Budget Management Warning Flag 1 – Across the Board Cuts

Turbulent economic times typically require budgetary constraint and even cutbacks. As business slows and revenues decline, executives demand managers reduce spending and increase production efficiency. Waste cannot be tolerated and must be rooted out.

In response to calls for spending cuts and out of a sense of ‘fairness’, executives and managers often demand across-the-board expenditure reductions; ensuring the pain associated with such cuts are shared by all within the organization. This common action, however, fails to recognize that different operations and initiatives contribute unique value to the organization – some far more than others. While, high-returning programs suffer equitably from the cutbacks, the organization suffers an unnecessarily and disproportionately elevated loss as the realization of the high returns are delayed in favor of continued pursuit of lower value activities.

Budget cuts should therefore be treated like any other resource restraint during the planning process. Low priority operations and initiatives losing funding in part or whole before high priority, high value activities. While not all inclusive, the four lists below, Process-Based Warning Flags, Process Execution Warning Flags – Behaviors, Potential, Observable Results, and Potential Causes, are designed to help organization leaders to recognize whether their rebudgeting efforts fail to consider the value proposition of effected activities. Only after a problem is recognized and its causes identified can the needed action be taken to move the organization toward improved performance.

Process-Based Warning Flags

  • Programmatic triggers exist that automatically implement across-the-board cuts when initiated
  • Corporate policies direct or encourage across-the-board cuts or are silent as to how budget cuts should be made
  • Strategic planning programs do not assess the organizational value contribution of operations and initiatives being funded
  • Lack of organizational performance measures associated with budget performance
  • Executives and managers do not have personal performance goals tied to budget accuracy and performance

Process Execution Warning Flags – Behaviors

  • Executives and managers implement across-the-board budget cuts in response to economic downturns or market turbulence
  • Executives and managers favor across-the-board employee pay reductions rather than workforce rightsizing
  • Executives subjectively select operations and initiatives to be funded during the planning process rather than systematically assessing the value contribution of each activity
  • Executives and managers are not held accountable for achieving operational returns on investment by senior leaders and/or the Board of Directors
  • Executives and managers are not held accountable for the accuracy and stewardship of their budgets on a routine basis

Potential, Observable Results

  • Defunding, slowing of progress on high-value returning initiatives while other lesser value creating activities are continued
  • Budget cuts are equally divided between employees, workgroups, and projects
  • Loss of and diminished productivity among highly talented employees as a result of across-the-board pay reductions

Potential Causes

  • Executives and managers seeking equitable distribution of the challenges associated with the budget cuts
  • Executives and managers seeking to reduce the replanning burden associated with budget cuts
  • Executives and managers view budget cuts as something other than a replanning activity
  • Executives and managers do not fully understand or appreciate the impacts of not considering the value contribution of people and activities when implementing across-the-board budget cuts