The Baby and the Bathwater – An Eternal Budget Dilemma

In the current Federal election campaign the centrepiece of the argument between the parties is about who can better manage the eternal budget dilemma. Managing budgets whether in the private or public sector is always a constant generator of tension and conflict between levels of management or even between work areas within an organisation. This is particularly so in tight fiscal times when it is necessary to look closely at what might be affecting the bottom line.

Two key reasons prompt boards and governments to look to reducing the expenditure side of their budgets:

  • revenues are declining or not meeting target and so there is not enough money to meet projected expenditures
  • revenues are stable but expenditure is blowing out beyond original estimates

There is certainly no criticism to be made of governments, managements or boards who want to live within their means. The Micawber principle isMicawber1 still a useful economic tool for individuals, organisations and governments alike but in our modern society there is also the need to consider the outcomes achieved by that balancing act.

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” – Charles Dickens

As with many and other aspects of life and business the devil is in the detail of how the reduction strategy is approached. In taking the razor to the budget there are a number of dangers which need to be carefully measured in taking decisions about where and how much to cut.

Throwing the baby out with the bathwater 

This is an old saying thought to date back to the 16th Century which describes situations where a person acting to dispose of something

baby and bathwater

Image courtesy: Phrases.org.uk

unwanted does not realise that they are also disposing of something precious. There are a number of ways that ham-fisted budget culling can fulfil the old saying. In other words where particular cost-cutting strategies are recommended aimed at securing a more favourable bottom line they can also, without proper attention to the collateral damage, create circumstances where other non-financial objectives of the organisation are put in jeopardy or significantly damaged.

Some of these instances include:

  • budget reductions that leave some functions operating but unable to produce credible outcomes.
  • eliminating functions that are important inputs to other functions.
  • reducing or eliminating quality control that directly impacts on delivery of services.
  • cutting activities that actually generate or indirectly sustain revenue.
  • cutting frontline services whilst maintaining back-office functions that serve them.

Separating babies from the bathwater

There are some basic risk management practices that can be undertaken when approaching the necessity to reduce costs or realign budgets that can prevent this problem occurring.

• Undertaking a detailed service review to determine priorities of desired outcomes compared to the consumption of resources required;
• avoiding a one size fits all reduction strategy;
• identifying key leverage points where the organisation can get more bang for its buck;
• analysing the business to see where the principles about elasticity of demand can be used to advantage;
• When considering temporarily shutting down some activity, understanding any serious leadtimes in recovering operational momentum and implications of gearing up again when economic conditions improve;
• understanding both short-term and long-term implications for budget or service cuts;
• understanding stakeholder reaction to the results of the strategies.

Governments are not the only perpetrators of baby tossing. Private Corporations finding themselves in a tight financial bind have been known to act so precipitously in cuting costs dramatically that they have in fact removed much of the very foundation of their prosperity.

Conservative versus Radical approaches to budget pruning

Obviously every circumstance has its peculiarities and depending on the seriousness of the challenges being faced management might opt for different approaches which could range from the ultra-conservative to the ultra-radical. There is always a further risk that even though the extremes of that continuum may seem necessary they might create significant unintended negative consequences. It is sometimes also the unfortunate case that the middle ground can be equally as damaging.

 So, at what point might be find out that we have actually thrown the baby out but retained the bathwater?

In the present political debates one might be forgiven for identifying a range of election promises which give the impression that a large number of new initiatives involving multiple millions of dollars expenditure could create many more tubs full of bath water whilst cuts to existing programs will quickly have the baby ejected.

Eternal Budget Dilemma

JoeBidenVP

Once again the answer is to critically examine not just whether the action will bring about the immediately desired result, but whether there are other consequences that will produce unwelcome side-effects. In the heat of electioneering unfortunately the baby often gets overlooked…even though it might have just been kissed.

Joe Biden, the current Vice Presdient of the USA, puts it nicely by saying: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.

 

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