Budgeting is at the heart of how nearly all large corporations are
managed today. Therefore managers cannot be blamed if they don't care about costs as long as they stay within budget. At the same time we want to nurture entrepreneurial spirit and empower managers at all levels. Therefore, in addition to the traditional budgeting process, we may have to establish a more encompassing performance management addressing efficiency and productivity goals.
Let us look at two real live examples from airport operation of an airport with expected passenger and cargo growth:
Passenger Bus Operation: Based on expected passenger growth, there is budget to employ more staff this year.
Cargo Operation: The head of cargo operation has budget to expand the warehouse this year.
Both investments will not be ideal if the growth does actually not happen and if the growth only occurs during peak times.
Suppose we gave them efficiency targets, expressed as cost per Workload Unit (WLU). For the passenger bus operation the WLU would be number of passengers transported. For cargo operation it would be tons of cargo processed.
Now instead of following just the budget, the manager responsible for passenger buses manages his WLU cost by contracting drivers for buses from a transport company to cover the highest traffic peaks of the day. And the head of cargo operation defers an expansion because this would increase his WLU cost. He instead rents storage space in an external building until he has sufficient volume to keep his WLU costs on an acceptable level.
This approach provides growth-independent performance indicators, a simple and direct cost control and empowers managers to make entrepreneurial decisions. There may be some challenges to implement this model. Firstly, such a paradigm shift from budget control to efficiency targets creates resistance. On all levels. Secondly, the budgeting process will be more demanding because we will have a budget and WLU cost targets. Thirdly, it is important, but not easy, to choose correct WLU because they need to be relevant for the bottom line.
This model is not about getting rid of budgeting but about getting rid of the budgeting mindset. The potential benefits are extensive:
Let us look at two real live examples from airport operation of an airport with expected passenger and cargo growth:
Passenger Bus Operation: Based on expected passenger growth, there is budget to employ more staff this year.
Cargo Operation: The head of cargo operation has budget to expand the warehouse this year.
Both investments will not be ideal if the growth does actually not happen and if the growth only occurs during peak times.
Suppose we gave them efficiency targets, expressed as cost per Workload Unit (WLU). For the passenger bus operation the WLU would be number of passengers transported. For cargo operation it would be tons of cargo processed.
Now instead of following just the budget, the manager responsible for passenger buses manages his WLU cost by contracting drivers for buses from a transport company to cover the highest traffic peaks of the day. And the head of cargo operation defers an expansion because this would increase his WLU cost. He instead rents storage space in an external building until he has sufficient volume to keep his WLU costs on an acceptable level.
This approach provides growth-independent performance indicators, a simple and direct cost control and empowers managers to make entrepreneurial decisions. There may be some challenges to implement this model. Firstly, such a paradigm shift from budget control to efficiency targets creates resistance. On all levels. Secondly, the budgeting process will be more demanding because we will have a budget and WLU cost targets. Thirdly, it is important, but not easy, to choose correct WLU because they need to be relevant for the bottom line.
This model is not about getting rid of budgeting but about getting rid of the budgeting mindset. The potential benefits are extensive:
- It is a scalable approach to be used by all hierarchical levels. The higher the level, the more consolidated the view.
- Managers will start to manage differently. Before they make a decision with cost relevance, they will carefully assess the impact on your WLU costs, something they would not necessarily do with a budget.
- You breed entrepreneurs and it actually leads to a culture change.
- Managers will learn a lot about the composition of the costs of their work load units, because whenever the costs go up or down they have to find out the reason.
- Then, when they know where the big levers are, they’ll start to pull them to get a better correlation between production and costs.
- For the controllers it is much more simple to do their job. (if you ask a controller today, he will tell you that his function is, to make sure that the managers act like entrepreneurs).
- This is a self-regulating system: whatever happens to the production, the responsible manager will act immediately to stay within his work load unit cost targets.
