Another common misconception is that budget management is the same thing as cost management. The primary goal of budget management in government is insuring that spending does not exceed the budget. This is a worthy goal but a relatively simple one that ignores how resources are spent: a huge opportunity in large and/or complex organizations.
One major problem is that the budget process initiates with self-assessment of the “needs” of all programs and sub-organizations. This results in enormous effort (read this as resources and costs) being spent on determining, justifying, and arguing what is needed. Furthermore, the size and complexity of many organizations and the time required for legislative approval means that the budget process is seldom informed by the actual costs of the prior fiscal year.
Imagine paying people or buying things at what the worker or seller said they needed! This emphasis on providing resources based on needs reminds one of the economic philosophy of the Soviet Union. The slogan was:
From each according to ability: To each according to needs
Of course, such a program finds a lot more “needs” than “ability.” It is ironic that this emphasis on needs pervades a capitalist democracy: including its Department of Defense.
Once the hard fought for budget is approved organizations do work hard to “manage” it. Unfortunately, good financial management has come to mean spending 99.9% of the budget.
Why not spend more than 99.9%?
Overspending a budget has legal consequences. In the federal government there is the Anti-Deficiency Act. This federal law criminalizes overspending and proscribes potential fines and prison time! These significant, personal consequences have resulted in control processes specifically designed to monitor spending throughout the fiscal year with limits or spending mandates to issue the proper “spend rate.”
Why not spend less than 99.9% if possible?
Exceeding the budget is catastrophic, but why isn’t spending 95% of the budget better than spending 99.9%? The answer is that one year’s budget cannot carry to the next year. Therefore spending 5% less than appropriated is considered “wasteful” of budget that might be necessary someday and perhaps admission that current budget and future projections can be cut. The result is that considerable effort is spent at year end to “sweep” all available budget and spend it somewhere.
Another unfortunate aspect of this phenomenon is that the variances between budgeted and actual resource consumption become meaningless because the variance is always zero or minuscule. This prevents the organization learning from experience that it important in continuous improvement and sound cost management. (More on variances and continuous improvement in future blogs.)
What not simply pass a sound management law?
Clearly a cost management and control paradigm is necessary. Unfortunately, many organizations seem to default to a system of rules, regulations, and restrictions that attempt to define permitted resource consumption in great detail. The paradigm details what can be done and what cannot be done. Bob Stone, a former Assistant Secretary of Defense, once claimed in Ted Gaebler’s Reinventing Government that he wouldn’t be surprised if one third of the Defense Budget was consumed in the friction of such a management paradigm.
Mr. Stone once provided an example of the difficulty of top down proscription of behavior. It had to do with a Defense Department initiative for energy saving. The program purchased and installed special thermostats in soldier quarters that could not be set lower than the energy efficient level decided in the Pentagon.
However, while visiting Ft Bragg, North Carolina, on a hot summer day, he asked a young soldier how the restricted thermostat was being received.
“No problem sir – all we have to do is leave a lamp light bulb burning next to the thermostat and we can drive down the temperature very nicely.”
The mandatory thermostat setting was put into place to save electricity. Instead soldiers were using even more electricity to burn a hot light bulb in order to fool the thermostat and get more air conditioning. Note that the hot light bulb added to the cooling requirement! While complying with the rule, they consumed more electricity than they would have had they been permitted to just set the thermostat where they desired.
Rules work best when they provide clearly defined boundaries: not detailed prescriptions for behavior.
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