One of the most thoroughly studied questions in business is how, at budgeting time, large corporations should choose among investment opportunities. In-house economists, management advisors and even Nobel laureates have worked on this problem and come up with an impressive array of quantitative and process-oriented resource allocation systems. Why, then, are so many senior executives frustrated with the process and convinced that their companies’ capital is not being invested as well as it could be?
One reason is that even the best-designed systems can be trumped by the power of personality. A forceful appeal sometimes carries more weight than even the most objectively accurate financial analysis built on highly reliable facts. It is now commonplace, in fact, for talented and charismatic managers to spin, manipulate and otherwise cajole senior management into funding their business ideas — often in the face of numbers that would, on their own, dictate a negative decision. Put another way, when people are economical with the truth during capital budgeting, the underlying economics get lost.
Having guided dozens of major corporations through the budgeting process and watched hundreds of presentations by line managers asking for capital, we have profiled five archetypes of bad behavior commonly used by managers to subvert decision-making standards and win resources. It is not uncommon for a manager to adopt more than one type, depending on how his or her plan is faring relative to others in the planning and budgeting process. Fortunately, there are ways for senior management teams to counteract such behavior directly during budgeting discussions and, over time, to instill values that lead to better use of investment capital.
“There is no way that we, or anyone else, can grow by 10%.”
Managers are sandbagging when they routinely come to the table with a business plan that is less ambitious than one they know they could probably fulfill. Sandbaggers argue that the market is so tough, the best the company could hope for is slight incremental improvement even with additional resources or the most heroic leadership. Of course, when such managers exceed their targets, as they usually do, they appear to be heroes themselves.
The president of a successful $700 million North American brokerage business, for example, was reluctant to commit to an earnings-growth target that the company’s CEO had proposed.