Strategy & Business Development

Beyond budgeting: Is it time to get rid of the budget?

For a long, long time there has been a consistent and penetrating criticism of the budget. According to several experts it's because the budget is neither build for making strategic decisions nor for assessing coworker performances and payments.

Get rid of the budget!

The claim from Jeremy Fraser and Robin Hope sound harsh, but the criticism of the budget is just as straightforward. According to Per Nikolaj Bukh and Niels Sandalgaard, other methods have previously attempted to solve the problems regarding traditional budgeting. For instance Zero Based Budgeting, Performance Based Budgeting, Balanced Score Card and Activity Based Costing (ABC). These methods undeniably improve the budget, but they don't solve the problem at its roots: The budget is no good at planning and evaluating performances! This is, among other things, because it was made as long ago as the 1920’s, where management assignments were far simpler and the future far more predictable.

What wrong with the budget?

According to Bukh and Sandalgaard there's a number of problems with the budget as we know it. They mention these challenges among others:

  • Budgeting is expensive and difficult. Making a budget, following up on it during the year, monthly reports with explanations of divergences and necessary management meetings require a lot of time and many resources among management and accounting staff.

  • Budgets are out of date with the situation of competition, and it no longer lives up to the needs of top management and the operative managers. Rigid annual budgets are not adapted to the ever-changing and unpredictable reality in which companies find themselves.

  • The extend of gaming has grown to unacceptable proportions. Employees attempt to negotiate as low a goal as possible in order to maximize the possibility of a bonus and of reaching a goal, while the manager attempts to pull in the opposite direction.

Another common problem of budgeting is one we all know around the time of Christmas, where employees have money that needs to be spend before the year is up in order to avoid the budget being cut the following year. This phenomenon is called the ratchet effect.

What is Beyond Budgeting?

Beyond Budgeting challenges the budget at its core and questions the fundamental assumptions regarding the strategic efficiency of both annual objectives and of whether the employees are in fact motivated from economic objectives. Beyond Budgeting takes one step further than previous economy management methods and gets rid of the budget all together.

Overview, motivation and goals are instead created from other means.

Beyond Budgeting is built around 12 central concepts that produces a frame, which organizes the organization around a so-called responsibility model. These 12 concepts are built around 6 performance management principles and 6 leadership principles.

The 6 performance management principles:

Performance management principles achieve many of the purposes that a budget has, but in a more adaptive way.

  • Target setting – Set stretch goals based on relative performance. For instance based on external competition within the industry or other comparable companies.
  • Motivation and rewards – Team-based bonuses based on relative performances rather than fixed performance goals and external benchmarks. Reduces gaming.
  • Strategy process – A continuing, adaptive process and more local involvement creates ambitions and fast reactions.
  • Resource management – Decentral decisions and resources “when needed” provides less waste.
  • Coordination – Coordination of transversal activities and initiatives according to customer demands encourages cooperation and excellent customer service.
  • Measurement and control – Rolling budgets and predictions focusses on learning and encourages ethical behavior.

The 6 leadership principles:

  • Governance Framework – Focus is on value-based management rather than the hierarchical structure of the organization.

  • High Performance Climate – The manufacturing of teams based on mutual relative goals with clear values and shared rewards.
  • Freedom to decide – delegating and involvement gives the employees freedom to make local decisions.
  • Team-based Responsibility – Decentralization of strategy into autonomous “front-line teams” that have the freedom to negotiate instead of being subjected to centrally managed decisions.
  • Customer Accountability – Results and decisions based on the market.

If you follow these principles, the results can be tremendous:

  • Managers are no longer evaluated based on numbers, but from benchmarking against peers, competition and “world class” organizations to ensure that they are competitive.

  • Because goals no longer evolve from hitting a specific number, and because resources are made accessible, it's far more probable that managers can make trustworthy predictions.

  • The Ratchet effect is avoided, because managers know that management does not make random cuts.

  • Fear of market uncertainty is no longer a problem, because resources are available, when they are needed.

  • Managers are no longer evaluated based on whether or not the budget’s goal is met, so they are now able to focus on adding value to the customer and thereby strengthen the company’s competitiveness.

  • Team-based structures and delegated strategy means that the organization is constantly run in a strategic way.

  • The company no longer drag itself behind the developments, because goals are constantly reevaluated.

There is much more to be learned about the concept of Beyond Budgeting. We recommend that you begin with Jeremy Hope and Robin Frasers article in Harvard Business Review from 2003: “Who Needs Budgets?”