SPRING 2014
FMI
*
IGF JOURNAL
33
example from the private sector
illustrates an unquantifiable situation.
My goal in the car business was to make
as much money as possible and grow the
business. This was achieved through;
car sales, parts sales and providing
workshop service. Being a numbers
man it took me a long time to realize
that giving away more free service lead
to more profit. When customers buy a
car they rightly expect to get a product
without fault. Unfortunately cars in
the 70s and 80s were built with many
faults yet the manufacturer would only
authorize warranty to fix things that
went wrong; dealers weren’t expected
to make new vehicles better than the
manufacturers’ standard. I believe that
our profit improved (more sales due to
increased goodwill) after I authorized
the workshop to go the extra mile in
making new cars better even though
this lead to more free service. I am not
able to quantify this hypothesis but am
confident it is correct.
On a much larger scale it’s been said
that quantitative easing, implemented
by central banks in the 2000s, helped
our economies avoid a depression.
We’ll never know if we would have
experienced a depression without this
strategy however, the risk of doing
nothing was too high even though
success could not be guaranteed in a
business case.
Budget Building
The budget department relies on
strategies put forth by operational or
program experts for the purpose of
achieving goals. In the public sector
goals are approved by elected officials
for the purpose of either fixing a
problem, or providing new benefits
to the public. As an example; if the
goal was to reduce the number of road
fatalities, the strategies used could be:
a) better training; b) periodic testing
to ensure drivers stay sharp and, c) the
elimination of driver substance abuse
by technically blocking the starting
of vehicles or a combination of these
three strategies. With this information
a budget department can then build
various budget scenarios estimating the
costs of these strategies.
Expecting a budget shop to provide the
costs of achieving a simple goal, without
input from the experts always results in
poor budget development, a guaranteed
recipe for future budget overruns. In
my experience or observations budget
overruns are often due to one or more
of the following underlying causes:
1)
Input was not solicited from the
subject experts.
Most projects require input from a
number of subject experts, normally
including: specific program experts
(example legal, judicial, health,
engineering,
security);
indirect
support experts (to cover areas such
as information technology, facilities,
human resources, accounting); executive
sponsorship to ensure that the strategies
are goal congruent; and advice/input
from key stakeholders (such as, local
community groups, advocacy groups and
environmentalists). Cost estimates will
likely be inaccurate without sufficient
input from any of these experts.
2)
Expanded project scope.
The scope of a project is determined
by the goal(s) to be achieved however,
the discipline of setting an unwavering
goal at the start is easier said than
done, especially for information
technology projects. How many times
can you recall information technology
projects that started out with the goal
of integrating several systems and end
up with the scope expanding due to
additional requirements? Scope creep as
it is referred to is really the addition of
new projects, often with no or limited
authorization, piggy-backed on an
original carefully approved project.
3)
Insufficient contingency allowance.
Normally the details of a strategy evolve
from conception to blue print plan stage
as more experts are consulted and details
solidify. Good practice dictates the
inclusion of a contingency allowance,
declining in magnitude as a strategy
matures. I am not aware of any standard
guidelines that budget departments
use to determine an appropriate
allowance. In the past, I have used a
contingency as high as 50% of the
initial cost estimates and reduced such
the budget practitioner. I entered the
workplace thinking that all spending
decisions could be modelled and
quantified; not surprising given my
love of mathematics and engineering
training. I found that assumption to be
mostly true but not completely. Over
the next few years, as in the past, you
will continue to read about publicly
funded projects with significant budget
overruns. Such overruns usually beg the
question, “what went wrong”. In this
article I suggest some possible answers.
BUDGET COMPONENTS
This article touches on the three phases
of budgeting; planning, building and
monitoring.
Planning
Before building a budget for a business
or non-profit service delivery entity the
decision makers must know where they
wish to end up and how they will get to
that point. Regardless of the technical
jargon used to describe this process it is
as simple of knowing where you want to
go and how you will get there. The end
point is usually referred to as the goal,
which may be the aggregate of several
outcomes and the process of getting
there is known as the strategy.
A plan is the essential framework to
build a budget upon. Building a budget
without first knowing your goal and
strategy is pure nonsense. The likelihood
of coming in on budget without having a
carefully developed plan is like winning
the lottery. A plan provides a benchmark
for success or failure. We won’t know
what success would look like unless our
goals are well defined. Typical this may
be a specific income level in the private
sector or service delivery achievement
in the public sector.
Having said this not every component
of a plan canbe quantified. The following
TACIT KNOWLEDGE
