All are familiar stories – and all point to the increasingly obvious problems of the management planning process we call budgeting.
Malcolm Simister, a principal of specialist financial consultancy Finacc Solutions, sums up the problem.
“The world is changing so fast that the traditional annual planning and budgeting process just doesn’t do it any more,” he says.
Simister, who consults to clients ranging from the ANZ to Warrnambool Cheese and Butter, frequently finds executives complaining that their recently set targets no longer make any sense.
“I had a coffee in July with a CFO whose year ends in June and he said, ‘We’re just weeks into the year and our budget is out of date’, because they made a fundamental assumption about their market that went spectacularly wrong. He then said, ‘There is no way we will meet our budget this year and we are pretty depressed about it all – no one is going to get a bonus this year’.”
Many critics of the budgeting process agree that budgeting is too often cumbersome and expensive (global car maker Ford once costed its annual budget process at a staggering US$1.2 billion).
Budgeting sets out internal costs and targets that are disconnected from competitive success – and also disconnected from satisfying customers and encouraging performance improvement.
Budgeting creates a bureaucracy that demands adherence to targets and encourages a ‘spend it or lose it’ mentality, particularly in the public sector. And, of course, it sometimes prompts management to tilt the numbers in their own favour.
As the world has become more volatile and these flaws are becoming more obvious, a number of accounting practitioners have turned to the ‘Beyond Budgeting’ model.
[breakoutbox][breakoutbox_title]12 principles beyond budgeting[/breakoutbox_title][breakoutbox_excerpt]The Beyond Budgeting Round Table, an international research consortium that works with a range of organisations, including the public sector, has developed 12 principles that redefine performance management in company finances.[/breakoutbox_excerpt][breakoutbox_content]
1. Set aspirational goals based on continuous relative improvement, not fixed targets.
2. Reward shared success based on relative performance, not on meeting fixed targets.
3. Ensure that planning is an inclusive and continuous process, not an annual event.
4. Make resources available as required and not through internal budget allocations.
5. Co-ordinate cross-company interactions dynamically, not through annual plans and budgets.
6. Base controls on relative performance indicators, not on variances against plan.
7. Base governance on values and boundaries, not on rules and budgets.
8. Build a high-performance culture that is based on relative success, not on meeting targets.
9. Devolve decision-making to front-line teams.
10. Create a network of small units that are accountable for results.
11.Focus everyone on improved customer outcomes, not on meeting internal targets.
12. Promote open and shared information, rather than restrict it to those who ‘need to know’.
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Beyond Budgeting
The Beyond Budgeting approach is the opposite of budgeting’s top-down, command-and-control approach. Executives check and reset their course based on the latest information, acting as coaches to empowered teams, their goals evolving as they improve, with resources made available as needed. And this approach elevates relative performance – that is, beating the competition.
Simister, for one, wants performance measured on nothing else.
Aubrey Joachim runs consultancy Leading Edge Change. Until 2005, he was the financial manager of Sydney Water’s asset management division, where the budget was assembled from more than 1,400 accounts. He confronted the flaws in that process when his division was asked to cut the proposed budget from $600 million to $564 million.
His response: overhaul the system. “Why spend all that time and the resources, with everyone in the organisation running helter-skelter, to get 1,400-odd numbers?” he asks now.
Instead, he focused on key discretionary costs that would change with circumstances and on performance indicators and external forces. Sydney Water empowered and challenged managers by making them set their own spend thresholds, “almost like athletes working to their personal best”.
“They would find costs that they would eliminate or not spend on and yet get the best outcome,” says Joachim.
Beyond Budgeting has now gone well beyond theory, with its principles at work not just within Sydney Water but in companies like Google, Toyota, Aldi and Swedish bank Svenska Handelsbanken.
In 1992, management visionary Peter Drucker wrote that uncertainty “has become so great as to render futile, if not counterproductive, the kind of planning most companies still practise”.
More than two decades later, there seems a chance that the once-a-year financial plan is finally facing real change.
