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Setting budgets in turbulent times

It’s approaching that time of the year again when we sit down at Savage Macbeth and set our budgets for the next calendar year. I was reminded of how potentially difficult this will be when a friend of mine recently recounted how his supply chain director asked him where he thought inflation would peak in the coming months.

Forecasts have moved from 13% to 15% and now more than 18%. As we know, this has been driven by a volatile energy market where restricted supply, legacy issues and downbeat sentiment pushes up energy unit costs and everything associated with it. Almost nothing seems to be immune - manufacturing, technology, pubs… (the list goes on). The only consistent words seem to be ‘when’ and ‘by how much’.

During these times, we have to accept that we will continue to live in an increasingly ‘VUCA’ world (with Volatility, Uncertainty, Complexity and Ambiguity) for some time to come.

But here’s the rub, a lot of business leaders understandably want to exercise their qualities of strength, clarity, and vision – it builds confidence. It shows they’re in control of their own (and their organisation’s) destiny – and of course it is ultimately their heads on the block. For many, there has always been a begrudging acceptance that you can’t control everything - what the competition does, where regulations are set and of course the demand for utilities. Despite this, there has always been enough slack in the system for the decisions that leaders make to impact the destiny of their organisations.

The corporate values of diligence, steadfastness and consistency that would suit many organisations admirably in more stable times, however, don’t play out quite as well in uncertain times. With volatility and uncertainty comes rapid change – whilst ‘an inch of progress is better than a mile in the wrong direction’, there are wider implications to consider. There’s already heightened complexity with difficult issues impacting on other issues (e.g., energy, health, absenteeism, competition – one chain of cause and effect). Leaders will be challenged to operate at pace, in new and different ways to those they have utilised in the past.

When we budget, it’s always wise to reduce costs (and therefore risk) where possible. However, my VUCA ambiguity plea is that rather than business leaders cutting spend on training and (in particular) areas related to commercial conflict, they should be looking to increase it. We can expect plenty of conflict coming our way this year and next. Some of it will be expected, some of it not.

Organisations will need to build new and enhanced commercial skills to plan effectively for conflict, so that they can engage and explore all the new and emerging opportunities to create more sustainable value. This is all whilst managing key relationships against a backdrop of tough conditions. These new skills will provide the necessary adaptability, agility and flexibility which will best place us to ride out these choppy VUCA waters.

Sam Macbeth, 31st August 2022

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