Budgets are strategic tools so pruning is better than slashing

Budgets are strategic tools – they allocate resources to strategic priorities. Pruning and shaping spending is better than slashing and burning. It is easy to cut costs by slashing but it is hard to prune and shape an organisation. Strategic budgeting shapes long-term value.

Pruning and shaping needs a focus on value streams

I made that comment about pruning and shaping online this week in relation to plans to cut $1.4Billion out of health spending in New Zealand. Don’t get me wrong. I have spent time in health, including successfully managing overspends down, so I know that savings can be made and money spent more wisely. The actual response to the public directive is likely to reflect that budgets are strategic tools.

The issue is how to prune budgets in a way that shapes a future system that works better. The same issue applies to other sectors and organisations. One problem is that headcount is not waste because headcount is people. If you want to cut waste in the long term you need to focus on value streams – increasing the proportion of effort that is value to the consumer and decrease the proportion that is waste. That is a systematic process, enabled by data, people and systems. Short term fixes don’t solve long-term problems.

Better ways of working reduce waste

At an organisational level, a lot of waste arises from weak communication, bad processes, disconnected systems and poor management of assets. The organisation then requires more people because things don’t work properly. Talk of bloated middle management is simplistic and denigrates people trying to do their best.

We can cut waste and add value by engaging with the people in the middle of it. Digital transformation can succeed but it does so because well planned change improves processes, engages people and creates positive cultures. It uses tech in ways that improve customer experiences and add value. Technology is one of several key enablers within that change and reduction of waste is a valuable by-product of better ways of working.

How to budget strategically for long term value

System-level deficiencies take time and effort to fix. That doesn’t mean we should defer action but we should ensure that what we do doesn’t make things worse. Strategic budgeting directs resources to key value streams that meet your most important goals. Here are a few tips:

• Identify your key value streams. Go to where the work happens and map the value streams, identify constraints and capture ideas for improvement
• Find and fix the most common constraints to flow in your system
• Stop doing stuff that doesn’t help! End projects with poor strategic fit or no credible benefits realisation
• Identify and protect spending that provides good value
• Ensure that budget controls are being applied consistently (if not, ask why not as it may be that they are the wrong controls and just shift cost)
• Ask people what would make them more effective. How can I help?
• Fix the most important broken systems first
• Eliminate duplicated systems – but capture data first as some will be unique and will save you money reinventing the wheel later
• Priroritise property maintenance based on your core needs. Don’t slash it.

CFOs can shape strategic value through budgets

Chief Financial Officers can shape the strategic success of their organisations by forcing a focus on value delivery in budgeting. If you choose to fund activity on the basis of the value it contributes to customers your organisation will be truly transformed. The best part about this sort of transformation is that it is cheap, non-disruptive and you can start with just one value stream and see what happens.

We would love to help.

Phil Guerin, Consultant/Director, Hague Consulting Ltd. © Hague Consulting Ltd 2024. If you like this content, subscribe to our blog – it’s free!

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