Driving the wrong behaviour
During the end of financial year, many organisations tend to engage in their annual budgeting and planning cycle. Projects are planned, budgets are set, money is allocated. This is a ritual observed by the vast majority of organisations and, I would argue, is one of the most wasteful and harmful behaviours an organisation can indulge in. Allow me to illustrate.
Imagine for a moment if one of the conditions of owning and driving a car was to have to submit a request once a year for all the petrol (or diesel, or electricity for those who have joined the EV revolution) you planned to use in the coming year. That request would be scrutinised, argued and assessed by people completely disconnected with your family and their needs. Your request would be balanced against the competing needs of a bunch of other families. If you had anything left over from last year, that would be deducted from your request as a matter of course because you clearly overestimated your usage.
Then, all that petrol arrives, all at once, in a giant drum (or a giant battery for the EV folks) containing everything the powers that be agreed to give you based on your request and the various other factors they used to make the final allocation. How would you and your family fare under that scenario?
How would you cope?
For a start, forget that unplanned trip to Bunnings to buy a replacement light globe for the one that just blew. You only budgeted for one trip each month, so the living room will have to be dark until it’s time for the scheduled trip. Unless you want to make savings elsewhere? Maybe skip the shopping this week to squeeze in that extra Bunnings run?
What about that offer for a brilliant new, much better paying job you just received? It will require an extra 10 minutes driving each day to get to it, so I guess we can’t accept it. We just don’t have the petrol budget to take advantage of it. If only the job offer had come a few months earlier when we were filling in our petrol application.
Work just gave you a day off as a reward for long hours put in. You would love to take the family somewhere nice for an unplanned long weekend, but… it’s not in the budget, so I guess you’ll just hang around the house instead.
Looking to buy a new, more efficient car? No budget to drive to the car yards and check them out, so I guess we’re stuck with the old petrol guzzler.
What happens when the end of the year comes and there is still petrol left in the drum! Oh no. If we have petrol left over at the end of their year, they will reduce our budget for next year. Quick, get in the car and drive, somewhere, anywhere, just use up that excess.
Then at the end of the financial year, you need to produce a detailed report to show that you actually gained the benefits you said you would when you made your petrol application in the first place. How do you explain the trip to the shops that you came back empty-handed from because they were out of stock? How do you qualify the value of any single trip? What’s the dollar benefit of doing the shopping one week? You’ll just have to do what you do every year and make up some numbers that look about right and hope no one looks too closely.
Crazy but…
Of course, this all sounds ludicrous. Trying to plan your car usage a year out and stick to that plan regardless of what changes is obviously unworkable. Flexibility and convenience are two of the key reasons for owning a car, and this method of usage takes both those advantages away. It locks you into a fixed plan with no flexibility, and that plan has almost no chance of still being valid 3 let alone 6 or 12 months down the line.
The sad fact is that most of us live lives that are, from the outside, quite boring and predictable. You could, if you needed to, make a quite accurate estimate of your car usage a few months out (Google and Apple probably have that estimate right now available for sale to third parties for a reasonable fee for ad targeting). I drive to training once a week, the shops once a week, some running around on the weekend and my wife drives to work one day a week. Unless one of the kids takes the car for something, that’s about it. Estimating your car usage, as silly as it sounds, is far simpler than estimating a project or initiative for an organisation. There are far more variables, far more unknowns, and far more ways the estimate will be off.
The pitfalls of annual planning
Annual planning for organisations has all the problems annual planning for car usage has — it locks you into a plan that doesn’t allow you to adapt to changing circumstances. It prevents you from capturing additional benefits. It prevents you from making efficiency improvements unless you plan them upfront, which is hard because improvement opportunities aren’t always apparent upfront. It prevents you from changing technology easily because you are locked into spending in certain areas. If there are miscalculations, it means work often has to slow down or stop when the money runs out, often with the exit of key people due to lack of funding. Then it has to restart again in the new financial year when new budgets are released, and you have to rehire all your staff at extortionate rates.
Most worryingly of all it promotes a behaviour where all the budget needs to be spent otherwise it will be reduced the next year. Every organisation has stories about departments desperately trying to spend their budget at the end of the financial year. People getting sent on training or conferences that are at best only tangentially relevant to the work being done. Consultants are hired to produce reports. There are the old jokes about local councils digging up perfectly good roads at the end of the financial year to correct an underspend. All this money is essentially wasted. It could have been redirected to more valuable work, but the financial system simply does not allow it.
What are the alternatives?
The pitfalls of annual planning are well known. Everyone knows it’s a flawed system. It occupies the senior people in the organisation for months, takes them away from more valuable work, and does not generate the benefits that it promises. So why do so many organisations still do it?
One of the reasons is that until now, better alternatives didn’t exist. Organisations want to plan more frequently, to respond to change and adapt, but information flow within the organisation was just too slow and too disjointed to allow for that to happen.
Today though, organisations can speed up their information flow massively by investing in tooling to create a single view of demand (all the work in the system) and match that to a single view of capacity (the organisation’s capacity to deliver that work) and a single view of benefits (what outcomes the organisation receives from the work). Having a view like that, generated in real time, from the real data in the organisation (not from made-up numbers in a budgeting spreadsheet once a year), opens up the possibility to accelerate the planning cycle.
In part 2, we will look at what it takes to set up those single demand, single capacity and single benefit views and the possibilities it opens up for how the organisation plans, funds and executes its work.
