As budget season approaches the Company must decide which of its strategic concepts will be crystallized into real strategies by allocating to them our scarce resources. While the goal is to maximize shareholder value, the need for crisp decisions inevitably leads to budget games as old as the oldest profession. Each Spring, as the world emerges from the repose of Winter, a general manager’s mind turns to budgets and bonus targets. Having survived such games without number, including seven years with the Federal Government in Washington, D.C., I thought I would help you with a primer on budget tricks. Let the games begin!
First, you need to start with a good environmental analysis. For instance, our customers are getting smarter about how they buy and competition is increasing. <Your biggest competitor’s name here> is coming. Our market share is at dire risk. As any book on negotiation teaches, people respond more strongly to the threat of bad things happening than to the potential reward of something good happening. Obviously then, you need to focus on the approaching Armageddon. You need more money just to protect your franchise. The potential benefits of growth are a lower priority than all the bad things that might happen.
After you have created the right climate of fear, the following techniques have all been used at various times to great effect:
- Create a sacrificial project. Everyone knows that executives feel good if they get to cut something so make sure you give them something to cut. It pays to make it obvious so that the exec’s don’t make a mistake and cut the wrong thing.
- Keep around extra people and projects as downsizing fodder so that when the inevitable cuts come, you have something relatively painless to give up.
- This next technique is called the “Washington Monument.” When the US legislature wants to prove that they have made every possible cut, they close the Washington monument because they have “run out of money.” There just isn’t another 0.0000001% anywhere. Local governments close the town library. In the semiconductor equipment industry the appropriate technique is to say that we won’t support Intel or Samsung.
- Claim that because of a 5% budget cut, the project will get delayed by 20%. This is done by either pointing out that most of the costs are “fixed” and therefore the only thing left to cut has a big impact. The other way to do this is to have multiple projects and allocate the entire cut to the lowest priority, as one should. Thus a 5% overall cut impacts the project that has only 15% of the budget by 33%. (People who come in and say that a cut will delay their highest priority project need career counseling.)
- Another one of the classic techniques goes by the name of the “gold watch.” This technique is to rank your projects and draw a proposed cut line where the project just below the cut line is the boss’ favorite project. The goal is to get the cut line moved down one project.
- The *Wow* new project. This is at least one CFO’s favorite. In this technique you assume a flat run rate for your existing projects and then come up with a *Wow* new project that has a great ROI and which everyone wants to do. For this new project you ask for new money. To do new stuff takes new money—what could be more logical?
- Existing projects involve ramping costs. Here we note that when the project was started last year and when the promises on schedule and ROI were made, we said that we would have to ramp up engineering. Now that we are pregnant with the project, we either need to do what we said and give the project more money or slow it down or abort it. Any action but ramping up the project, as promised, would have a terrible ROI on the sunk costs.
- By funding this new project for $100,000 you will save millions, later. This goes by the name, “I will gladly pay you Tuesday for a hamburger today.” (Thank you, Wimpy)
- It is important to get connected to something big. It is a lot easier to hide $10,000 in a $10,000,000 budget than in a $100,000 budget. Similarly, get connected to something growing rather than something shrinking. It is easier to hide. One person explained this to me when I was in Washington D.C. this way: if you go someplace where there is a lot of money flowing, like the Pentagon, the key is to go down to the sub-basement and put your cup under some huge pipe with a very small percentage leak. It would be impolite for me to point out where those locations are. Untold Beltway bandits have made fortunes this way.
- Emotional blackmail. The only way you can prove to me that you value my contribution is to increase my budget. A variant on this is to show that any action other than this would result in the company not behaving in accordance with its values. Mr. CEO, do you believe all that stuff you said?
- Jujitsu: this superb technique involves getting the boss to think that he or she came up with the project idea themselves. Consistency is an important part of this. You need to convince the boss that not approving this would be inconsistent with what they said last time. It is the boss’ fault. Indeed, shifting blame back to the boss must be considered the most time-honored of techniques since it dates back to the first conversation Adam had with God in Chapter 3 of Genesis, where Adam says, “The woman whom You gave to be with me—she gave me of the tree and I ate.”
- Customer blackmail. “We already committed this to a very important customer.”Or better yet, “the customer believes that the CEO committed this to them the last time he was there and they are going get very emotional if this is not done.”
- Everyone is doing it. <Your biggest competitor’s name here> is doing it! <Your biggest competitor’s name here> is doing it! <Your biggest competitor’s name here> is doing it!
- Go for big dollars. It is as much trouble to get a large new project through as a small one, so the ROI is better to go for something really big. And in some ways it is easier. That is because you end up working at higher levels in the organization where there is more macho behavior. Some executives are eager to make a bold decision. There is also the advantage of unreality. If you are talking about $1200, that is a lot of money to most people in their personal lives and everyone can relate to it and have an intuition about it. You will get lots of questions. But if you ask for $120,000,000, then very few people in the world can relate to it. It is strangely a less emotional decision for most people—it is just not real.
There are other techniques involving reciprocity and the use of authority, (e.g., industry expert, consultant, etc.) see, for instance, Influence: The Psychology of Persuasion, but enough is enough.
Given these techniques, there is the secondary issue of what should you ask for money for? You probably have your own ideas, but if not, some time-tested requests include:
- We passed the final phase-gate exit and the product is in full production, but we now need to finish the product and fulfill all of the promises we made to customers when we sold the product.
- The product was designed by Ph.D.’s but we need people with an even higher degree in order to set up effective recipes. Every oracle needs a priest, but we need a whole priesthood. We need much more money for Applications Engineers.
- While we have introduced hundreds of products over the years, we forgot that engineering needs to buy (expense) the parts to wet the line and systems for testing and for the demo lab.
I hope that this was helpful to you. To save time, you can just refer to these techniques by their number when you brief the executive team.
P.S. figuring out how to cut spending and profitably grow the company is a refreshing alternative if you want to avoid the crowds