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As a consultant for large corporations my startup is considering recommending the following:

Imagine that you have a large business with several thousand employees. Usually such a business has budgets for each department and may or may not be split up into strategic business units.

Imagine that the upper management set a value (in money) on the services that each team delivered. Say for example the cantine (which offers food for free as is often the case in Denmark). The cantine would be obligated to make surveys of the employees and make the employees rate the food. Lets say that the food is currently rated at three stars. The upper management could then decide that increasing the rating to four stars is worth 2$ per meal to the company (due to employee satisfaction etc.). This means that if the manager for the cantine believes that he/she can achieve this rise in ratings, he automatically has a budget of 2$ extra per meal. He/she does not need to ask the upper management for approval for using this money, even if it is not in his/her budget. If he/she delivers the increase for just 1.8$ extra, then this is very good, if he/she spends more than 2$, then this is bad.

The idea is to do this for most teams in a whole organization. The purpose of this is to enable lower management to act in a way that is the best for the company without asking for approval all the time.

My question: Could this method work? Do you know any examples of such a thing. I believe that profit centers are not an appropriate description of this.

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2 Answers

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This sounds great, but is actually pretty confused.

Let's tease out the elements of intention.

  1. We need to start measuring employee satisfaction with the canteen

  2. We're willing to spend a bit more to raise that satisfaction level

  3. We want to encourage and empower staff to act to improve their part of the organizational machine

Subjective measures are famously unreliable. So the first objective is good: we need to find best practice for conducting such ongoing measurement, implement it and watch the results. But we will be cautious: the accuracy of measurement is probably going to be low.

The second is also good, though structurally problematic. The figure of $2 per portion is plucked from the air, and encodes an assumption that conveys a signal - spend more on ingredients. And spending more would be a failure; failing to move the needle enough (or at all) would be a failure.

This is in fact exactly the old-fashioned kind of 'intervention from on high' that you are trying to avoid. I'm a general manager. I hear that people don't like the canteen food. 'Buy better ingredients, up to $2 per portion' is my decree. Yours might have been, "build the canteen staff as a team and encourage them to be more welcoming - you can spend $500 per team member each year." Sally would have commanded a canteen refit, a $200,000 capital expense. Jim would have hired a new chef, adding $40,000 to the operating budget. Jo would have negotiated a master catering supplier contract, with a 10% quarterly bonus based on satisfaction. Any or all of these might help, one might be the optimum answer, but they are nevertheless random acts of management.

The third, I suspect, is the vision you're pursuing. Staff empowerment is a major (and valuable!) change. If you choose to go about this team by team, by definition you should begin by consulting the people you mean to empower and engaging the managers who have to date measured their significance by the size of their budget and the scope of decisions they are authorised to make.

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Thank you for your excellent answer. I will go through your answer point by point. 1. Subjective measures are not 100% reliable as other unrelated factors might influence what you are measuring. I still believe that things like employee or customer satisfaction cannot be beaten my any other measures. Including any other measure than employee satisfaction to measure quality of canteen food would reduce the quality of your measure. Employees might need additional information about things like hygene to make a better decision, but those are details. – David Jan 5 '11 at 11:19
2. 2$ is plucked from the air, but I would say that such plucking needs to be done when making a decision about increasing quality of the food if using a traditional budget process. With the traditional process this will just be after the team manager has come with a specific proposal (if he ever does). You have an excellent point with the 2$ per portion indicating better ingredients. This enlightened me about the communication challenge related to the implementation. – David Jan 5 '11 at 11:26
2. I believe that this method would enable the most competent (closest to the floor) to make the optimal decision and therefore do not understand what you mean by "random acts of management". – David Jan 5 '11 at 11:31
3. I am currently consulting the lower management regarding this, and they are initially positive to getting more room for making profitable decisions. – David Jan 5 '11 at 11:51
'Random act of management' - I gave 5 examples of possible 'from above' responses to the canteen situation. That's the extent of my point, and as you agree, the concept (give budget latitude) got confused with a direction (focus on dollars on the plate). – Jeremy Parsons Jan 5 '11 at 13:43
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I'm not aware of any small businesses (+50 people) not working with budgets allocated and fragmented across departments and managers.

This system allows optimization like your describe as soon as it doesn't go over budget. Of course managers can always ask the board for more if they can prove the benefits for the company.

So for large corporation in which many stakeholders, it's impossible to work with yearly budgets.

It's the basic of accounting and finance management.

I think it would work better for very small startups.

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One company I know has something like 100-150 employees in four countries. They have EBITDA of 40-50% and has existed for something like 30 years. They also do not have any loans and privately held, so there are no external stakeholders requiring budgets. What they do have are vague profit goals (something like "better than last year") and they do check their cash-flow regularly and forecast it if they are under pressure. – David Jan 5 '11 at 9:56
What is the name of that company ? – user3997 Jan 5 '11 at 9:59
Let us take an example where I believe that it is clear that there are no reasons for budget. Imagine a company, which has virtually limitless capacity to produce (for example if they have infrastucture which can serve 1 million or 10 million customer by just buying a couple more servers and having a few more support staff). Such a company is exclusively concerned with getting dollars out of their infrastructure (to cover their fixed costs). – David Jan 5 '11 at 10:13
I believe, then that it is meaningless to say to a sales team that they need to watch their cost. It does not matter what expenses they have as long as they make a profit and are aware of the cash-flow of the whole company. If that sales manager knows that he/she can sell for 10 million by investing an additional 100.000 dollars, then it is a no-brainer, no more senior management needs to consider this, he should be allowed to do it as soon as possible. There, of course, needs to be limit to how much unexperiensed managers can spend in their first year or so. Do you see my point. – David Jan 5 '11 at 10:13
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David: the subject is interesting enough to go further in the discussions. I'm not an expert, what I can only do is telling you it's probably impossible to convince large corporations to stop using budgets. I subscribed to your blog. Could you please publish your findings about the subject if you decide to go further in that idea? I'm very interested to learn from your experiences. – user3997 Jan 5 '11 at 10:16
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