I learned from the excellent Professor G. Richard Patton at the University of Pittsburgh, that the purpose of strategy is to match organizational capabilities to the operating environment. Extending on this concept, the purpose of budgeting is to determine the appropriate resource allocations to fund the organizational capabilities that dictate how your firm competes. To be clear, as CMO, this staid and somewhat dreaded activity is one of the most critical decisions you will lead your team through.
You know the old axiom that you don’t manage what you don’t measure. Similarly, you won’t have capabilities that you didn’t fund.
I’ve found that most organizations follow a predicable path when determining their budget. They start with the current year budget and then adjust that total amount up or down by a nominal percentage for the coming year. Functional leaders will then get their previous, or newly negotiated, proportion of the overall budget. This is viewed as an efficient process and the least painful approach to budget determination. But it’s an approach that shortchanges this quintessential function of leadership.
Unsurprisingly, there’s a better way to conduct your budgeting. It’s a multifaceted approach termed The Four Lenses of Budgeting. Nothing as important as determining which capabilities to fund should rely solely on a single perspective. The four lenses are: Strategic Alignment, Benchmarks, Comparative Performance, and Redundant Spend. Let’s touch on the first two in post.
Align your budget to your strategy
Remember the most common approach to budgeting? As markets and organizational objectives have shifted over time, budget allocations haven’t kept pace, resulting in misaligned budgets. Clearly, funding activities that aren’t going to generate the results you’re accountable for isn’t a wise way to spend your resources.
Your first exercise should be to evaluate your budget for alignment to your strategy. Initially this might mean pushing your peers for a clear and agreed-upon definition of what your overall strategy is. Once the strategy is articulated, prioritize your investments to drive the vision forward. Expecting growth to come from emerging markets? If so, make sure your allocations don’t unfairly favor your cash cow established markets. Has your market long since crossed the chasm and you’re well on your way to commoditization with your two closest competitors? If so, investing massive amounts in brand building isn’t the most effective use of your funds. You get the idea!
Benchmarking to the best of them
Benchmarks are great tools for providing a frame of reference for your budget allocations. They can shed light on the investments of your industry peers and provide much needed support when substantial budget changes are presented to your colleagues. The very best benchmarks link budget allocations to performance measures. These, naturally, are the hardest to find.
To help get you started, here are a few reasonable and free benchmark resources:
Even with these positives, benchmarks aren’t the holy grail of budgeting. You shouldn’t simply copy the allocations of top performers and expect similar results. That’s why you get to make these tough decisions. The four shortcomings listed below will affect how reliable and applicable any benchmark is to your firm.
- Generalized benchmarks don’t necessarily reflect the market conditions you’re operating in.
- The study data is limited by the respondents. Participants in highly competitive industries may be reluctant to respond.
- Studies without a performance link are purely descriptive. Just because someone else is spending a certain way doesn’t mean that’s how you should spend.
- Resource allocations fund capabilities, but doesn’t guarantee your firm has, or will successfully acquire, those capabilities. Developing an organizational capability takes time and prematurely funding a capability at a high rate could be just as ineffective as not funding it at all.
By all means rely on benchmarks as another data point to help guide your budgeting decisions. Call on them to support a dramatic move. And be prepared to provide justification if your allocations veer far afield of the norm.
In the second installment of this blog series we’ll cover two additional budget lenses in detail: Comparative Measures and Redundant Spend.
What do you think about the first two lenses? Are they methods you currently use?
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Justin Yopp is a Marketing Strategist at The Pedowitz Group. He has spent the last ten years crafting business and marketing strategies for local and global businesses, with an emphasis on demand generation. Justin helps organizations accelerate beyond best practices to quicker positive ROI, increase internal buy-in and adoption, and capture more market mindshare.
- Posted by Justin Yopp
- On 12/06/2016
- 0 Comments