By Steve McKee
We've just witnessed the Fall Classic, the annual winner-take-all event where the two best teams battle for supremacy. In the sports world, they call it the World Series. But in the business world it's not about baseball. It's about budgets.
Ask marketing managers and they'll probably agree that annual budgeting is the bane of their existence. It is hard enough to forecast what's going to happen next week, let alone next year. Yet, they are asked to develop a budget that will move an outfit forward through economic swings, competitive slugfests, and technological change-ups -- all without blowing the profit margin. It's virtually impossible.
No one would suggest neglecting next year's budget, but there is no reason (other than inertia) that the budget cycle must be an annual one. Continuous budgeting can be much more efficient. As baseball legend Yogi Berra might suggest, take it one inning at a time.
A RELIC OF THE PAST..
In today's fast-paced business world, annual budgeting absorbs too many resources in the third and fourth quarters as managers spend weeks poking, prodding, planning (and protecting) their budgets. In larger outfits, it encourages budget inflation, with some managers making decisions that are based not on what they need but on what they can get. And it provokes internal politicking and turf protection in a zero-sum, you-win-I-lose game. Perhaps most significantly, budgeting once per year hampers marketers' ability to think on their feet and shift on the fly in response to changing market conditions.
The two largest cost centers in most marketing budgets are media and printing. In both cases, prices change frequently. In theory, the media landscape changes quarterly in response to ratings. In practice, however, the media market operates just like the stock market. Rates are changing constantly in response to economic, environmental, and cultural signals.
The same is true of the printing industry. The raw material in printing is paper -- a traded commodity. Printing prices change when paper prices change, not when annual budget cycles come around. Since the two largest drains on a marketing budget are continually changing in price, why would a business want to lock itself into a fixed annual budget when so much of what it funds is variable?
A DIFFERENT APPROACH. .
Continuous budgeting, by contrast, allows companies to be fleet and nimble. A quarterly budgeting process might take 2 days every 12 weeks, rather than 3 weeks every 12 months. That's a net savings of 7 working days. By keeping the time horizon as short as possible, a more realistic budget can be developed and its creators held more accountable.
There's no way to escape the fuzzy nature of trying to see into the future, nor the turf-protection pressure that comes with budgeting. But continuous budgeting can keep marketers more attuned and responsive to the marketplace and focused on growing their turf rather than protecting it. Mistakes can be adjusted to more quickly and opportunities seized more readily.
Maybe budgeting really is like baseball. A month ago, only a handful of teams were still in a position to get to the World Series. Three months ago, the playoff picture was less clear. But a year ago no one would have ever thought the Florida Marlins would by playing at the end of October. In baseball, as in budgeting, it's impossible to know what's going to happen a year from now -- who would have ever imagined that the long-odds Marlins would beat the Yankees to win another World Series.