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Rethinking Budgeting: Insights from Steve Morlidge on the Unicorny Podcast

Core Team member, Steve Morlidge, was a recent guest on the Unicorny podcast, which explores the business of marketing, creating value, and helping businesses succeed.

Steve offered a fresh perspective to marketers, who often recognise the traditional marketing budget process as flawed (or at least damned difficult to work with).

We thoroughly recommend listening to the engaging and entertaining podcast for yourself, but if you're short of time, or have left your earphones in another pocket, here's the TLDR (or TLDL!) version.

Understanding the Flaws in Traditional Budgeting

Budgeting, as we know it, is rooted in practices from the 1920s and has remained unchanged despite significant shifts in the business environment. Steve argues that the outdated process of setting fixed, single-point targets once a year no longer serves our dynamic and complex world.

This rigid system fails to adapt to changing circumstances, leading to several key issues:

1. Costly and Bureaucratic processes

Traditional budgeting is an expensive, resource-consuming process. Steve highlights that it often takes about six months to create a budget, involving around 10% of managers' time in large organisations, making it the most costly process in the business.

"(A budget) is like having a bank that's only open once a year. You have to go to your bank in October, get a loan from the bank manager, and if you don't get the money, you're stuffed until next October".

2. Lack of Flexibility

Fixed budgets are inflexible, making it difficult to adjust to changing market conditions. This rigidity often results in cutting marketing budgets when performance strays from target, or running short-term promotions, which ultimately harm long-term growth.

"If the world changes, it's really difficult to change (the budget). In fact, the only thing that's easy to do in that world is cut marketing budgets".

3. Distorted Performance Metrics

Performance is measured against fixed targets that are set through politically motivated negotiations. This approach does not reflect true performance.

"We get so obsessed by steering the ship towards an immediate goal that we lose sight of where we're actually going".

4. Perverse Incentives

The negotiation process creates a zero-sum game, where departments exaggerate their needs and undershoot their targets to secure more resources and ensure easier performance evaluations. This leads to systemic underperformance and inefficiency.

"What really matters is, are you winning? Not have you hit an arbitrary number".

The Beyond Budgeting Approach

Steve advocates for a shift towards Beyond Budgeting principles, guided by Ashby's Law of Requisite Variety. This law states that systems need to be as flexible as the environment they operate in to handle complexity effectively. In a volatile world, organisations need processes that can adapt swiftly to change.

Applying Beyond Budgeting to Marketing

For marketers, the budgeting process often results in stop-start behaviour, where short-term adjustments disrupt long-term strategies. Steve explains that this is down to a fixation with hitting immediate numbers rather than fostering continuous growth. The Beyond Budgeting approach can help mitigate these issues for marketers by:

  • Increasing Flexibility: Allowing for more adaptive resource allocation based on real-time needs and performance, rather than fixed annual budgets.
  • Fostering Agility: Enabling marketers to respond quickly to market changes and opportunities without being constrained by fixed budgets.
  • Aligning Goals with Reality: Shifting focus away from arbitrary targets to actual business performance and customer needs.

Implementing Beyond Budgeting

Transitioning to a Beyond Budgeting model involves changing how we view constraints and planning. Beyond Budgeting is not about eliminating budgets, but reframing them to be more dynamic and responsive.

"A plan is essential. Planning is essential. The problem is sticking to the plan when the assumptions upon which that plan have been based change".

This approach requires:

  1. Empowerment: Decentralising decision-making to allow local managers more control over resources, thereby increasing organisational agility.
  2. Continuous Planning: Shifting from annual budgeting to a continuous planning process, which adjusts based on real-time data and market conditions.
  3. Focus on Value Creation: Prioritising activities that deliver the most value and reallocating resources as needed to support these initiatives.

"So it makes much more sense to say: "this is the amount of money which is potentially available, given our current assumptions", without committing the business to spending all of it, and without committing the business to limiting your spend if you find out that you've done something which is much more impactful than you thought".

Shifting the paradigm

The traditional budgeting process is deeply ingrained in organisational practices, but it is increasingly clear that it no longer serves the dynamic and complex business environment we operate in.

"Tradititonal budgeting induces a kind of heart arrhythmia. You introduce this wave, this artificial disruption into the just throws sand into the face of the business".

By adopting Beyond Budgeting principles, organisations can become more agile, efficient, and effective in allocating resources. For marketers, this means having the flexibility to respond to market changes and focus on long-term growth rather than short-term targets.

As Steve aptly puts it, rethinking budgeting is not about eliminating constraints, but about applying them in a way that supports agility and continuous improvement. This paradigm shift can help organisations navigate the complexities of the modern business landscape and achieve sustainable success.

Eager to find out more? You can download the Beyond Budgeting principles here. Better still, sign up as a follower to increase your understanding of what Beyond Budgeting might mean to your organisation.