UNWIND

SVENSKA HANDELSBANKEN - YET WITHOUT BUDGETS

More Swedish lessons from the banking industry is of Sweden's Svenska Handelsbanken.

Svenska Handelsbanken staff made a presentation at a Beyond Budgeting Round Table (BBRT) meeting in Texas about a decade ago.  Handlesbanken was a model to BBRT as they had the experience of running their organization since 1972 without fixed budgets and without detailed budget planning.  Budgets which would normally take 10 months to complete were prepared in less than two weeks on the Handlesbanken model.  Svenska Handelsbanken was classified as one of the most profitable banks in Europe, and it is alarming to see that this bank has been profitable even in this worst economic downturn.  The bank’s core philosophy is a focus on customers, profitability at the level of each operating unit and long-term relationships, not short-term gains.

Essays:BUDGETING

Budgeting by Merrill Cassell, available for sale at Amazon.com.

Note: Other essays in the market place:

At Amazon.com: Level Best is of the multi-tiered tax system vs the flat tax.

At Highbeam.com in the UK: 37 essays on various financial & management topics:

UNICEF's Integrated Budget - A Decade of Failure?

Like we were slow on the uptake, the Booze Hamilton Management Study recommended a unitary budget system for UNICEF, in their management study report almost 12 years ago. Little did the management consultants know that program and administrative /program support budgets were two different animals.

FORGET THE WORLD BANK

Forget the World Bank, Try Wal-Mart shows that free markets gives jobs and reduce poverty.

Overhead

The social sector is constantly grappling with what is overhead. When donors impose implicit percentages as 10% or some other benchmark this does not add any value how well money is spent on development aid projects. Donors and parties questioning the validity of how funds disburse are ignoring the costs of the program service sector itself.

GLOBAL NON-PROFITS - REVISED BUDGETING FRAMEWORK

GLOBAL NON-PROFITS (GNPs)

A REVISED FRAMEWORK FOR PLANNING AND BUDGETING

1.                   INTRODUCTION

Global non-profits (GNPs) that render foreign aid to developing countries (non-industrialized countries) have disintegrated planning and budgeting systems that make it very difficult to formulate a total financial estimate of its development assistance and supporting costs. There is one plan for development assistance, usually from 2-6 years of duration (illustrated in Exhibit 1)  and there is two-year total budget for all of the support costs for development assistance (the core budget).  Development assistance is analogous to the manufacturing cost and support cost is analogous to the overhead cost.   Since the foreign aid is linked to the development programmes of each country, start and end dates of each country’s development programmes and their duration are all different.  In addition, the revenue base contains special allocations that are tied to specific countries or specific development programmes that are donor dictated and controlled and therefore could not be targeted to the regular planning and budgeting cycle.  Special allocations make it difficult for GNPs to formulate a development strategy with sufficient confidence that the funds would be forthcoming.  GNPs must therefore operate within a high degree of uncertainty for a major part of its development assistance plan.  The work that goes into planning and budgeting is voluminous and messy and takes up a tremendous amount of senior management time that could otherwise be spent on the main theme of the GNP – development assistance.  A revised framework is required to simplify the process of planning and budgeting for GNP’s.  Adaptation of the principles of the Balanced Scoreboard and Beyond Budgeting concepts and the introduction of a few other theories (integrated and mutual fund theories) could help in making a mole out of a mountain, both in terms of documentation and time.  Gaining acceptance of a revised framework for GNP planning and budgeting would require the cooperation of the industrialized world (donors) and the developing countries (recipients of foreign assistance).  Who is going to lead the charge, is a big question that will remain unanswered for quite some time.

RETIREES WITH POWER - NOT IN UN

In the private sector, retirees still hold much of their retirement money in company stock to finance their future living expenses. When the company stock goes down the retirees have less retirement wealth. Now retirees are getting back at management in a big way. For instance, in the USA, retirees of Lucent Technologies have seen many of their benefits cut due to bad company performance in a low stock price. Now retirees are fighting back to curtail executive compensation. On February 15, 2006, Lucent Technology shareholders voted on a proposal to restrict the salary of top management. The proxy proposal put forward by retiree shareholders would make 75% of stock grants dependent on the company’s performance. Retirees from other companies are joining the bandwagon. Verizon Communications, General Electric and International Financial are making proposals to restrict executive compensation.

It is presumptuous not to assume that the UN Pension Fund is self-financing, when it finances itself from earnings in the Pension Fund. Therefore, who owns the pension fund, UN management or UN Staff and Retirees? I think the UN staff and retirees worldwide (or all UNJSPF participants and beneficiaries) have the first right of decision in the privatization of the UN pension fund and it cannot be a UN management priority.

WHY DEVELOPING NATIONS REMAIN POOR?

Sri Lanka like any other developing country is a country that has to import many goods and services. As a mid-teen each time I went to market, I was amazed at how prices of groceries would jump from month to month when all other indices were constant. The grocery store owner used to tell me foreign currency is up, and I never knew what he was saying. All I knew was that in the months or so before, ten rupees would fill my bicycle basket with groceries but in a particular month, it was half-full. My family and I were poorer now, as to purchase a full basket of groceries, I now needed twenty rupees instead of ten. In addition, when I grew up and started earning and purchased groceries for my own family, I would recount this getting poorer story, and yes, I continued to get poorer in spite of salary increases. What was happening to me then is also happening to others now and to entire developing nations the world over who have to import much of its goods and services.

This leads to one very important conclusion drawn by some of the great finance writers on why developing countries remain poor. Say the Gross Domestic Product (GDP) of developing country X increases by 5% but its local currency devalues by 10% to major convertible international currencies. Then in terms of global purchasing power, country X has become poorer by roughly 5%. Moreover, each time there is currency devalues, they get poorer.

Thus, each family now spends more in local currency to fill a basket of goods and services than they did prior to devaluation. When a business or local UNICEF office goes to market to purchase anything from paper clips to paint, devaluation of currency also increases the prices of those imported goods. Facing the same dilemma, the property owner says that the  cost of living has gone up and increases property rent. On the program side, now less goods and services are procured (note 1).  In addition, for the entire nation, people must now spend more to fill a  basket of goods and services.  Currency devaluation makes the country poorer and poorer.

Of course, in addition to inflation and currency valuation, there are many other economic, social and natural variables in a complex economy that cause poverty, but when the GDP growth rate is less than the rate of currency devaluation the country is poorer than before in an instant.

Further reading: The Force of Finance by Reuven Brenner, Texere, New York, London.

The Birth of Plenty by William J. Bernstein, McGraw-Hill.

Note 1: UN HQ offices normally cut field office (FO's) budgets when issuing budget allotments so that FO's end up with the same amount in local currency. However, most often those  budget cuts have to be reinstated in some proportion due to price increases in the local markets. While budget cuts cannot be made on a 1:1 ratio with devaluation, some savings can be recouped due to time lags in the market place for price increases to impact consumers. Unfortunately, there is no accurate measure for this at a UN budget level.

US TAXES - E-FILING

E-filing of income taxes is easy and is what millions do in the USA.  Regretfully, over 10,000 UN employees and retirees all over the USA area cannot e-file their federal and state taxes because UN New York does not have an employer ID number. 

UN REORGANIZATION

Change is inevitable for the United Nations since its establishment almost 60 years ago.  While its program priorities have shifted, perhaps its management, administration, and bureaucracy at large has taken a back seat.  One of the other problems with bigness is that the UN has grown, not only at the secretariat base but also with the addition of agencies over time.  The time has come to examine the duplication or triplication of efforts between the different agencies and the UN secretariat itself.

A Wall Street article on ‘Reform, U.N. Style’, (Review & Outlook, December 6, 2005) pointed out the example of the duplicity of AIDS issues stemming from INSTRAW (U.N. International Research and Training for the Advancement of Women) with that between the World Health Organization (WHO) and UNAIDS. In addition, of course, UNICEF does social work that specifically targets women and children of the developing world. UNICEF also researches and programs AIDS issues questioning further the legitimacy of INSTRAW.

If you mention education for instance, much more than one UN agency will speak of it and program it.  Similarly, if you speak of water and sanitation or the reduction of poverty, there will be more than one than one UN agency doing work in those areas.  Due to this reason, sometimes third world country governments are confused to hear so much of the same thing from different UN agencies. 

However, while duplication should be avoided at all cost, coordination may not be misunderstood for duplication. For instance, UNAIDS is not an agency competing or duplicating work but is a coordinating body. The Joint United Nations Program on HIV/AIDS (UNAIDS) is a secretariat bringing together efforts and resources of UN system organizations to the global AIDS response.  The co-sponsors of UNAIDS are UNHCR, UNICEF, WFP, UNDP, UNFPA, ILO, UNESCO, WHO and the World Bank.(see Footnote 1).

Nevertheless, in some respects the UN has been functioning as if the rest of the world has been standing still.  Coming out of the developing countries are knowledge bases of highly skilled professionalism and intellectualism. Private companies have relocated much of their labor-intensive operations to inexpensive low-wage localities outside major metropolises and in the developing world.  It will be thus difficult for the UN to defend its heavy high cost headquarter structures in the most capital cities of the industrialized world.  In addition, digital telecommunication technology has reached such an advanced stage that geographic distance should not prevent the execution of some tasks that hitherto required close personal contact.  For instance, procurement need not initiate from central locales in the industrialized world.  Placing procurement centers closer to the action may be the most desirable management decision to consider. As a case example, the Toyota Motor Corporation decided to open manufacturing plants in the USA because it was much faster and cheaper to deliver a Toyota automobile to a US customer than ship it all the way from Japan.

The entry point of staff selection deserves high priority so that some staff appointments base on well-honed ability rather than political influence. The classification of staff into general service (GS) and international professional (IP) should be combined into one grade structure through more levels, e.g. from 1 to 17, so that lower level staff do not feel demoralized and tainted with low levels of esteem. The maximum retirement age of 62 years-old should apply to all grades of staff without exception.  It is discriminatory to allow staff at the senior levels of assistant secretary-general and beyond to work past the retirement age enforced on lower level staff.

The functions that must get the highest recognition and upgrading in the UN systems are that of Information Technology (IT) and Human Resource Management (HRM).   Technology has transformed business with boundless potential.  Technology is changing every day and offering newer and better opportunities to enhance communication, information sharing and decision-making.  The UN needs a highly skilled technology group to advance its operations and without the right incentives, it would be difficult to attract and retain good people in this field.

Not of lesser importance is the function of HRM. The UN and its agencies have no factories and need none either.  What it needs is the ideas from its people to solve the difficult problems of the developing world.  Upgrading the HRM function to serve beyond personnel administration should be the next best course of action.  HRM directors should post at ASG level in UN agencies as large as UNICEF and report directly to the head of that UN agency.  With today’s knowledge-economy, harnessing employee intellect to narrow the efficiency gaps in the UN is a critical ingredient of UN reform.  Much more enhancements in the UN leadership development, staff motivation, staff training, and recruitment and appraisal systems are long overdue. Hitherto, HRM officers focus more on recruitment, routine personnel administration and firing of staff rather than given a free hand to mobilize the resources of the organization and update HRM practices to infuse innovation in the UN workplace. 

The structure of executive boards and the frequency of board meetings seem overbearing on UN agencies. With one executive board meeting each year, a UN agency had more time to spend on doing real work.  However, with a change to hold four executive meetings a year, UN agencies embraced this added burden with much strain to its existing operations.  Perhaps, it may be appropriate to examine the experiment of more frequent board meetings over the past few years.

Outdated UN regulations are not a good base to start UN reform. Rewriting UN rules and regulations from a clean slate may provide better accountability and minimize bureaucracy. The UN is in need of a big dose of unbureaucratic management principles.

Finally, UN harmonization is another issue that needs close examination.  With too much harmonization UN, agencies seem restricted to evolve and change with the fast changing circumstances of its program environment.  The quest for greater harmonization may lead to unhealthy needs for enforced conformity.  UN agencies must be left free to adapt and change to their own growth and program needs without channeling through a big monolithic process of harmonization.  What needs harmonization in the UN is salary and grade scales and accounting and administrative procedures, and much of that exists already.  Furthermore, the harmonization process has brought on more meetings and more delays in addition to the already hopeless turnaround times that make the UN infamous.

This short essay in no doubt covers all areas of UN Reform - a big subject of discussion and action. However, the UN and its agencies cannot stop working for UN reform, the work must go on. Rather than one mammoth overhaul, UN reform must be a continuous process.  It is therefore incumbent on the reformers to have a  plan that phases reform over a term of years in some priority order and make adjustments to that plan as experience is gained with the reform process.

Footnotes:

UNAIDS = Joint United Nations Program on HIV/AIDS.

UNHCR = United Nations High Commissioner for Human Rights

UNICEF = United Nations Children's Fund

WFP = World Food Program

UNDP = United Nations Development Program

UNFPA = United Nations Population Fund

ILO = International Labor Organization

UNESCO = United Nations Educational, Scientific and Cultural Organization

WHO = World Health Organization