THE BEYOND BUDGETING: the solution for a more Agile budgetary management ?
Face to more complex and competitive environments, dissatisfaction towards traditional budgets is growing in the business world, a Bearing Point survey shows that 28% of companies plan to do away with budgets. Is the Beyond Budgeting the solution for a more agile management accounting contribution in business ?
The original purpose of budget
The budget was born on 1920 in an effort to help managers control costs and cash flows to drive and evaluate management performance. Nowadays, the budget has become a tool to implement a firm’s strategy.
Colin Drury determined 6 functions of budgeting:
Refining the company’s long term plan
Coordinating the different departments budgets and helping to improve relationships between them
Communicating ideas and expectations from top management to all other employees
Motivating managers to achieve challenging target and goals
Controlling the business activities using variance analysis to determine areas requiring attention
Evaluating managers’ performance to achieve targets
Criticisms toward traditional budgeting
Budgets are time consuming
Traditional budgeting is too time consuming and unresponsive to external changes. Budget takes 20% of management time. Leanest companies take 79 days to organize budgets (210 days in the worst companies). In other words, it represents too much time for an activity without value.
Lack of strategic focus and value creation
The aim of traditional budgeting is cost reduction. It is bureaucratic tool which is a disincentive for flexibility and creative instincts. Budgets, used as a system of control are seen as a restriction for progress for modern companies, budget strengthens vertical command structure and engenders a lack of adaptability and responsiveness.
It triggers dysfunctional behaviors
The budget as a system of rewarding performance (reward manager for getting target but punish if they fail) encourages dysfunctional behavior:
- It de-motivates employees due to the control forced onto them.
- It puts managers under pressure to meet targets and gives rise to budget games.
The purpose of Beyond Budgeting
The concept of beyond Budgeting
The idea of “Beyond budgeting” finds its origin in an article published in the Harvard Business Review in 2003. Based on this article and of the work carried on by the Beyond Budgeting Institute, 12 pillars have been identified to reinvigorate management accounting contribution in business operation and performance.
The purpose of this approach is to put distances with the annual accountability and to substitute positive stress (do better than the competitors and satisfy customers) to a negative stress (reach annual objectives).
An element for more adaptive firms
The Beyond Budgeting consists in a more flexible, agile and responsive approach and requires an revision of the organization structure and a shift of the management style. The empowerment of employees and the decentralized management style should result by an increased productivity and motivation.
The Beyond Budgeting promotes innovations and operational excellence which are adapted to the volatile nature of the environment.
The main success story of the beyond budgeting is the Swedish bank Handelsbanker which gave up traditional budgeting in the 70s. It has resulted by a higher profitability and performance and has allowed it to outperform its competitors. More recently, companies such as Hilti, Lego or Volvo have decided to do away with traditional budgets and to opt for the Beyond Budgeting.
The Beyond budget principle & implementation
The idea of Jeremy Hope and Robin Fraser (the directors of the Beyond Budgeting Round Tables) : the process should look on the external benchmarks and competitors rather than internally set targets.
The 3 key elements of Beyond Budgeting
- Use of evaluation relative to the performance: not relative to an objective but to results of the competitors. The beyond budgeting purpose is to no longer rewarding managers but a rewarding system relative to performance measures (derives from competitors and benchmarks)
- Use of indicators and KPIs
- Use of rolling forecast: no more annual forecast from December 31 to December 31 next year (no fixed date)
The 12 guiding principles of the Beyond Budgeting:
1) Measure performance against the competition, not internal targets
2) Motivate employees by empowerment
3) Delegation to divisional managers allows them to take responsibility
4) Give operational managers independent access to resources
5) Create customer focused team
6) Provide transparent information sharing across the organization
7) Set targets on external benchmarks
8) Rewards in line with beating the competitors
9) Allow managers to be involved with strategy planning
10) Grant management access to local resources
11) Coordinate the internal use of resources
12) Performance measurement information should be available freely
How to get there?
The implementation can be done in two stages:
1) Move toward performance evaluation relative to competition
2) Then implement a decentralized structure
The implementation of the Beyond Budgeting requires a change of mindset (Performance and value rather than control and directive management) and organization (no more organization in silo).
It requires an effort in communication towards the decision-makers. The message transmitted should insist on the “groundbreaking” aspect but also on the concrete and realist application.
The end of the traditional budget ?
There is no doubt that the traditional budgeting process need to be reinvigorated as it is no longer effective in complex and competitive environments. The Beyond Budgeting could be the solutions for companies which need to develop a more Agile environment and to innovate. However, it would be a mistake to think that the Beyond Budgeting fit with every structures. Some complex companies have to find solution which replace the coordination and framework role of traditional budget.
Want more information about Beyond Budgeting ? Visit the official website of the Beyond Budgeting RoundTable or buy the complete Harvard Business Review article.
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