One of the most important basic problems for the transformation of a company is the archaic form in which budgets are usually handled.
Almost every company I know of manages budgets in the same way: every year, in a political meeting, each person defends their project, department or initiative.
After this meeting, each manager receives an annual budget, sometimes with quarterly adjustments depending on whether the company has gone well that quarter or not.
As a result, managers spend a lot of time preparing this meeting to defend their interests as well they can (sometimes not aligned with the company). Because if a project gets a budget for that year, unless there is a resounding failure, it is very difficult for it not to receive something in subsequent years.
This system is one of the culprits of the continuous delays in projects, since in general, with this type of management a delay to improve the product is worthwhile. If you have a budget with this system, if you are going to succeed in launching a project now, you will always decide to delay it.
Because if you implement it now, you run the risk of cancellation or a resounding failure. While if you delay it, surely after some initial anger, you ensure more budget to improve it and ensure a more perfect launch.
Obviously, this way of proceeding goes against the interests of the company, which is interested in launching the initiatives as soon as possible to spend as little as possible if they do not succeed.
Therefore, the usual way of managing budgets is not only inefficient, but it restrains the innovative mentality and restrains any transversal initiative that involves several departments.
How should a digital company manage budgets?
Using a model more similar to a startup, that is, maintaining a direct relationship between the results of a project and its financing. With results I do not mean only direct economic benefit, but also other aspects such as retention rate, brand image or efficiency.
In this new model there are no quarterly adjustments depending on the results of the company, that is, if you have budget X to achieve a goal. And you can count on that budget if you meet results.
This means that you have total freedom of budget management by product or initiative (never by department), in exchange for establishing very rigid criteria to increase that budget. Always in shorter financing cycles, not in years.
This does not mean that we should be obsessed with measuring absolutely everything and that all internal tasks that do not have a direct return should be completely eliminated. But this mentality of orientation to results, in a certain dose, can greatly optimize the functioning of a company.
Nor should we fall into the error of directly associating the value of people with the failure of their projects, because that is how we penalize innovation. It seems stupid to me that there are entrepreneurs who are proud to have founded 5 startups that have failed. But as before, this mindset of accepting failures, at a certain dose, encourages innovation.
Advantages of this system:
- Break the silos between departments. While traditional companies do not work with budget systems of this kind, they will never break their departmental silos. Because the management of budgets and objectives by departments and not by products weighs a lot when collaborating.
- Business mentality. If your budget depends on achieving some objectives, increase your involvement with the project and, by extension, with the company, in addition to ensuring that your work provides more value.
- Metrics and results orientation. If obtaining more budget depends on success, money is optimized and business metrics are encouraged.
- Reduces political costs. Avoid many powerpoints and the effort of many people to justify their work.
- Focus on what is important. In a distribution by departments it is very difficult to have a complete picture so as to distribute budgets well. So this system is much fairer. It helps you invest in what actually has a return.
- Early release. This system also encourages the launching of projects much earlier. It also allows you to identify beforehand which projects work and which ones don’t, avoiding failures that could cost millions of euros.
We do not need PowerPoint, we need analytics
Startups put much more emphasis on real metrics and squeeze the budget because literally, their life depends on it.
Traditional companies put more emphasis on powerpoints that justify how much you work in a department, to obtain a budget on which you can rarely measure the return.
The main problem, make no mistake, is that traditional companies are not able to measure the return of a project and are guided by intuition or vanity metrics, doing things mainly because they have always done so.
But it is time to change. And one of the first steps is to have a system of budgets and a system of metrics aligned with the objectives of the company.