Definite case of misaligned incentives.
Another surprising place where this happens is project scheduling. We budget time for each individual step of a project based on our guess of a 90% or 95% success rate, then our "old-timers' experience" kicks in and we double or triple our time for all the steps together, then our boss adds 50% before giving the estimate to their boss, which sounds gratuitous but it is to protect you because their boss looks at how grotesquely long the estimate is and barks out a cut of 20%, so the overall effect of those two is (3/2) × (4/5), so your boss still netted you a 20% buffer while making the skip-level feel very productive and important.
Say the 50%-confidence-to-95%-confidence gives you 30% more time as safety buffer, and you only double the estimate, and the work that you missed in your initial assessment, while it's not gonna be say half the project, maybe generously it's a third of the project or so. So the project actually takes time 1.5 measured properly, you have together budgeted 1.3 × 2 × 1.2 = 3.12 time. The total project deadline is more than half composed of safety buffer. And we still consistently overrun~!
But if Alice needs to work on some step after Bob, and Bob finishes early, when does Alice start on it? Usually not when Bob finishes. Alice has been told that Bob has until X deadline to complete, and has scheduled herself with other tasks until X. Bob says "I got done early!" and Alice says "that's great, I'm still working on other things but I will pick my tasks up right on time." Bob's safety buffer gets wasted. This does not always cause any impact to the deadline, but it does for the important steps.
Of course, if you are a web developer you already know this intuitively because you work on servers, and you don't run your servers (Alice, for example) at 100% load, because if you do then you can't respond to new requests (Bob's completion event) with low latency. It's worth thinking about, in an efficient workplace, how much are you not working so that you have excess capacity to operate efficiently?
It's a revelation. You get to have some hard conversations with other managers. But in the end everyone finds it easier to deal with "it'll be ready when it's ready" rather than endless missed deadlines and overruns.
When people who are experts on the topic evaluate the work needed over a period of say 3 months, even in something as notoriously hard to plan as video game production, it can hold. This entails being willing to adjust scope and resources though, when planning, in order to ensure the objectives are likely to be met.
http://www.startuplessonslearned.com/2009/07/principles-of-p...
Sorry, but this frustrates the hell out of me! What am I missing here? What arcane bit of finance lore leads us down this path? Am I just hopelessly naive? Is acing money such a bad thing!? I just don't get it...
But I'd say it's not a feature of governments only, any sufficiently big organisation which centralise power ends up being like this. That's why large corporates need nimble startups to innovate: startups either innovate or die.
The government is just the largest example of this phenomenon - and they don't have any analogue for startups, they're just doomed to grow larger and larger over centuries until they collapse.
Look at the USA, once the perfect minarchist experiment and now the largest employer in the world.
But god help the poor people who file simple tax returns that can be easily audited, however.
Zero based budgeting is one answer to the moral hazards of either over or under-estimating your budget on purpose. If each year you start with a blank spreadsheet and then add (with justification) expenses for the year, it avoids some of the pitfalls. Not a panacea however.
https://en.wikipedia.org/wiki/Zero-based_budgeting#Advantage...
Ahah, that would be nice. In most company I know, they are shrinking every years, because you know, “cost reduction plans”.
1) separation of duty: you might not be the best department to invest surplus
2) cost effectiveness: if you're operating with a deficit, as is generally the case with governments these days, this money is not free, so it could effectively be cheaper to give it back and re-borrow it when you actually need it
But with this reasoning there is no surplus, because departments will spend their money at all cost.
> 2) cost effectiveness: if you're operating with a deficit, as is generally the case with governments these days, this money is not free, so it could effectively be cheaper to give it back and re-borrow it when you actually need it
That's totally fine, when GP said “Save the money” they didn't meant “on their own bank account”. It just means: the top management owe them this money when they'll need it later.
Anecdote: I'm currently working on a project started in emergency earlier this month, which must be done before the end of the month (because it's the end of the accounting year at this company) for this exact reason. And this project is overprices by a factor close to two, because this money really had to be spent!
Budgets are meant to estimate costs and manage cash flow. From a greedy team perspective it’s best (and self interested) to try to game the system as much as possible so you get the largest share of the pie. From the organizational perspective it’s best to reallocate capital efficiently, especially if a team consistently over budgets.
No, but if you accurately forecast that dinner will cost $100 on average, and this time it only happened to cost $75, you should put most of the savings aside for the other times when it will cost $125 and not reallocate it to be spent on something else.
Consistent over-budgeting is still an issue which would need to be addressed, of course, but a system where any annual cost underrun is treated as over-budgeting and punished by reallocating that part of the budget to other groups ignores the inevitable presence of risk in the budget forecast.
For example, if a team says they need $100 a year and comes in at $90 then I don’t think next year’s budget should be $110 while some people in this thread think it should be. That makes no sense. Neither do I think the budget should be cut to $90. Unless something has changed, the budget should stay the same.
Your point about average cost just means that you’re budgeting on the wrong timeframe. If you estimate your average dinner is $100 but you’re spending $75 most of the time except for one huge dinner every month then you should be budgeting $75 for dinner and then budget separately for one large dinner a month. Similarly, if a team says they need $10MM a year but half of that is them trying to amortize a $25MM cost over 5 years then they are budgeting incorrectly. Their budget should be $5MM with a $25MM side fund contributed to on a risk adjusted basis.
The worst case scenario is the team budgeting $10MM when they only need $5MM and losing control of their budget so that when the real charge comes due they’re fucked because they’ve been spending $10MM for the past 5 years without realizing the fixed charge is coming or, worse, realizing the fixed charge is coming but just ignoring it so they can buy new office furniture and exhaust their budget this year selfishly.
IMHO it depends on why the expenses were less than the budget. If it's a matter of probability or essential uncertainty then the savings should be set aside for other occasions where luck isn't as favorable. If the department realized cost savings by improving business practices then most or all of the savings should stay with the department to be invested in future improvements (a one-time carry-over into the next budget period) and/or distributed as reward to those responsible for the improvements, as an incentive to continue making such improvements. If costs were lower because the department didn't accomplish everything they set out to do then that might be a justification for reallocating their budget, and/or implementing more drastic changes to get them back on track.
> Your point about average cost just means that you’re budgeting on the wrong timeframe.
The timeframe for the budget would generally be predetermined (e.g. one fiscal year) and not set by the department itself.
> If you estimate your average dinner is $100 but you’re spending $75 most of the time except for one huge dinner every month then you should be budgeting $75 for dinner and then budget separately for one large dinner a month.
Sure, but I was referring to probabilistic variation due to uncertainty in the forecast, not a predictable mix of large and small expenses. And the "dinners" in this analogy would be once per budget period (i.e. annual for most organizations), not frequent enough to average out.
Unfortunately I couldn't think of much. I suggested maybe we buy some more computers with it but I'm sure he'd already thought of that himself. I don't know what he ended up doing, but I'm sure he'd have decided to buy something with it rather than just losing it entirely.
You contact a department who’s services you use a lot, then you arrange to pre-pay for services. Ideally you negotiate a discount.
Then you use the service and state which grant to draw from.
This way you have grants paying for things that are completely unrelated to their intent, you have one nightmare of a billing system which no one understands and you get to use everybody cent.
We shot so much we destroyed some of the rifles, apparently that was better than getting a smaller allocation next year.
The non-government sector isn’t immune to this.
Only if the inefficiency is large enough to overcome other forces.
Or to put it another way, picture if every single individual teams at Google did this to the tune of 100k a year, per team, and assume among 135,000 employees there are 13500 teams.
That's 1.35 billion dollars. Well under 1% of their revenue.
No way is a competitor going to appear that is identical to Google in every way except they have better budget management. Google has too many moats around their business, they can be really inefficient in many many ways and still dominate in multiple markets.
It was not even believed by Adam Smith. He writes that it only works that way in a controlled environment. That’s why European countries usually rank higher in market freedom than the US, because we don’t have companies getting so cancerously big that they have very real effects on law making (how lobbying is legal is still beyond me)
It's less blatant, but just as pernicious.
Nowadays the USA jurisdiction is comparable to the EU one, but they still have more $$$.
If you like freedom rankings I recommend these ones: https://www.heritage.org/index/ranking
I work at one of those US bank.
The amount of inefficiencies in form of red tape, confusing processes, custom half-baked tools that crash half the time is just mind-boggling. I've spent more than a week now for opening firewall on one ip/port on one host just to test my prototype in dev environment(local machine or docker are not an option due to lack of admin rights ), and it's still in change approval stage. If we weren't this giant too-big-to-fail bank we'd be out of business by now.
I see that as the SOP for large companies too...
What strikes me as unique to government is the tendency for sufficiently powerful appendages to secure enough resources to start wagging the dog (e.g. the military industry in the US), although now that I think about it seems possible that it would happen within companies.
Any business with a natural monopoly, high migration costs, etc. can support a surprising amount of inefficiency even if most of their customers find the experience unsatisfying.
I think we imagine a lot of market forces that no doubt exist, but people aren't logical in the face of them.
But large companies tend to have MBA types scurrying around rooting this stuff out as it pops up or shortly thereafter. Government has no such sort of immune system to fix these problems on the go. It just gets sicker and sicker until the tax payers vote for something drastic or revolt.
You see this in nonprofit entities too. They get big, abstract away from their mission and waste a lot of money until someone gets tasked with cleaning house or a more mission-driven comes along and replaces them.
Department either uses or loses the budget, so, there was a push to make sure nothing is left.
He told me that the school had to prevent those automatic budget cuts. His reasoning was that it's nearly impossible to get a higher budget if some big expenses had to be made. And suddenly needing a higher budge, after for example 3 years of low expenses, doesn't make a good impression on higher-level administrators.
Sounds like the eighties!
That's the way in every major corporation I ever worked for too.
At the end of the budget period they've only spent 80% of their allocated budget, so they throw out a bunch of perfectly good equipment/furniture/etc. and order new stuff so that their budget doesn't get cut the following year, rather than accepting that maybe they were over-budgeted to begin with.
Rinse, repeat, thus continuing the cycle of wasting X% of the budget every year.