Mitigating the Effects of Baseline Budgeting


This posting is on a topic of particular concern to me.  As someone that has worked for and provided consulting services to major corporations and our Federal Government for more than 20 years, I have found baseline budgeting to be at the root of tremendous waste,  bloated budgets, and overgrown organizations.  It is my sincere hope to see our Government take serious steps to reduce the effects of baseline budgeting, for the sake of us all.  Here is some content from a concept paper I recently authored on the subject. Click here to download the entire paper Mitigating Effects of Baseline Budgeting.  Also, please post your comments and ideas on other ways to mitigate the effects of baseline budgeting.

Baseline budgeting is the financial planning practice in which an organization has an annual budget developed and approved based on a baseline of spending plus requests for additional funding in each financial planning cycle.  The baseline is based on previous year’s approved spending.  Additional funding is based on many factors including inflation, cost of materials, new programs, new technology, and other forms of growth. This is the approach to budgeting predominately used by Government agencies and some large businesses.  The most apparent problem with baseline budgeting is the assumption that current spending levels are the appropriate baseline or “bottom line” of spending.  This assumption is problematic for many reasons. Given that financial planning cycles range from 18 months (Industry) to four years (DoD), numerous things can reduce the required baseline of spending needed for an organization. Baseline budgeting is a root cause of inefficient use of Government resources.  The financial costs are measurable and easy to comprehend.  The human and performance costs are nearly impossible to measure on a large scale, but as we have witnessed, can outpace financial costs by several orders of magnitude, especially when baseline budgeting operations manage expensive end items (planes, tanks, buildings, or human capital).

Ways to reduce the effects of baseline budgeting, in order of importance, include:

  1. Hoshin Kanri (a.k.a. Hoshin Planning, Goal Deployment)
  2. Standardized Business Case Analysis[1]
  3. Cost/budget reduction based performance incentives

Hoshin Kanri, a Proven Method for Strategic Management

Hoshin Kanri is the most powerful technique for mitigating the problems with baseline budgeting. It is used by many of the world’s highest performing corporations including Toyota, General Electric, and Hewlett Packard.  It is just now starting to get traction in Government. Hoshin Kanri connects tasks to strategy through simple step-by-step planning, commitment to the plan, and rigorous management to the plan through a set of tools that continuously align every day activity to strategic goals.



In addition to the disciplined process for performance and financial planning established by Hoshin Kanri, the tool that specifically helps mitigate the effects of baseline budgeting is the Goal Deployment Matrix, shown below.  The Goal Deployment Matrix is particularly useful as a tool against baseline budgeting in that it captures all goals and objectives for the organization, plots them against the organization’s core functions and initiatives, and establishes ownership and performance metrics both horizontally and vertically.  When fully implemented, the Hoshin Goal Deployment Matrix is a matrix based catalog of every function (operational and developmental) within an organization and identifies the value each of these functions is supposed to drive.  This is used to mitigate baseline budgeting through enforcement of a budgeting process that requires all budget line items to be associated with the Goal Deployment Matrix.  If a budget line item does not have a clear place on the Goal Deployment Matrix, then it is not aligned to value and it is waste.  All new developmental initiatives are vetted against the Goal Deployment Matrix to again identify their value and place within the plan.

Standardized Business Case Analysis Drives Spending Discipline

Standardized business case analysis is another method that can help mitigate the negatives of baseline budgeting.  Though not as powerful, business case analysis is a great tool in conjunction with Hoshin Kanri.  Business case analysis primarily addresses the expansion of the baseline by forcing all new starts and developmental efforts through a standard business case process.  In each case, new starts must be vetted against a balanced set of criteria, must add value, and must align with strategic goals.  Further, the standard business case process forces a set of process steps and approvals that cannot be short circuited to enable end of year spending. The diligence of the process forces management to think more strategically about spending activities.

Individual Performance Metrics, a Useful Tool for Specific Problems

Perhaps the most difficult technique for reducing the effects of baseline budgeting is the application of individual performance metrics targeted at cost savings.  This is also the most risky, because personal performance metrics drive personally motivated behaviors.  These behaviors may not be best for the organization.  In other words, if people are incented to reduce cost for personal gain, they may do so at the expense of increased market share or improved customer satisfaction for the organization.  However, cost reduction individual performance metrics can be used sparingly when targeted at specific functions or offices within an organization.

Improving Financial Planning Processes, The Time is Now

It has been our observance during nearly two decades of management consulting that baseline budgeting is a root cause of significant Government inefficiency.  It is the source of compounding financial excess and irrational management behavior.  It is not feasible for Government to perpetually increase its percentage of financial and human resources consumed.  Sequestration and recent cuts in Government spending have created an opportunity for new ways of managing the tax payers’ dollar.  It is incumbent upon Government leaders to seek out and employ new strategic planning, financial planning, and human capital management techniques that ensure Government agencies build upon and institutionalize recent change.



Building a Great Mission Statement

It is the time of year when many organizations are doing their strategic planning for the year ahead.  In the spirit of the season, here is a strategic planning tool for revising or building anew a mission statement for any size or scope of organization.  The approach is simple and effective.  It originates from the management discipline known as Hoshin Kanri.  I have used it very successfully for many years in numerous environments including telecommunications, product development, defense, and information technology.

The method is very simple.  It begins with a mad libs (remember those?) style fill in the blanks.  The template is shown below.

Mission Statement Template

The mission statement building process will take from one to four hours depending on size and complexity of your organization.  Bring your team together, include a representational cross section from leadership, management, and staff and make sure you have a good facilitator.  Building the mission statement if fun and easy from this point.  Using a large white board, the facilitator should solicit answers to each blank line, beginning with purpose.  Get everyone to participate and throw out some stimulating ideas.  For example, you can propose to the team that the purpose of the organization is “to put all competitors out of business” or “to dominate the world.”  These are not likely realistic or productive as a true purpose, but they stimulate discussion and get people to loosen up and participate.

I like to begin the process with an example mission statement built using the process.  I often use a mission statement leveraging my past as a landscaping business owner, back when I was in college.

Lawn Mission Statement

In this simple and effective mission statement, we identify that our ultimate goal is to be the regional leader that protects its customer base and that we recognize our most important capabilities are with our crew chiefs and our equipment.  This creates both operational and strategic focus for the organization.

I regularly see mission statements from multi-billion dollar corporations that are less concise and less meaningful.  Yet, those mission statements typically take months to develop.  This approach can develop a great mission statement in hours.  Even if your mission statement is not open for revision, going through this exercise is a great early phase tactic for your strategic planning team.  It helps to get everyone focused and often exposes strategic gaps or lack of alignment.  If you choose to give this method a try, please send a comment to let us know how it worked out.






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