Brave New Work: Are You Ready to Reinvent Your Organization?

by Aaron Dignan

The solution to this resource allocation problem, we think, is to create a budget. Perhaps no other process is so respected and reviled as the annual planning and budgeting process. For those who have managed to avoid direct contact with James O. McKinsey’s “gift” to humanity, here’s how it works: A business plan is created through a bottom-up and top-down negotiation between business units and corporate headquarters, in which they make assumptions about what will happen, internally and externally, for the next twelve months. The business “locks” a version of the plan that they believe walks the tightrope between satisfying shareholders and being theoretically achievable. This forms the basis of a budget for the year ahead. The budget includes a detailed set of targets for sales and profitability, as well as funding commitments to support operations and investment. All of this is underpinned by an elaborate set of incentives designed to ensure the delivery of the budget as written. During the ensuing twelve months, actual performance is compared to the budget with a high degree of scrutiny. Any variance is attributed to “good” or “bad” performance by the team. Managers are expected to eliminate any gaps in performance, ideally without reallocating resources. The idea that the underlying assumptions in the budget may have been unrealistic is never seriously considered. Midway through that same year, the process starts all over again for the upcoming year, the resulting work...