My Favorite Choopchicks - Budgets (and Headcount Targets)
One of the most futile efforts I have had the pleasure of working through in my career is the budget and headcount process in a large company. This process is essentially a shaman's ritual - gaze into the crystal ball and determine how much money and resources we will need for the next 12 months. It's about as accurate as marketing's forecast for the next 12 months, except we have one piece of data - what was your budget and headcount last year?
Worse still is that budget’s and headcount are broken down to very small groups – a supervisor with 10 people will have a budget and headcount target. The assumption is that going down to this level will be more accurate, and make the supervisor more responsible for the decisions impacting his group.
Now it seems fairly obvious that there is a tie in between headcount and budget. The budget depends to a great extend, especially in engineering operations, on how many people you have in your department and group. But this logic didn’t fly in one company I worked for, and they made no real attempt to keep the two in sync. Why? Because those two numbers have to be approved by two separate organizations in this large company: financial for budget approvals, and HR for headcount approvals. To avoid excessive thrashing on this problem, they simple took last year’s budgets and headcounts and slashed them by a certain about (5-10%) from the previous year to determine this year’s budget.
That didn’t end the debate, however, since some groups end up with a legitimate reason to increase head count – safety, throughput, program-of-the-month, etc. Thus, you could get approval for a head count increase in HR, but due to budget limitations, end up not receiving any budget increase. Thus, if you did not want to overrun your budget, you could not hire these two people. And over spending your budget in tough times was a sure way to have your own name end up on a cost saving list.
Likewise, when a manger ended up in charge of two groups that had been consolidated into one to reduce headcount, you could find yourself with a large budget, but with the total headcount significantly reduced. Suddenly, in order to keep your budget for next year, you had to find a way to spend that money on something beside headcount.
My first (and turns out, only) advice from the department financial person in the department where I was a manager was, “There are only two rules – 1. Don’t overspend your budget, and 2. Don’t under spend your budget.” This usually leads to the punch line of a Dilbert cartoon, like the one where the pointed-haired boss buys a giraffe at the end of the year to make sure his budget is consumed. For Consultants and contractors, this can be a boom time, since they usually (emphasize usually) end up with a bunch of contract work, since this expense had no impact on headcount.
In my case, I had contractors who worked for me for years, since I had budget for them, but not the headcount. I am sure I paid for the equivalent of three employee salaries for every two contractors that I had, but it was the only feasible answer. Even worse, since most of these contract engineers were young kids out of college, they somehow thought their great work (and much of it was great) would lead to an eventually hiring. It did happen, when the fates allowed for a favorable change in the budget to headcount ratio, but it was pretty rare. Still, it was those rare occurrences that keep the hope alive for these engineers.
Beside all of this chaos comes the constant battle between groups for people and headcount. How do you get a 5% reduction in headcount when you have two groups each with 10 people. Only one person has to go, but which supervisor will take the hit? These two supervisors will begin to campaign to keep their headcount, and cast doubt on the effectiveness of the other supervisor’s ability to manage his people, the lower importance of the work the other group is doing, etc. More conflict and chaos.
In the end, about half way through the year, the budget and headcount meetings will wind down, and the organization will pat itself on the back for slashing costs. But like the previous choopchick of cost savings, the same problems apply here. Because the organization has little clue of where the constraint is, they probably reduced the budget and headcount of the constraint department, which could lead to less revenue. Net Profit, despite the company’s best effort, continues to go down.
Some thoughts on how to resolve could go in several directions. My recent improved understanding of Viable Vision, however, makes me conclude that budget and headcount targets are choopchicks, and the company needs to figure out ways to increase revenues much quicker than operating expenses. There is a much stronger impact on Net Profit by undertaking a Viable Vision than arguing about a few thousand dollars here, and an employee or two there. Headcount and budgeting becomes trivial, and burning as much time as most companies do on this subject takes their focus often the more important elements of creating a competitive advantage and then being able to capitalize on it.
So that makes the budgeting and headcount target process my next favorite choopchick – any comments?
Kevin
