Long-Term Budgets Do Nothing But Stifle Results
Corporate budgeting is like astrology, predicting outcomes with certainty and prescribing ways to deal with events that are yet to materialize. And, managers are often so committed to their own forecasts that they’re willing to do whatever it takes to make them real — often at the cost of the company’s overall profits. In other words, corporate budgeting is a tedious mix of numbers, never-ending meetings and strained deliberations which drain valuable time and incentivizes corporate deceit.
Basing the budgets on long-term projections introduces into the equation multiple variables nobody can control. More often than not, managers resort to lying and cheating so that they can set low targets and achieve results that therefore, seem tremendous. When every executive approaches the budget with a hidden agenda, the situation quickly devolves into people playing against each other. Rampant distrust festers and incentives meant to motivate performance get distorted, often risking the best interests of the company.
No wonder corporate budgeting in most companies is rife with deeply embedded negativity and the deceit is almost invisible because it’s viewed as being part of the process. It’s a game where cheating wins and honesty loses. But, it needn’t be such a tedious and depressing process: When corporate budgets focus on creating value and reinforcing a growth mindset, the process could be positive and stimulating, encouraging people to be proactive. But to do that, you need to rethink your budgeting process and maybe even turn it on its head.
The Farce of Long-Term Budgets
Traditional budgeting that forecasts over long periods of time is a complete farce. You cannot possibly predict all the changes that will take place over two to three years. As time passes and reality strikes, the predicted figures often become irrelevant. This approach makes a company’s frontline employees less powerful and confident; it encourages corporate secrecy and bestows only a select few with the relevant information. And, it leads to companies dragging their feet when they should have reacted nimbly to changes in the market situation.
The Semi-Annual Rollover Budget
On the other hand, companies that roll over budgets semi-annually, use real facts to make decisions. These decisions can then have a real impact on the company’s growth and value. They know it’s wasted time and effort to forecast numbers, economic contexts or competitor movements beyond 12 months because those predictions are most likely to change. Instead, they treat the budgeting process as it should be — the first step in their firm’s foray into the future — and update their numbers and vision according to current market conditions.
Nothing but the Truth?
Jose Violi, who’s been at Semco for over 35 years, recalls a specific year when Semco was receiving a lot of media attention after a year of crisis. The crisis, however, wasn’t restricted to Semco alone — the year was challenging for companies across Brazil. When Semco leaders were getting ready to publish their numbers at the end of the year, they realized that they could manipulate one or another metric to show either a small profit or a small loss. It wasn’t something illegal — instead, it was just another way to present the numbers to the public. They had the choice to present a loss or a profit. Which face would they show to the world?
Ricardo Semler discussed with his core team but left the final decision to them. Violi, who was on the core team, proposed that it would be better to show the loss. Everybody was confused and wanted to know why he wanted to do that. “It’s a good way to show that we’re being transparent and that we’re trying to be even more conservative than usual. It sends the message that although everything is fine with Semco, we did face a very challenging year — which is the reality. Let’s show it as it is,” responded Violi.
SEMCO Found Wisdom in Transparency
Ricardo was personally against this view and decision. He preferred to send out a more positive message to the market at that time because Semco was really on the ball back then. Nevertheless, he agreed with the decision that the team took and they published the numbers showing a small loss. Although it was a decision that he didn’t agree with at the time, a few years later he conceded that it was one of the wisest decisions the company made.
This anecdote is a great example illustrating how Semco refrained from manipulating the numbers or playing corporate games. Instead, they chose transparency, which on the long-term, paid off and deepened the good image of the company as perceived by the market and competitors.
Originally published at semcostyle.org. In collaboration with Aruna Iyer.
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