In the last post Jim Kennedy, Asset Management Council, looked at what it took to construct a ‘defensible budget’.  He argued that stakeholders (customers, community, government, employees) are everything but he wondered whether organisations really understood what they were promising. In other words were they really clear about the consequences of their decisions and promises made?

Capability to deliver

For example, had they turned these promises into the capability to deliver (technology, plans, people, facilities, information systems, logistics, support systems).

This has two aspects: there is an ‘enabling or inherent capability’ and an ‘organisational design, or organisational capability’. In other words, the equipment may be able to deliver, but has the organisation the right people in place?

Studies have shown that where someone was sent in to fix a problem who did not know what needed to be done, was not familiar with the asset or problem, or was not fully competent to do it, the level of competence was only 50% . This led to the job needing to be done 5 (!) times more often than if a competent knowledgeable person had done the job initially with 100% competence.

But what is the organisational implication of this?   To ensure that you have the right level of competence ready when needed, you have to have highly competent (and thus well rewarded) people under-occupied so as to be available when needed. As we cut back on training because it is expensive, and aim to have everyone fully engaged all the time in order to ‘achieve efficiencies’ – what is the real cost?   If  we cannot demonstrate the benefits of organisational capability in a ‘defensible budget’,  costs will increase and quality decline.

Comment?

We often take pride in our ability to ‘make do’ when the situation is not as we would have liked. This particularly applies to those occasions when we do not get the budget we requested. We grizzle – but we ‘make do’. But what message does this send? Jim Kennedy, speaking at an Asset Management Council Chapter Meeting in Adelaide warned of the dangers of this ‘make do – can do’ culture. When we ‘make do’ (usually by cutting corners, or deferring activity that results in larger costs later) we are telling the finance section that our budget request was overblown. When Finance subsequently provides less than requested (working on the basis that the initial request was ‘gold plated’) and the recipients subsequently ‘make do’, that does more than confirm the initial Finance suspicion, it creates a lack of trust on both sides. Budget proposals are now ‘boosted’ to allow for the inevitable cuts. Finance reduces the budget request and as it goes on, budgets lose their informational, decision-making, value.

Jim proposes that the value proposition for Asset Managers should be “How to protect your leader against political opposition” and his answer to this question is a ‘defensible budget’.

So what is a ‘defensible budget’?   Jim describes it as follows:

• Fact and Risk Based
• Fully traceable to the asset’s output requirements.

He reckons these two are really sufficient but could be bolstered by showing that the budget is

• demonstrably good practice and in accord with national standards; *compliant with statutory and regulatory imperatives;
• implemented by competent (certified) staff;
• supported by verified technology (information decision systems);
• transparently and verifiably costed (which builds up trust between the technicians and finance; and
• deliverable in the agreed time frame (don’t promise what you cannot deliver).

Good stuff! – but, and here’s the rub – developing good practice, ensuring competent (certified) staff, establishing sound information decision systems, demonstrating transparency and ensuring deliverability does not happen overnight. It takes years of consistent management attention and good leadership.

Question this week: Do you know where your organisation stands on each of these facilitators of sound and defensible budgets?  Is there a program to improve it?  Comment?

Editor:  You can find earlier posts on budgets, by using the search function, and all posts by Mark by selecting his name.

Further to my earlier posts about asset budgets, I couldn’t help but want to have another go at this by asking a slightly different set of questions. These relate to the principle of transparency.

By transparency I mean:

Is there a clear and documented basis for the estimates upon which the asset budget has been based?

• Are the estimates based on ‘simple’ or ‘averaged’ projections of expenditure rather than ‘modelled’ projections that emulate realistic timings and patterns of expenditure for the nature of the works involved and how they will be procured?
• Is it based on estimates for all assets over the full period that the budget is meant to address? By all I really mean a schedule that lists all of the assets, including those for which a $NIL expenditure is forecast for the relevant period. (I ask this as a check that all assets have been given consideration.)
• Are the underlying assumptions documented and made clear to those being asked to approve the budget – especially the reliability / sensitivity of rates used and associated finance costs?
• Are the priorities inherent and sequencing / pace of the proposed works also made clear and demonstrably aligned with corporate business and services priorities for the forecast period? How does this align with projected cashflow requirements and funding availability? (A projection showing a skewed acceleration of expenditure towards the final quarter must raise concerns – not only about reliability of delivery, but also in relation to business and services priorities being effectively supported, and in relation to getting value for money from what is going to be spent.)
• Are the risks that are inherent to the portfolio and the proposed program delivery made clear and ‘current’ for the immediate and forecast context of the program and its delivery?

If these aspects are not transparent to the decision-makers then there is greater risk that the program will not be delivered and the budget will be nowhere near accurate