detailed line items. There is a lack between company strategy and allocation of capital that supports the company strategy. You end up with an accounting exercise that requires thousands of human capital hours and at the end of the day doesn’t have a lot of relevancy and can actually work against account purposes for the company.
Companies that adopt lean rolling forecasts, preferably linked to their balanced scorecard and strategy map elements, are really the ones who can accelerate in performance. The traditional budgeting has gone by the way side - it’s not as relevant today as it used to be. Companies need to act quicker, be more strategic and flexible. Traditional budgeting tends to straight-jacket that process.
PJ Q: Obviously the BSC has been shown as a leading management systems in translating business strategy into action in various functions of the organization, but how specifically can the BSC improve the budget/financial process?
BP: The principal reason for wanting to use the balanced scorecard in the budgeting and management process is that you have already determined your strategy, key objectives from your strategy and key measures, so wouldn’t it make sense to budget around those measures as opposed to having an entirely different set of measures that you budget to from a financial context? You have already done the heavy lifting when finding your objectives, strategies and measures, so what you do is budget to these - it’s a lot more efficient. It’s leaner and it’s more on point with strategy. Why track things like rent expense and electricity expense in your budget line-up when really what is more important is not those expenses, but to get on-time delivery to your customers, which is maybe a strategic measure on your Scorecard which you can budget for. There is a big difference between tracking lagging indicators which are all financial and tracking strategic indicators.
PJ Q: What types of metrics are used to measure the effectiveness of a BSC based budget?
BP: The actual measures themselves should measure whether or not your business is improving. We found where we implement the balanced scorecard against budgeting tied in with compensation in the HR process, we experienced improvement in all 25 measures anywhere from 10 to 400%. Customer satisfaction, for example went from a 3.5 on a 5-point scale to 4.0 to 4.25 points. Employee satisfaction went from the low 60s to the high 80s (percent). The question isn’t what type of measures to use the effectiveness of the scorecard, but understand that the scorecard measures itself.
To see Bob Paladino’s presentation, please click here.
In addition, read Carl DeMaio (founder of ASMI) and Bob Paladino’s article Realizing Business Strategies through Balanced Scorecard Based Budgeting. Read more.
