Is it time to move beyond budgeting?

Production targets have been a mainstay of industry for more than 100 years now.
In fact, targets abound in every aspect of business, from revenue and market share growth, to customer satisfaction, employee engagement and, of course, to cost control.
Here in the UK, we have looked on in awe as countries like Japan and Germany have combined automation and human endeavour to blast through targets and drive ever higher levels of productivity in their economies.
Certainly, relative to our own, their productivity has been enviable and our Government seeks to catch up, but what role do targets play in all this, particularly when they are translated to the micro level of an individual business?
The old adage "targets drive behaviour" is true: targets do drive behaviour, but in a post-industrial society, the question now is whether they drive the right sort of behaviour.
The Beyond Budgeting Institute argues strongly that they don't.
Advocates of Beyond Budgeting maintain that businesses with flexible business planning processes and a devolved organisational structure, perform better than those with the fixed annual targets and functional hierarchies of traditional businesses.
There are some large and very successful businesses that adopt the principles to support their case: Maersk, Handelsbanken and Bayer to name but a few, but the thinking can also be scaled and made relevant to small and medium-sized businesses.

The problems with traditional budgeting

According to management thinker, Dr Steve Morlidge, regardless of size, most businesses plan using a variation on the following theme:
  1. Write a business plan aligned to agreed objectives
  2. Set budgets and targets around the plan
  3. Measure and manage performance relative to achievement against targets
There is nothing wrong with creating a business plan, even if in practice it can take weeks or months to arrive at something everybody agrees upon.
The problems start when it comes to fixing the targets and using them as the basic reference for performance. Why? Because it is almost impossible to predict what customers, competitors and the economy are likely to do twelve months in advance.
In his book, The Little Book of Beyond Budgeting, Steve Morlidge explains: "The world is fundamentally unpredictable, and yet actual performance relative to a target is often described as being good or bad. In other words, the difference between the actual outcome and the target is assumed to be a direct result of the effort and skill of managers and their teams. Ergo, gaps can be closed by getting people to ‘perform better’ or 'work harder'.
"Of course, that's not true. The results could be due to external factors entirely outside of their control".
There are other problems too.
In practice, revenue targets become a ceiling because there is no incentive to exceed them. Cost targets become a floor because there is no incentive to spend less.
Finally, providing incentives for hitting budgeted targets invariably leads to ‘gaming’ behaviour and suboptimal performance because it is in the financial interests of employees to negotiate targets that are easier to achieve!

The Beyond Budgeting approach

Beyond Budgeting practitioners aren't advocating chaos or a laissez-faire approach to leadership. Instead, they strive to measure performance in a more meaningful way, for example by comparing their performance to that of peers. Forecasts are still an essential part of resource allocation and control, but they are continually refreshed as the environment changes rather than being tied to an arbitrary financial year, and rewards are based on shared success instead of being focused on a few high-performing heroes.
The organisations that adopt the Beyond Budgeting principles clearly believe they work. They will point to their financial performance as evidence, but also to what underpins it: customer satisfaction, high ethical standards, and good employee wellbeing bolstered by a heightened sense of purpose, among others.
Whether you think this is enlightened thinking or simply management consulting hocus-pocus, it is fairly obvious that the way we structure and lead our businesses towards sustainable performance is going to need to change as we move deeper and deeper into this age of digitalisation and AI.
An annual target might have worked once, but it is now time for a re-think.
Source: The Little Book of Beyond Budgeting by Dr Steve Morlidge. Available here

Is it time to move beyond budgeting?

By: Neil Edwards

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