Target Setting (Budgeting)

Target Setting is about translating the tactical plan into a series of measurable objectives so that everyone is clear about what performance is required from them.  It sets you up for the “Check” part of the Plan – Do – Check – Act cycle.  Since the plan is a hypothesis, monitoring progress against target allows you to gauge the continued relevance of the plan, and make adjustments as necessary.

Metrics and targets can be powerful drivers of performance and need to be selected with care.  As Goldratt says (Ref 3): 

“Tell me how you will measure me, and I will tell you how I will behave.  If you measure me in an illogical way…do not complain about illogical behaviour.”  

Targets should be internally consistent and aligned to the business strategy.  Driver Tree Analysis is useful tool for generating internally consistent and aligned targets.

In the BusinX Framework, Target Setting incorporates the process more commonly known as Budgeting.  This has been done to emphasise a point that many accountants miss; budgeting is merely a process of turning the business plan into a set of financial targets and metrics.  It is a means to an end…not an end in itself.

Financial targets are necessary but not sufficient... not everything that is important translates into hard dollars.   Financial metrics also tend to be lagging, that is, they tell the story of past events.  It is important to also have leading indicators to give you an insight into the future. (See Cascading Balanced Scorecard).

According to Jack Welsh (Ref 4):

“The budget process at most companies has to be the most ineffective process in management.  It sucks energy, time, fun and big dreams out of an organization.  It hides opportunity and stunts growth.  It brings out the most unproductive behaviours in an organization from sandbagging to settling for mediocrity.”

This dysfunctional outcome can be driven by a poor budget process, or by the way targets are used to drive and reward performance.  Too often, the targets set during a budgeting process become ends in themselves, with achievement hard-wired to people’s bonuses and career progression.  This stunts people’s ability to respond to changes, and can lead to counterproductive and sometimes dishonest behaviour. (See Reward and Recognition).

Targets also provide a means of delegating boundaries of discretion.  For example, the budget tells managers the level of expenditure they can incur before they need to seek higher authority.  

When selecting metrics and targets, aim to be SMART, ie:

  • S = specific
  • M = measurable
  • A = attainable and within the ability of the individual or team to control
  • R = reasonable and relevant to the team.
  • T = timely, giving adequate time for intervention.