Benefit and Limitation of Beyond Budgeting Round Table - Case Study Example

BEYOND BUDGETING SECTION OVERVIEW 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: Is there an alternative to budgeting, Is there a better management model, How should it be implemented This is the main focus now. A budgetary system is made up of both budgetary planning as well the budgetary control. Budgetary planning is the process of preparing detailed short-term plans (known as budgets) for the functions, activities and departments of an organization. A budget is a future plan of action either for the whole organization or a section thereof. It could also be defined as a financial a and quantitative statement prepared and approved prior to a defined period of time of the policies to be pursed during those periods. 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 (Robin Fraser, Jeremy Hope). A budget is a too static instrument and locks managers into the past - into something they thought last year that it was right. To be effective in a global economy with rapidly shifting market conditions and quick and nimble competitors, organization have to be able to adapt constantly their priorities and have to put their resources where they can create most value for customers and shareholders(Juergen H. Daum). In order to do that, they need the right concepts, management processes and tools, concepts such as the Beyond Budgeting Management Model. The introduction of new management instruments such as the Balanced Scorecard, which help to better align the entire organization with corporate strategic objectives and to focus it on the essentials, has created the right foundation. Because if corporate strategy and the objectives are clear for all people in an organization, one can principally react faster to changing market conditions. But then the fixed budget comes into their way and prevents them from really doing the right things. Though what is often missing is a more flexible operational planning and control model. The Beyond Budgeting model wants to fill exactly this gap. NEEDS FOR BEYOND BUDGETING The management system's task is to institutionalize decisions through management processes on strategy adjustments, but also on adjustments of operational enterprise activities and resource utilization plans. This should enable the enterprise to continually control and optimize its short and long-term success in a dynamically changing enterprise environment. TECHNIQUES The goal setting technique: It should be based on agreeing external benchmark based targets, not on negotiating fixed targets. This is focusing mangers on beating the competition and not on meeting the budget. If the market goes up, a manager is still challenged to do better than competitors. The motivation and rewards technique: It should be based on recognizing and rewarding team-based success. Today, no single person can act alone in achieving specific targets for an organization. To reward people individually for reaching specific targets will create tension and mistrust in the organization, which is a recipe for bad performance. The strategy and action planning technique: It should be devolved to operating mangers and made continuous. It should not be managed centrally as an annual event. Only this way a company is able to use the know how from the people at the customer front to adapt fast and constantly to changing market needs. The resource utilization technique: It should be based on local access to resources (within agreed parameters), not on the basis on allocating them through annual budgets. Only this way frontline managers are able to act fast in front of threats and to realize sudden opportunities. The coordination technique: It should be based on making cross-company interactions through "market-like" forces, not through predetermined detailed actions set down in central plans. Frontline, operative units negotiate resource and service requirements with service units and agree on certain ranges for required services. The measurement and control technique: It should provide fast, open, and distributed information for multilevel control. Information should be available to everyone, so that operational managers are able to compare their performance with the one of their colleagues and that senior managers can see what is going on and can monitor and challenge their subordinates instead of controlling them. SECTION 2 A summary report for senior management on the understanding of Beyond Budgeting, stating the benefit and limitation of beyond budgeting. In business, budgets help you determine how much money you have and how you will use it, and help you decide whether you have enough money to achieve your financial goals. As part of a business plan, a budget can help convince a loan officer that you know your business and have anticipated its needs. The benefit and limitation Beyond Budgeting are as follow: BENEFIT OF BEYOND BUDGETING Traditionally, the corner stone of the management system of a company is the budget. The budget determines how managers behave and on what activities and objectives they focus. These annual budgets, which are absorbing considerable management time and other resources in creating them, are fixed over the following fiscal year as soon as they are released. Through monthly actual/budget comparisons companies check, how good manages are in meeting their budgets. The main target of these managers therefore is, to not exceed their budget, because their bonus is dependent on meeting the budget. Beyond Budgeting 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. In Beyond Budgeting 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. LIMITATION OF BEYOND BUDGETING Budgeting is not an exact science, its success hinges upon the precious of estimates. Estimates are based on the facts and managerial judgement. Managerial judgement can suffer from subjectivism and personal biases. The adequacy of budgeting, thus, depends upon the adequacy of managerial judgement. Beyond Budgeting is a management tools a way of managing not the management: the presence of a budgeting system should not make. A skilfully prepared budgetary programme will not itself improve the management of an enterprise unless it is properly implemented. SECTION 3 Most of the materials used for this essay were retrieved from electronic sources; databases and journal articles. The keyword used for searching through these electronic sources was 'Beyond Budgeting', though several variations and modifications of the keyword were used to achieve more relevant information. All the sources derived through this means were thoroughly read and analysed for relevance to the topic at hand and validity of information in the light of the various printed source also used for the essay, and the most relevant ones were used. Google was the most useful search engine, and a couple of conference papers and organisational papers were also used to give the analysis carried out in the paper a more practical approach. Reference: BeyondBudgetingSummit, 2nd July 2003 in London/UK program of the summit Beyond Budgeting on the move: Report from the First Annual Beyond Budgeting Summit in London, 1-2 July 2003 Brad Williams and David Vasche, "The State Appropriations Limit," California Legislative Analyst's Office, April 13, 2000, www.lao.ca.gov (retrieved on 22nd August, 2006 ) Information System Requirements for Performance Management Beyond Budgeting, May 16, 2002, London/UK: Juergen H. Daum,Enterprise Management, Leadership and Business Control for Value Creation, 27 January 2004 in London, UK Juergen Daum, Enterprise Management in the 21st Century - A Blueprint for a New Approach and the role of Information Systems at the BBRT member's meeting, 26 June 2003 Michael J. New, Proposition 13 and State Budget Limitations Past Successes and Future Options,No. 83,June 19, 2003 Robin Fraser, Jeremy Hope -Beyond Budgeting - Managing performance without budgets and fixed performance contracts (2003). Rolf H. Carlsson Ownership and Value Creation - Strategic Corporate Governance in the New Economy No. 83,June 19, 2003 Read More