Are You Ready to Move Beyond Budgeting?

His session was titled “Getting Future Ready: How to Master Business Forecasting.” I recently connected with Steve to learn more about his research and the Beyond Budgeting Roundtable. Here’s what he had to say.

John: Steve, can you start by talking about the mission of the Beyond Budgeting Round Table (BBRT)?

Steve:  Sure, John.  The BBRT is a member-based consortium of companies who have joined together to find better ways to plan and control operations.  Beginning in 1998, the BBRT has researched why organizations create budgets, the processes they use, and how effective (or ineffective) these processes are.  This research has resulted in finding fundamentally better ways to plan and control operations.

The Round Table captures these best practices and helps member companies implement them. This has resulted in the Beyond Budgeting network creating a community of practice that regularly helps its member companies assess their current practices, identify and apply the current best planning practices, and implement improvements much faster and more cost-effectively than other approaches.

John: What’s wrong with the way companies do budgeting today?

Steve: Our research has uncovered over 30 problems with current budgeting practices. The top seven complaints are:

  1. Budgets take too long to complete, often making them out-of-date as soon as they’re published.
  2. Budgets are too costly to prepare, particularly when you consider the senior management time required.
  3. Budgets are based on assumptions that are nearly always wrong.
  4. Budgeting causes gaming that erodes the ethical foundation of the organization.
  5. Budgets trigger unnecessary spending.
  6. Budgeting gives the illusion of control, often robbing the organization’s potential.
  7. Budgeting “sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth.  It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity” (Jack Welch).

John: Thanks, Steve, I love the quote from Jack Welch. What’s the better approach for companies in today’s business world?

Steve:  Organizations are much better served by adopting the 12 Beyond Budgeting principles, which help split budgets into four separate tasks. By separating these tasks, each one can be improved.

  • Target setting should be aspirational and focus of reaching the organization’s strategic goals and objectives as quickly as possible. Organizations should shift from one year targets to medium-term (3 to 5 years out) targets.  This provides clear direction linked to achieving the strategic plan and avoids the problem of annual targets being negotiated stopping points.
  • Forecasting should provide realistic assessments of where the organization is currently headed. This is needed to clearly identify what projects and initiatives are needed to improve and how well the organization can move to close any gaps identified.
  • Resource allocation needs to shift from being done annually based on anticipated demand to becoming real time based on what is actually happening. This keeps resources matched and responding to actual needs.
  • Evaluation and rewards should be based on what was actually delivered in the actual environment it was delivered into. Performance should be evaluated compared to peers, to competitors, and to world-class best practices.  This eliminates game playing and the need for sandbagging found in traditional systems.

John: These are definitely practical suggestions. How can companies get started on the path to “beyond budgeting”?

Steve: Companies adopt Beyond Budgeting by taking either the revolutionary path or the evolutionary path. Selection of the revolutionary approach is typically led by a visionary CEO or CFO who understands all the pitfalls of traditional budgeting. These senior executives provide guidance to make the changes as quickly as possible and pave the way for the organization. Key examples include Handelsbanken, Guardian Industries, tw telecom, and SlimFast. These implementations typically take 12 to 18 months.

The evolutionary approach occurs when an organization agrees with most of the 12 Beyond Budgeting Principles but is concerned about how fast the organization can change and adapt. This still requires strong executive leadership but takes a more measured development approach, which can begin with a pilot or experimenting with some of the concepts. Key examples include Unilever, American Express, and M.D. Anderson Cancer Center. These implementations typically take 24 to 60 months.

In some cases, an organization can spend a considerable amount of time evaluating the move to Beyond Budgeting (as would be seen in the evolutionary path) but then encounter a trigger event that accelerates its adoption. HOLT CAT is an example of this approach. They considered moving to Beyond Budgeting for many years, then swiftly took action in response to the severe market downturn at the end of 2008, which dramatically shrank their 2009 sales pipeline.

CFO Paul Hensley led the efforts, which resulted in far better than expected revenues and margins in 2009 and 2010.By time 2011 had rolled around, some of his operating managers were asking when they would get their budgets back. After discussing the question with the COO, management decided they would never return to budgets – the simple reason was to look at how much better the organization performed without them.

John: Do you have any other examples of companies that have taken the leap to “beyond budgeting”?

Steve: They are many other implementation examples. The current Beyond Budgeting Executive-in-Residence, Nevine White, served as Vice President of Financial Planning & Analysis at tw telecom when they evaluated Beyond Budgeting and chose to eliminate budgets in 2004. Nevine continued to lead the FP&A function at this publically held company for over a decade. Nevine was able to reposition her team to the front lines to better support operational decision-making.

Another notable success is Statoil.  Their implementation journey and related success is documented in Implementing Beyond Budgeting by Bjarte Bogsnes. These cases and many more can be found in the member archives of the Beyond Budgeting Round Table.

John: This is great stuff, Steve.  Where can readers go for more information?

Steve: For more information, see the , or check out the following books:

Future Ready: How to Master Business Forecasting by Steve Morlidge and Steve Player (Chichester, UK: Wiley, 2010)

Implementing Beyond Budgeting by Bjarte Bogsnes (Hoboken, NJ: John Wiley & Sons, 2009)

The Leader’s Dilemma: How to Build an Empowered and Adaptive Organization Without Losing Control by Jeremy Hope, Franz Röösli, and Peter Bunce (Chichester, UK: Wiley, 2011)

If you would like to hear more from Steve Player, here’s a link to a recent video interview. Also, here’s a link to Steve’s presentation from the Planful Future of Finance Tour.

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