St PetersburgStateUniversity

GraduateSchool of Management

BEYOND BUDGETING: Executive Summary

Accomplished by:

Anna Popova

Daniel Sorteberg

Maria Molodsova

Saint-Petersburg

2009

Content

Comparison of Traditional budgeting and BB

Principles of Beyond Budgeting (BB)

Advantages of BB

Disadvantages of BB

Problems of BB implementation

Real examples

Conclusion

Comparison of Traditional budgeting and BB

Beyond budgeting is a set of ideas developed by Hope and Fraser that could be fully or partially implemented inside an organization as an alternative to traditional budgeting system. These set of ideas was developed, because traditional budgeting system seemed to be too expensive, time-consuming and not value-adding to the company.

On the whole, beyond budgeting is different from traditional budgeting system in 6 main issues:

  1. As goals, relative and self-imposed KPI are used in opposition to fixed annual targets in traditional budgeting system
  2. Team-based rewards are used mainly, but not individual ones
  3. Plans are based mainly on customer demand, but not “make and sell” approach
  4. Resources are allocated on demand (no central allocation)
  5. Dynamic allocation of resources leads to satisfying customer needs in a better way (no central coordination needed)
  6. Multilevel information is equally available for decision-makers at all organizational levels (more open and transparent information system)

Principles of Beyond Budgeting

This issues described above are reflected in 12 beyond budgeting principles, among which 6 are main and other 6 are supporting (mainly explaining how to embody a certain principle in reality inside an organization) (see the table below)

Key performance management principles / Supporting principles
Set high targets directed to achieving relative improvements / Create a performance climate based on sustained competitive success
Reward team-based competitive success / Build the commitment of teams to a common purpose, clear values and shared rewards
Make strategy a continuous and inclusive process / Devolve strategy to front lines teams and provide freedom and capability to act
Draw resources when needed / Champion frugality and challenge the value added of all resources
Coordinate cross-company interactions on the basis of dominating customer demand / Organize a network of teams that connect their capabilities to serve customers
Provide fast, open information for multi-level control / Support transparent and open information systems

To summarize all the principles, real decentralization with transferring responsibility, market-like relationships inside the company and relative KPI indicators should be implemented in an organization in order to make beyond budgeting work.

Advantages of BB

Those companies which stopped traditional budgeting and implemented beyond budgeting, found out that new informational system is faster, opener and offers better mechanism of control. And the question of forecast after implementation is not a huge problem. Especially if we take into consideration the fact that little number of companies can predict the future. So, we will look at the beyond budgeting advantages in more detail:

Faster response

When BB is successfully implemented, managers start operating within a flexible, decentralized network, when responsibility is given to operational managers.It enables managers react to emerging threats and opportunities as they arise rather than being constrained by a fixed outdated plan. Rolling forecasts can be helpful and access to resources when they are needed can be critical. It will help to cut down bureaucracy.

Innovative strategies

In BB people work within an open and self-questioning environment. Clear governance principles set the right climate and build mutual trust needed to share knowledge and best practices. This advantage is encouraged by moving away from rewards based on budget cells towards the results based on business unit or group. The knowledge sharing imperative is often driven by need to achieve ambitious goal. In BB organizations resources strongly connected with strategic plans, more than with functional budgets and department budgets.

Lower costs

There are several main reasons for lowering costs:

  • budget prepare process rejection;
  • bureaucracy reduction and behavior changes;
  • faster response with more adaptive processes and dynamic culture;
  • concentration on customers. When implementing BB managers start asking a question “Does it [this or that process] add value to the customers?” Such an approach could lead to elimination of work which is not necessary;
  • resource allocation. Operating managers also challenge resources used rather then seeing them as entitlements. It means that the managers have to use not all resources which are prescribed for their department by budget, but only that one which are necessary for fulfilling the task;

More loyal customers. BB companies place customer value needs at the center of their strategy and adapt their processes to satisfy them. Fast response to customers request is also important. Thus people in front have to have the right to make quick decisions.

Clear quantitative aims.All departments have to define their strategies. Most of them have their own plans of actions, which can be measured.

Effectiveness Management reward system is strongly connected with key efficiency indexes.

Prevents managers playing games with budget figures. A manager who is judged by meeting his budget will try to negotiate a budget. The same is about aim which have to be achieved.

An emphasis on future rather than on past as in traditional budgeting

Disadvantages of BB

  • BB drives complex changes (touch not only one part, one can not introduce only aim setting system without reward system, there have to be some sequence in actions and implementations of different BB systems). The managers have to cope with all arising problems while implementing, doesn’t matter in what management sphere they appeared.
  • Motivation system has to be well done
  • Construction of new processes
  • To implement BB concept managers of a company have to think about creation of dynamic organizational culture. It is a hard process when employees have to be well-informed and educated. In this case company can meet a problem of shifting from centralized way of thinking.
  • BB doesn`t fit all companies (see Conclusion).
  • BBconcept incorporates many traits of the other models as IT automation (ERP-implementation), Rolling Forecasts, Zero-Based Budgeting, Activity-Based Budgeting, Balanced Scorecard.
  • BB implementation requires a lot of efforts from all employees of all levels, their deep involvement; significant amount of money and time.

Problems of BB implementation

There are some problems a company could meet while implementing and running BB principles and mechanisms:

  • Absence of coherent vision of future system and excessive focus on financial issues can strongly damage success of implementation. Most of people in BB see an opportunity to switch to more adaptive process of efficiency management, others see new philosophy which could help when fighting against bureaucracy and centralization. That is why it`s clear that the main aim and scale of the project have to be realized from the very beginning.
  • Top management or employees could resist changes. It could happen because the process can take a lot of efforts, it requires education, it requires changes in processes, and changes in behavior.
  • Delegation of power without responsibility

The changes here could be so huge that the company has to decide whether to implement BB in the whole organization at once or to make a pilot project.

Illustration of BB-principles implementation

Two cases are a good illustration of howBeyond Budgetting can be implemented in the real world: The classiccase of Whole Foods Market and the special case of Linux, where BB-principles have been used in a modern voluntary community sharing company. In this summary we limit ourselves to present the classical case as it best describes the BB principles in a modern company.

In the case of Whole Foods market the principles can be summarized as:

Having a de-centralized cell structure with autonomous cells capable of taking their own local key operating decision like: new hiring, product placement, pricing, ordering and promotion of their products. In this hierarchy the cell closest to the customer has the most power according to market pull principles, and the customer is the most valued stakeholder.

The level of decision making is pushed down as far as possible, however for executive decisions, Mr. John Mackey describes the 3 different ways of taking key decisions as:

Command and Controll decisionsWhen time is of the essence

Consultancy decisionMost used decision

Consensus decisionsThe democratic way

Whole food market set 6 core values to maintain a common strategy and made its own “declaration of interdependence” stating how closely linked and interdependent the different parts of the company are. Transparency is another part of Whole Foods core focus, as Mr Mackey believes openness to be one of the most important values in an all-for-one company. For this reason, all employees have access to all data (financial, salaries, profits) about their own company, and SEC finally chose to list all employees as insiders.The different departments compete with each other for bonuses based on sales, growth, quality, service profitability and is always kept on tip toes, the store tour and customer snapshot.Their employees gets paid in team-bonuses, and Whole Foods markets have one of the best option program for its employees.So, as we see the BB-budgeting principles are really working in the environment, when information is maximally transparent, the departments are operating with each other on the basis of market principles and decision-making system is highly decentralized.

Conclusion

So, BB can be seen as a way to solve a lot of organizational problems in a certain environment. However, there is one very important notion – beyond budgeting as a set of ideas to improve organizational performance and increase the efficiency of value-adding activities, is not suitable for every organization. Implementation of every single principle should be very careful, with a clear understanding of how it will work and who is responsible for what. Appropriateness of these ideas for the company depends on several factors: nature of competition in the industry, type of organization (should be relatively complex, otherwise it does not make sense), strategy (necessity to adjust frequently to the external environment) and organizational culture (highly decentralized, otherwise beyond budgeting is impossible to implement). In general, it is usually more suitable for organizations with project-based organizational structure as it is at maximum closed to required level of decentralization and responsibilities taken, as well as allocation of resources on demand. However, in any case, implementation of these ideas is very company-specific and could not be a panacea.