Breadcrumbs

Myths about Beyond Budgeting

Introduction

Although the roots and origins go further back in time, the Beyond Budgeting philosophy expressed as a coherent management model has just had its 10 year anniversary. This might seem long given the output rate and lifecycle of new management books and theories, but short given how much time it takes to create real change in organisations. As with any new concept, the understanding will vary, especially before business schools and the consulting business fully embrace it and secure a reasonably consistent communication of what it is and what it isn’t.

Beyond Budgeting has not yet reached that stage, although something seems to be brewing both in academia and in the consulting business. For instance, the Norwegian School of Economics and Business Administration (NHH) is launching a major Beyond Budgeting research program.

But these are still early days. It is therefore not surprising that a number of myths and misunderstandings have developed about Beyond Budgeting. Here are five common ones, and why they are myths and not the truth.

  1. It is only about removing budgets
  2. It is only about rolling forecasts
  3. It is only for rich companies
  4. It means losing control
  5. It only works in Scandinavia

 

1. It is only about removing budgets

This is probably the most common misunderstanding out there. The term Beyond Budgeting works well as a teaser or a provocation, depending on people’s background. But the headline always travels faster than the rest of the story. Before the full story arrives and is fully understood, it is quite understandable that most people believe it is all about removing budgets.

The real purpose of Beyond Budgeting is, however, both deeper and broader. The purpose is to respond to major changes in current business realities:

  • The environment that companies operate in has become much more dynamic, turbulent and unpredictable. Knowing what lies around the next corner is a luxury fewer and fewer companies enjoy.
  • Expectations from shareholders and other stakeholders about performance and delivery have increased significantly, and not just in financial performance terms.
  • Expectations from employees have also changed radically. They want to have a voice and to be listened to, they want to be involved in setting direction and making choices and not merely “execute” and “implement” whatever is “cascaded” from above. They often represent most, and sometimes all of the value in the company, impacting financial results in much more important ways than as “payroll cost”. 

The days of centralised command-and-control with a mechanistic view on people and organisations are over. The Beyond Budgeting movement believes that this major change in business realities requires radical change towards

  • Decentralisation of  power and authority
  • More flexible and dynamic management processes
  • A broader and more meaningful definition of performance and success

 Removing the budget is only a consequence of moving in this direction, because the budget is an important barrier, typically representing centralisation, inflexibility and a narrow definition of performance. But it is in no way enough to only remove the budget. Significant change is needed also in other processes and leadership behaviours that represent the “budgeting mindset”, such as the belief that all employees will act like children and spend money like drunken sailors unless they are tightly controlled, that the future is manageable and “plan-able” as long as we describe it with enough details, and that hitting the budget numbers is a great way to describe high performance.

Beyond Budgeting is actually as much about leadership as it is about budgets. It is about unlocking the untapped performance potential that exists in most organisations, where traditional management and the budgeting mindset often is more of a barrier than a support for great performance.

Beyond Budgeting is therefore not just a Finance thing, and not something that can be driven by Finance alone. Human Resources must also be onboard, while the ultimate ownership of course must rest with a committed and passionate leadership team.

2. It is only about rolling forecasts

I have lost track of how many articles I have read and statements I have heard claiming that Beyond Budgeting is about replacing budgets with rolling forecasts. What these people seem to say is that it is all about rolling budgeting, updating the budget more frequently, and with the same time horizon each time; typically five or six quarters.

This perception of Beyond Budgeting and rolling forecasts misses some important points. First, a budget has three very different purposes:

  • Target setting
  • Forecasting 
  • Resource allocation

 The budget (and business plan) is at the same time trying to express short and longer term targets - what we want to happen - and a forecast on the same period – what we think will happen. In addition, cost or capex numbers shall also represent the approved funding – the resource allocation. All three purposes are expressed through the same set of numbers.

Combining these three purposes in one process leading to one set of numbers is a problem in itself. An application for funds is seldom a good cost forecast, neither is target proposal. They will both carry bias, driven by their main purpose which is something else than a forecast. Just ask a sales manager for his or her best forecast, and let it be known that the number might become next year’s bonus target….The purpose of a forecast is to get issues on the radar screen early enough to take corrective action. The “best” forecasts are often the ones where we don’t like what we see, given that we see it early enough.

It is not meaningful to talk about rolling forecasts before the budget have been separated into these three different purposes. Only making the budget rolling will not solve an inch of the serious conflict between the three.

Second, when this has been done, why should the forecast have one fixed time horizon, whether that is five or six quarters? Again, the purpose of a forecast is to get issues on the radar screen early enough. But a company seldom consists of uniform ships of identical size, all sailing in steady weather and waters that never changes.  In real life, a company portfolio typically includes both super-tankers and speedboats, and many of in-between sizes. And the sailing conditions keep changing all the time. This calls for different types of radar screens and forecasting horizons, monitored with a frequency that would be different under clear skies at open sea than in foggy and narrow waters. “One size fits all” is just not ineffective, it is even dangerous.

Third, as you will have noted from the first point above. Beyond Budgeting goes way beyond only changing one of the finance processes, in this case forecasting. It needs to cover a range of other processes, making them all point in the same direction, including how targets are set, resources are allocated, and performance is evaluated and rewarded. In addition it requires major change in culture, values and leadership behaviour, especially related to trust, transparency and motivation. Forecasting is only one component in the overall model, and actually a rather small one.

3. It is only for rich companies

My own Beyond Budgeting experiences are from two quite different companies, the European petrochemicals company Borealis, and later the oil and gas company Statoil (now StatoilHydro), Scandinavia’s largest company. In the latter, the introduction of Beyond Budgeting in 2005 coincided with the recent strong increase in oil price, moving from around USD 50 per barrel when we started out, to above USD 140 as these words are written (and who knows what that number will be as you read, up or down!).

I can understand the reaction from many that “this is something you can do as an oil company because the oil price is sky-high. Our business reality is completely different!”

Actually, the high oil price is just half the picture for us. Our cost side is not standing still. The cost of renting exploration drilling platforms, building production platforms and buying all the other goods and services we need to explore, build and produce have also sky rocketed in the same period. A drilling rig that used to be USD 150,000 may now cost well above USD 500,000.

But still, we are making money and we are not a “poor” company. But that is not a criterion for going Beyond Budgeting. On the contrary, it might actually be the other way around. It might be that Beyond Budgeting is even more effective and relevant when times are tough and you need to turn every penny every day.

Perhaps this is a surprise to you. But Beyond Budgeting is not about less cost focus, it is about having a better and more relevant cost management. Better because the focus is not mainly on absolute cost numbers, but also just as much on metrics like unit cost, comparison with others or trend monitoring, or on the bottom line only. Cost management is about fighting “bad cost“ and nurturing the “good costs” that contribute positively  to both the top and bottom line. The “right” level of resource usage is more of a continuous discussion than a once-a-year autumn decision. The aim is more self-regulating and flexible cost management mechanisms than what the annual negotiated cost budget represents. Instead of a budget, our exploration costs are now managed through a combination of unit cost and volume targets. The more output that is delivered, the more input (exploration costs) that can be used, and vice versa.

The last thing I would do in a company in a serious financial situation would be to lock all my spending for next year into fixed and detailed monthly budgets, when you actually need the opposite--  the ability to move quickly and ensure that resources are reallocated fast as the picture changes and opportunities occur or disappear. And fast does mean that reallocation seldom can not be a top-management decision, but something much more local and self-regulating.

The petrochemicals company Borealis was a company pretty close to the “poor company” category. We were living on tight and constantly falling margins, with tough competition and cost effectiveness as a key competitive factor. Still, all the arguments for abolishing traditional cost budgets were just as relevant in that company as they were in Statoil back in 2005. In the two years Borealis operated with budgets, we overran both years. When cost budgets were abolished, costs actually came down.

The Swedish bank Handelsbanken abolished traditional budgeting back in 1970. The bank has on the bottom line consistently performed above the average of comparable Scandinavian banks, and is also the most cost effective universal bank in Europe.

4. It means losing control

How can you lose something that you don’t know what it is?

I ask this question because when people share their biggest concern about Beyond Budgeting, almost everybody starts with “losing control”. When asked to be more specific, “losing cost control” comes fast, but then most become surprisingly quiet. They seem to struggle with identifying and describing what they fear to lose the most.

“Control” is a word that we tend to use somewhat uncritically. It can actually mean many different things. There is “good control”, which is about order in the house, effective processes, understanding what is happening, making the right moves and so on. This kind of control has nothing to fear from Beyond Budgeting. On the contrary, it is the “bad” or the perceived control we must get rid of. This is, for instance, the controlling of people through various micromanagement techniques, detailed budgets, excessive procedures, micro-instructions, advanced individual bonus schemes and all other levers available in traditional management. It is the belief that if we only describe the future as a single outcome case with enough places of decimals, then we have eliminated uncertainty and can safely set sail. Or the belief that even if we missed once again, we can at least explain in details every singled deviation between plan and reality.

This kind of “bad “control is more dangerous than only being a waste of time and energy. It is actually a serious barrier for achieving good performance in most companies, because it hinders sensing and responding as we go, it blocks the performance potential available in teams and  people by emphasising “don’t”  and “no” over “do” and  “yes”, and it creates a false comfort about the future.

So this myth is actually partly true, because we do lose control, but only the “bad” control. Instead, we get much more of the “good” control. That shouldn’t be too scary?

5.  It only works in Scandinavia 

Scandinavia has a number of early Beyond Budgeting cases, including the famous Handelsbanken story dating back to 1970.  The interest in the Beyond Budgeting philosophy is strong, with a number of new companies coming onboard. A recent example is Norwegian Telenor, who ranks 7th in the global telecommunications business after successful entries into Asian and East European markets.

Many of the Beyond Budgeting leadership principles resonate well with the Scandinavian leadership style. Involvement, transparency, flexibility and low power distance is strongly engrained in the Scandinavian business culture and in these societies in general.

This “culture fit” as well as the many cases have led to some believing that the concept works best and maybe only in Scandinavia. But even if the Scandinavian culture provides important tailwind for a Beyond Budgeting implementation, a number of cases in other parts of the world shows that this is not only a “Scandinavian thing”.

Take the Brazilian company Semco, which seem to challenge every thinkable part of traditional management, and seem to go for the opposite of what everybody else is doing. They have demolished almost every control mechanism in the management vocabulary, and show a level of trust which should make any Scandinavian company blush. This has taken place in South America, a region where we tend to think that macho-management is the only option. And by the way, Semco is doing very well on the bottom line, in case you were wondering.

In the US, companies like W.L.Gore, WholeFoods, Millipore, Southwest Airlines, Google and others are also challenging many of the management myths, with impressive results. In Europe outside Scandinavia, a number of companies like Aldi, Unilever, DM drogerie markt, Tomkins and Egon Zendher are doing the same. Many of them come from national cultures which we might associate with command-and-control management.

Even if some cultural adaptations might be necessary, the Beyond Budgeting principles seem to be quite universal, maybe because it actually is very much the same things that make people tick, perform and excel across cultures and nationalities?

So what is actually Beyond Budgeting?

What you just read was about what Beyond Budgeting is not. It probably also gave you an idea about what it actually is. The twelve Beyond Budgeting principles below summarizes the concept. They were developed by Jeremy Hope and Robin Fraser, founders of the Beyond Budgeting Round Table. Read more in their book Beyond Budgeting, Harvard Business School Press, 2003.

Leadership Principles

  • Customers. Focus everyone on improving customer outcomes, not on hierarchical relationships.
  • Organization. Organize as a network of lean, accountable teams, not around centralized functions. 
  • Responsibility. Enable everyone to act and think like a leader, not merely follow the plan. 
  • Autonomy. Give teams the freedom and capability to act; do not micromanage them. 
  • Values. Govern through a few clear values, goals, and boundaries, not detailed rules and budgets. 
  • Transparency. Promote open information for self management; do not restrict it hierarchically.

Process Principles

  • Goals. Set relative goals for continuous improvement; do not negotiate fixed performance contracts.
  • Rewards. Reward shared success based on relative performance, not on meeting fixed targets.
  • Planning. Make planning a continuous and inclusive process, not a top-down annual event. 
  • Controls. Base controls on relative indicators and trends, not on variances against plan..
  • Resources. Make resources available as needed, not through annual budget allocations.
  • Coordination. Coordinate interactions dynamically, not through annual planning cycles.