Beyond Budgeting in International Hospitality Industry - Essay Example

Beyond Budgeting in International Hospitality Industry First Last Word count: 2386 Abstract International hospitality industry needs to structure its organization to compete successfully in the third wave by creating a vision beyond the traditional. The new century known as the information age depicts a very small percentage of success for the industry considering the evolution of new business practices. The new organizational structure must be resilient, proactive, and forward-looking so that the change program will be effective. To complete such development, a change of accounting system must also be considered, most of which is to get rid of budget or ‘managing with numbers’ and set goals for a longer period of time. Traditional budgeting is no longer valid in the emerging information age that is why hospitality industry needs to move ‘beyond budgeting.’ This is an alternative management model that promotes flexibility, devolution, and value maximization. This suggestion is supported by empirical investigation of hospitality budgeting mostly in the United Kingdom and United States. It is believed that Beyond Budgeting fits the progressive N-form organizational structure wherein full potential of the organization and the people are being liberated. Beyond Budgeting in International Hospitality Industry Introduction Nowadays, most organizations are facing considerable barriers in managing their performance capabilities particularly in the areas of budgeting. Hospitality industry is one of those industries that desperately need to experience a new management structure and performance budgeting system in the emerging information age. Traditional budgeting model is said to be universally disliked because the concept is expensive, it takes too long to respond, and a minimized value. Shareholders as well as customers are pressuring the industry to consider an alternative management model that is designed to eliminate conflicts in the organization as well as the reduction of costs and bureaucracy. Aside from being cost effective and strategic, the new management model must also coincide with the business goals of the twenty-first century. This vision is a great challenge to every organization because it requires “a new set of management process and new style of leadership...a new coherence among these management process and leadership principles to liberate full potential of the organization and its people” (Hope & Fraser, 2003, p.17). Beyond Budgeting is the model that has a capacity to manage performance and at the same time control the organization without budgets. However, the success of this concept is still doubtful to many organizations considering that how can there be management if there is “no budgets, no absolute targets, and no fixed plans” (Daum, 2002, p.1). The purpose of this paper is to discover the fresh approaches of information age such as Beyond Budgeting and new management structure. This paper has three sections that include: the overview of opportunities in Beyond Budgeting principles; the examination of current literature and critical evaluation of the topic; and the key recommendations applicable for international hospitality industry. Overview of Beyond Budgeting and Organizational Structure “The two fundamental elements of Beyond Budgeting model are new leadership principles based on the principle of empowerment of managers and employees, and new more adaptive management process” (Daum, 2002, p.2). According to the Beyond Budgeting Round Table (BBRT) of the Consortium for Advanced Manufacturing International (CAM-I), this empowerment which is also known as devolution is a process that will enable the organization to discover the full potentials of its people. The existence of Beyond Budgeting is due to the growing dissatisfaction delivered by the traditional general management approach of budgeting. Most of the tools and techniques that organizations used nowadays were no longer applicable to the issues of information age. Budgeting is not the only accounting technique which is not fully working; however, this tool is given the emphasis because it is considered as the groundwork for all the barriers of change. To make the change program fully effective, it is argued that organizational structured should also be developed in a form appropriate for the information age (Maccoby, 1996). Current Literature: Traditional Budgeting vs. Beyond Budgeting Model These two management models of budgeting have two fundamental differences which are all in terms of management (Collier & Agyei-Ampomah, 2006, p.56). Beyond Budgeting does not have a budget and fixed plans because it only relies on its predetermined actions and plans which are all proactive rather than reactive. Not to commit with any absolute target is a wise move in order to adopt to constantly changing business conditions (Hope, 2007, p.177). Based on the study conducted by the Transportation Research Board (2005, p.108), “...failure to set target may slow progress...[but] casual targets without credibility can undermine the performance management process.” However, having fixed annual targets will only lead to a bureaucratic and complex organization which is too rigid to reach out the changing of events. The second fundamental difference is all about the leadership style that is based on principle of empowerment. Instead of a centralized leadership, Beyond Budgeting is using the decentralized way of managing whose authority of making decisions is devolved to its front-line people. These fundamental differences produced significant benefits that include improved customer service, job satisfaction, reduced waste, and to a more ethical behavior (Rasmussen, et al., 2003, p.136). Traditional budgeting is considered to be a barrier to progress while Beyond Budgeting is the new management model that will guide the organization to progress (Daum, 2002). The concept of Beyond Budgeting is a sustainable competitive advantage that is meant to be shared and not to be kept in order to release people from bureaucracy and control system. Analysis and Critical Evaluation: Beyond Budgeting Principles “The principles of Beyond Budgeting offer a new coherent management model” (Hope & Fraser, 2003, p.29). Creating a high performance management cannot only be achieved through a coherent management model, but also by reducing bureaucracy, aligning process and leadership style, and eradicate culture dependency. Getting rid of budget is the nature of Beyond Budgeting and this is supported by two fundamental principles: the process and leadership principles. Setting Targets without Budgeting. In traditional approach of budgeting, the organization used to set targets that mostly contained negotiated numbers that need to be met annually. These targets are considered fixed performance contract that is commonly decided by the top management without prior communication to the front line people. On the other hand, Beyond Budgeting has no annual fixed targets rather it only sets goals which are due in a longer period of time. The setting of goals to strategy is done by team and supported by senior executives so that the full potential of all the people in the organization are maximized through the use of N-form organizational structure. Being a strategy-focused organization would likely increase complexity and costs; however, if strategies are “looser, flexible, innovative at lower levels...” and have directions, everything will work out (Hope, 2009, p.3). Rewarding People without Budgeting. Generally, people in the organization are rewarded individually based on how they meet with the fixed targets for managers assumed that through this approach individuals will be motivated. According to Pfffer (1998), rewarding employees can be done in various ways as long as the myth of paying is within the budget contract. However, Kohn (1993, p.4) argued that “rewards are just temporary compliance” and it is not a motivating factor that will last long, especially managers have failed to provide a convincing argument. In Beyond Budgeting, rewards are given by team to build a one-team position and to encourage people to be more open with each other. Action Planning without Budgeting. Planning is an important process that organization must conduct so that it will be prepared on what they must do for the future (Moeini, 2005, p.4). In most organizations, planning is centralized and predetermined which at all times not in accordance with strategic objectives. However, this approach is myopic considering that business environment is unforeseeable wherein not all of the surprise happenings are laid out in the plan. Basically, planning needs to be resilient and used rolling forecasts because every now and then, new risks and opportunities might exist which are not at all times expected (Hope, 2009, p.7). By using performance reviews like balanced scorecard, and by devolving authority in making decisions to front line people, this area might be resolved. Involving front line people in grasping for opportunities and deriving for action plans is the primary benefit of Beyond Budgeting approach. Say, for example, hospitality industry needs to ensure that there are sufficient resources to back up the marketing and sales plan. Managing Resources without Budgeting. Resources in traditional budgeting are all assigned depending upon how the proposed unit is justified. Budget reviews are conducted every after the end of fixed plan together with all the accumulated costs. It is an irony that despite of resources allocation, disbursing budget for the proposals is still to be approved by the senior executives. Unlike in Beyond Budgeting, resources are made to be always accessible to any approved investment proposals. Instead of senior executives, front line people have the power to make decisions on how to deploy resources, and they are also given the responsibility to look after their resource decisions. Furthermore, budget reviews are done in regular basis instead of annually so that waste will be reduced (Bowhill, 2008, p.155). Coordinating Actions without Budgeting. Coordination of plans and actions in traditional budgeting is focused on the company’s specific departments or business unit. With this approach, it is doubtful for an organization to reach a coherent plan fitted with broader strategic goals. Thus, there is no coordination if plans and actions are centralized and not seen as a system but a number of disparate parts. Recognizing every effort of employees as well as their commitments is crucial to the organization because it will give them more courage to serve beyond their capabilities. Hospitality companies particularly those of international hotels have seen that coordination and control need to be schemed into hospitality operations rather than imposing them to the system (Brotherton, 2008, p.90). In terms of maximizing market opportunities, Beyond Budgeting gives priority to customer service because according to Bunce (2007, p.14), “customer is always the prime consideration in all decisions.” Controlling Performance without Budgeting. In terms of controlling and measuring performance, traditional budgeting does not anticipate the next-fiscal year-end; however, Beyond Budgeting is managing performance of the future rather than the past. According to the study conducted by KPMG International (2008, p.2), only 22 percent of companies in the global marketplace are qualified to use a better forecasting in making the right decisions which is flexible and forward-looking. Controlling strategy performance is one of managers’ functions that need to be exposed so that it will be aligned with action plans of the organization (Kaplan & Norton, 2001, p.304). Devolving Decision-Making to Front Line Teams. It has been mentioned earlier that in order for Beyond Budgeting process to be effective and fully successful, devolving of authority to front line people is necessary. “Front line staffs are so important that hotel organizational charts should be inverted, with the front-line employee at the top of the ‘inverted pyramid’ and management and all backroom functions providing support to the front line...” (Hoque, 2000, p.30). However, devolving authority alone without its supporting roles is useless. In other words, giving the front line people the authority to make decisions for the organization is good for nothing if there is no freedom. The totality of empowering is not as easy as giving people the capability to decide but under a certain condition that the decision should be the exact. By abandoning culture dependency, and by eliminating mini-control into the system, front line people will have the confidence to make good decisions. Devolving authority may have some drawbacks but the organization should be optimistic that in the long run people will develop their strategic decision-making skills making them worthy for the said responsibility. On the other hand, empowerment must be thoroughly explained to the employees by providing them some clear guidelines and boundaries in order for them to look after all their actions and decisions (Hope, 2009, p.8). Through this process, mutual trust and total commitment will be developed between the company and the employees. For instance, a study about the role of empowerment in the hospitality industry has been conducted in Jordan, and the result showed that there is an increase in job satisfaction among employees (Melhem, 2004). Four Key Recommendations Budgeting as one of the tools in management accounting has been identified through various empirical research that it is still widely used as a performance indicator of several industries. Based on the investigation conducted by Jones (2006) particularly the hotel budgeting practices of UK hospitality industry, he discovered that majority of them are budget-focused. Several researches about hospitality budgeting have been conducted for the purpose of developing fresh approaches for budgeting in the information age (Atkinson & Jones, 2008, p.237). The US-based research of hospitality budgeting believed that hotel organizations need to move from traditional budgeting to a better budgeting approach called Beyond Budgeting. Research findings acknowledged that being “budget-focused” is not anymore applicable to the hotel sector; instead it must shift into a “strategy-focused” organization. Hospitality industry can use marketing-oriented and operations-oriented strategies such as improving loyalty programs among customers or attract them by reducing costs of the product or services to increase economic value. Another suggestion for a brilliant execution of strategy is through the use of balanced scorecard. The fact that hotel organizations have been a global industry, they must now deploy their business operations from industrial age to information age. The concept of information era is a little bit complicated considering the evolution of new business practices, the existence of new assets, and the intensity of competition that in reality, traditional models can no longer manage. Overcoming limitations in managing financial measures of traditional approach is the primary role of balanced scorecard (Kaplan & Norton, 2001, p.22). Another approach that may be appropriate for international hospitality organization is through the implementation of empowerment. By fostering supportive relationships between employees, senior executives, and customers, the prediction that “most sectors of the hospitality industry will experience either slow growth or be in decline over the next few years” will be hindered if empowerment exists (Hughes, 2003, p.687). One of the recommended empowerment strategies is power-sharing wherein necessary information has been provided to the employees for them to be competent in all of customer’s demands. To avoid some negative outcomes of this strategy, senior executives must ensure that employees know the boundary of this responsibility through appropriate training, realistic job descriptions, etc. Hospitality industry has only one choice in order to be successful in this new century, and this is to raise the white flag of change. In order to be competitive, it must not anymore focus on the organization but on the needs of the customer (Cline, 1995). It must get rid of budget, the concept of planning must be forward-looking, and change organizational structure into N-form. The industry must embrace global change, and decentralize its leadership style because the new century is all about survival. Conclusion Hospitality industry in information age needs to move ‘beyond budgeting’ as it is clearly stated based on realities that traditional budgeting is not anymore sustainable. The industry must be strategy-focused and get rid of budget, used balanced scorecard as its performance measurement, implement empowerment, and surrender to constant change. The change program will initiate through a change in organizational structure declaring the involvement of front-line people in making decisions for the future of the organization. References Atkinson, H. & Jones, T., 2008. Financial management in the hospitality industry: themes and issues. In: R.C. Wood & B. Brotherton, eds. 2008. The sage handbook of hospitality management. 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