Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap / Edition 1

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Overview


The traditional annual budgeting process--characterized by fixed targets and performance incentives--is time consuming, overcentralized, and outdated. Worse, it often causes dysfunctional and unethical managerial behavior. Based on an intensive, international study into pioneering companies, Beyond Budgeting offers an alternative, coherent management model that overcomes the limitations of traditional budgeting. Focused around achieving sustained improvement relative to competitors, it provides a guiding framework for managing in the twenty-first century.
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Editorial Reviews

Planning Perspectives
Beyond Budgeting is a must-read for anyone interested in seeing the future of performance management.
Issue #29, September 23, 2003
Publishers Weekly
This concise and cogent management study focuses on reforming the traditional annual budgeting process. The authors, both experienced consultants, argue persuasively that the "fixed-performance contract" mode of conventional budgeting increases costs and delays and centralizes decision-making to the point of reduced flexibility and adaptability. In the current rapidly changing business environment (particularly international business), where there's less of a demand for strictly hierarchical models of management, decentralized budgeting and devolved authority are quite simply survival issues for businesses. The authors focus on reforms made at Swedish wholesaler Ahlsell and Swedish bank Svenska Handelsbanken, as well as the British truck manufacturer Leyland. But they also cast the net over the chemical firm Borealis and the operating model of household furnishings company IKEA. Inevitably, the authors cannot get too far beyond summaries, and their reliability depends somewhat on the credibility of their in-house sources. But in an information age when branch offices can maintain adequate data files, and in the post-Enron milieu when everyone seeks barriers to fraud, this is a persuasively argued starting point. (May) Copyright 2003 Reed Business Information.
Soundview Executive Book Summaries
It's no secret that annual budgeting processes are time-consuming, add little value and prevent managers from responding quickly to changes in today's business environment. Traditional budgeting's focus on fixed targets and performance incentives often leads to dysfunctional, even unethical, management behavior. But organizations can break free from the annual budget trap once and for all.

In Beyond Budgeting, Jeremy Hope and Robin Fraser, directors of the Beyond Budgeting Round Table, present an alternative management model that enables companies to manage performance through processes specifically tailored to today's volatile marketplace. Based on the decision-making needs of front-line managers, this model lets you take advantage of two major opportunities. The authors write that your company can create a set of adaptive management processes that replace centrally controlled, predetermined goals with self-regulating, relative competitive benchmarks, and transfer the power and decision-making authority from the center of the organization to the front line.

The authors point out that everyone has an opinion about budgets. CEOs like the warm feeling they get when they see the year-end profit forecasts, but they might be anxious about the reliability of the assumptions and the firm's ability to respond to change. CFOs like the way they are able to tie operating managers to fixed performance contracts, but they also know that the process takes too long and adds little value. Operating managers like "knowing where they stand," but they are also concerned about the time wasted and that fixed performance contracts lead to decision paralysis and cosmetic accounting rather than decisive action and ethical reporting.

According to the authors, the consensus in American business circles is that the budgeting process isn't all it could be. Dissatisfaction is rampant. There are three main reasons for this:

  1. Budgeting is cumbersome and too expensive. The budgeting process is a deeply embedded annual ritual. It absorbs huge amounts of time for an uncertain benefit. Typically, it starts with a mission statement that sets out the aims of the business followed by a group strategic plan that sets the direction and high-level goals of the firm. These form the framework for a budgeting process that grinds its way through countless meetings.
  2. Budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating mangers. The authors explain that the pressure on corporate performance has become intense. Shareholders demand that firms be at or near the top of their industry peer group. Intellectual capital, such as brands, loyal customers and proven management teams, drives shareholder value. Product and strategy cycles have shortened. Prices and margins are under pressure and customers are becoming fickle. The old command-and-control management style is out of tune with the new need for agile and adaptive leadership and the need to transfer more power and authority to people closer to the customer. According to the authors, few of the innovative management tools of the past decade have been used to fundamentally transform the performance management process. At best they have made marginal improvements to a broken system.
  3. "Gaming the numbers" has risen to an unacceptable level. Budgets started life in the 1920s as tools for managing costs and cash flows in large organizations. By the 1960s they had mutated into fixed performance contracts. By then companies were using accounting results like costs, net income and return-on-investment (ROI) to do more than keep score but also to motivate operations personnel at all levels. By the 1970s, financial indicators were being used to manage the business. This led to the increased use of the fixed performance contract as the basis for setting fixed targets against which performance was evaluated and rewarded. The fixed performance contract begins with an "earnings" contract between senior executives and external parties, and then cascades down the organization in the form of "budget" contracts between senior executives and operating managers.


One problem with this management method is that it may lead to fraud. When senior executives and operating managers commit to overly aggressive targets, they may fudge the numbers to meet them.

Breaking Free
The authors point out that there are organizations that have eliminated the annual cycle of preparing, submitting, negotiating and agreeing on a budget by department, function, business unit, division or even the whole organization. The result has been to save months of work. The budget no longer represents an annual fixed performance contract that defines what subordinated must deliver or how resources are allocated or what business units must make and sell. The authors write that the budget no longer determines how the performance of those units and their people will be evaluated and rewarded.

The essence of the adaptive and decentralized management model, the authors write, is that by giving capable and committed people the authority to make fast decisions in their local markets, they will act responsibly, respond appropriately to the threats and opportunities confronting them, and with an eye on competitive performance, deliver consistent results. The focus of the model has moved from central to local control. This means that it is the local team that engages in planning and execution. The authors point out that they are the ones in touch with customer needs and the ones who have the freedom and capability to act. Copyright © 2003 Soundview Executive Book Summaries

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Product Details

  • ISBN-13: 9781578518661
  • Publisher: Harvard Business Review Press
  • Publication date: 2/27/2003
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 256
  • Sales rank: 522,379
  • Product dimensions: 6.38 (w) x 9.48 (h) x 0.97 (d)

Table of Contents

Foreword
Acknowledgments
Introduction: Toward a New General Management Model
Pt. I The Promise of Beyond Budgeting
Ch. 1 The Annual Performance Trap 3
Ch. 2 Breaking Free 19
Pt. II The Adaptive Process Opportunity: Enabling Managers to Focus on Continuous Value Creation
Ch. 3 How Three Organizations Introduced Adaptive Processes 47
Ch. 4 Principles of Adaptive Processes 69
Ch. 5 Insights into Implementation 95
Pt. III The Radical Decentralization Opportunity: Enabling Leaders to Create a High Performance Organization
Ch. 6 How Three Organizations Removed the Barriers to Change 119
Ch. 7 Principles of Radical Decentralization 143
Ch. 8 Insights into Changing Centralized Mind-Sets 161
Pt. IV Realizing the Full Promise of Beyond Budgeting
Ch. 9 The Roles of Systems and Tools 177
Ch. 10 The Vision of a Management Model Fit for the Twenty-First Century 197
Glossary 211
Notes 217
Index 221
About the Authors 231
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