The first approach does not take in account the functions that are critical to the fiscal health of the organization. These may need to be exempt from budget cuts. It also penalizes functions that are managed well and has little effect on poorly managed functions. This sends a strong message to management “don’t try to operate efficiently”.

The first approach should only used in an extreme emergency. The second approach is generally the one most followed and it has merit after all there should be good reasons why certain functions are not favored by senior management. The second approach should be followed when emergency measures are required. But I would argue that the third approach should be followed as an on going process not just in an emergency. Here is how I would approach the third Method.

Audits of each of the organization’s functions over several years should yield the following data: the “Product” produced by each function. The relationship of the quantity of “Product” produced on an annual basis to the function’s budget and employee numbers. Examine this data for all organizational functions for growth in their budgets and in employee numbers over several years. Make allowances for long term investments and special skilled employee requirements. This method should in fact be a part of the annual budge approval process.
The key lies in determining what a function’s “Product” is. For example a state’s highway department has several major functions and each has its own Product.
1. Function: Construction of new highways Product: “miles of new highways”
2. Function: Resurfacing existing highways Product: “ miles of resurfacing”
3. Function: Bridge repairs major Product: “bridges/major repairs”
4. Function: Minor road surface repairs Product: “miles of minor road repairs”

To continue the example, select the following data for the Function “construction of new highways”.
A …………B…………..C………..D
Year…mi. of new…annual…..no. of
……..highways…..budget…employees
1998……80…………..1.8m………156
1999……69…………..1.9m………175
2000…..95……………2.1m………182
2001……78…………..2.2m………189
2002…..115………….2.8m………210
2003…..102………….2.9m ………211
2004……94…………..3.0m……….213

A …………….E……………………..F
Year..ratio of C to B…ratio of D to B
1998………. .0225………………1.95
1999…………0275………………2.54
2000………..0221……………….1.91
2001………..0282……………….2.42
2002………..0243……………….1.83
2003………..0284……………….2.07
2004………..0319………………. 2.26

Upon careful examination of this data you should arrive at the following conclusions: The number of employees grows steadily and bears no relationship to the actual miles of new highway produced. The annual budget actually increased for years when the actual miles of new highways decreased. Mismanagement of funds is clearly shown in this example. Now lets select the most efficient budget ratio that is .0221 found in the year 2000 and the most efficient number of employees ratio which is 1.83 found in 2002. We will use these ratios in our budget planning for the year 2005. If 90 miles of new highway construction is planned for 2005. We can calculate the budget for the function by multiplying 90 x .0221= $1.99m and the most efficient number of employees required is found by multiplying 90 x 1.83 = 165. The assumption here is that if these numbers were good in past years they should work in 2005. Each year millions can be saved with this method.