The Beyond Budgeting Model - Budgets as Tools of Repression Rather than Innovation - Case Study Example

Budgeting Budgeting The Budget Is a Tool of Repression Rather Than Innovation A budget refers to a financial tool or plan that lists all planned revenues and expenses. A budget functions as a plan for spending, borrowing, saving, and it is an essential tool for microeconomics. Budgets play crucial roles in illustrating trade-offs between goods, and exists as organizational tools stating organizations plans in monetary terms. Budgeting plays a crucial role in providing forecasts for expenditures and revenues by serving as a construct for business performances in case the business adheres to events, plans and strategies. Budgets also enable the measurement of actual financial operations against a forecast and establish the costs constraints of a project, operation and program (Daum 2001, p. 21). Budgets have been used as tools for aiding the planning of actual operations by ensuring managers consider changes in their environment. Additionally, budgets enable managers to outline steps and measures for ensuring the organization meets it objectives. Budgets crucially help managers to examine the relationships between the different departments and their own operations. Most importantly, budgets control resources, and help in communicating organizational plans within the different settings (Drury 2007, p. 31). It is equally crucial to mention that budgets motivate managers to work towards the achievement of the organization’s objectives, provide visibility of the organization’s performance, and help when evaluating the performance of managers. Recently, budgets and budgeting processes have faced immense criticism consequently attract publicity. Critics to budgets and budgeting note that budgets provide barriers to successful management and utilization of organizational resources. According to these critics, budgets influence managers and employees in counterproductive ways. It is essential to note the movement of current economies and their rapid rates of maturity are negatively affected by budgets because they impede flexibility of organizations (Daum, 2004, p. 41). Since 1998, several propositions have been made for the development of a new management philosophy called Beyond Budgeting. These proposals emerge as responses to dissatisfactions with traditional management approaches. These approaches focus on management as a function of budgeting through control cultures and command influences. In recent years, organizations have faced immense pressure to change their management strategies and approaches. This has been motivated by the need to shift from traditional management strategies because of changing business and operational environments. It is crucial to note that company and organizational activities become complex when seeking income generation. In this case, company activities have grown in dynamics, complexity and competitiveness despite the uncertain and turbulent business conditions (Dugdale, and Lyne, 2006, p. 51). Currently, businesses are not limited to production and sales, but rather, they engage in different economic and non-economic activities. Currently, organizations need to operate with the intention of addressing quality aspects of the business spectrum to maintain their productivity and competitiveness as well as maintain contact with their customers. Therefore, companies have begun identifying internal processes that impede their functioning in order to respond to challenges within the current business environment. In the process, companies are getting rid of their inflexible processes or procedures that limit their flexibility (Hope, and Fraser, 1999, p. 67). The Beyond Budgeting model provides an essential strategy for organizations to fill the gap left by abandoning budgeting. This strategy provides tools that enable managers to achieve their market objectives and develop plans. It also prevents managers from focusing their energies on their budget requirements. The Beyond Budgeting approach provides organizations with platforms for controlling and managing their resources and operations without budgets. Budgets as Tools of Repression Rather Than Innovation According to Bob Lutz, budgets are tools of repression instead of innovation. Opponents of budgeting who see budget as tools that do not favor progressiveness echo this statement. The current business environments do not favor budgets. Bob Lutz advanced the notion that organizations should not budget because they can maintain their operations without budgeting. Budgets are tools that favor repression instead of innovation because they cause dysfunctional behaviors in an organization (Hope, and Fraser, 2001, p. 23). Additionally, budgeting does not confer competitive advantages because it limits the flexibility of an organization. In addition, budgets are static tools that make managers focus in the past instead of providing platforms for future management approaches. This means that budgets blind managers into following previous trends in a rapidly changing global market. Additionally, budgeting prevents managers and business operations from identifying real competition. It is important to note that budgeting requires immense time for collecting and analyzing organizational data. During this process, the organization does not focus on its market presence and activities giving competitors an edge (Hope, and Fraser, 2001, p. 85). Budgets do not provide managers incentives for new growths opportunities, which make managers and organizations highly inflexible. Several CEOs and head of companies reflected the fact that budgeting impedes organizational activities. For instance, Lutz considered budgeting as a repression activities tools. Additionally, Jack Welch former General Electric CEO said that budgets should not have existed because they act as banes of American corporate. These notions show that budgets are remote and complex processes that seek to manage using numbers. Additionally, budgeting is a time consuming process that leads to inflexibility because it affects an organization’s ability to adapt to its markets. Additionally, budgets affect manger’s abilities to motivate themselves to ambitious targets acting as barriers to fundamental change. They also present hurdles for the successes of the enterprise instead of acting as support tools (Dugdale, and Lyne, 2006, p. 72). According to a CFO study in 2006, most of the respondents indicated their dissatisfaction with budgeting. According to senior managers, the budgeting system causes organizations immense problems because they fail to support the strategic objectives of the organization. Budgets also do not tolerate excuses and they are easily affected by volatile market conditions such as social unrest, natural disasters, wars and the collapse of an economy. Has The Budget Outlived Its Usefulness In The 21st Century? In my opinion, budgets have outlived their usefulness. This is because budgets have proved to be cumbersome processes that require immense financial and time investments. The budgeting process requires immense management and organization time because it involves all the departments and processes in an organization. For instance, organizations use immense work force during performance measurement and data collection. Additionally, the organization requires immense labor for the development of financial plans. A study by KPMG (2010) showed that budgeting processes require 30-40% of organizational and management time. For instance, Ford Motors (2010) estimates its total performance measurement and planning to cost $1.2 billion annually (Moeini, 2007, p. 95). It is essential to note that budgeting takes organizational time that adds value to the organizational processes. Finance personnel use 25% of their time interpreting and analyzing organizational data and numbers. Additionally, they spend 45% of their time, during budgeting periods, to gather and process information for the budgeting team. Budgeting ignores the competitive environment and it does not provide approaches for meeting the requirements of the operating and executive managers. It is essential to note that change cannot be managed, but managers can prepare or herald change. It is essential to note that numerous processes in the current business context face challenges from rapid changes in market conditions, customer behaviors and technologies. For instance, companies must contend with shortened product life cycle and rapid technological advances, which cannot be managed using a budget. These two facts are the crucial pointers and determiners of a business (Moeini, 2007, p. 89). As a result, organizations and business must develop adaptabilities to the market trends. However, because of the inflexibility of budgets, they stifle responsiveness and innovation. Budgets require companies to adhere to fixed plans. This prevents managers from having tools and strategies or alternatives for quick responses to customer requirements and changes in market trends (Otley 2006 p. 4). Therefore, conformity to budgets and budgeting is not compatible to continuous organizational improvement. The levels of gaming the figures or numbers have risen to unacceptable levels. It is essential to note that budgets determine the behaviors of managers and their focus on different activities. Budgets occur as remote tools for managing organizational processes using numbers. As a result, budgets focus managers towards the achievement of the budget’s objectives. This prevents managers from thinking ahead and managing their targets. In this case, budgets force managers, at all organizational levels, to commit towards the delivery of specified financial figures regardless of the realities on the ground. This affects management behavior, which may become dysfunctional (Moeini, 2007, p. 77). For instance, failure to meet the budget’s objectives leads to immense repercussions for the management team as they seek to explain their failures. In addition, in case the company fails to meet its objective, the management ensures early delivery of orders. However, in case the company meets its objectives, the management pushes their delivery to the next fiscal year, which represents a dysfunctional management. How Do The Criticism Of Budgeting Made By Beyond Budgeting Round Table Differ From Those Generally Acknowledged By Academics Today? The arguments and criticism of beyond budgeting differ because they are based on three key viable propositions. According to this criticism, budgets are no longer compatible with current economic trends Libby and Lindsay 2010 p. 5). This criticism argues that companies and organizations should abandon traditional management strategies that emphasis on budgeting. Hope and Fraser believe that budgeting provides barriers to a firm’s competitive advantages. They argue that currently, competitive advantage arises from effective use of information. According to Beyond Budgeting, budgets are time consuming. Despite the emergence of effective information technology tools, budgets use traditional models that require up to 6 months for their completion. Additionally, traditional budgeting does not add value to an organization’s operational processes, and they fail to recognize the value of shareholders (Moeini, 2007, p. 63). They also note that managers focus on the achievement of budget fixed targets. According to beyond budgeting, budgets do not consider customer satisfactions, but focus on sales targets. The budget system also does not provide effective platforms for the implementation of strategies, and they encourage a culture of dependence. Previous criticism to budgeting was based on attempts to improve the budgeting process while the Beyond Budgeting approach does not consider budgeting as a management process. For instance, academics developed the Zero-Based Budgeting as an attempt to beat the limitations of budgeting. This type of budgeting is based on projected expenditure. In this case, existing programs start at zero with blank sheets of paper. This approach was first used in 1969 and it became an established and fashionable tool for management. Additionally, it was effectively used to review discretionary overheads (Mol, and Birkinshaw, 2008, p. 142). In addition to this tool, academics developed another budgeting approach called the Activity Based Budgeting. This approach reassigned resources to activities and users. The Activity Based Budgeting begins by estimating demand for resources. This approach then works backwards in order to derive resources and activities needed for the demand. To What Extent Does Type Of Organization, Its Culture And Environment Affect The Successes Of The Operations Of A Budget. These crucial factors affect budgeting processes and the successes of the operations of a budget. For instance, different organizations have different approaches to governance. This sets the basis of action taking within an organization. In this case, governance has its basis on mission plans and statements (Libby and Lindsay 2007 p. 3). Responsibility for performance influences manager’s actions and responsibilities, which affects the achievement of competitive results. This factors influence management practices such as delegation. In this case, people should be given the flexibilities required for freedom of actions. This means that senior managers should not constrain and control employees, which could affect the operations of a budget. Structure plays a crucial role in the operations of a budget (Niven, 2002, p. 85). Organizations are based on structures, which influence networks and processes within an organization. The operations of a budget require coordination, leadership and strategy formulation. Failure to institute these activities affects the operations of a budget. Most importantly, organizational environments influence leadership principles, which influence the empowerment of employees and managers. How Should Organizations Today Overcome The Perceived Limitations Of Budgets? Organizations can overcome the challenges and limitations imposed by budgeting through innovativeness. Organizations should abandon traditional budgeting annual fixed performance contracts, and employ realistic and innovative approaches to management as well as resource management. These approaches provide radical approaches to resource management (Proctor, Burton, and Pierce, 2006, p. 112). Reference List Daum, J 2001, Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century?. Available athttp://www.juergendaum.de/articles/beyond_budgeting.en.pdf [Accessed 6 April 2009]. Daum, J 2004, The Origins of Beyond Budgeting and of the Beyond Budgeting Round Table (BBRT) - an Interview with Jeremy Hope. The new New Economy Analyst Report, Jan 10, 2004. Available at: http://www.juergendaum.com/news/01_10_2004.htm [Accessed 6th April, 2009]. Drury, C 2007, Management and Cost Accounting, 7th ed. Cengage Learning EMEA. Dugdale, D and Lyne, S 2006, ‘Budgeting’, Financial Management Hope, J and Fraser, R 2003a, ‘Who needs budgets?’ Harvard Business Review Hope, J., and Fraser, R 1999, Budgets: the hidden barrier to success in the information age. Availableat:http://www.beyondbudgeting.nl/media/beyondbudgeting/199903%20Hope%20&%2 0F raser-Budget%20the%20hidden%20barrier.pdf [Accessed 6th April, 2009]. Hope, J., and Fraser, R 2001, Beyond Budgeting: Questions and Answers. Available at http://www.balanced-scorecard.de/docs/Beyondbudgeting3.pdf [Accessed 6th April, 2009]. Hope, J., and Fraser, R 2003, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press. Libby, T. and Lindsay, M 2007, ‘Better budgeting or beyond budgeting’ Strategic Finance, 2007 Vol 89 Issue 2 pp46-51  Libby, T and Lindsay 2010, Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research 21 p56-75   Otley, D 2006, ‘Trends in budgetary control and responsibility accounting’ in Bhimani, A et al ‘Contemporary Issues in Management Accounting’ OUP Oxford (available as an e-book). Moeini, H 2007, Beyond Budgeting. GRIN, Verlag. Mol, M. J., and Birkinshaw, J 2008, Giant Steps in Management: Creating Innovations That Change the Way We Work, Pearson Education. Niven, P 2002, Balanced scorecard step by step: maximizing performance and maintaining results, John Wiley and Sons. Proctor, R., Burton, N., and Pierce, A 2006, Managerial accounting for business decisions, 2nd ed. Pearson Education Read More