Beyond budgeting is the concept which encourages the company to abandon the traditional budgeting and focus on the adaptive management process. It suggests the company should stop using the annual budget and try to focus on a highly decentralized organizational system. The company should work on improvement of management activity to increase shareholder wealth rather than spend resources on calculating and follow up on the budget.
The Beyond Budgeting Round Table (BBRT, www.bbrt.org), an independent research organization, proposes that budgeting, as most organizations practice it, should be abandoned. They list the following ten criticisms of budgeting as put forward by Hope and Fraser, Beyond Budgeting, 1st edition, Harvard Business School Press, 2003.
What are the Criticisms of Budgeting?
|Criticism of Budgeting|
|Time-consuming and expensive||Budget preparation is a very time consuming and complicated process. It usually takes most of the top management time, and they need to join many meetings and spend their valuable time on this work.|
|Provide poor value to users||The budget will be used during the annual management appraisal when everything is too late to take action.|
|Not provide value to shareholder||The budget usually prepares by middle management, review by top management, and approved by the board of directors who represent the shareholder. Failing to meet budget will impact the performance of both middle and top management, so they are highly likely to set a target, which is a bit low compared to the maximum company capacity. They will try to archive short term goals, and even it scarifies the company’s long term benefit.|
|Not well responsive||The market and other external factors keep changing every day. For sure, our annual budget will not be able to catch up.|
|Not propose cost saving||The middle manager will try to use all expenses on the approved budget even they provide less value to the company. If the actual expenses below budget, they need to request again next year, so they will try to spend them all this year. It will anther problem when they compare actual and budget.|
|Discourage Product and strategy innovation||The managers will think twice before taking any risk of initiate new products even there is a chance. They wish to stay the same with a low growth so they can ensure the remuneration package. They want to ensure the growth of company is under their control, and it should be similar from year to year.|
|Focus on sale growth, not customer satisfaction||The target in each budget usually contains the sale volume and profit. Yes, the sale can increase by some aggressive strategy even it decrease the customers’ satisfaction. They think that low customer satisfaction will not impact immediately. They may move to a new company by the time it causes serious damage.|
|Budget is different from the strategy||Most companies review monthly and annual budgets while ignoring the long term goal where there is no tool to measure.|
|Depend on top management||After the budget was approved, the middle and low-level staff will strictly follow it even they found some error. They are unlikely to go against the budget and cause other issues, they just keep silent and follow. It will encourage a centralized culture, and everybody will blame the top management who approve the budget.|
|Lead to unethical behavior||The staff will focus on their bonuses and other remuneration packages, and it also includes the middle and top management. They will keep silent if the budget is slack; the target can be done quickly.|
What are the Principles of Beyond Budgeting?
|Beyond Budgeting Principles|
|Purpose||We wish to encourage the shareholder and all employees to share the same goal in order to prevent any conflict and boost the intrinsic motivation which will grow the whole organization. Everybody will have the same imagination, ambition, and they will work their best to archive it. It also helps to attract and maintain great people within the company.|
|Value||The value will encourage the employee to work hard for the company. The value-based management will provide guidance and let the employees work on their own. It will give freedom to employee to chose their way to work and take responsibility in case of something wrong. We believe that using our judgment and common sense is enough to replace the strict rule.|
|Transparency||The company should open for innovation, self-control, and regulation. It will send a strong message to all employees that we are doing the right things and had nothing to hide. The front line employee will be able to act faster when they receive enough information. They do not provide strict guidance to do their work.|
|Organization||We encourage the company to decentralize, free communication, persuade the employee to initiate a new idea. It will lead to high engagement, a strong sense of belonging and accountability throughout the whole organization.|
|Autonomy||The company should provide freedom and responsibility to its people will increase accountability and organizational performance. The trust should pass through from top management to the front managers and team. People will be more productive and focus on their work. Adding more rules and procedures will not add any value but increase more problems.|
|Customers||The purpose of all companies is to serve the customers, so we should try to focus on what they need and do our best to provide value to them. Everyone in the company have to think of customers first, their activities should have a direct link to customers need. Any action which results as a conflict with customer needs to avoid at all cost.|
|Rhythm||The business operation has nothing to do with the calendar year. There is no point in setting the target sale and profit for each year. We recommend the target, resource allocation, and performance evaluation should base on business rhythm, event-driven, and less calendar-driven.|
|Target||The target should be the tool to provide direction rather than precision, and it should be linked to the company’s overall purpose. The objective should be relative but not fixed as the world is full of uncertainty. The team, not management, would set the target.|
|Plan and forecast||The plan and forecast should be unbiases and reflect on where the company wishes to go. It represents the most likely outcome.|
|Resource allocation||We encourage the company to manage costs but not to minimize costs. Only the cost which does not add value should be eliminated, and other necessary expenses will keep as normal or even increasing.|
|Performance Evaluation||The performance should not rely only the bottom line figure. We should take into account the value that we have achieved, peer feedback, and other qualitative factors. Performance evaluation is to improve learning and development, not rewards.|
|Rewards||We recommend the company provide a profit-sharing scheme and avoid the individual incentive.|
Disadvantages of Beyond Budgeting
Even there are many criticism and disadvantage, there is some circumstance when budget plays a very important role in determining business success. Beyond budgeting sounds very interesting, but it is not practical for all businesses and scenarios.
These are the techniques that prove that budget provides benefits to the company:
- Use rolling budget to keep track of company performance. Rolling budget reflects the current situation and provides alert to management if anything goes wrong.
- Use activities based budget as the basis for budget preparation. This budget will be based on the activities plan which will change depends on those activities. It completely ignores the past data and reflects the current change in the market.
- Use external benchmark rather than past data to determine company performance.