Last in my series of reflections from the 2012 Beyond Budgeting Conference… Some of our colleagues are disappointed that more organizations have not truly “abandoned” budgets. As I reflect on the organizations that have presented, both in this conference and in previous ones, as well as ones that I have worked with, what is apparent is that while many have not fully abandoned budgets, they have truly begun to understand those other concepts that enrich management practices.
I attribute some of this to confusion about the very term “Beyond Budgeting”. Many believe that this refers to the abandonment of budgeting in favor of more forward-looking tools such as rolling forecasts. While the name works from a marketing perspective, I think that a more comprehensive view of this name should reflect the role of multiple tools in performance management – “beyond” meaning that budgeting is only one tool in a strong performance management toolbox, and that its role must be carefully framed to be an annual outlook focused on longer-term resource allocation decisions. Perhaps we should call it “Beyond Just Budgeting”. Bjarte Bognes (of Statoil) writes, “the name [Beyond Budgeting] is actually misleading; it is about so much more than budgets, it is about taking reality seriously.”
This challenge of implementation may be a reflection of reality, at least in North America. Paul Hensley from Holt CAT, this year’s “Implementer of the Year” likened budgets to cockroaches (he really said that) – they never quite die, but need to be attacked again and again to keep them from taking over the kitchen. Budgets are too entrenched to be eradicated in many companies; the best we can do is to keep them in check within an appropriate place amongst a set of balanced tools.
What have I observed as the common themes?
1. Strong organizations have recognized that good management decisions start with solid understanding of cost and profitability analytics as the way to make solid, fact-based decisions. There was significant discussion and interest from the healthcare sector, as it recognizes that a traditional budget-based approach is woefully inadequate to deal with the extreme pressures being exerted in this environment today. 2. Organizations are moving to embrace Rolling Forecasts, but recognize that this must be more than a focus on efficiency through “better spreadsheets” – it needs a more effective approach that relies on an understanding of forward-looking, driver-based models. Further, these models need to be based on true cost analytics. In a workshop that I led, we reviewed the ways in which costing information could be effectively linked to driver-based plans. Unfortunately, many companies purchasing forecast software tools continue to focus first on more efficient consolidation with some inter-line calculations, as opposed to taking the opportunity to truly re-engineer their forecast processes. 3. The words that companies use in describing their culture are good indicators of how they operate: attitude is often as or more important than tools. Companies that are successfully in moving “Beyond Just Budgeting” use phrases such as “trust”, “empowerment”, “cost-consciousness” and “flexibility” consistently when discussing their experience. Creating a truly adaptive organization means moving beyond the budgeting box to give managers throughout the organization the means to act, as long as they are aligned with corporate strategy and measures. They use targets and goals but reward true, relative performance. The best ones (like Mark Lack from Mueller and Bjarte Bognes from Statoil) use tools such as the Balanced Scorecard to promulgate strategy and align behavior without forcing compliance. This is why I have such difficulty with the term “Balanced Scorecard Budget” used by some practitioners. 4. Compensation continues to be the elephant in the room. High performers have almost exclusively removed the link between variable compensation and fixed targets. But many organizations struggle with finding other ways to create appropriate variable compensation mechanisms linked to other measures. In this area, much work remains to be done. So, “are we there yet”? Good progress is being made by companies that recognize that other tools, capabilities and philosophies must be introduced if they are to be more flexible and adaptive. The volatility in business markets over the past few years has forced organizations to be more creative in many ways. For some, it means paying a premium for more flexible infrastructure through outsourced operations. For others, it means stronger analytics and forward-looking measures. But for all, it means a recognition that innovation in financial management practices is a requirement for success. If “Beyond Budgeting” has enabled organizations to think outside the box, we are well along the journey.