BUDGETING HAS FAILED....

Why Budgeting has failed the social sector?

By Merrill Cassell

Even UNICEF’s efforts at Integrated Budgeting have failed

            In my 25 years with UNDP/UNICEF and the previous 12 years in the private sector, I firmly believe that the private sector as well as the social sector has much to learn about Beyond Budgeting.

            Business practices are similar to the social sector. Business needs markets, and then they have to manufacture and sell goods and services that people will purchase.  On the other hand, the social sector inherits problems, and the problems of the destitute people are the markets for the social sector.  The social sector produces goods and services in the form of social programs to alleviate the suffering of the destitute to give them a normal life.  While the perception of the market may be different for the business world and the social sector, the process of producing goods and services is the same and so is the budgeting process.  Before a business starts preparing a budget, they need firsthand knowledge of the market: what types of goods they must manufacture in the right quantity, quality and time.  Operations in business are those manufacturing departments (in services, the core services) and the rest are the staff functions (corporate functions, administration, human resources, accounting etc).  However, in the social sector, the staff functions refer to as ‘operations’ and what are operations in business is ‘programs’ for the social sector. The point is that in business the budget for operations and staff functions are one consolidated web – you first see what you will produce and then see what equipment[1] and staff you need to produce and market products.  Similarly, the social sector should see about programs needs and then budget for the equipment and human resources needed for both program services and resulting operations.

            For instance, UNICEF is one big part of the social sector, aiming to shape the lives of women and children in the developing world with better education, health, nutrition, rights and a host of other social services. When Booze Allen undertook the management study of UNICEF in the mid-90’s they underscored that UNICEF budgets were fragmented.  There were separate budgets for ‘Administrative and Program Support’, ‘Global Funds’, ‘Country Programs’, and a host of other ancillary activities.  The consultants recommended a unified budget for UNICEF. It was up to UNICEF to determine what a unified budget would look like.

            Following the Booze Allen recommendations, UNICEF embarked on an integrated budget proposal.  That meant that Field Offices would cease to have two-year budgets for operations and the administrative and program support budget would fuse as part of the country program on the same status of any other program input.  In short, UNICEF needs a truly integrated budget to be more successful in planning and budgeting.  However, at the same time donors insisted that there should be a harmonization of budgets with other UN agencies.  Harmonization killed the UNICEF unified budget approach, as other UN agencies did not agree to such a radical and conspicuous change.  UNICEF then started an integrated approach by reviewing country programs first before deciding on the administrative and program support budget.  The UNICEF integrated budget exercise is a failure as country programs approve at a different time scale and the administrative budgets for UNICEF field offices continue to approve and debate by the Executive Board on a different time scale. The integrated budget exercise has created a lot of extra work with little results to show off.  UNICEF and the rest of the UN programs, needs a truly integrated budget inasmuch that business integrates these functions.

            Of course, since UNICEF started its integrated budget exercise much has changed in the concepts of budgeting. Budgeting is a long process, filled with many hopes, and dreams that are out-of-date before the ink has dried on the printed budget document. For UNICEF too, this statement holds good for the administrative budget as well as the program budget.  What is the major problem? Really, there are three major problems.

             First, budgeting is a long process of meetings and paperwork.  At these meetings, presenters would try to make the best presentation to get their budget approved. One might say there is nothing wrong with a good presentation, certainly yes.  However, a good presenter gets his/her budget approved over a not so good presenter. Is the presentation more important than what is in the budget? The process of meetings and the paperwork trail also leads to taking the time of other people (budget staff, management, and staff from program functions) away from doing work to budget talk. Too much budget talk takes time away from core work. The long process of budgeting makes stale all the intentions spoken of many moons ago, but the bureaucracy does not allow any changes, so even stale budgets bake into a printed documents for executive board approval. The same speaks of the country programming process as well.  Most of country programming is just carrying forward what was done before, yet there is a marathon process of documentation and meetings involving both UNICEF and government personnel.

            The second major problem with budgeting for operations and programs is that the exercise is devoted to a fixed year.  Once the budget concludes for that target year then the keenness is to make the targets and numbers posed for the fixed years with less attention to surrounding changes.  Staff are aware of the changes taking place but could not do anything due to the limits placed by bureaucracy to making changes.  In view of these limits, staff try to use other innovate ways to transfer funds or make other changes or just have to wait until the next budget cycle.  These protracted delays make the programs suffer.  Imagine what could happen in business if they must wait for change, a competitor will overtake and put them out of business. Protracted delays for the social sector means more endured suffering by the target group.

            Third, there is much dishonesty in budgeting, either by design, negligence or to escape the burden imposed by bureaucracy.  The bureaucracy, rules and regulations in budgeting are so stringent that managers need to be innovative to overcome them.  For instance, managers may hide the actual needs of travel and budget for some other service instead.  However, after the budget is approved, they may disqualify other services and transfer funds to the travel budget. In the end, what actually takes place in the budget is not in alignment with prior approvals. Of course, when the variances add up for the organization as a whole, these differences may iron out, 1000 lies plus 1000 truths add up to zero.

            Planning and budgeting must change its time-scale; they have to move from fixed periods to rolling periods.  Planning and budgeting must move from annual or biannual reviews to continuous reviews focused on the changes that have taken place.  Changes are taking place so rapidly in this world today that even one quarter can be considered long term.  Social programs must yet tie to a country development plan of 3-5 years or so, but these plans must change to rolling plans of 3-5 years supported by shorter one-year rolling plans.  It is much easier to see certainty in a one-year plan that a 5-year plan.  Similarly, operations’ budgets that function on an annual or two-year cycle should have rolling forecasts supported by realistic quarterly forecasts.  The longer plans and forecasts must change each time a quarterly or annual review takes place.  Budgeting must also change its format.  More time should be devoted to the short-term forecast (or budget), 3-4 months for operations and one year for programs with higher levels projections and much less details for the longer period, 2-5 years.  If fixed periods must maintain for accounting periods, these rolling forecasts are a good opportunity to update the fixed period accounting forecasts.

            The social sector will need much help in reinventing its budgeting process.  There is much to learn from participating in the Beyond Budgeting Round Table discussions.  The World Bank has joined the Beyond Budgeting Round Table in the hope of amending its complicated budgeting processes.  In 2006 UNICEF is embarking on a new management study and has a great opportunity to revisit its budgeting processes and the integration problems of the administrative budgets with that of the country programming exercise.

Merrill Cassell

Educator & Writer

Former Budget Director of UNICEF.

Further reading:

• Beyond Budgeting Round Table (BBRT) web site www.bbrt.org
• Beyond Budgeting, by Jeremy Hope and Robin Fraser, Harvard Business School Press.
• Stop Making Plans; Start Making Decisions, by Michael Mankins and Richard Steele, Harvard Business Review, January 2006.
• UN Program Processes: Too Slow and Too Old, by Merrill Cassell, Wall Street Journal, September 21, 2005.
• GOOD TO BE GREAT and the SOCIAL SECTOR by Jim Collins, A monograph to Accompany Good to Great, July 2004.
• Future of UNICEF by Merrill Cassell, UNICEF Staff News, July 2005.
• Is the UN Really Reforming? By Merrill Cassell, UN IPS Journal, September 17, 2004.
• Blow the Budget by Merrill Cassell, Financial Management, UK, April 2004.
• Can We Budge It? By Merrill Cassell, Financial Management, UK, November 2003.
• Budgeting & More by Merrill Cassell, Management Accounting, UK, September 1999

[1] Equipment refers to supplies for the target group as well as the supplies needed to run an office. Even infrastructure like an office is a supply, and so is a computer or pig iron to make water pumps.

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