Maintenance and Management - The Budget Game (Pt 1)

The Budget Game is played out year after year in the vast majority of asset intensive organizations all around the world. 

And what is the budget game? I'm sure you will recognize it.

1) I know that the manager is going to try to cut back my budget so I am going to pad it out a little.

2) The manager knows that you are trying to pad it out a little, so he knows he has to cut it back.

3) And when we are getting near to the end of the financial year make sure to spend every cent you have or they will take it away from you next year.

Survival of the fittest. Those who can outmaneuver each other wins this round and gets what they want. But generally, the entire organization pays the price. 

The seriousness of this didn't occur to me until I saw the case of Severn Trent Water in the UK. Where the Serious Fraud Office was called in by the industry regulator, with implications of charges being laid against individuals. 

Wow...the entire industry took a deep breath and suddenly every conversation had a different shade to it. 

This was obviously a very specific case and an extreme example. But the more I thought of it the more logical it became. When you pad out a budget what you are actually doing is defrauding the shareholders, owners, and in the case of regulated industries sometimes even the general public.

Yet everyone plays the budget game every year... that's a frightening thought when you look at it in the light of this line of thinking. 

It was about this time that I, and a few select clients at the time, began to look seriously at bidgeting practices and how they could be improved to eliminate The Budget Game.

The screamingly obvious issue was that without a solid and logical tie between performance and risk, and the activities required to achieve it, that this issue was never going to go away.

And in the mire we uncovered a few practices, techniques and planning mechanisms that would not only eliminate the budget game, but when implemented correctly it could force an entirely new dynamic on the management of the asset base. 

The first of these was Zero Based Budgeting, the second, an evolution of the first, was Risk Distributed Budgeting. 

While Zero based Budgeting was not new,  what had been missed previously was it's capability to feed into the long term planning accuracy by setting the framework in place for proactive data capture. (E.g. failure data without crashing a few more assets)

Over the next couple of weeks I am going to post a series on both of these methods, trying to go into detail about what they are, why they matter, how to do it, and of course - how to implement it. (You might want to subscribe via the links at the top, or via the email subscription box on the side.)

Without even considering the financial and risk impacts of this form of work during the implementation, other impacts of this work includes:

• Tying costs directly to the required / expected performance and risk of the physical asset base
• Eliminating costs tied to bad habits formed over years. (Remember the monkeys?)
• Setting up a framework for proactive data capture
• Increasing the accuracy of capital maintenance activities
• Elimination of The Budget Game

And if your organization track such things, and if they do not then they should do, you start to get a vastly higher level of confidence about the net present costs of the asset base. Meaning, more importantly, a far greater level of confidence over the Net present Value or profits of an organization.

That's the sort of thing clients can take to the bond market for billions, not millions, of dollars in potential benefits.

Game changing ideas...


Part 2 - The Root of the problem