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Why budget games don't add up

Managers can be adept at playing budget games, such as setting goals easily surpassed to win a bonus. The problem: Such fictions lead to far-reaching consequences in your company. From Harvard Management Update.

It's budgeting time again, and several managers are up to their old tricks. The head of marketing presents a less-than-ambitious plan so he can exceed his targets and earn his bonus. A division manager is veiling her unit's flaws to win funding for her plan. The product development director insists that failing to invest in his idea will doom the company to the sidelines.

Though such budgeting shenanigans have long been practiced, today they're increasingly worrisome, says Richard Steele, a New York-based partner at management consultancy Marakon Associates. During boom times, business leaders didn't care as much about budget trickery because resources were plentiful, says Steele, who is also coauthor with Craig Albright of "Games Managers Play at Budget Time" (Sloan Management Review, Spring 2004). "But in tough times, the behavior is getting more attention," says Steele, and executives are less willing to tolerate it.

Moreover, in this age marked by corporate malfeasance, questionable budget behavior carries the whiff of poor ethics. "It's a small step from budget tricks to outright unethical behavior," says Steele, "and more executives are aware that a reputation for dishonesty can seriously hurt their firm's market value."

In addition, every investment dollar counts more than ever. If the money doesn't go where it's needed, revenue investments suffer, he says.

Yes, in the short run, budget games may pay individual managers dividends in the form of healthy resources and achievable bonuses. But in the long run, executives who tolerate budget games "help create a culture of underperformance, or what we call a mediocracy," says Steele, and they set the stage for ongoing underperformance.

And, ultimately, when the company underperforms, everyone suffers. To avoid this scenario, you need to identify questionable behavior and intervene promptly.

Five faces of budget trickery
Steele and Albright identify five especially insidious types given to playing budget games:

The Sandbagger. Sandbaggers arrive at budget meetings with plans that are less ambitious than ones they know they could fulfill. They argue for incremental improvement goals so they can more easily meet those objectives, win bonuses, and appear to be heroes. These tricksters are particularly active during tough times, when resources are tightest.

Sandbagging is particularly difficult to spot, and challenging it often leads to defensiveness from its practitioners. As Steele points out, "A sandbagging manager, when challenged, might say, 'Look, I'm the one closest to my market. Are you saying I don't know my own business? You've delegated this work to me; don't you trust me?'"

The Magician. Magicians know things about their business -- a large customer's intent to defect, a key manager's imminent departure -- that don't appear in their budget figures. But they conceal those realities and divert attention to more positive aspects of their operation to win their funding. Often coming up through the finance ranks, they find it relatively easy to manipulate their numbers. But after they've been allowed to work their "magic" several times, serious damage can be inflicted on the culture.

The Lone Agent. Lone agents claim they shouldn't have to conform to the usual conventions because their business is supposedly unique. They demand special treatment -- such as exemption from cost-cutting requirements that everyone else must fulfill.

The Visionary. Visionaries tout "breakthrough" technologies or services that will "revolutionize" the industry -- appealing to emotions when they can't produce feasible numbers. Claiming that they can't quantify the value of their plan because it won't pay off for a while, they argue that short-term underperformance is worth tolerating. Many are technologists taken with the latest advances or marketers imbued with the typical fervor of extroverts.

Visionaries are more common during boom times or in industries that are rapidly changing.

The Hostage Taker. Hostage takers also tend to proliferate during flush times, insisting that they can deliver major, immediate results if given the lion's share of available resources. They expect executives to bet the company on their plan. They have the potential to damage their company the most by overexposing it to a single high-risk opportunity.

An array of defenses
Each type of budget gamer causes unique forms of damage and requires a unique intervention. (See "Stemming the Damage.") But Steele argues that executives must also apply higher-level strategies to discourage gaming in general.

Create decision support units. Strategic-decision support units, as Steele calls them, sit in strategy or finance functions and operate independently of business units. These groups develop parallel plans based on external market realities and competitors' tactics, laying out the assumptions behind the plan.

"With the strategic-decision support unit in place, managers know they'll be challenged," says Steele. If they chafe at being challenged, "remind them that the goal is to provide a second opinion so as to improve plans for everyone's benefit."

Revise 360s. Another strategy entails revising the peer portion of a 360-degree performance review to help signal any tendencies toward questionable budgeting practices. Steele suggests posing peer-review questions such as, "Does this person accept and contribute to our corporate goals as he should?" "Does he accept and respond to peer challenge?" "Does he lay out plans that are ambitious relative to competitors'?" "Are his alternatives credible?" "What causes you to draw these conclusions about him?"

By revising the peer-review process in this way, Steele says, "you link personal feedback, which is often abstract, back to budgeting, when behaviors are actually demonstrated -- it's a much more powerful perspective."

Reframe the debate to focus on the customers. Framing budget debates to focus on customers helps get below the skin of the financials. Say you suspect a manager of sandbagging. Steele advises "challenging the assumptions behind his less-than-ambitious goals on the basis of his customer knowledge. Ask, 'How many customers have you lost this year? How many would you have to acquire to meet a higher target? What pricing changes would enable you to get those customers? What does that mean for relative price?'"

Create budget-approval standards. Finally, Steele suggests working through a checklist of standards with managers in budget-planning meetings. He recommends three categories of standards:

  1. Execution: Ask questions that help you determine whether the proposed plan can be delivered -- for example, "Is it grounded in market realities?" "Are the timing and anticipated results realistic?" "Can we monitor the plan's performance quickly enough to make appropriate midcourse corrections?" "Have we identified resource bottlenecks?"
  2. Strategy: Determine whether the plan is sound strategically -- for instance, "Have we explored enough alternatives for high-stakes opportunities?" "Have we prioritized ideas according to the value they generate for customers and our company?"
  3. Investment: Ask if the proposed plan can be properly resourced -- for example, "Can our available resources accommodate our competitors' countermoves and our customers' responses to the plan?"

Budgeting games won't ever disappear completely. But by familiarizing yourself with some of the more common and destructive forms -- as well as applying strong countermeasures -- you can minimize the damage not only to your company but also to everyone in it.

Reprinted with permission from "Debriefing Richard Steele: Stamp Out Budget Shenanigans," Harvard Management Update, Vol. 10, No. 8, August 2005.

See the current issue of Harvard Management Update.

Lauren Keller Johnson is a Massachusetts-based writer. She can be reached at

To read more articles like this one, visit HBS Working Knowledge, an online source for business analysis, information and research.

© 2005 President and Fellows of Harvard College

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