Reality Budgeting

When the September 2001 quarter rolled around, computer chip maker Xilinx Inc. had missed its quarterly earnings forecast four times in a row. By then, of course, the company knew something was seriously wrong. Hard as it tried, it simply couldn't get its budget numbers in sync with customer demand—in part because it couldn't get the right information concerning the extent of business its customers, such as Nortel Networks, Lucent and Cisco Systems, did with their customers, such as MCI and Sprint. And that made planning and budgeting at the San Jose, Calif.-based company a shot in the dark. "It was like flying a plane at night without instruments," says Xilinx CFO Kris Chellam.

For example, some $50 million had been budgeted for a new product rollout, but when it was time to ship, demand had all but dried up amid the industrywide recession of 2001. "We invested heavily in building the inventory of one of our newest products that was designed into base stations for the rollout of the latest in wireless devices globally," Chellam says. But because so many equipment makers were betting—wrongly, as it turned out—on winning DoCoMo's business in Japan and getting new orders out of Europe, Xilinx "ended up with too much inventory."

When the telecom industry took another downturn last fall, Xilinx got hit hard once again. "Our customers overforecasted demand from their customers, so we essentially did the same," says Chellam. And because Xilinx based its budget on those woefully inaccurate forecasts, its ability to allocate resources collapsed as well. "Our budgeting became very difficult because confidence in the data deteriorated," Chellam says. "We were focused only on what our customers were telling us rather than paying attention to the global wireless market." The result: Xilinx was forced to write off some $100 million in excess inventory last year.

Xilinx is not alone in its struggle to get its numbers right. Companies across the corporate landscape face increasing pressure to do a more precise job matching their budgets with business strategy—and the fast-changing realities of the marketplace. "Today, if you can't budget faster, you waste time, money and, worst of all, you risk losing touch with your customers completely," says Haim Mendelson, an e-business expert at Stanford University. Says John Dunleavy, a financial consultant for PricewaterhouseCoopers and a coauthor of the book eCFO: "One of the hottest topics for our Fortune 500 clients today is this: 'How do I get the disaster of the last 18 months of missing forecasts and missing budgets behind me? Why am I tied to a restrictive and static budgeting process that's based on costs and on last year, when Wall Street is beating me up because I'm not flexible to the moment and fluid?'" Today, says Dunleavy, "it's all about achieving fluidity. It's all about getting real budgets and forecasts"—or should be.