Already, a Hard Look at 2022 Budgets

Talent wars and inflation have already sent some firms’ budgets off-kilter. But trimming back could create a series of a financial booby traps.

Welcome to this latest of unprecedented times, which is now being called an “unsettling monetary tightening cycle.” Inflation is sky high, unemployment is under 4%, supply chains are a mess and the Fed just decided to stop babysitting the markets. Did you just sigh? Or choke? So did the global economy. 

Barely a month into the new year, executives worldwide are eyeing budget cuts, in an effort to hedge against impending lower profits in most industries. Sure, executives have a century of experience at trimming budgets, but this time they’re facing a confluences of often-contradictory financial indicators. Among the biggest: many leaders are staving off the great resignation by touting increases in bonus and merit pay, while the costs of goods and services also rise. “Companies’ costs are really going up crazily,” says Elise Freedman, workforce transformation practice leader at Korn Ferry. “Altogether it’s not sustainable.” It’s going to be an interesting year for budget planners.

To be sure, some businesses are nearly untouched by inflation, with plenty of profits to go around sans budget slashes. But for most, experts say that something must give—and it can’t be compensation (workers will quit) or prices (customers will leave) or materials prices (it costs what it costs). This leaves the spotlight on internal budgets.

Historically, organizations have trouble cutting budgets effectively. “My pet peeve is 10% cuts across the board,” says Andrés Tapia, global diversity and inclusion strategist at Korn Ferry. “Budget cutting should be strategic, not one size fits all.” But experts say too many firms commonly ignore this advice, and do things like unilaterally axe expense accounts and  travel allowances, which invariably turns off the executives who argue they need those perks to drum up business. Sometimes staffing additions are delayed, which succeed in reducing costs but may limit revenue sources.

Tapia says that leaders would do best to get out of the budget-cutting mindset, and instead focus on prioritizing. Perhaps instead of seven priorities, a company focuses on just there, and add  those budgets. “It’s strategic. Just as everyone else is cutting spending by 20%, you spend more.” Advantage: yours. This strategy, experts say, proved successful for a slew of organizations in surviving the turbulence of 2008.  

It can be very challenging to narrow down to a short list of priorities, says Nathan Blain, global lead for optimizing people costs at Korn Ferry. “Look hard at the bottom of your list, and ask, Do we need to do these initiatives? Can we do them another way? Or at a later time?” This initiative-based thinking can be extremely effective by ultimately avoiding the costs of entire programs. But it requires a shift away from typical budget-creation mindset, where companies look at last year’s budget and add a bit to account for inflation.

Blain advises clients to also look at remote and hybrid arrangements, which are also still leaving money on the table for many firms. Most commonly, some travel and commercial leases can be targeted, as can the Achille’s heel of all businesses: complicated processes. You know you’re facing one when addressing a tech problem requires talking to four different help desk workers, or a financial transaction is proceeded by a dozen different risk calculations. Might six suffice? “Just make sure that you're designing everything for simplicity. It’s good business hygiene.”