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Functional thinking destroys business value

by Robert Buttrick

In the blog, Enemies within, I highlighted 10 reasons why projects continue to fail, despite all the methods, standards and training we throw at our people.  Basically business leaders get the project performance they deserve as most inhibitors are institutional. This is what I said:

"Functional thinking – not taking the helicopter, the organisation-wide view. This often happens when executives’ or individuals’ bonuses are based on targets which are at odds with the organisation’s needs, e.g. sales bonus rewarded on revenue, regardless of profit or contribution."

Let’s look at another aspect of this – cost management.  Most organisations set their annual budgets, top-down, based on an expectation of revenue and costs. The costs then trickle down to cost centres and managers of departments of functional specialists, or other segments of the organisation. They have a budget for the year to work within.

Sounds familiar? On top of that we put time recording and ever more rigorous (onerous?) procurement systems – after all, we must be hard-nosed business people and make sure we only spend what is needed. Finance people then monitor the costs and do all sorts of jiggery-pockery to deal with their fiscal needs, accruals, internal transfers, prudence concept etc.

All this budget setting is done for a financial year, 12 to 15 months in advance.

Actually, that approach can work well for steady state bureaucracies, where next year tends to look rather like last year. It is what most people are familiar with and yet, how many people, nowadays, work in such a predictable, steady state organisation?  What if you are in a fast-moving, unpredictable sector where you are not sure what will make up your order book and what mix of resources you will actually need? They also realise that they need to deal with cross-functional projects and so they 'interlock' the demands of the projects with the cost centre budgets.

A budget set to 12 to 15 months in advance on this basis looks rather optimistic. So what happens is this:

  • Department managers spend their all budgets (so they don’t lose it next year) regardless of the overall business need – after all they are targeted on their cost spend.

  • Projects get starved of resources, as the mix of resources and costs change as work is won (if customer facing) or initiated (if for internal transformation). This can be despite the 'project budget' having enough funds, as all too frequently the departmental budget takes precedence.

  • Project managers get cross with functional managers who unilaterally withdraw their resources, despite the project budget being adequate

  • Department managers get cross with project managers for not predicting exactly what they will need up to 12 to 15 months in advance.

  • It becomes a blame game

  • The company and customer suffer

Managers:

  • who exceed their budgets are told they are bad managers;

  • who undershoot their budgets are told they are bad at forecasting;

  • who hit their budgets are told the budget was probably not stretchy enough.

So how can you deal with this?  The first thing is to realise that the above scenario describes a matrix organisation, where resources are shared across many projects and business activities. If you have a matrix organisation, the controls of the simple bureaucracy (cost centres) are totally inadequate – you need to have a full, matrix infrastructure in terms of portfolio, programme and cost management and for resource planning and assignment. This infrastructure should:

  • Manage the business across the organisation not down the cost centres

  • Allocate budgets and funds to projects (or other cross-company entities) not to cost centres.

  • Create governance which crosses the organisation, taking power off the costs centre managers

  • Only give cost centre managers funds for training, management, holidays, sickness etc.

  • Have a rolling monthly forecast, spanning financial years ('interlock' resets half yearly or even quarterly of often not enough).

  • Let any person work on any work, anywhere in the company.

Done right, you will have a flexible, self-correcting organisation, which is simpler to run and focused on business value not discrete costs centres. You will have tipped the balance of power away from the 'silo' cost centres towards managing business value across the organisation.

 

© Robert Buttrick

http://www.projectworkout.com

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Functional thinking destroys business value

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