Now might be the time to step back rather than forward

Across the country public sector organisations will be getting into the swing of their budget process for the 2012/13 financial year. The chances are that they will be following an incremental process. They'll start with what they know—this year's budget—and add to it estimates of the changes in prices and policies that they are confident will happen between now and March 2013 and then they will identify ways balance the inevitable gap that will open up between their forecast levels of income and forecast levels of spending.

Incremental budgeting has strengths and weaknesses. One of its strengths is that it is relatively stable, year on year, and it is relatively easy to explain to politicians and the public how the budget for next year was arrived at. The downside is that it is implicitly based on the assumption that this year's budget was right in the first place. There is no challenge made to it.

What this means is that over the last years and decades public organisations have moved forward year to year in a fairly steady, and I would say safe, way. If everyone (more or less) has accepted this year's budget and we have not changed it much then the chances are they will accept next year's. But, as the cartoon above illustrates, sometimes moving forward in small increments, even by inches, can have disastrous consequences. That is, when you're at the edge of a precipice it might be prudent not to make a step.

So, if we are not to use incremental budgeting what else might we do? Let me use an analogy that Ron Heifetz used in a talk I saw him give at Warwick Business School last year. He described how the leader of a group of chimpanzees fulfils her role of solving day to day problems of where to find food, where to sleep and how to defend themselves from predators. These problems are what Heifetz calls transactional problems and the chimpanzee can learn how to solve them in an incremental way because of her experience. But what happens when a human hunter arrives with a gun? This is an "adaptive problem". The chimpanzee's experience might suggest attacking the hunter  but that (probably) won't work. An adaptive problem requires a different sort of leadership and a different solution. The chimpanzees need a leader that can teach them to run away and hide from the hunter.

Returning to budgeting, the incremental approach has worked for public sector organisations over the last twenty years or so when they have been asked to find small amounts of efficiency savings year on year but will it work effectively when faced with making cuts of ten or twenty per cent? I have my doubts. I think public sector organisations are facing an adaptive problem and they have to adapt to the environment if they are to be successful. That means trying different things and accepting the risk that some things will work and other may not. What I think that means in terms of budgeting is for organisations not to spend the next five months poring over spreadsheets showing marginal increases in costs and endless lists of marginal budget cuts. Instead, there needs to be a step back (away from the precipice) and a review of policies. If an organisation can identify a better way to achieve its ends without being constrained by a budget that says we should do what we did last year but try to do it a bit faster or with less people (that is, it can find an effective solution to the adaptive problem) then the budget can take care of itself.

A time for leaders...

Following the spending review announcement there will be feverish work going on all over the public sector to make plans and budgets for 2011/12. The level of cuts that these public managers are facing is an order of magnitude larger than they would have faced in the previous ten or twenty years.

What these managers are facing is what Ron Heifetz calls an adaptive problem as opposed to a technical problem. I saw Heifetz give a lecture at Warwick Business School in the summer where he explained that managers are good at technical problems. They’ve seen them before, they know how to find the solution. Adaptive problems, on the other hand, are novel, complex and don’t lend themselves to easy solutions. What they require, said Heifetz, are leaders rather than managers.

Looking at the financial conundrum facing public organisations, this means that the answer is not likely to be found by trying to do what has been done every year for a generation. Yes, over that time, public managers have found ways to eek out 2 or 3 per cent efficiency savings, or to put fees and charges up a bit, or to find a new grant that will pay for a project, but that won’t work to find the 7 or 8 or 10 per cent that has to be found for three or four years in a row. Public organisations have to try some radical ideas, take some risks. And to do that they need leaders who can show the organisation how to move ahead.

In his lecture, Heifetz draw a parallel between the tackling adaptive problems and natural selection, where random adaptions that best suit the environment succeed. Failure to adapt quick enough can lead to the ultimate failure: extinction. I guess this idea, when brought up in association with bureaucratic public organizations, inevitably leads one to think about dinosaurs and that the future is bleak. But consider this: birds are evolved from ground-dwelling dinosaurs so perhaps the future could be dramatically different from what we know today.

In my next post I have an idea for tackling the current budget crisis that perhaps fits this bill: not having a budget at all.