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Can we go Beyond Budgeting

Should we go beyond budgeting?A research into optimizing the budgetary process

Ralph Holtkamp

June 2011

Erasmus Universiteit Rotterdam

Faculteit der Economische Wetenschappen

Sectie Accounting & Finance

Should we go beyond budgeting?A research into optimizing the budgetary process

Master Thesis

In order to obtain the title Master of Science from the Erasmus University in Rotterdam


Ralph Holtkamp

June 2011

under the supervision of

Drs. Hendrik Geerkens


I would like to thank Wilco de Haan, Focko Doorhout Mees, Fred Willemze, Anton Cornel and Gerrit Geers for their continuous support. I couldnt have made this thesis without their valuable input.

Table of Contents

1 Introduction1

1.1 Introduction1

1.2 Research Relevance2

1.3 Research Purpose and Method3

1.4 Research Strategy and Design4

1.5 Overview and structure of thesis9

2 The Company: Marsh & McLennan12

2.1 Introduction12

2.2 Marsh and McLennan Companies12

2.3 Marsh Netherlands18

2.4 Conclusion22

3 Budgeting23

3.1 Introduction23

3.2 Management Control Systems24

3.3 Strategic Planning27

3.4 Budgeting29

3.4.1 The history of budgeting29

3.4.2 Budget functionality31

3.4.3 Perspectives on budgeting and evaluative style33

3.4.4 Target setting and incentives36

3.4.5 The impediments of the budgeting process39

3.5 Better Budgeting41

3.6 Beyond Budgeting45

3.7 Conclusion47

4 Analysis: The construct of the organization50

4.1 Introduction50

4.2 Organizational process and problems50

4.3 Analysis of best practice56

4.3.1 Activity Based Budgeting57

4.3.2 Zero Based Budgeting58

4.3.3 Rolling Budgets59

4.3.4 Profit Planning59

4.3.5 Beyond Budgeting60

4.3.6 Overview of the alternatives62

4.4 Overview of actions and controls63

4.5 Conclusion65

5 Conclusion and Recommendations68

5.1 Introduction68

5.2 Summary of main findings69

5.3 Discussion71

5.4 Limitations71

5.5 Possibilities for further research71



Appendix A: Criteria for quality of research design78

Appendix B: Simons four levers of control79

Appendix C: Beyond Budgeting Principles82

Appendix D: Statistical overview of survey83

Appendix E: Beyond Budgeting survey (in dutch)87

Table of Figures

Figure 1.1 Relevant situations for different research strategies5

Figure 1.2 Structure of thesis11

Figure 2.1 MMCs organizational structure13

Figure 2.2 Marshs organizational structure19

Figure 2.3 2010 contribution to growth and NOI21

Figure 2.4 The trend of the budget and forecast22

Figure 3.1 The development and functionality of the budget23

Figure 3.2 The shift of the approach in management and control25

Figure 3.3 The multidivisional structure (M-form)31

Figure 3.4 The Principal-Agent Theory38

Figure 4.1 Statement on the strategic focus51

Figure 4.2 Statement on the responsiveness and flexibility of the budget52

Figure 4.3 Statement on the budgets time frame52

Figure 4.4 Statement on the budgetary time frame53

Figure 4.5 Statement on the foundation of the budget54

Figure 4.6 Statement on dysfunctional behaviour54

Figure 4.7 Statement on top-down structure55

Figure 4.8 Statement on departmental barriers56

Figure 4.9 Weighted index of the problems57

Figure 4.10 Overview of the alternatives63


1 Introduction

1.1 Introduction

Budgeting is not from the past decades. On the contrary, it can be traced back to the late 1800s to the government of the United States (US). In the US, budgets were introduced at municipal level to control the states tax earnings and expenses. By 1919 more than forty states had adopted a form of a state budget. The first national budget was provided in 1921 to the National Congress. This was the start of the role of budgeting in the public sector.

The word on the effectiveness of budgeting spread quickly in the private sector. In 1930, most of the larger industrial companies had implemented some kind of budgetary control, although not many used budgeting throughout the organization. A study was conducted in 1941 and showed that almost 50% of the established companies in the US used a form of budgeting.[footnoteRef:1] Budgeting was practically fully integrated by 1958 in the US. European companies followed the example the US a bit later in time. [1: National Industry Conference Board (USA), Budgetary Control in Manufacturing Industry, 1931.]

Nowadays almost every organization has implemented a management control systems (MCS). The budgeting process is a vital component of the MCS and has been a very useful system by which the management successfully plan, coordinate and control. The budgeting process involves the creation and implementation of the organizations objectives as well as the short and long term planning. A budget allows the organization to better utilize the available financial resources.

The budget can be distinguished into a normative and behavioural approach. The former elaborates on the preparation and the use of a budget. The latter explains the behavioural aspects of budgeting and people (Grnhaug and Ims, 1988). Argyris (1952) found that behavioural factors were important for understanding the effectiveness of budgeting. DeCoster and Fertakis (1968) investigated how budget pressure was related to leadership style of departmental supervisors.

More distinctive research has been conducted on the budgetary participation by subordinates and to which they were able to influence budget targets. Hopwood (1972) and later Otley (1978) respectively showed how the budgets are used to evaluate managerial and subordinates performance. This is now commonly known as Reliance on Accounting Performance Measures (RAPM).

Other studies show the relationship between job related issues and managerial style (Otley, 1978; Merchant, 1981; Brownell and McInnes, 1986; Chenhall, 1986; Harrison, 1992; Ross, 1995; Lau and Tan, 1998; Emsley, 2001), and between budgetary participation and job satisfaction and rewards (Merchant and Manzoni, 1989; Frucot and Shearon, 1991).

The normative and behavioural approaches show the distinct relationship between organizational, individual and environmental variables. Both approaches have factors that negatively influence the budgeting process. Neely et al. (2001) determined the twelve most cited criticisms which relate to a) non-added value of the budgeting process, b) the impeding results of budgetary controls and c) organizational and people related issues.

The weaknesses of the traditional budgeting have been studied and therefore alternative budgeting techniques such as Zero Based Budgeting, Activity Based Budgeting, Rolling Budgets and Beyond Budgeting have been developed over the past decades to overcome these weaknesses.[footnoteRef:2] [2: There are other budgeting techniques available e.g., Beyond Beyond Budgeting or Scenario Budgeting. These techniques are insufficiently supported by the literature on budgeting and are therefore not taken into account.]

Although, the approach of each technique can be very different, the fundamental purpose of each alternative serves the same cause; to plan and control.

Most alternatives are in line with the traditional budgeting, but Beyond Budgeting advocates abandoning the traditional budgeting as the budget does not aid the organization as intended. Beyond Budgeting argues that the disadvantages cause more damage to the organization than the advantages yield. The organization should more to a more devolved environment and use adaptive processes that are based on relative performance. There are several examples of companies (e.g., Svenska Handelsbanken, Tetra Pak, Borealis) who have successfully implemented Beyond Budgeting and have outperformed their competition.

1.2 Research Relevance

An organizations structure and (performance) culture always is susceptible to change. These changes can lead to several shortfalls in the management control systems. The shortfalls are most notably noted in the short-term related goals. Negative effects, such as impeding of allocation of organizational resources to their best use and myopic decision planning and other dysfunctional behaviour (e.g., slack or budget gaming), play a major role in the annual budget planning and performance evaluation (Hansen et al., 2003). The numerous shortfalls of the traditional budgeting process have extensively been discussed in the past decades (e.g., Schmidt, 1992; Bunce et al., 1995; Hope and Fraser, 1997, 2003a, 2003b; Wallander, 1999; Ekholm and Wallin, 2000; Marcino, 2000; Jensen, 2001).

The shortfalls have lead to the discussion whether the traditional budgeting is the best solution for an organization to go forward or that the organization should decide to change to an alternative budgeting technique.

In this view, Hansen et al. (2003, p. 96) share the same vision:

The conflicting developments illustrate that firms face a critical decision regarding budgeting: maintain it, improve it or abandon it?

Problem definition

For several years, Marsh is not able to comply with the annual budget. The problems that Marsh face is a snowball effect of the past five years. Firstly, the budgetary process is not punctual and the budget works counterproduc