To hell with the Budget!

Now that the pressures of your company's "year-ending'' are boiling over, it's time to stop cursing and start asking: why do we need a budget anyway? Budget data is usually obsolete, bears no relation to strategy-planning and collecting it wastes everyone's time.

Worse, it sets off acute dysfunctional behaviours in the organisation. Everyone tries to beat the system and, in the process, defeats the budget's very purpose.

Companies' disenchantment with budgets has become so acute that some are trying to do without them. The brave pioneers -- like American Express, Wachovia Securities, and Volvo in the US, France's Groupe Bull, Norway's Fokus Bank, Swedish wholeseller Ahlsell, Scandinavian bank Svenska Handelsbanken, and the UK's Leyland Trucks -- have started dismantling the grip that budgets have on organisations, both in terms of method and mind-set.

Says Steve Player, the managing director of The Player Group, a Texas-based performance-management consultancy: "Companies have to think about what they use budgeting for. Many of them do it by rote. The challenge is to ask: what objectives are we trying to achieve? What is the best way to attain them?"

Asking those questions not only clarifies budgeting's goals, but also brings to the surface how warped an organisation's planning and control mechanisms become because of the process.

Managers deliberately pad demands for allocations in next year's budget, expecting them to be cut. Departments rush to spend resources left over from the previous year's budget, in order to prevent them from being rolled over into the next year. And whenever budgets are reviewed, the focus is on meeting targets -- never exceeding them.

What undermines the budget the most is its uncanny ability to de-link strategy from reality. Fixed annual targets and a fixed annual process leave companies with no room for mid-course corrections.

That isn't a pleasant thought for managers in an ever-changing world. Little wonder, then, that companies are chafing against the bonds that budgets impose, especially since budgetary exercises tend to suck in time and money. The Ford Motor Company estimates that it spends $1.2 billion a year on budgeting and planning.

If not budgets, what? A consortium, the Beyond Budgeting Round Table, was founded in Europe in 1997 to answer that question.

From its members in Europe, North America, and Australia, it has culled practices and mechanisms to build the Beyond Budget Model.

According to Player, who is also the programme director of the BBRT chapter in North America, the model dramatically alters the six functions of traditional budgets. "I call it Big Change," explains Player, "because it changes the way you manage your company."

One, Beyond Budgeting companies set relative targets in terms of relative improvement in contrast to a typical budget that begins by setting targets through a fixed annual negotiation.

The goal is no longer, for example, to increase sales by 10 per cent over the previous year, but to increase market share by 10 per cent in the next year.

Two, traditional budgets link employee compensation to the targets they've met. That leads to all kinds of monkey business; most companies are familiar with ploys like shipping goods out of warehouse to distributors or retailers just to show that targets were met.

In the BBRT scenario, employees get relative rewards based on their accomplishments, not their ability to hit targets.

Three, action-plans aren't negotiated just once a year. Instead, Beyond Budgeting companies use a continuous planning process, where actions are based on real-time developments.

The fourth change is in the key role that traditional budgets play in coordinating and allocating resources between units.

In the new model, that mechanism is replaced by an internal market between units. Resources move on the basis of the dialogue between providing units and consuming units.

Companies are often trapped into the annual budgeting process because the stock market keeps tabs on it. Instead, Beyond Budgeting companies use rolling forecasts with a constant timeframe of five to eight quarters, depending on how far into the future the company wants to project numbers.

Perhaps the most dramatic difference, says Player, is in the last area: control. Instead of using the budget as an internal control mechanism, the Beyond Budgeting model uses subtler means. Banks, for example, can use peer pressure -- comparing one branch with another, or contrasting performance with rivals -- to drive performance.

Points out Player: "Budgets lead to what we call the great theory of excuses: most smart people can explain anything away. But the real issue is how the company is doing against the competition. Compared to traditional budgets, that's the greatest transformation our model brings about."

With many of the BBRT's practices still under development, it's early days yet. But smart companies should take a cue. The days of budgeting, as we currently know it, are numbered.

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