The annual budget is often considered a fiscal exercise for the bean-counters. It is disconnected from the mission-critical spending needed to implement strategy and priorities in a volatile industry.
What happened to the value of the Annual Budget process?
It’s no secret that the annual budgeting process sucks the value out of most oil and gas companies. The traditional annual budgeting and planning process is fundamentally flawed. It’s distracting for company leaders who have to endure endless budget iterations, debate over conflicting business goals, and sandbagging, all of which lead to poor decision making. The result is a final product that becomes irrelevant soon after providing guidance to the Street.
In his best-selling book, Winning, Jack Welch calls the budgeting process, “the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization…In fact when companies win, in most cases it is despite their budgets, not because of them.”
Top 5 acute issues with Oil and Gas annual budgeting
It takes a long time, costs too much, and consumes too many corporate resources. The average corporation spends four months and 20-30% of senior executives’ and financial managers’ time on the budget (with some organizations taking six to nine months). Past research from the Hackett Group found that the average billion-dollar company spent as many as 25,000 person-days per billion dollars of revenue putting together the annual budget.
It doesn’t respond well to a volatile industry. It’s fixed and inflexible, and quickly becomes irrelevant. Your strategy is to improve productivity. When a new productivity initiative is identified after budget is closed – what do you do?
Performance incentives not aligned. Most companies tie executive and employee compensation directly to performance against the budget…leading to an employee goal of “How can I minimize performance expectations?”
Budgets do not identify waste. Inefficiencies in the current business processes are carried forward as ‘cost of doing business’.
No linkage of strategy-to-operations-to-financial results. The lack of driver-based planning principles perpetuates the Herculean effort required to re-plan and hinders insight into the drivers that truly matter.
Oil and Gas companies need a New Breed approach to budgeting and planning to thrive in a volatile environment.
Progressive Oil and Gas CFOs view budgeting and planning as a continuous process that consists of parallel work streams:
Strategic Capital Investments –one time investments or project cash outlays to implement strategic initiatives.
- capital investments for asset/resource development
- strategic initiatives typically associated with operational efficiency and back-office automation
- risk mitigation actions associated with compliance
Recurring Expenses –an ongoing resource capacity planning exercise to enable known initiatives and operations.
Leading Oil and Gas companies treat all capital investments as a portfolio. When a new operational efficiency or back-office automation opportunity is discovered, they are able to accelerate value. Forward-thinking leaders keep a pulse on their organization’s constraints (financial, technical, maturity, and capacity for change). Recognizing that the environment isn’t static, they optimize the portfolio to solve for these constraints and deliver maximum value.
Their secret sauce is an agile capability to quantitatively and objectively evaluate each investment opportunity in context of the organization’s ability to execute vs. the ultimate business value.
Consider a new approach to improve your performance management. Sense Corp Energy knows how.