Linking Operations to

Linking Operations to
Strategy and Budgeting
By David P. Norton, President, Palladium Group, and cofounder, Balanced Scorecard
Collaborative; and Philip W. Peck, Director, Palladium Group
In the May–June issue,David Norton made the case for a new expense
category, STRATEX, dedicated to funding strategic initiatives—the
means by which the enterprise carries out strategy. But successful
strategy execution requires more than just a separate budget for
strategy; the organization must link both strategy and operations
to the budget, and do so in a way that is transparent (thus easy to
analyze and revise) and future-focused. Causal models, driver-based
planning, and adaptive tools such as rolling forecasts together constitute
just such an integrating mechanism that can also give organizations
more information (the whys, not just the whats), flexibility,
and agility—vital capabilities in a competitive, fast-changing world.
The budget: we love to hate it. Former GE chief Jack Welch once characterized
it as “the bane of corporate America,” words that capture the frustration of
growing numbers of managers. For most organizations, the annual budget
process is a painful, distracting, months-long exercise that consumes a tremendous
amount of resources and so quickly becomes outdated that it is often
irrelevant for decision making. Moreover, since most organizations do not link
the operational plans (the basis for budgets) to strategy, they suffer chronic
fiscal disconnect. Once the budget is approved, they spend the next twelve
months reconciling results to the original—and flawed—numbers. Despite the
cost and complexity, the end result is so inflexible that it can’t be adapted to—
or help the organization adapt to—changing conditions.
In fairness, much of the frustration comes from what budgeting doesn’t do—
and was never intended to do. The financial budget was meant to provide a
rational way to allocate financial resources and ensure control of their use,
functions that it performs with reasonable effectiveness. It was not designed
to adequately make forecasts, explain variances, or promote a long-term view.
It was not meant for communicating strategy or for target setting. And more
important, it was never intended for managing either strategy or operations,
although many organizations attempt to do so. We don’t advocate, as some do,
eliminating financial budgeting. Let’s just accept it for what it is: a necessary
tool for managing the allocation of financial resources. To manage strategy and
operations, we must look to other systems.