In this month’s piece, we shift from our usual focus on risk and assurance effectiveness, to risk and assurance efficiency. In other words, how to do more with less.
Budget uncertainty and cost pressures remain widespread and are driving four common responses:
1. Cost cutting
2. Defending existing budgets
3. Reshaping the audit program
4. Doing things differently
In this article we explore how to use each of these responses for best effect.
Cost cutting (BAU less x%)
“In order to change, we must be sick and tired of being sick and tired.” (Unknown)
How a problem is framed can make all the difference in the world.
Consider the request – keep doing what you’re doing now, but cut 10% of your budget.
This problem is framed so that the cut is big enough to be painful, but not big enough to force major change. It also assumes that business as usual is desirable, and hence trimming around the edges is required instead of re-thinking how the function operates.
The standard response is often to cut discretionary costs. Training and consulting may get cut. Areas of the audit plan may get shaved. Vendors and travel might get squeezed. Headcount may get put on hold.
While short term cost savings may be gained, these dividends and can lead to the dreaded “death of 1,000 cuts”.
Our view is that this approach is not sustainable.
Doing things differently
The alternative is a clean sheet.
Let’s frame the problem differently.
If I was to start from scratch, with 50% of my current budget, or if my organisation was to double in size, what would I put in place to be successful?
Reframing can drive very different thinking. Indeed this order of change was the genesis of behind control self assessment and second line of defence concepts which continue to serve us well today.
Different framing allows a series of different questions to be asked:
• What can we do with technology?
• What could we do with smarter planning and methodology?
• How can we shave 20%+ out of key phases in every major activity?
• What could we achieve with different resources?
• How can we formalise 2nd line of defence activities to drive faster, cheaper assurance?
• What would happen if we stopped doing things the way we do them now?
Leading audit functions are asking these questions proactively before budget demands are made. The result is a virtuous circle of increased productivity with higher performing more relevant, rewarding work and engaged teams.
As one optimist one said, I don’t have a budget problem, I have a budget opportunity.
If you want to understand what’s possible, when you “draw outside the lines”, please give us a call.
Defending existing budgets
Like any other cost centre, risk and assurance is a budget area that can provide short term savings.
However, there is also is a strong argument to say that spending on risk and assurance needs to be countercyclical.
Leading CEOs invest more in audit and risk during restructuring, so they have the confidence to cut elsewhere.
We’ve worked with a number of organisations to make the business case for budget and for change.
If you need help on this, please give us a call.
Reshaping the program / zero-based budgeting
“Ask not what your company can do for you, ask what you can do for your company.” (Apologies to John F. Kennedy)
While using benchmarks and historical data for budgeting provides sound starting points, they’re not always fir for purpose.
A more productive discussion is on where assurance is required.
During times of cost cutting and restructuring, we always find it helpful to revisit an organisation’s heat maps, and use our favourite shade of yellow (custard).
The concept is simple. If you’ve got a significant change in people, roles or accountabilities, compliance will often drop rapidly. This is when things go wrong – when things go to custard – and when assurance is required.
A basic heat map that highlights this type of change is relatively simple, yet powerful to introduce, and generates a different conversation around audit plans.
If you’re not having this sort of discussion with your stakeholders and audit committee, we’d suggest “the custard chart” is a very good place to start.
Cost-cutting without changing to the way your assurance function works can be a vicious cycle.
As expectations keep expanding and budgets remain tight, there is a need to do things differently and work from a clean sheet.
We regularly run “possibilities workshops” with organisations to explore what’s possible.
If you’d like some help turning budget challenge into an opportunity to do things differently, we’d love to hear from you.