Performance Management - Beyond Budgeting Model - Research Paper Example

? Performance Management: Beyond Budgeting Introduction Funding is undoubtedly among the most important assets an organization possesses, and is usually second only to the personnel in this respect. These funds are often entrusted to the organization by its stakeholders as an investment of sorts. Needless to say, the last thing an organization would like to do in such a scenario would be to waste the funds given them – and along with it, the trust of its stakeholders. An organization without any money is essentially paralyzed, and will not be likely to hold out long before it keels over and dies. This being the case, the executives and managers of a particular organization tend to be very discriminating and cautious when allocating funds, albeit justifiably so. Their allocation of funds to various departments quite clearly needs to be done with the utmost care and deliberation, with more important departments and/or projects requiring more funds. Such a task is often easier said than done, as assigning the budgets of multiple departments within an organization requires copious reliance on one’s skills in planning and micromanagement. Even then, things can still happen that end up forcing sudden changes in the allocation of funds. Budgeting, then, is a concept any company would do well to keep in mind. Despite being relatively dated, the traditional method continues to be widely used all over the world, and in some cases has even been used to great effect. As of late, though, newer and more modern methods have begun to expose flaws in the traditional approach, most notably the Beyond Budgeting approach. To be discussed in this paper is the traditional approach to budgeting, in terms of its most glaring weaknesses, in order to allow a more objective comparison to the Beyond Budgeting model. Traditional Budgeting – Major, Major Weaknesses Hill (2012) summarizes the traditional approach as being a blend of the top-down and bottom-up budgeting methods. This means that top management sets goals that subordinates are to collaborate towards. At the same time, department managers come up with budget plans for their respective departments, which are then given to the top management for review and for consolidation into a plan encompassing the whole company. This setup looks easy enough to understand. Under such an arrangement, the top brass sets goals the company is to work towards, while the heads of various departments report exactly how much money they need to accomplish their functions in this regard. Thus, at first glance, it seems like a very much reasonable approach to the task of budgeting. It may even be considered an effective approach, at least in theory. Unfortunately, in practice, the results tend to be less than satisfactory. First and foremost, it should be pointed out that the persons in charge of setting company goals are the executives. More likely than not, these executives have rather lofty goals they intend to have the company work towards. Nothing is wrong with this in itself; however, the problem is that they go about setting goals without the input of the departmental managers. As such, their goals may very well be beyond their ability to achieve, and end up being not only unrealistic, but often arbitrary and unfair. Smith & Lynch (2004) expound on this, saying how allocated funds tend to have little correlation to company goals and performance. In this way, the money is allocated on a more general level, as opposed to being focused on a specific area, with no room for alteration based on the performance of a particular department. This does have some rational basis to it; after all, if a department’s track record happens to be rather sketchy, it would be but natural to be hesitant in giving it too much money to work with. At the same time, though, it might be more prudent to keep the company’s future needs in mind when allocating funds, rather than focusing too much on the past performance of a given department. Murray (2010) also expounds on this in her article. Most traditional budgets, she says, simply involve carrying over this year’s budget plan into the next, albeit with a small increase to account for cost-of-living expenses. In effect, adds Koller, Dobbs, & Huyett (2011), companies adopting such a model assume that they know exactly what will happen in the succeeding year. Unfortunately, this tends to cause departments to ‘hurry up’ and use the budget up by the end of the year, presumably under the assumption that whatever remains is to be forfeited in the favor of the organization, inadvertently causing the budget to go higher each year. As such, traditional budget schemes fail hard at keeping business expenses under control. More specifically, they tend to forget to overestimate expenses and underestimate income. Indeed, organizations should assume that expenses will be higher, and income lower, than originally expected; in this way, they become less likely to be caught off-guard. And if such a scenario fails to materialize, it only means that they have more discretionary funds at their disposal. Stokdyk (2007) further lambasts the traditional budgeting model as not only being inflexible and inefficient, but as one of the ‘evils’ that brought about the terrible, terrible scandals of Enron and WorldCom. His reason for this is that it only served to perpetuate a culture of instant financial gratification. The problem with this, he says, is that the business environment has changed, even compared to as recently as 2002, having become more demanding and dynamic. Just as the playing field has changed, so too must companies adapt themselves to it. As such, companies that continue to bind themselves to traditional budget schemes are, in effect, limiting their opportunities for growth and innovation. Philips (2012), meanwhile, alludes to ‘silo decisions’ brought about by a traditional budgeting scheme as a natural consequence of taking a project-to-project approach to the allocation of resources. He reiterates that such an approach limits a company’s opportunities, not least because those in charge of coming up with the budget either have no time, or inclination, to coherently analyze the other options available to them. Admittedly, he says, budgeting is something particularly difficult to do well; however, this should not be an excuse not to improve. Another article by Springs (2012) exposes more problems of the traditional budgeting approach, this time relating to accountability. Traditional methods, she says, dictate a specific amount to be spent for specified items, but fail to spell out the results of such spending. Under this setup, expenditures are accounted for solely by means of receipts and payroll records. Unlike more modern budgeting schemes that require managers to meet a budget objective, the accountability espoused by traditional budgeting schemes clearly leaves much to be desired. Many more articles such as these exist, but these should serve as sufficient testimony as to the ineffectiveness of traditional budgeting models. Not only do fail with respect to accountability and the ability to make revisions or adjustments at a later date, they also allow executives to set even the most unfeasible and unrealistic goals. Worst of all, this is often done without the input of the department managers, who are nevertheless blamed when things go wrong. Needless to say, the traditional method is terribly, terribly flawed. Beyond Budgeting The many shortcomings plaguing the traditional approach to budgeting have not gone unnoticed by companies. Indeed, many newer and more modern budgeting models exist, most of which were devised in response to certain problem areas noticeable in the traditional model. And for the most part, most if not all of them can be said to have succeeded, at least on some level. Foremost among these is the Beyond Budgeting model. According to the Beyond Budgeting Round Table (2011), this model was conceptualized to allow companies to become more responsive to change. Since currently existing management systems at the time all focused on allowing leaders to command and control their frontliners, most of them necessarily left out the factor of independent thought and action among managers. The Beyond Budgeting model is thus intended to promote ethics, innovation and responsiveness among managers. In addition, it also seeks to allow companies to adapt to an ever-changing business environment and to come up with easily adaptable strategies, besides empowering the people making up the organization to become catalysts for effective change (Lohan et al, 2010). Certain key principles exist that drive the Beyond Budgeting model (Beyond Budgeting Round Table, 2011). First and foremost, it eschews a central plan as a means of binding people, instead focusing on a common cause. Governance is done through shared values and judgment rather than mere rules and regulations, and information is treated with openness and transparency. A structure still exists, but it becomes more instinctive and intuitive, as opposed to restrictive and counterproductive. It also promotes the idea of having teams that actually practice accountability, besides overhauling the system of goals and rewards. Organizational structures are built around a network of accountable teams instead of centralized functions. Each of these teams is trusted enough by the company to regulate its own performance, and is thus left untouched by any form of micromanagement. Accountability, meanwhile, becomes based on holistic criteria and actual testimony, rather than one’s place in the organization’s hierarchy. Goals become ambitious and medium-term, and rewards are given out not based on the achievement of fixed targets, but on relative performance. Finally, the planning and controls systems are also given a makeover by the beyond budgeting model. Planning is not a ‘one time, big time’ event to be held at the start of each year, but a continuous and inclusive process in which everyone concerned gets to have a say. Similarly, interactions are coordinated more dynamically, as opposed to reliance on mere annual budgets. Resources are given out only when the situation requires it, and controls are based on fast and frequent feedback rather than on variances in the budget. Bragg (2011) and Taylor (2009) characterize companies that adopt the Beyond Budgeting model as being team-based and both quality- and knowledge-oriented, aside from being very much concerned for their customers. The trend toward bureaucracy is bucked in favor of the implementation of simpler structures and flatter hierarchies, and the empowerment of frontline teams to make decisions for themselves. In short, he says, the model is all about how the company makes decisions on what to do, and then deciding how and when to do it. As already attested by numerous sources, the traditional model of budgeting has and continues to operate on the false premise of micromanagement bringing about better accountability and control. Secondly, it assumes that a strategy is developed and then pushed down by a control bureaucracy in order to find grained targets, incentives, budgets and balanced scorecards. Lastly, people are then held to those measures in order to provide a mere illusion of control. All in all, it results in terrible, terrible micromanagement, which means that the traditional model even fauls at its own goals. To change the traditional model for the better, rather than adopting a whole new model altogether, sounds simple and straightforward at first. In reality, however, it would be far too expensive and needlessly difficult. If anything, it seems to be getting worse, given how recent studies have discovered how more control mechanisms and bureaucracies are being added to it. At IBM, for instance, it was noted how only 23% of the time spent by corporate planning groups was value-add, the rest being spent on more mundane activities such as collecting, cleaning and rolling data up. Admittedly, such a setup does have its own advantages, at least with respect to fine-grained analysis and tracking. However, more important issues – such as the company’s current state and direction, its performance as compared to the competition, and how much value its businesses add – are sadly left unaddressed. The system becomes more complex, but the company remains ignorant and oblivious to the behavioral implications involved. Aside from the aforementioned, such complexity also has the drawback of demotivating employees, stifling their sense of creativity and creating an environment in which collaboration and teamwork would not thrive. Even worse, such an environment also serves to encourage cheating, not to mention loophole abuse. All of these things are exactly what the Beyond Budgeting scheme hopes to change. Conclusion As can be seen from the above, the Beyond Budgeting model is a near-complete overhaul of the traditional approach to budgeting, and rejects the unhealthy fixation the said model has with respect to command and control. The fixed nature of the budget makes it the greatest obstacle to those seeking to adopt a more dynamic approach, because as already noted, a company without money is essentially paralyzed. Even balanced scorecards suffer from their equally unhealthy dependence on variances and structure, besides already being grossly limited to the confines of a fixed budget. All are things the Beyond Budgeting model seeks to avoid. The Beyond Budgeting model seeks to accomplish its goals, first and foremost, by abolishing the toxic environment brought on by the traditional model, in which teamwork is frowned upon and every man is essentially out for himself. Under the new setup, the entire organization is divided into teams, each with its own purpose and role to carry out. The executive team, for instance, focuses on strategic leadership, and is tasked to take the big picture into account, while setting both a strategic direction and long-term goals and exercising portfolio management across the entire enterprise besides. The best way to describe this team is that its members tend to adopt the mindset of venture capitalists. More importantly, it works in concert with the value center teams to consistently provide the most value possible. Value center teams, of course, are tasked with value creation. Each team is established around brands, customer segments, territories and branches, with the purpose of making decisions pertaining to the customers as well as the business itself. In this regard, the thing to do would be to establish enough of them in such a way that they are able to address even the company’s smallest customer segments. Operating teams, meanwhile, focus on performance improvement, and constantly come up with new products and solutions to pitch to the value centers. Last but not least are the support service teams, which focus on the company’s business partners. Any company can come up with this setup, but only those that actually adhere to the Beyond Budgeting model will actually get anywhere with it. Of course, it should be noted that all companies strive to cater to their customers in some way, shape or form. After all, those customers happen to be their source of income. Unfortunately, for such an attempt to prosper, the organization must not only be focused on its customers, but also needs to be adaptable and collaborative, none of which are possible under the traditional model. After all that has been said, it should now be painfully obvious that the traditional model really needs to go, and that companies that adopt the Beyond Budgeting model would eventually find themselves succeeding on a major, major scale. Reflection Above, I discussed the weaknesses of the traditional model – why it fails, and how it fails to accomplish even its own purposes. As I mentioned, it would probably be much simpler to just revise the model itself, rather than coming up with an entirely new one, but given how fixed it already is, such a task would be outrageously expensive and needlessly difficult. Given how a better option now exists, the wise option would be to just go for that option and be done with it. Even a cursory glance at the details should underscore the fact that the Beyond Budgeting model is just that much more effective compared to the traditional one. Whereas the traditional model was too liberal with the distribution of funds, sometimes leading to abuse as a result, the Beyond Budgeting scheme instead promotes accountability and teamwork in the workplace. As a result, employees truly feel that whatever success the organization experiences is a direct consequence of their efforts. All in all, they themselves provide their incentive for staying with the organization. References BBRT. 2012. Executive Summary to Beyond Budgeting and the Adaptive Organization. Beyond Budgeting Rountable [online] available at [accessed July 24, 2012] BBRT. 2012. What are the beyond budgeting principles? Beyond Budgeting Roundtable [online] available at < http://www.bbrt.org/beyond-budgeting/bb-principles.html> [accessed July 24, 2012] Bragg, S. 2011. Budgeting: A comprehensive guide. Centennial, Colorado: Steven M. Bragg. Hill, B. 2012. The disadvantages to the traditional approach to budgeting. eHow.com [online] available at [accessed July 24, 2012] Koller, T., Dobbs, R. & Huyett, B. 2011. Value: The four cornerstones of corporate finance. New Jersey: John Wiley & Sons. Lohan, G., Conboy, K., and Lang, M., 2010. "Beyond budgeting and agile software development: A conceptual framework for the performance management of Agile Software Development teams. AIS Electronic Library [online] available at [accessed July 24, 2012] Murray, J. 2010. Zero-based budgeting works for small businesses, too. About.com [online] available at [accessed July 24, 2012] Philips, L. 2012. Moving Away From Traditional Budgeting. QFinance [online] available at [accessed July 24, 2012] Smith, R.W. & Lynch, L. 2004. Public budgeting in America (5th edn). Upper Saddle River, New Jersey: Pearson. Springs, J. 2012. The disadvantages of a line-item budget. eHow.com [online] available at [accessed July 24, 2012] Stokdyk, J. 2007. Traditional budgeting under the microscope. Accounting Web [online] available at [accessed July 24, 2012] Taylor, J. 2009. Going beyond budgeting! JT on EDM. [online] available at [accessed July 24, 2012] Read More