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Budgeting for a VUCA world

Economic growth
By Paul Hodges on 26-Oct-2013


“I use the term VUCA to describe the world – volatile, uncertain, complex and ambiguous. It is very difficult for people to get a total picture.”   Paul Polman, Unilever CEO

The title for the 2013 Budget Outlook chooses itself.  If the CEO of Unilever, one of the world’s great companies, can’t get a “total picture”, then what hope is there for the rest of us?  Of course, we might get lucky and come up with the winning numbers in the lottery.  But that is not the approach most companies would want to take.

The range of genuine uncertainties is unprecedented:

  • Financial markets.  Central banks and policymakers have so far added $33tn of stimulus – nearly half the size of the global economy.  It is the biggest financial experiment in history by a very long way.   Therefore we cannot have any confidence that we know what happens next.  Do they keep adding more stimulus forever?  Do they try to ‘taper’ and stop the money printing, as the US Federal Reserve has suggested?  Or ????
  • Debt bubbles.  The only central banker to forewarn of the financial crisis in 2007 was William White, then BIS chief economist (the central banks’ bank).  Ominously, he warned last month that “This looks like to me like 2007 all over again, but even worse…And we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle”
  • Oil and commodity markets.   It is clear that the blog is now not the only one to believe that central bank liquidity has caused these markets to lose their power of price discovery.  Today’s consensus assumption of $100/bbl oil forever is in fact the least likely option.  Whilst Ed Morse, commodities head at Citi, has just published a detailed outlook titled ‘The end of OPEC’ 
  • The Four Butterflies.  The Eurozone crisis; US political dysfunction over the debt/budget issues; rising interest rates; China’s new economic policies.  All are now flapping their wings very hard, as the blog feared back in August.  Each has the potential to deliver a cold winter on their own.  And now there is the spying scandal, causing further mistrust between Western leaders
  • Demographics.  Although still largely unrecognised, the world’s ageing populations are the real cause of today’s New Normal and its changing demand patterns.  Sadly, out of touch policymakers still seriously argue that demographics don’t impact the economy.  And the longer this core issue is ignored, the more problems it stores up for individuals, companies and countries for the future

How can companies possibly deal with this long, but by no means complete, list of major uncertainties?  Should they simply throw up their hands in despair, and stick with a consensus forecast that they know will be wrong?

This may seem tempting.  And indeed, it has been the default policy until recently.  But today, the balance of risk and reward is starting to change.  Staying with the status quo is more painful than adopting a New Normal-based approach.  After all, how many more times can you explain to your boss that your budget has not been delivered?  And how many more times can your management tell shareholders that key targets continue to be missed?

Thus in different ways, and at different times, companies are starting to look at the world from new angles.  Instead of relying on growth forecasts based on ratios to IMF forecasts of GDP, they are instead thinking about the potential needs of people at different income levels, and at different ages.  And they are starting to find that it might not be so difficult after all to make the transition.  It might even be that it is the first step, that is the most difficult.

This is certainly the blog’s experience as it continues to work with Boards and ExCos and management teams around the world on these super-critical issues.  The release of energy, when reality is acknowledged, goes a long way towards putting that critical first step in place.  The key, the blog has found, is for each company to then develop its own VUCA for success:

  • Volatility.  Developing a road-map requires Vision
  • Uncertainty.  A strategic Understanding of the changes underway is essential
  • Complexity.  The planning process requires Clarity over implementation
  • Ambiguity.  Unforeseen events will place a premium on Agility

Nobody said business was meant to be easy.  But companies who take on the challenge of today’s VUCA world will be increasingly successful as we move through the 2014 – 2016 budget period.