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

Contents

  1. Summary
  2. Forum
  3. Best Practices
  4. Expert Tips
  5. Resources
  6. Print

Beyond Budgeting traditional adaptive

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 -


Beyond Budgeting Forum
  Budgeting Must Be Flexible and Auditable
Just like a strategy, a budget needs to be flex...
     
 
  Add Rolling Quarterly Forecasts to Traditional Budgeting Process
One should look at a budget plan as a base against...
     
 
  Budgeting in Uncertain Business Climate
What about when you are doing your business in an ...
     
 
  Budgets Should Facilitate Communication, Collaboration, Cooperation, and Coordination
The metaphor of an algorithm explains the dynamics...
     
 
  Financial Measure / Budgeting is no Longer Dominant
It is interesting to observe that over the last 15...
     
 
  Budgeting Must Be Integrated in Strategic Process
Budgeting is not an independent process. It has to...
     
 
  Why Budgeting and Sound Financial Practices are Crucial
Folks, all you have to do is look at the US debt a...
     
 
  Budgeting Has Become the End Instead of a Tool to an End
Budgeting - like many other activities - has often...
     
 
  Budgeting is the Essence of Good Management
25 years ago I ran a public school knowing I had a...
     
 
  Quarterly Lump Sum Budgeting
Business environments are becoming less predictive...
     
 
  'Beyond' Budgeting -- Call it Whatever, It's Necessary
Budgeting, in whatever form at whatever level is a...
     
 
  Beyond Budgeting in Young Companies?
Is it possible to embed the BB model in a young co...
     
 
  Budgeting for Guidance, not for Control
Budgeting by itself is not bad. It is the importan...
     
 
  What is a Budget? Definition
What precisely is a budget? Let's collects some go...
     
 

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Best Practices - Beyond Budgeting Premium
  Weaknesses of Traditional Budgeting
Fraser and Hope mention the main weaknesses of ...
     
 

Expert Tips - Beyond Budgeting Premium
 

Implementing Adaptive Rolling Forecasts

An alternative to traditional budgets is the imple...
Usage (application): Generic Implementation Steps
 
 
 

Better Budgeting Best Practices

It is not always necessary to replace budgets comp...
Usage (application): Improving the Budgeting Process
 
 
 

12 Principles for a Robust Beyond Budgeting Framework

In his article “Beyond Budgeting” the author menti...
Usage (application): Implementing Beyond Budgeting
 
 
 

How to Avoid that Forecasts Fail?

In a paper titled “Why Forecasts Fail. What to Do ...
Usage (application): Dealing with Uncertainty
 
 
 

The Value of Traditional Financial Planning, Budgeting and Forecasting in Difficult Economic Times

How can nowadays companies recover performance<...
Usage (application): Budgeting, Uncertainty
 
 
 

List of Problems with Traditional Budgets

In the article "Re-Evaluating the Traditional Budg...
Usage (application): Potential Improvement Areas of Budgeting Processes
 
 
 

Beyond Budgeting Implementation Approaches

Approach 1: The first approach begins in the contr...
Usage (application): Budgeting, Controlling
 
 
 

The Reasons Why Forecasts Fail

In business school academia in the 1970s and 1980s...
Usage (application): Understanding Forecasting Limitations
 
 

Resources - Beyond Budgeting Premium

Activity-based Budgeting

- Shortcomings of traditional budgeting processes....
Usage (application): Flexible Budgeting
 

Beyond Budgeting Case

This case by R. Murray Lindsay and Theresa Libby e...
Usage (application): Svenska Handelsbanken AB
 

A Corporate Strategic Tool: Beyond Budgeting

Good presentation about Beyond Budgeting. The foll...
Usage (application): Budgeting, Managing Performance, Strategy
 

Beyond Budgeting Diagram

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Usage (application): Dynamic Budgeting
 

Beyond Budgeting of Statoil

Presentation about the implementation of Beyond Bu...
Usage (application): Budgeting, Performance Management
 
 

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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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