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?