Monday, June 09, 2008

How to come in under budget

Budgets are a tricky thing, because they're filled with perverse incentives. A manager who brings his department in under budget is likely to have his budget cut to fund a more profligate manager. Thus the use-it-or-lose-it clauses in most budgets (and budget negotiations) creates wasteful spending. At my last job, for example, they had a discretionary equipment budget around $8,000ish a year, which was well below the threshold needed for a medium-sized equipment purchase (typically some $20-30,000). Thus projects were ranked not by the importance or cost-effectiveness, but by their total cost. Back-burners were running constantly to avoid losing money.

Medium-sized projects are also discriminated against in budget negotiations, because they are the pawns of the budgetary world. They're useful as a supporting cast, to be used and cast aside when necessary, but only when one makes the leap to the other side of the board, to become a queen, a major piece, do any but the most skilled players, or in this case, managers, wield them effectively.

On the other hand, throwing more money at a department that obviously has no use for it is just as wasteful as not providing enough.

Thus my solution to all these problems: Any department that comes in under budget can roll over its unused budget from year to year, and its budget will not be changed. The rolled over money can provide a means for funding medium-sized projects that would be otherwise neglected, and inflation will take care of reducing funding to that department. By not increasing its budget, you're automatically cutting it by a few percent. No waste, no perverse incentives, and the economy does the difficult task of budget cuts for you.

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