Change Management and Incremental Budgeting

If you want to change your organization, you need to know how it allocates resources.

Change is a Function of Resources

Recently I worked with a big brand consumer product goods company.  Our team worked on increasing customer loyalty in a commodity business where global competition was accelerating.  

Early on it became obvious that we needed to shift the customer focus from the “rational” benefits of the products to the “emotional” relationship we could build with the brand.

We worked with client teams to better understand the needs of their customers and to develop ideas for new products, product extensions, and marketing.  Some of the ideas were brilliant game changers while others aimed at needed incremental improvements.

The client teams built business plans and submitted them into the formal decision-making process to get funding.  That's when the  wheels started to spin.  We were caught in the realities of incremental budgeting that had committed resources over long periods to specific responsibility centers. 

The brilliant political scientist Aaron Wildavsky taught us long ago that incremental budgeting works because … well, it works.  We know that 80% of what an organization needs to do next year will be the same as what it’s doing this year.  When you’re allocating resources it’s simple math to get from here to there.  The problem is that every year the 80% shifts.

The key is the 20%.  That’s where change comes from.  That’s the investment in the future.  That’s transformation and survival.  The question, of course is how to fund the 20%.  This is where incremental budgeting becomes a barrier to change.

Incremental budgeting strives for predictability.  It likes to lock in resources in multi-year plans for: operations, capital improvements, projects such as IT, and even R and D.  As line items get frozen in place they also have tacit approval to eat ever-increasing amounts of resources and push out the 20%. 

To accommodate the vagaries of the 20% organizations often claim that they will “repurpose” on-going resources, as the needs of change become known.  Don’t be trapped by this sirens call.  Don’t think that somehow managers will find sufficient resources in their base budgets to fund change.  Repurposing doesn’t work.  It’s a euphemism for “change is a good idea but we’re really not committed to it if we have to make tough decisions that affect our incremental plans.”

If your organization believes it must change then don’t even launch the initative unless you support it with the means to survive.  You need to understand how resources are allocated and you need to change the resource decision-making process to accommodate the 20%.    

Here’s what you need to do to fund your organization’s ongoing renewal:

1. Carve out and dedicate resources for change.  Don’t fund change through the traditional, incremental budgeting process.  
2. Use the skills of creative leaders to decide how to use the change budget.  Don’t rely on the power structure to make decisions about change.
3. Use a “stage and gate” process to refine and develop change initiatives.  Don’t make big bets that stifle flexibility.

By definition, change is not the same as your ongoing operations.  If you don’t fund change differently it will be little more than rainbows and butterflies.