Jean-Louis Lalonde is the owner and CEO of AZUR Group, a Canadian leader in smart digital transformation. In this interview, Lalonde shares his thoughts on the Beyond Budgeting model and how companies can transition to a hybrid version to stay competitive in today’s rapidly changing business climate.
What are some of the issues with the traditional budgeting process?
For many years, most traditional-style companies have been using budgets. And this worked well from about 1950 until recently. But in the past 10 years or so, many important business leaders, like Jack Welch, the former chairman and CEO of General Electric, have been saying that companies shouldn’t be using budgets anymore. Why? Because the process of creating a budget is slow, expensive, requires a lot of labour hours, and, in the end, the result will likely be outdated by the time it’s published. Businesses need to be more agile because today’s business climate is volatile and fast. That is why the traditional budget, as we know it, should be, maybe not completely replaced, but greatly improved.
The Beyond Budgeting model, as described by the Beyond Budgeting Institute and authors Jeremy Hope and Robin Fraser in their book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, was developed over the past decade or so as a reaction to these issues. Can you describe this model in a nutshell?
It’s a process that involves transitioning from a traditional company to a lean company to an agile company. There are several tools that can help you transition, but one of the most important tools to start with is the smart rolling forecast (SRF) because it lets you manage your cash flow. Approximately 75 percent of start-ups fail, not only because they have a bad business plan or idea, poor management, and overexpansion but also because they don’t manage their cash flow properly. The rate of change today is exponential, so if you don’t have a tool to help you track these changes and see how they affect your cash flow, you’re going to run out of money even if your business is profitable. With a smart rolling forecast, the budget is within the tool and it’s dynamic—getting updated every day by everyone who has access to it.
So is the Beyond Budgeting model simply about switching from an outdated style of budgeting to a modern and dynamic one?
In fact, the Beyond Budgeting model is mostly about teamwork. We’re not necessarily getting rid of performance bonuses, but they’re taking a different form and changing employees’ mentality and behaviour. Instead of motivating people with bonuses when they meet their budget targets, we’re mobilizing them to do a good job and because of that, the company will be more efficient and generate more net profit. As a result, salaries and bonuses will be adjusted according to each individual’s performance, and everybody wins.
What is the main advantage of the SRF and Beyond Budgeting model?
The main advantage is that your data is of a much higher quality. You can also involve more people in making sure the data is predictive and the quality is good. You can use an SRF to forecast your cash flow in the short term to make sure you can pay the people working for you and your suppliers. In the mid and long term, you can use the SRF for your business plan to set your revenue targets, product targets, etc. The higher you go in the company, the more you can use it as a governance tool.
Are there any disadvantages to switching to the Beyond Budgeting model?
The main disadvantage is for people who have been using traditional budgets for so long that they’re used to doing it this way. There will be early adopters and slow adopters. There may be many people who won’t think it’s appropriate for their company but, with time, they won’t have a choice in this fast-paced digital era.
Can you talk a bit more about how the Beyond Budgeting model uses budgets and targets?
It’s important to understand that I’m not saying that we’re not doing any budgeting, we’re just not doing it the old way. To meet targets in the digital era, you need to quickly react and adjust what you’re doing. If you get a new project or lose one, or if you were hoping for a cost reduction and it’s not happening, you won’t reach your targets. There are two things you can do: you can change a specific target or you can come up with another way to meet it.
This is very important. If you want to manage your company properly, you can’t change your targets all the time. This is not a good idea and it’s not what I’m telling people to do. You should stick to your business plan as much as possible, be creative, and really try by all means available to reach these targets—reasonable targets, of course. Don’t set a new target right away—instead, you should brainstorm, talk with people, have a meeting, and try to get back on track.
So, even though the model is called “Beyond Budgeting,” it seems that expense and revenue targets remain very important. The big difference is that, while the targets remain fairly stable, the forecasts are constantly being updated and are dynamic, but they are still integral to the process.
Yes, but not only that. The other really important thing is that, with an SRF, you can have more people looking at the same data, as opposed to an Excel budget, where everyone has their own copy; then you have to merge them, and you make errors… Keep in mind that the decisions you make today may have a major impact on your business three years from now. If you don’t have a tool like an SRF to show you the impact that gaining a big project or losing a big project will have on your business plan, then you won’t have the right information to guide your next moves.
How would a business transition to this model? How should they prepare to make the transition? What steps should they take?
The very first thing a company needs to do is map the customer journey for almost everything they do with their customers, suppliers, and even their employees. From there, they can create a digital customer experience (DCX). And after that, smart micro-tasks need to be integrated into software packages, such as a CRM or an ERP, to support the DCX. By smart, I mean software with AI integration. You need to have custom-built software, because the rate of change is so fast that a package won’t be able to keep up. You need a way to produce what we call intelligent micro-tasks combined with robotic process automation (RPA) workflows. This is highly customized and must be affordable and built quickly to meet new market objectives.
We also recommend simplifying processes. In terms of cash flow forecasting, our SRF software can do that for them. After that, once they have streamlined their cash flow processes, streamlined their operations, and streamlined any other processes that they have, using software to support it, then they can start to shift towards managing their company in a smart and agile way. That means everything they do will need to be more adaptive and smarter; they need to be able to anticipate better and react quicker to whatever is changing in the landscape of their company. Because now, in the digital era, everything is moving so fast that if you’re not agile with every decision you make, then you’re going to lose your edge and the competition will beat you.
And part of that transition would involve automating as many systems as you can?
That’s right. And also having smart responses based on your data. Your company is collecting a lot of data from customers, from employees—all this data needs to be crunched and provided to people in real time so that you can manage your company the agile way.
It’s kind of a combination of using AI, robotic process automation (RPA), and business intelligence. Taking this data and having a way to view and interpret it easily.
That’s right. Again, it’s about being dynamic. An agile enterprise is highly dynamic—able to respond to almost anything within a few seconds or hours, depending on how complex the process is. This is what companies need to achieve if they want to be able to track and anticipate market trends. Because of the rate of change of business everywhere, especially if you want to compete against China or Europe, you need to be more efficient in how you produce your product, more efficient in how you talk to your customers. So that when a customer calls you, you can see their history right away and have an informed discussion with them. Traditional companies might say, “I’ll call you back because I need to check your file and figure out how we can help you.” It could take a week before they get back to the customer.
At that point they’ve gone elsewhere.
What is the cost of making this leap for companies?
Transitioning to an agile company should be done in stages, based on prioritizing the best ROI. It is something companies will have to budget for in order to stay competitive and succeed in today’s market.