Beyond Budgeting
(Fraser, Hope)

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Managing performance without budgets and fixed performance contracts. Explanation of Beyond Budgeting of Fraser, Hope and Bunce. ('03)

Contributed by: Niels Pflaeging, BBRT

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What is the Beyond Budgeting model? Description

Working with budgets, as practiced in most corporations, should be abolished. That may sound like a radical proposition, but it is merely a step in a long running battle to change organizations from centralized hierarchies towards 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 realize the new ideas, because the budget, and the command and control culture it supports, remains predominant.

 

Beyond Budgeting (BB) is an alternative that is more adaptive and devolved. It replaces the budgeting model with a more adaptive and devolved alternative. Criticizing budgets is not new. But to define a set of principles, that guides leaders towards a new management model, that is lean, adaptive and ethical, is.


Origin of the Beyond Budgeting method. History

The BBRT (Beyond Budgeting Round Table) was established in 1998 in response to growing dissatisfaction, indeed frustration, with traditional budgeting. The BBRT community successfully addressed three major questions:

  1. Is there an alternative to budgeting? - Yes.
  2. Is there a better management model? - Yes.
  3. How should it be implemented? - This is the main focus now.

Examples of Beyond Budgeting. Applications

Organizations of any size and industry can use BB. Some examples include:

  • Toyota, the Japanese automotive manufacturer, Svenska Handelsbanken, the Swedish bank, Aldi, the German retailer, and Southwest Airlines, the American airline.
  • Other less well known exemplars are Ahlsell, the Swedish building materials wholesaler, and ISS, the international Danish facilities service group.
  • World Bank
  • Small Non-profit: Sightsavers International, a UK charity.

Steps in the Beyond Budgeting model. Principles

BB is not a process. It is a management model based on two sets of principles.

The six principles of managing with adaptive management processes are:

  1. Goals are based 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 six devolution-based principles:

  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 creation decisions at front line teams.
  5. Make people accountable for customer outcomes.
  6. Support open and ethical information systems that provide "one truth" throughout the organization.

Strengths of Beyond Budgeting. Benefits

  • Faster response. BB companies operate with speed and simplicity, and simplicity comes from reducing complexity in the management process. This can best be achieved by giving managers the scope to act immediately and decisively within clear principles, values and strategic boundaries. Operating within a flexible network is also important as it enables managers to respond quickly to customized requests by reconfiguring processes. But making strategy an open, continuous and adaptive process is perhaps the key element in a fast response organization. It enables the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan. To this extent regular rolling forecasts can be helpful and access to resources when they are needed can be critical. Underlying all these approaches is the shredding of the bureaucracy that still plagues most large organizations
  • Innovative strategies. In BB companies, people work within an open and self-questioning environment. Clear governance principles set the right climate and builds the mutual trust needed to share knowledge and best practices. This is also encouraged by moving away from rewards based on budget 'cells' (a formidable barrier to a sharing culture). And by moving toward rewards based on the results of a business unit or group. The knowledge sharing imperative is often driven by the need to achieve ambitious goals. This can even lead companies to exchanging knowledge with suppliers and contractors that, in earlier times, were seen as adversaries. (Compare: Co-opetition)
  • Lower costs. Only by seeing operating processes as supplier-customer relationships will managers respond to demands for improvement in quality and cost. And only by eradication of the budgeting mentality, will managers be encouraged to challenge fixed costs and seek sustainable cost reductions. Beyond budgeting companies have lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects, and structures with their strategy. Operating managers also challenge resources used rather than seeing them as 'entitlements'. Just asking the question, "Does it add value to the customer?" is often sufficient to ensure that unnecessary work is eliminated.
  • More loyal customers. BB companies place customer value needs at the centre of their strategy and adapt their processes to satisfying them. Fast response to customer requests is also important. Thus people at the front line must have the authority to make quick decisions. The 'right' customers must also be profitable. Thus measuring order line profitability is crucial, after charging all costs which are serving customers.

Limitations of Beyond Budgeting. Disadvantages

It is difficult to say categorically whether any one program of change (even with the benefit of hindsight) leads to a direct and measurable improvement in shareholders' wealth within a given period of time. It is easier to say what hasn't worked. For example, it is doubtful that many of the aggressive expansion projects of the 1990s involving significant mergers and acquisitions have improved the wealth of shareholders (except in the companies which they acquired). But in a number of organizations that have migrated towards the adaptive and decentralized model, their leaders have been adamant that it was this switch that underpinned their performance transformation.


Assumptions of Beyond Budgeting. Conditions

  • 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 responsibility. This causes increased motivation, higher productivity and better customer service.
    Individually these two main features can produce significant benefits. But in combination they can help to realize a leadership vision that until now was strong on vision, but was weak on delivery.
  • Because BB 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 power 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.

Book: Robin Fraser, Jeremy Hope - Beyond Budgeting -

Book: Thomas Johnson - Profit Beyond Measure -

Book: Stephan H. Haeckel - Adaptive Enterprise -

Book: Gary Cokins - Activity-based Cost Management -

Book: Ricardo Semler - The Seven-Day Weekend -

Book: Dieter Brandes - Bare Essentials -

Book: Henry Mintzberg - Rise and Fall of Strategic Planning -


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Compare with Beyond Budgeting:  Balanced Scorecard  |  Managing for Value  |  Activity Based Costing  |  Business Intelligence  |  Leadership Continuum  |  People CMM  |  Adaptive Management  |  Decentralization


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