“Beyond budgeting is not merely a negative idea that trashes budgeting. Instead, it is a positive idea that uses the abandonment of budgeting as a trigger for improving the entire management control process.”
Charles T. Horngren, Littlefield Professor of Accounting, Emeritus, Stanford University
What’s wrong with the traditional budgeting process?
Despite their best efforts, many of today’s companies remain ill-equipped to navigate the highly volatile complexities of the digital era. Why? Because the traditional annual budgeting process used by most companies was designed for the more stable and predictable business climate of the past.
The traditional budgeting process is long and expensive, involves many people, and yet adds little value. In fact, budgets can become outdated and unreliable almost as soon as the process is completed. Beyond Budgeting offers a coherent alternative management model tailored to today’s rapidly changing digital era—one that allows companies to be agile and adaptive through a radical shift in processes and a drastically different management model.
Today, I’d like to explore the basic principles as well as the advantages and disadvantages of the Beyond Budgeting model and how they compare to the traditional annual budgeting process. But most importantly, I’d like to introduce my hybrid version of this model, which is less drastic and more realistic for companies to transition to. It uses information from optimized and automated processes such as the smart rolling forecast (SRF) so that companies can still reap the benefits of having high-quality data at their fingertips in real time.
Introducing the Beyond Budgeting model
The Beyond Budgeting model isn’t about simply doing away with budgets and targets or adding smart technology. It involves a completely different set of management processes and a different style of leadership that can harness the full power of a company’s people, IT systems, and tools. It goes beyond the outdated command-and-control style of management to one that is more dynamic, empowered, and adaptive, entrusting employees with high-quality information and allowing them to make decisions.
According to the book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, written by Jeremy Hope and Robin Fraser, the Beyond Budgeting model is based on six principles of managing with adaptive processes:
- Set stretch goals aimed at relative improvement. Goals are typically based on external benchmarks rather than fixed targets set internally. Instead of trying to beat other managers, the focus shifts to working together as a team to beat the competition. The goals are lofty, yet still realistic, encouraging managers to push their limits.
- Base evaluation and rewards on relative improvement contracts with hindsight. Managers are motivated by challenges and responsibilities bestowed on them rather than the fear of missing a target. Rewards are also team- instead of individual-based, fostering a spirit of collaboration.
- Make action planning a continuous and inclusive process. More focus is put on the expertise of those who actually interact with customers, and the process is ongoing rather than a once-a-year event.
- Make resources available as required. Managers can access the resources they need when they need them, allowing them to respond more dynamically to changing resource needs.
- Coordinate cross-company actions according to prevailing customer demand. Customer-focused teams work together to constantly adapt to ever-changing customer demand.
- Base controls on effective governance and a range of relative performance indicators. The open and transparent sharing of information in real time means upper management does not need to “command and control”; it simply needs to ensure that things are on track.
Advantages of the Beyond Budgeting model
There are many advantages to switching to the Beyond Budgeting model. According to the book Beyond Budgeting, some of the initial “quick wins” include “the cost savings from not budgeting, the cost savings from reducing bureaucracy and changing behaviour, and the faster response from more adaptive processes.”
But the main advantage is how it affects management style. For instance, with a smart rolling forecast (an automated version of the regular rolling forecast), senior managers always have up-to-the-minute data on what is happening with their company, which lets them track and adapt to changes quickly. Employees can also have access to this information and be empowered by it. Unlike the traditional model, which is typically top-down and where the budget is really a set of commands, the Beyond Budgeting model allows for decision-making to occur at multiple levels, with managers making informed decisions based on the ever-changing information they receive rather than blindly focusing on targets that were set months ago.
“Once you break away from the constraints of budgeting, you begin to focus on the more important questions. We now support operating managers by helping them answer questions about which parts of the business […] are creating value and which aren’t,” says Anders Forsberg, HR and controlling director for Industrial Sales Americas at SKF Group, a Swedish bearing and seal manufacturing company.
To foster this kind of empowerment, the Beyond Budgeting model also recognizes performance in a different way. The traditional practice of setting fixed performance targets has led to dogmatic and even unethical behaviour and the stifling of innovation. In the Beyond Budgeting model, collective performance is recognized rather than individual performance. This approach encourages teamwork and provides a more holistic review, one based not on
hitting a number but on relative improvement. This shift mobilizes employees to collaborate and excel and does away with the need to fudge the numbers to get a bonus.
At the Swedish bank Handelsbanken, profit-sharing is used to reward the team’s collective efforts and achievements, not as an individual incentive. As the late Dr. Jan Wallander, former CEO and board chair of Svenska Handelsbanken, explained, “Beating the competition or one’s peers is a far more powerful weapon than financial incentives. Why do people need cash incentives to fulfill their work obligations to colleagues and customers? It is recognition of effort that is important. Managers will only strive to achieve ambitious goals if they know that their ‘best efforts’ will be recognized and not punished if they fail to get all the way.”
Disadvantages of the Beyond Budgeting model
The main disadvantage is that the Beyond Budgeting model requires a major shift in how a company is managed. According to the book Beyond Budgeting, the model tends to fail when companies implement stretch targets or rolling forecasts, for instance, but do not change their recognition and rewards structure. The change must be coherent. The model is not just about adding new tools and technology to the old system; it is a global change in the way a company is managed. Companies that are not willing to change their management style may find that the system does not work for them.
Training and education are also paramount. If a company fails to support its new systems with proper training and education, the system can backfire. Power is placed in the hands of managers at all levels, so everyone’s work and leadership skills need to be up to the task. Companies need to make adjustments to their human resources to ensure a successful digital transition. They cannot simply put a traditional-style manager in charge of overseeing the change; a different set of skills and management style is required to successfully transition from a hierarchical model to a lean and agile one.
How to make a successful transition
According to the book, transitioning to the Beyond Budgeting model can begin differently for every company, with some simplifying their management model, removing bureaucratic roadblocks, and building team spirit while others add modern management tools.
In its full form, the Beyond Budgeting model ultimately leads to something called “radical decentralization,” which gives employees the freedom to make local decisions in line with the company’s goals and governance principles. Such a radical shift may not be for every company, or at least not right away. That’s why I recommend a hybrid version, which involves implementing a smart rolling forecast that incorporates budget targets for each revenue and expense category. It’s a less drastic, more realistic version that companies can transition to.
To make the shift, companies can begin by mapping the customer journey so that they have a clear picture of the entire process. From there, they can create a digital customer experience (DCX). This also provides a good opportunity to simplify their processes and start becoming lean and more streamlined with their operations, their processes, and, most importantly, their cash flow.
Once a company becomes leaner, they can begin to automate each of their business processes in order to become agile. Because cash flow is so critical to a company’s survival, the most important process to automate first is their financial forecasting. The best way to do so is to transition to a smart rolling forecast.
Companies can start by implementing a simple form of the regular rolling forecast using Excel spreadsheets. This will allow them to continuously see where their business is headed 36 months down the road through data manually entered into spreadsheets.
For those who already use an Excel forecast, they can shift to a SFR, where AI can automatically calculate different variables—such as seasonality, trends, and cycles—to determine the potential outcomes of a single decision from multiple angles. It is a way for companies to predict what might happen if they take a particular course of action.
A smart rolling forecast is an automated version of the regular rolling forecast, using modern AI algorithms to feed information around the clock into the SRF. It is a major improvement over the regular rolling forecast; instead of relying on a static plan that must be updated manually, an SRF gives you dynamic, up-to-the-minute information on where your business is heading in real time. And because the information is added automatically, there is less chance of human error. The result is a simplified yet more accurate budget that can be used to align costs with unexpected changing revenues so that you can make better business decisions and adapt to market fluctuations.
Because the market is always changing, companies that become agile and dynamic need to remain so. It is not a static process with a clear end point. With this in mind, companies need to find a reliable IT partner who can take their dynamic needs and make them happen as quickly as possible within a budget they can afford.
That is why we have developed the AZUR Innova incubator, where we can design anything as a smart solution. After a company has successfully implemented the SRF, smart solutions or smart software are the next step in the process of becoming—and staying—agile.
Does the traditional budgeting process still have value?
According to the late management consultant Peter Drucker, the uncertainty of the economy, society, and politics has made the traditional budgeting process futile, if not counterproductive. The business climate is changing faster than ever before, and companies are struggling to keep up. That is why now is the time to move beyond the traditional budgeting process to a smart rolling forecast with RPA (robotic process automation) optimized with AI that will enable companies to react and adapt quickly to the ever-changing market.
The transition to this dynamic hybrid model is a continuous process of staying ahead of the curve, relying on smart technology to help companies improve the way they forecast their financial situation so that they have the information they need when they need it, enabling them to make fast, informed decisions.
For more information on the hybrid version of the Beyond Budgeting model and the smart rolling forecast, be sure to check out “Beyond Budgeting: Harnessing the Power of the Smart Rolling Forecast,” an interview with Jean-Louis Lalonde, owner and CEO of AZUR Group.