The uncertainty generated by the spread of the Covid-19 pandemic has severely impacted the business dynamics of every industry, accelerating change and triggering an intensification of context volatility in a world where it was already difficult to move in scenarios of business continuity. Key market relations and internal operating mechanisms were put under tremendous pressure, with potentially irreversible fallout on the survival of organizations and/or their capacity to respond to their institutional missions.
Of all the management support tools that take on critical importance in scenarios like we are experiencing today, marked by dramatic discontinuity, the budget is one of the most relevant. Even in the cyclical phases that are not disrupted by exogenous agents, the budget enables organizations to rein in corporate complexity, ensuring the necessary autonomy to different business units in a context marked with common purpose. When dealing with uncertainty, the weight of this role grows abundantly. Here are the reasons why the budget becomes paramount: (i) as far as resource allocation and use, company policies can be efficiently adapted to environmental changes (coordination function), and (ii) as an organizational process, budgeting is applicable for effectively aligning the action plans of various business units to corporate strategy while garnering consensus (integration function).
In the context of the Italian healthcare system, for nearly twenty years now the budget has been the object of national legislation and regulation, from Legislative Decree 502/1992 to Law 150/2009 (which sets down the parameters for the performance cycle, both benchmarking the budget to this cycle and linking it to individual target setting). Intervention at a national level has gone hand in hand with similar measures frequently implemented at a regional level, often detailing the methods for drawing up the budget. But there is a very real risk that this hyper-regulation will attenuate the reach of the tool, making it rigid and unadaptable to changing conditions.
This rising rigidity is one of the reasons why uncertainty has made the process of drawing up a budget particularly problematic for many healthcare organizations. To explore this issue further, we ran a study with the invaluable help of our colleagues Elenora Santoli and Alessandro Furnari in the area of the Healthcare Controllers Community at SDA Bocconi School of Management. Around 78% of the healthcare organizations that made up our panel were just beginning to compile their 2021 budget - this in March of 2021 - and 36% had not even initiated the process. On one hand, this phenomenon has emerged because uncertainty, which nullifies any reference to the past, makes it difficult to adopt the extrapolative approach used up till now. Such an approach enabled a simpler and more linear connection between regional programming guidelines, management strategies and objectives of individual business units. On the other hand, linking budgeting to individual target setting means structuring a budgeting mechanism that revolves around responsibility centers; this hasn’t made it any easier to come up with projects for transversal change that are needed in times like these.
Despite these challenges, many organizations are trialing modifications for the 2021 budget, realizing that there is a need – and an opportunity – for change. To ensure that these actions actually translate into an overall improvement in the budget, they must pave the way for innovations in its structure and economic representation, as well as the method and process of budgeting (both in rational and organizational terms).
Specifically, the structure of the budget has to dismantle organizational silos, and instead build on corporate processes that enable an explicit end-to-end connection between available resources and patient needs. Such a structure must also promote a new common theme for the organization, allowing for what we might call an ‘integrated’ reading of the budget. In fact, this knowledge is fundamental for revamping the structure of organizational resources in a coordinated and transversal way, in order to provide the required integration of various business areas.
The method must be based on clear, well-defined action plans shared throughout the organization, so the link with strategic priorities is obvious (priorities that are also reflected in the personnel and investment plans). In addition to this, zero-based budgeting policies must be adopted, basing resource planning on current needs (not on the previous year’s performance) applying an incremental approach. This would allow for comparative analyses to ascertain the strategic relevance of processes and activities.
As for the ‘rational’ component, the budgeting process should overtly open up to continual forecasting techniques which, based on changing scenarios, make it possible to reformulate predictions regarding resources and results by adopting a rolling approach. In fact, the extreme variability that typifies today’s competitive scenarios represents a serious obstacle to the forecasting capabilities of the budget, as it is normally interpreted and understood. The only way to overcome this limitation is to try to narrow the window between the forecast and the time period it refers to. From this perspective, we should try to combine the process of budgeting with rolling forecasting.
In terms of organizational behaviors, this process calls for onboarding various organizational actors in an iterative way, in an attempt to achieve greater centralization in initial phases, so top management can lead the change. In addition, more input from professionals is needed when action plans are being formulated, input that’s indispensable for generating knowledge of the characteristics of the activities in question. With this in mind, and with the proper support staff, controllers should and could serve as the “critical conscience” of corporate policy. In doing so they would step out the all-too-common role of punching ball, and actively develop a bi-directional relationship and dialogue with top managers (without their commitment the scope of the innovations in question would be drastically rescaled) and line managers (engagement of professionals).
Last of all, the economic representation should place the obligatory administrative view side by side with a managerial view, which allows for a segmentation of economic data by process, drawing a distinction between resources that must be used for current operations (baseline) and discretional resources linked to action plans for change (stratex, or strategic expenditures).
So as far as the budgeting process, the prerequisite to ensure that innovations generate value is that these initiatives must not be one shot. (Examples here include cost savings aimed at curbing the “higher cost of doing business” triggered by the crisis, adopting a contingency approach.) Instead, these measures must be adequately institutionalized. The key is for the innovations introduced in the healthcare budgeting systems to be formalized and translated into operating manuals (at the level of individual healthcare organizations), shared and improved on (at the level of benchmarking network), and communicated and institutionalized (for example at the level of a broader audience, to reach through books and conventions).