Balling without a Budget

My company is notorious for running almost all small and some medium size projects without an “official” budget or with no mention of budget at all.  Many of these projects are either product developments or internal process improvements.  Upper management believes that these types of projects shouldn’t be limited to the constraints of a budget primarily because a successful new product or major process overhaul is invaluable to the company and they want our Engineers to have freedom when doing their “thing”, whatever that may be.  Major costs are approved/denied by the management team and these costs are recorded throughout the project but no one sets a limit.  Management also believes, rightfully so in some cases, that the team will eat up a project for a budget even if it doesn’t add any saleable value to the end result.

I’ve seen this work exceptionally well in some cases.  The most prominent was the recent development of a new product for the automotive market.  The project team successfully completed the development with total hard costs of ~$150k.  By the end of this year we should accumulate ~$100M in cumulative revenue from this product.  Winning!  If we had set a budget for this development my guess is that it would have been in the $2-3 million range given the scope.  This project was particularly interesting because the development team took “no budget” as a challenge to keep the project costs as low as possible.  This allowed the team to come up with some really creative solutions to the more challenging aspects of the development.  There was a very respectable amount of reuse of existing automation equipment, never before seen manufacturing processes, and they leveraged a significant amount of existing raw materials.  Give these guys a raise!

On the other hand I’ve also seen this philosophy blow up in our happy little budgetless faces.  We had a team start developing software for order entry, marketing, and other internal processes.  Here we are many millions of dollars later and we have nothing usable to show for the development.  This team took the “no budget” philosophy as an opportunity to try and reinvent the wheel despite the fact that we’re not in the business of selling wheels.  Plus, square wheels don’t have much use in the world we live in.

I have a couple of questions that I’m hoping my top notch MBA classmates and friends may be able to help me address.

Can you think of situations where budgets may be detrimental to a project development?  Are there, or can there be, guidelines established on which types of projects require firm budgets and which can be looser from a cost standpoint?  Or, in your opinion, do all projects need a firm budget, period?

Can you determine during your hiring process which PMs are “budget eaters” and which ones would take the “no budget” project plan as a challenge to keep costs low?  How can we go about identifying these distinctly different personalities during the interview process?

5 thoughts on “Balling without a Budget

  1. Interesting post Damon. I see this all the time in Research. You have some researchers that are producing amazing results and registering patents with minimal resources then others who, millions of dollars later, have nothing to show for it. When we get funding requests we generally ask for project plans but we are looser on those requirements when the work is aligned with the university’s mission. It is hard to put price tags on innovation and no one wants to shut down the next big break through. We tend to hire based on past results but if you can figure out a foolproof way to screen for the golden gooses, let me know!

  2. Wow, wouldn’t it been great if all you had to do is ask a person what he/she would do in either situation and get an honest response? It is very hard to find the right person for the right job. But I might have a solution for you. If you are looking for a person who can do more with less, look for someone who did not have a lot of opportunities growing up. I have worked with lots of immigrants, people from Eastern Europe and Russia. Some of these guys and gals had to completely reinvent themselves in order to make it. Speaking of doing more with less, try growing up in the Eastern Block. When they tell you they had to walk uphill both ways barefoot in the snow, you better believe it. It doesn’t have to be Eastern Europe though, that has just been my experience. Again, I’m sure there are a lot of hard working Americans that are looking for work and they probably will be just as great. The point of this is, during the interview, talk to them, find out what makes them who they are, and how did they get where they are now. Hopefully, this will give you an insight if this is the right person for the job. It is not easy, but then again, if it was no one would have had to walk uphill both ways.

  3. Damion let me help you out here. Focus on the budget maker and not the budget itself. Budgets need to be realistic with the information available. When you set a budget you are securing financial resources from the company. Basically you are saying that with this money I will return to you this output and this output is a better investiment for the company then other options available.

    Remember the pool of money is the same. If your team has an issue with wanting to eat up the budget by the end of the project if there is extra money left, then you have a culture problem. Address that first then the budget next.

    To make things easier you can have budgets that are NMT (no more than) or NLT (no less than) a certain amount. These types of budgets give you a floor or a ceiling that will prompt a re-evaluation by management before contributing additional funds. This is critical so that you can not limit the creativity of the team or the freedom of the team, but still keep the accountants happy and your shareholders assured that you company is managing their money appropriately.

    I have the same issue in my company, where engineers come to me in the fourth quarter stating that they have extra money that they want to spend because they feel it is a use it or lose it option. I tell them to return it!

    Great post, thanks for introducing this topic. Hopefully this will help.

  4. Damion,

    First, your writing is really engaging, so I thoroughly enjoyed your stories in this post.

    You raised some interesting points and some of our classmates gave valuable perspectives! There is obviously no right or wrong answer, but I wanted to share some learnings from my experiences. Keeping in mind my company’s industry is different than yours, I have learned these general lessons:

    * Putting a budget in front of people does set the mark exactly at that dollar amount. For a project your firm has no experience with, it might be better not to develop a budget than to develop one that a) consumes tons of time to develop and/or b) isn’t entirely valid because the project will take various twists and turns before it comes to fruition.

    * People are either methodical and require a structure (and budgets/processes/guidelines) to succeed, or they are more of a risk taker and work well in an ambiguous environment where being flexible is a requirement. During the interview process, you can find out who falls into either category by learning more about their history (both personal and professional). If their history sounds really scripted and “safe”, the person might be the type to require a budget and then work to come as close to exact on that budget as possible (thinking that’s what’s expected).

    Hope some of this was helpful to you!

  5. The idea of being without a budget is a fantastic idea that i think should be adopted by many more companies. I think it helps innovations. Some of the best ideas came from engineers who were told, take a month off,have some money, and lets see where your ideas end up. There is something in the creative process that budgets destroy. I enjoyed how you mentioned both extremes of this however, there must be controls in place where a project can be axed if its deemed to be taking in way too many recourses without and foreseen benefits.

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