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[MA blog]: Beyond Budgeting

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Beyond Budgeting - A radical proposition

Posted: 16 Sep 2008 10:13 AM CDT

A radical proposition? - From The Beyond Budgeting Round Table (BBRT)

Budgeting, as most corporations practice it, should be abolished. That may sound like a radical proposition, but it is merely the final (and decisive) action in a long running battle to change organizations from centralized hierarchies to devolved networks. Most of the other building blocks are in place. Firms have invested huge sums in quality programs, IT networks, process reengineering, and a range of management tools including EVA, balanced scorecards, and activity accounting. But they are unable to establish the new order because the budget, and the command and control culture it supports, remains predominant.

10 reasons why budgets cause problems:

Budgets are time consuming and expensive.
Budgets provide poor value to users.
Budgets fail to focus on shareholder value.
Budgets are too rigid and prevent fast response.
Budgets protect rather than reduce costs.
Budgets stifle product and strategy innovation.
Budgets focus on sales targets rather than customer satisfaction.
Budgets are divorced from strategy.
Budgets reinforce a dependency culture.
Budgets lead to unethical behaviour.

There are twelve principles (two sets of six) that govern the Beyond Budgeting Model. One set relates to adaptive management processes and the other set relates to a devolved leadership.

Process Principles

The six principles of managing with adaptive processes are as follows:

Goals - set aspirational relative goals for continuous improvement, don't negotiate fixed contracts
Rewards - reward shared success based on relative performance, not on fixed targets
Planning - make planning a continuous and inclusive process, not an annual event
Controls - base controls on relative KPIs and performance trends, not on variances against plan
Resources - make resources available as needed, not through annual budget allocations
Coordination - coordinate interactions dynamically, not through annual planning cycles

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.

Leadership Principles

The evidence from our cases is that there are six principles that leaders should adopt:

Outcomes - focus everyone on the outcomes, not on hierarchical realtionships
Processes - organize as a lean network of accountatble teams, not as centralized functions
Autonomy - give teams the freedom and capability to act, don't micro-manage them
Responsibility - create a high responsibility culture at every level, not just at the centre
Transparency - promote open information for self-management, don't restrict it hierarchically
Governance - Adopt a few clear values, goals and boundaries, not detailed regulations

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 high-performance 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.

SAS can assist with the implementation of these principles as follows:

Target setting - obtain information on competitor activity and link to external databases
Strategy - make the update and maintenance of objectives and targets an easy process
Growth and improvement - build hypotheses and scenarios and test against capabilities
Resource management - track the life time cost and value of resources
Coordination - search for and use cause and effect relationships across business units and processes
Cost management - identify areas of cost which need attention through analysis (eg. Activity Based Costing) and data mining
Forecasting - create and maintain rolling forecasts
Measurement and control - implement a balanced scorecard with leading and lagging indicators
Rewards - track actual performance against targets
Delegation - maintain personal information portals.

SAS is the only software supplier that is capable of collecting, transforming, modelling, analysing and supporting the complex information needs of organisations. Our flexible framework adapts technology to the management processes - not the other way around.

Sources:

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