Why Budgeting is a Bad Way to Measure a Budget Holder's Performance
Steve Player, Director, United States, Member
When you try to use budgets as the way to measure a budget holder's performance, the process creates a CONFLICT OF INTEREST which results in back and forth negotiation of what the number should be. Since this is about future performance it inherently includes assumptions about the conditions that this performance will be delivered under. When changes of economic conditions occur and these assumptions turn out to be wrong, the measurement system suffers a design failure.
To protect against this (or any other) failure, budget holders naturally seek to low ball or sand bag their budgets. As a result, traditional budgeting systems can better be described as negotiating "minimum acceptable performance."
Rolling forecasts that are adjusted for changes of economic conditions may help a little to decrease the mentioned negotiation, but the Beyond Budgeting movement has identified much better ways to achieve the goals of budgeting without the negative behavior.
