Priority Based Management (PBM)
Priority Based Management (PBM) is a structured approach to defining, planning and budgeting overhead, service and production activities which results in overall savings of between 10% and 25% in an Organisations budget. At the same time it aligns processes with company strategy.
PBM is led by the Organisation’s management and has been used successfully to:-
- define the activities undertaken in an organisation in a consistent manner and in line with the organisation’s objectives taking into account known constraints.
- make significant reductions in costs and improve the allocation of resources;
- gain greater participation of managers in the defining, planning and budgeting process.
- Align processes with critical factors
Limitations of Traditional Approaches
- The Chief Executive and other members of senior management in every organisation are faced with conflicting demands on the use of resources and ensuring the processes undertaken within their organisation align with the organisations objectives. The demand to improve or maintain services conflicts with the demand to minimise costs and keep within financial limits or meet competitive pressures. Also the demand for growth and technological development, often requiring significant allocation of today's funds to meet tomorrow's new product, process or market, conflicts with the demand for this year's profit and cash flow.
- Decisions on the use of resources have to be made or confirmed at the time of preparing the annual budget or profit plan, but traditional budgeting systems do not provide the kind of information needed to resolve conflicting priorities satisfactorily. Whilst most organisations put considerable effort into evaluating capital expenditure proposals, they often do not apply the same scrutiny to revenue expenditure, and yet in many the distinction between capital and revenue expenditure is not always clear-cut and, in some situations, revenue expenditure is of greater significance to the future of the organisation.
- Under traditional planning and budgeting methods, management's attention is focused primarily onto proposed changes from the previous year's level of spending, a process which is known as "incremental budgeting. Considerable effort may go into the development of these budgets, usually by financial management, but the base level of spending tends to be regarded as already authorised and does not come under the same intensity of review as proposals for new expenditure.
- The difficulty in reviewing current activities is aggravated under traditional methods by the way in which budgets are presented. They do not normally provide senior management with enough information about alternative methods, nor about the consequences of reducing or the benefits of increasing the funds allocated into particular areas. The budgets are usually presented in the form of an accounting schedule, as a statement only of the resources required. There is often little indication of the way in which the figures have been built up.
- In times when the pressure to reduce costs and obtain better value for money is great, the effect of the traditional approach is to constrain any new developments or forward initiatives and often to force management into arbitrary cost reduction programmes, cutting x% across the board, which can be very harmful. The process by which an acceptable consolidated budget is achieved involves the recycling of departmental budgets which in large organisations can go on for some time. The effect of this on management can be demoralising and inevitably generates defensive attitudes.
- Priority Based Management was developed to meet these limitations. Accordingly, the process aims to help managers at each level in the organisation to understand better the purpose of their area, the alternatives available and to simplify the task of developing an annual operating plan. The resulting plan should balance the relevant priorities of different demands on funds and carry the commitment of line managers.
The PBM Process
- PBM is a planning process which involves the managers responsible for each function making a radical reassessment of their activities and documenting proposals for review by senior management. In doing this, each manager is required to:-
- establish the purposes of his activities and evaluate alternative ways of achieving them;
- define the absolute minimum level (and lowest cost) at which service could be provided, to satisfy essential requirements only;
- identify successive incremental levels of-service and their costs and benefits to satisfy the more discretionary requirements of the function.
- In developing these proposals, the managers are required to discuss them with their senior managers and with representative users of the services provided to ensure realism and consistency. The managers then present their proposals to senior management in review panels, where:-
- the purpose of the area/activity is established
- proposals are challenged to ensure they are sound and cost-effective;the various requests for resources are ranked in order of priority for funding.
- The resulting priority listing provides the basis for top management to decide which plans to approve and to determine a budget within revenue constraints.
- An important feature of the process is that it is led by senior management and allows a high degree of involvement of managers at all levels in the organisation. It thereby enables, the ideas, creative energy and commitment of the budget centre managers to be harnessed, whilst senior management gain greater insight into all activities, assign priorities and are assured that current and emerging needs are given their due weight.
- PBM can be applied to all activities for which some cost/benefit relationship, even a highly subjective one, can be identified. In manufacturing industry it is usually applied to all costs except direct labour and material (since these costs are normally planned using work standards related to production volume). The process can therefore be applied to all administrative and staff functions, technical and production indirect costs, commercial functions and, in service industries, to all activities.
- PBM can be applied on a comprehensive basis throughout all parts of an organisation, applied either to selected divisions or profit centres, or applied only at specific functional levels. However, the greatest benefits are usually achieved when PBM is used to cover the whole range of indirect or service costs in a profit centre.
- Implementation of PBM can normally be completed within the annual planning cycle, but sufficient time needs to be allowed particularly in the initial cycle to enable the approach to be properly planned, management to be trained and the detailed analysis of alternative methods and service levels properly carried out. It is not a superficial exercise, but rather involves management in a detailed reassessment of their activities.
- The process itself is an approach to planning and budgeting, not a fixed procedure or set of forms to be applied uniformly from one organisation to the next. The process must be adapted to fit the specific needs of each user and, in practice, the particulars of PBM implementations will differ significantly among different organisations.
- It is important to appreciate that PBM is a management planning process and not simply a financial budgeting exercise. The detailed work of analysing activities, developing service levels and reviewing and ranking the budgets must rest with the managers responsible for the functions covered, and not with financial management. It is advisable however, at least in the initial cycle, to provide some internal support to the project and use some form of external assistance from someone who has experience of implementing the process successfully.
Benefits and Conclusions
- The main benefits, which organisations have found in practice are that, compared with traditional budgeting PBM enables senior management to:-
- define the purpose of actions/functions/activities
- allocate resources better to activities in functions of different importance to the future of the organisation;
- achieve more rationally reductions in costs of up to 30%, after careful consideration of the consequences;
- identify opportunities more easily to improve efficiency, both immediately and in the longer term.
- The participative nature of PBM also leads to some important benefits. In particular, when the process is applied with the strong commitment of top management and used to achieve an objective of strategic importance to the organisation, PBM can cause a significant release of creative thinking and thereby lead to far greater results than would normally be possible by other means. It also assists in generating more constructive attitudes and leads to readier acceptance by managers (and unions) of the plans decided upon.
- In times of financial constraint, PBM is a valuable alternative to the more arbitrary cost reduction approaches which management is often forced to take as a matter of expediency. The process can be helpful also in periods of uncertainty in developing contingency plans, and it can be equally helpful in planning the reallocation of resources when an organisation moves from a contractionary to an expansionary phase.
- A major advantage of the priority based approach over contemporary methods is that PBM ties planned cost improvements into the annual budgeting and monitoring system. This enforces a discipline both in terms of ensuring that the process is completed to a deadline, but also in providing a control through the management reporting system that planned Improvements are in fact achieved.