About Beyond Budgeting

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Learning Byte 160"There are four things that hold back human progress; ignorance, stupidity, committees and accountants." Anon "Acquaintance; a person whom we know well enough to borrow from but not well enough to lend to." Ambroce Bierce

About Beyond Budgeting - The Budgeting ProblemBudgeting is the bane of corporate America Jack Welch, ex CEO, General Electric

A number of organizations have recognized the damage done by budgeting and rejected the reliance on obsolete data and fixed plans. Organizations that have gone beyond budgeting represent widely differing industries and vary in size. They have all found that their performance has improved once the budgeting process was abandoned in favour of more relative and adaptive means of planning, evaluating performance and control. They report saving considerable amounts of time that used to be spent on budgeting.


Here are 10 reasons why budgets cause problems:1. Budgets are time consuming and expensive. Despite the advent of powerful computer networks and multi-layered models, budgeting remains protracted and expensive. The average time consumed in large companies is between four and five months. It also involves many people and absorbs up to 20 to 30 percent of senior executives' and financial managers' time. Ford Motor Company figured out this amounted to $1.2 billion per annum. 2. Budgets provide poor value to users. The perception of the value provided by the budgeting process varies widely. In one firm it was apparent that the group board thought the budget gave them control, whereas operating managers thought it was completely irrelevant to their needs. One of the primary reasons that financial directors rank budgetary reform as their highest priority is that their staffs spend too little of their time adding value. One conclusion from a 1999 global best practices study was that finance staff spent 79 percent of their time on "lower value-added activities" and only 21 percent of their time analyzing the numbers. 3. Budgets fail to focus on shareholder value. Budgets focus on internally negotiated targets which tend to be incremental changes from the previous period's outcomes. The result is a target that is inwardly comfortable to you, yet appears outwardly difficult to your superior. There is no focus on the maximization of customer or shareholder value. 4. Budgets are too rigid and prevent fast response. The evidence suggests that only 20 percent of firms change their budgets within the fiscal cycle. Another survey result shows that 85 percent of management teams spend less than one hour per month discussing strategy 5. Budgets protect rather than reduce costs. "Use it or lose it" is the manager's mantra. Not spending the budget is a cardinal sin in most organizations. The result is that superiors invariably question why the resource is needed and are understandably reluctant to allow it to pass into the budget for the next period 6. Budgets stifle product and strategy innovation. "Never take risks." It is just not worth it. If it's not in the budget, you might be exposed. Anyhow, if you did take a


risk and it worked out well, your superior probably thought of it first! And if it didn't work out, your job might be on the line. 7. Budgets focus on sales targets rather than customer satisfaction. Though everyone wants to satisfy customers, that is not how they are measured and rewarded. So they meet the sales target, persuade customers to buy their products and convince them that their slow-moving stock really is a great deal! 8. Budgets are divorced from strategy. According to a recent cover article in Fortune magazine, around 70 percent of companies surveyed were poor at executing strategy - a massive indictment of the performance management capabilities of budgets. 9. Budgets reinforce a dependency culture. The way to survive and prosper in a budgeting environment is to do what you're told, meet the budget (but never beat it!). 10. Budgets lead to unethical behaviour. Managing the results (also known as cooking the books) is a frequent outcome of budgeting. Many finance managers are well versed in "managing the slack" and feeding it into the results when needed. However, as we have seen, this practice can border on outright fraud.

From fixed budgets to adaptive processes and From centralized hierarchies to devolved networksCompared with the traditional management model, beyond budgeting has two fundamental differences. First, it is a more adaptive way of managing. In place of fixed annual plans and budgets that tie managers to predetermined actions, targets are reviewed regularly and based on stretch goals linked to performance against world-class benchmarks, peers, competitors, prior periods and strategic goals. Second, the "beyond budgeting" model enables a more decentralized way of managing. In place of the traditional hierarchy and centralized leadership, it enables decision-making and performance accountability to be devolved to line managers and creates a self-managed working environment and a culture of personal accountability. This leads to increased motivation, higher productivity and better customer service. Individually these two main features can produce significant benefits, but in combination they can meet a leadership vision that has, up until now, been strong on vision but weak on delivery. Because it is a coherent model in which all of its components work in harmony, it can produce outstanding and sustained success. This success is driven by four direct value drivers: innovative strategies, low costs, loyal and profitable customers and ethical reporting. However, these drivers will be ineffective unless front line people have the scope, knowledge and are enabled to deliver. The result is an organization that is lean, adaptive and ethical and that has the potential to remain at the top of its peer group league table.


too often we have fixed targets and fixed plans. They no longer make sense. Beyond budgeting is a provoking alternative we should take seriously - Charles T. Horngren, Littlefield Professor of Accounting, Emeritus, Stanford University Stretching allows people to constantly reach for the goal. And people are getting more and more comfortable with the idea that you can get the best out of people not by fighting budgets, which are all about minimal numbers, but by getting people to do the best they can, and measuring their progress toward it against last year, against what competitors are doing. Were in the process of enriching our organization through the stretch concept. Operating margins are 50 percent higher than they were for the first one hundred and eight years of our company, and in a tougher global environment Jack Welch, CEO, General Electric

About Beyond Budgeting - The PrinciplesThere are two sets of six principles that govern the Beyond Budgeting Model. One set relates to adaptive management processes and the other set to a devolved organization. Process-based Principles The six principles of managing with adaptive processes are as follows: 1. Base goals on maximizing performance potential 2. Base evaluation and rewards on relative improvement contracts with hindsight. 3. Make action planning a continuous and inclusive process. 4. Make resources available as required.


5. Coordinate cross-company actions according to prevailing customer demand. 6. Base controls on effective governance and on a range of relative performance indicators. The results of applying these principles include setting aspirational goals, reducing gaming, encouraging ambitious strategies and fast response, reducing waste, improving customer service, and promoting learning and ethical behaviour. Devolution-based Principles There are six principles that leaders should adopt: 1. Provide a governance framework based on clear principles and boundaries. 2. Create a high-performance climate based on relative success. 3. Give people freedom to make local decisions that are consistent with governance principles and the organization's goals. 4. Place the responsibility for value creating decisions on front line teams. 5. Make people accountable for customer outcomes. 6. Support open and ethical information systems that provide "one truth" throughout the organization. The effects of these principles include: a clear governance framework leads to the acceptance of local decision making by front-line teams throughout the organization; a highperformance climate leads to sustained competitive success; the freedom to decide fosters innovation and responsiveness; team-based responsibility results in a greater focus on creating value and reducing waste; customer accountability builds more commitment to satisfying customers profitably; and finally, an information culture based on openness and "one truth" promotes ethical behaviour.

FURTHER READING1. Who needs budgets? Jeremy Hope & Robin Fraser, Harvard Business Review, Feb 2003, pp 108 115 2. www.bbrt.com 3. Check out the BBRT Benchmarking diagnostic at http://www.beyondbudgeting.org/ and take the "Free Taster". This will help you benchmark your existing performance management approach against the Beyond Budgeting model and help you make the case for change.



Beyond Budgeting, How Managers can break free from the annual performance trap. Jeremy Hope & Robin Fraser, Harvard Business Press

Business Sculptors CommentsYET ANOTHER PARADIGM SHIFT!

A Paradigm is a mindset that acts as a filter through which we see and find solutions to problems. Paradigms are very useful for rapidly finding solutions within our mental models, but sometimes they prevent us seeing new solutions from a different paradigm. The budgeting filter prevent