EVERY year at this time, traffic grinds to a halt in London and other big towns as the streets sprout holes, stop signs, cones, piles of sand, JCBs, drunkenly-leaning temporary traffic lights and other paraphernalia of the March roadworks festival. Is this some mysterious urban rising of the sap, a mechanical equivalent of Wordsworth’s daffodils or the arrival of the swallows in spring?

Well, yes and no. The plague of roadworks is indeed linked to the seasons, in this case the end of the financial year. But the cause is not nature but strictly man-made. It’s the budget. Unless you’re a taxi driver, you’ll probably just shrug at this point. Surely budgets are a fact of life, whether for governments, big companies or the smallest tiddler? Budgeting, planning and monitoring against the plan is what managers do. It is management – or at least one version of it.

We shouldn’t be so tolerant. In all the (long) list of dubious management practices, none is so incontrovertibly an emperor without clothes as budgeting. Its effects are deeply corrosive on both sides of the organisation.

On the spending side, every budget-holder spends to the limit in the last months of the year to make sure they can ask for the same amount next year.

Of course there’s no earthly reason why all the streets should be dug up at the same time – it would be much better if they weren’t. In any case, the situation may have changed since the budget was set a year or more ago. London’s New Oxford Street might not need resurfacing. Or that daft new one-way system might be less urgent (it always is) than spending on care for the elderly, schools or libraries. But there is no way of switching resources to match new priorities, because ‘it’s in the budget’.

In this way, a process that is undertaken in the name of controlling costs actually ring-fences them. Through the incentives, the budget provides for budget-holders to create larger budgets and keep or spend surpluses – there is no incentive for anyone to give them back so that they can be used elsewhere – it is actually a powerful driver of inflation. The justification for next year’s roadworks budgets is last year’s, with no examination of real need.

The effects on the output side are, if anything, even worse. For example, in most organisations salespeople act like budget-holders in reverse. Instead of setting their budgets high, they have every incentive to keep their targets low, since they are paid for meeting them.

Here, too, there is a matching reverse-inflation effect. As sales targets are usually set monthly or quarterly, perversely there is little incentive for a salesperson to go on selling after he or she has met the target. They’re getting the bonus, so why should they? From an individual point of view, it makes much more sense to get the next period off to a running start by postponing a new sale over the month-end.

As with spending, the budget encourages and protects sub-optimisation. Of course, managers know that salespeople want lower targets, so they often arbitrarily put them up: ‘To make the budget numbers, you must sell X million this month.’ That gives people incentives to sell at all costs – the wrong product to the wrong people (as in financial services), unnecessary extra features, to bring forward sales from the next period, or, in the worst cases, to invent them. The counterpart to the March holes-in-the-road syndrome on the output side is factories all over the country working flat out to meet a wholly artificial sales rush that magically materialises just in time for people to win their year-end bonuses.

It is no exaggeration to say that budgets corrupt. In a large company with many business units, product divisions and geographical regions, each with its own budget, the effects are compounded many times over. ‘Managing’ in such organisations is often as much a political as a business activity- gaming the system by negotiating low targets and high bud gets – and ‘success’ is about managing contingencies – hiding pots of resources at different levels that can be brought into play throughout the year to make up the numbers. Either way, people’s energy and attention is focused on managing internal relationships rather than the risk and uncertainty of the real world.

Not surprisingly, budgets create despair and misery for many thoughtful managers, as well as massive organisational cost. In a large company, the budget process may take six months and consume 30 per cent of management’s time – all for something, as they are well aware, that is out of date long before it is signed off and actually hinders real-time business adjustment.

As a fixed performance contract in a volatile world, budgets are the reverse of what’s needed. They are as obstructive to rational business behaviour as the holes in the road to the circulation of traffic. The taxi driver’s right: the world would be a lot better without them.

The Observer, 21 March 2004