Management Accounting-Performance Evaluation: Bob Scarlett Charts the Rise of the beyond Budgeting Movement and Explains How It Differs from Traditional Approaches to Financial Control
Scarlett, Bob, Financial Management (UK)
Budgeting is what's known as a dependency model, whereby action is guided by fixed plans that are based on information that quickly becomes obsolete. It is most suitable for use in a centralised organisation where actions are decided at the top and delegated to subordinates for execution. This approach gives rise to various problems, which have been widely discussed in the management literature. Beyond Budgeting (BB) is the generic name given to a body of practices that are intended to replace budgeting. Its core concept is the need to move from a business model based on centralised hierarchies to one based on devolved networks.
In essence, BB places modern management practices within a cultural framework. It is identified with the Beyond Budgeting Round Table (BBRT), which is "at the heart of a new movement that is searching for ways to build lean, adaptive and ethical enterprises that can sustain superior competitive performance", according to the introductory text on its home page. The BBRT was set up in 1998 as consortium to promote research into the subject. At its centre is the eight-strong "BBRT team", the best known of whom are Robin Fraser and Jeremy Hope. These two have jointly written various books, including Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Harvard Business School Press, 2003).
The BBRT has about 60 corporate members that fund its studies and benefit from access to its research reports, forums and conferences. It also provides them with strategic and management support. The full round-table community consists of the core team, the member companies and its academic and business associates.
Budgeting is a pervasive exercise that provides the administrative basis for organisational planning and control in many traditionally run organisations. The chief executive's vision is translated into a plan that is expressed in the form of a budget. Once this is adopted, the management team's task is to secure compliance with it. Budgeting is a core management process that provides stability and reduces risk. This becomes a cultural phenomenon reflecting a hierarchical method of management under which those further down the organisation are judged on to extent to which they succeed in complying with orders. The approach has been linked to some high-profile business failures. For example, managers at WorldCom claimed that working life was all about satisfying the demands of the chief executive, Bernie Ebbers, that they had to stay two per cent within budget.
The BBRT advances the idea that budgeting should be abolished and replaced by an alternative business model. BB is a "responsibility model", whereby managers are given goals based on benchmarks linked variously to world-class performance, peers, rivals and/or earlier periods. This requires an adaptive approach that devolves authority to managers. An organisation run in this way will be more of a network than a hierarchy.
The whole spectrum of modern management techniques and tools should be adopted in any BB implementation. IT networks improve communication among different parts of an organisation and between it and its customers, associates and suppliers. Total quality management (TQM) programmes, business process re-engineering (BPR), supply chain management (SCM), balanced scorecards and activity-based accounting all have a role here.
Advocates of BB claim that it does not provide a "softer" management environment than budgets. Both individual and team performance should remain highly visible in a devolved management culture. For example, a performance control report based on the scorecard principle might appear as in the panel on page 56. That gives a fuller impression of performance than a straight actual-to-budget comparison--and the approach can be refined much further. It is possible to adopt industry averages or trend analysis based projections as the relevant benchmarks instead of fixed targets. …