Silo Budgeting: The Major Cause of Bad-Decision Making

Posted by  Richard Ludlam 11-Aug-2017 05:08:00

Marketing Manager at ERIKS UK and keen follower of trends and innovations in the industrial world built from time at Fenner, FPT, WYKO and now ERIKS

KnowHowBlog---Silo-Budgeting.pngDoes this ring any bells? You’re sat in a meeting to sign off on an important new project and the thorny issue of who is paying for it comes up.

“Well we can’t. I’ve used up all of our budget on the new conveyor,” says the Production Director.

Finance quickly jump in. “Well, if we are going to contribute, we’ll have to insist on the first option.”

Maintenance, sensing problems further down the line, pipe up. “Well you would, it’s the cheapest and you won’t have to maintain it.”

Everybody looks at IT. “No, it’s impossible, this new ERP system has bled us dry.”

If this sounds familiar you almost certainly have silo budgeting, in which pots of money are given to individual functions, more often than not causing project delays, division and inter-departmental conflict, not to mention non-delivery of project objectives.

In fact, I sometimes wonder whether most organisations, cursed with silo budgets, would be better off accepting that there is no point scheduling yet another budget meeting and, in future, decide the whole thing on the basis of three falls, two submissions or a knockout. It would certainly be quicker.

So why is silo budgeting so painful? Because decisions are inevitably made with each department attempting to inflict minimum damage on their own budget, without regard to the company overall.

Too often decisions are made on the basis of the initial purchase cost, with scant regard for cost of maintenance, operational effectiveness and the total cost of operation.

It is a foregone conclusion therefore that bad decisions will be made. The dominant department (all organisations have a first among equals) inflicts their will on the others and critical issues, such as total cost of ownership, are given little airtime.

We all know where this is heading. The cost in reworks, downtime, spares, maintenance and, crucially, customer satisfaction, all exponentially increase. And then, again inevitably, when it becomes clear in 18 months, two, three or even four years down the line that, quelle surprise, the original decision was wrong, we go through the whole tortuous process again.

What’s the solution? Breaking down silos in organisations is never easy, but one of the biggest barriers is budgets, with departments jealously guarding their own pots. Movement away from functional budgeting based on department, towards more process-based budgeting, based on specific processes within the organisation, will help to break down barriers and enable a more holistic view with better decisions.


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