Beyond Budgeting 1 Research ArticlesBeyond Budgeting Beyond budgeting

Beyond Budgeting 1

Research Articles-Beyond Budgeting Beyond budgeting … Breaking through the barrier to “the third wave” Jeremy Hope and Robin Fraser “Is your organization ready for beyond budgeting? ” Andre A. de Waal 2

10 reasons why conventional budgets cause problems: 1. 2. 3. 4. 5. 6. 7. 8. 9. Budgets are time consuming and expensive. Budgets provide poor value to users. Budgets fail to focus on shareholder value. Budgets are too rigid/Inflexible and prevent fast response. The Budgets protect rather than reduce costs/ invite “gaming” of the system Budgets interrupt product and strategy innovation. Budgets focus on sales targets rather than customer satisfaction. Budgets are divorced from strategy. Budgets reinforce a dependency culture eg: Often imposed from the top – “ Top Down” 10. Budgets lead to unethical behaviour/ used for too many different purposes

3 waves Ø Traditional Budgeting Ø Better Budgeting Ø Beyond Budgeting 4

• Due to the weaknesses in the traditional budgeting, budgeting moved to another wave, known as better budgeting. • Better budgeting techniques – – – Activity based budgeting, Zero based budgeting, Value based management, Profit planning and Rolling budgets. 5

• Better budgeting concept too failed – due to issues such as linkage of the budget to the organizational strategy • Better budgeting is an another level of budgeting that still stuck to managing numbers

New management Model Ø Insufficiencies in better budgeting Ø Growing dissatisfaction with the general management approach, which is based on and much influenced by traditional budgeting. As a solution Hope & Fraser pioneered in the introduction of beyond budgeting concept

The Paradigm Shift in Business Models over Years Second Wave. Industrial age (Management of Financial Capital) Third Wave. Information age (Management of Intellectual Capital) 8

Multidivisional (“M-form”) Structure Fountain of knowledge, strategists Top management 9

Network (“N-form”) Structure Top managers (Provides inspiration) Strategists, decision makers 10

Transition. . . § Transition from M-Model to N-Model requires cultural transformation & structural changes § However, the continuation of the traditional budgetary control pulls back to old culture Culture of Compliance and Control (M-Model) Traditional Budgeting act as a constraint for transformation Culture of Enterprising & Learning (N-Model) 11

How Budgeting Acts as a Constraint? § There is an inter-dependency between accounting system and business model (Asif M. et al. , 2011) Accounting System Business Model § Business model has changed, yet accounting system remains the same § This act as an obstacle for the transformation 12

Beyond Budgeting Culture of Compliance and Control (M-Model) Successful Shift B U D G E T I N G Culture of Enterprising & Learning (N-Model) (Hope and Fraser, 1997, 1999) 13

Activity • Based on Jeremy Hope’s Beyond Budgeting (1997) compare and contrast the multi-divisional M-form with the net-work N-form model with respect to structure, responsibilities of management layers, culture and philosophy. 14

What is Beyond Budgeting(BB)? § There is no well established definition for BB § BB presents an alternative, coherent management model that enables companies to manage performance through processes (Hope and Fraser, 2003) § Beyond budgeting is a guiding set of principles. It is not a model or set of tools (Player, 2003) § These exist already in the form of the following: - Shareholder value models - Benchmarking models - Balanced scorecards - Activity-based management 15

What is Beyond Budgeting(BB)? Cont. • There are twelve principles on which Beyond Budgeting is based (Bunce, 2004) • ‘Process’ principles support adaptive management processes that enable enterprises to be more responsive to their competitive environment and customer needs. • ‘Leadership’ principles support greater delegation of responsibility to teams accountable for improving customer outcomes relative to peers and competitors. 16

Principles of Beyond Budgeting 17

Process Principles BB organizations should have relative targets and the strategy should be aimed at beating the competition, not last year’s budget. The targets should be set in relation to the organization’s main competitors or comparable organizations. Managers should allocate resources on demand to those units where they are needed most, at the time they are needed most. • no fixed investment budgets based on last year’s budgets • units should have a different investment pool each year Continuous strategy-setting process should be a continuous and bottom-up process, not a yearly top-down exercise • fast, distributed information should be available with easy access for those who need it & at the time it is needed • information should not be over-detailed but should contain both lagging and leading indicators. An anticipatory system • At least once every quarter managers should make rolling forecasts which extend beyond the year end • no connection between forecasts and reward system rewards need to be based on the results of the self-managing units and the organization as a whole

Leadership Principles self-governance framework suggests that the hierarchical organizational structure is subdivided into smaller, selfmanaging units. The managers should have the authority to run their unit as they see fit. Leadership Principles network organization These entities should focus completely on the market and delivering value to customers. There should be empowered managers market coordination who has the freedom and opportunity to Each unit should be able to decide for act at their own discretion itself whether it wants to use services from central support or whether it wants to hire external support Accountability for dynamic outcomes should be responsible for achieving competitive results, not for achieving pre -set targets for a department or function. supportive leadership The senior managers should act as mentors who coordinate the relations with and between unit managers.

BB Succeeded Cases § Rhodia – A large specialty chemical company § Swedish bank Svenska Handelsbanken § Borealis – One of the largest petrochemical companies in the world § IKEA – World’s largest furniture manufacturer § Volvo cars § Park Nicollet Health Services (Hope and Fraser, 2003, Mc. Vay and Cooke, 2006) 20

Research Findings § Recent studies revealed that budgeting is still widely used management accounting tool (CIMA, 2009, Libby and Lindsay, 2010) § Traditionally budgets are widely used for planning, coordinating, controlling, motivating, evaluating and allocating resources (Drury, 2005, Horngren et al. , 2008, Langfield-Smith et al. , 2000) § It has, however, received much criticism as a barrier to competitive success especially in the information age (Hope and Fraser, 1997, Jensen, 2001) § Beyond budgeting (BB) has been suggested as a potential solution § BB requires far reaching changes in the organizational structure (Hope and Fraser, 1997, 1999) § However, there is a dearth of knowledge in the developing world about the application of BB models 21