Many companies are coming to the conclusion that traditional planning and budgeting just don't work. A recent survey suggested that 80 percent of companies are dissatisfied with their current processes, and financial directors ranked budgetary reform as their top priority. Another survey suggested that up to three-quarters of all plans are never executed—and planning is nothing without execution. Among the top problems associated with traditional approaches to planning and budgeting is the fact that these processes are rarely viewed as strategically focused and are often misaligned with strategy. If corporate strategy fails to drive the planning and budgeting process, all of the effort is just "huffing and puffing."

How can something as important as a company's budget not tie directly back to the strategy? In most companies, budgets are built from the department level up instead of from the senior management level down. In constructing budgets, the tendency is to build up the expense assumptions first. What can happen in this approach, however, is that departments may develop undue protection for those expenses and try to construct income projections that will fit the expenses. Thus, the income assumptions are built to generate enough income to cover projected expenses, rather than reflect what is realistically possible.

As they start working on their budgets, how many front-line managers have a clear understanding of their company's strategic plan? Do they understand the need for strategic alignment, which includes aligning all parts of the organization in a common direction as required by customers and the marketplace, future trends in the industry, and the goals of the company's stockholders? Have they seen the company's plans for marketing, operations, technology, and human resources? Unless this strategy is understood by all employees involved in the planning and budgeting process, "gaming" is encouraged between superiors and subordinates during target setting.

The company must be strategically aligned, with all areas planning and budgeting for common goals; otherwise, the process will continue to be viewed as adding little value, especially given the considerable amount of management time required. Conversely, there are three common attributes among the companies that view planning and budgeting as valuable tools: 1) strategically aligned, 2) driven by senior management, and 3) trusting. We'll leave #3 for a future discussion.