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The wasted effort as a result of a budget target (and an example of Goodhart’s Law)

One example, anyway

Also: You wouldn’t want to know the true cost of all the wasted effort that comes from budget measures becoming targets

Also: There’s a better way to budget

Question

Our department is having a terrific year. But the organization isn’t meeting its budget target for an important revenue driver. With a quarter left in the fiscal year, there’s now frenetic energy around achieving an outcome that, absent a miracle, we’re probably not going to achieve. My staff is exhausted. I’m a little tired, too. What should I do?

Answer

You, your staff, and I all know it’d likely be more productive to direct the organization’s response to the next fiscal year. So there’s a reason behind the reason the reaction to the poor budget performance is coming at this late stage—what do you think it is?

Your hypothesis is where I’d direct my attention. There’s some corporate theater playing out. Find where you can be a supporting actor beneficial to your longer-term interests and give the part your best shot.

You’re (probably) going to have to do what you have to do over the next three months, as far as the organization response goes. I’ll mention the importance of constructively voicing your concerns if you feel it appropriate. 

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The more consequential management task is that of your employees’ energy levels. You noted they’re already exhausted—why is that? Your department is having a great year and everyone is tired? 

I’m wary of what that forecasts for the next twelve months. Consider having honest conversations regarding the momentary kabuki. It’s better than ignoring what everyone is seeing and feeling. 

It’s time for the opening curtain on addressing the issues contributing to your collective departmental weariness. Of all the challenges you’re facing, it’s one that can swiftly ruin the show.

One last thing: This situation is going to play out again and again in your organization (and all the others) while the industry vacillates between fee-for-service and value-based forms of reimbursement. It’s a classic systems issue.

That system is the budget.

The way organizations budget is by creating forecasts. In those forecasts are absolute measures that represent assumptions, such as the budget target for the important revenue driver you mention. Our jobs are to manage against those absolute measures. 

Those absolute measures, informed by the past but often not all that well informed by the moment, have a tendency to encourage short-term decision making at the expense of longer-term organizational priorities. It can result in wasted effort—as you’re experiencing—and wasted resources, when unallocated budget dollars are used in a year-end spending spree for superfluous needs. It can also lead to more calamitous consequences like missed competitive opportunities and unethical behavior.

Perhaps you’ve heard of Goodhart’s Law? It states: “When a measure becomes a target, it ceases to be a good measure,” is how Marilyn Strathern put it.

The budget problem is a problem worth solving (especially as it’s one of the most important challenges influencing negative organizational outcomes), although it may be a problem for future you when you’re in charge rather than attempting a reformation from the middle of the organization at this moment.

One idea from the budget reformation that may help you now is that of relative measurement. Rather than using a yes-or-no absolute measure which can contribute to untoward behavior, a relative measure compares performance—against a previous time period or group of competitors, for example—resulting in a more holistic approach to achieving business outcomes.

Rather than pursuing a revenue goal at all costs, decision makers are encouraged to pursue a revenue goal in the context of other things that support long-term business success like energized employees, collaborating across departments, longer-term competitive interests, and (especially relevant to healthcare reimbursement) business model transformation. 

Relative measures are one way to make the annual performance planning and review process better for everyone involved. Compare individual employee performance this year against their performance last year and you’re promoting learning and development and taking a step toward a better culture.

All that to say: keep doing good work and good luck. Change is a flip, not a journey.

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