Beyond Budgeting is more than just a method of preparing an annual budget. Instead, Beyond Budgeting encompasses a modern, alternative approach to performance management that looks past the traditional, annual budget as the primary control tool of a company.
The Beyond Budgeting philosophy begins with the recognition that many successful modern companies are moving away from traditional, top-down, command-and-control cultures and structures. These organisations are becoming more decentralised and nimble to stay competitive and are using approaches such Balanced Scorecards, ERP systems, and business process re-engineering to help them achieve this. Innovation and beating the competition to market with new products are new critical success factors for these companies. However, the budgeting processes of such companies are often stuck in the past.
The creators of Beyond Budgeting argue that in the modern business environment, the traditional approach to budgeting is no longer appropriate, and hinders performance. When a fixed, annual budget is used as the primary source of performance metrics for managers, for example hitting static sales or cost targets, problems can emerge:
Beyond Budgeting emerged in the 1990s and its principles and main ideas are formally set out by the 'Beyond Budgeting Round Table' (BBRT), an international network that helps organisations make a move to Beyond Budgeting. As a Performance Management student it is a good idea to review this website and gain further insight into this modern performance management topic.
The BBRT spells out four advantages that organisations will gain from making a move to Beyond Budgeting:
Faster response
Organisations using beyond budgeting, operate with speed and simplicity. This is achieved by giving managers more authority to act immediately within clear strategic boundaries and allowing them to more quickly meet customer needs. Bureaucracy is highly discouraged, and managers can react quickly to new threats and opportunities instead of being forced to follow to an outdated, annual plan.
More innovative strategies
Under the Beyond Budgeting approach, rewards go to teams and are based on relative performance versus peers, rather than individual incentives based on fixed targets. An open and self-managed environment is promoted, rather than a culture of sticking to a set of rules. This helps enable empowered teams, continuous improvement and innovation.
Lower costs
Under a fixed, annual budgeting approach, managers might be motivated to ‘pad’ their budgets (ie include extra resources, just in case) and have a ‘use it or lose it’ attitude (spend everything in your budget or you won’t get it next year). The net result of this is that the traditional budgeting process is protecting costs, rather than controlling or reducing costs.
Under Beyond Budgeting, this mentality is discouraged and instead managers are motivated to question fixed costs and look for cost reductions. Managers no longer see the budget as an entitlement to spend, but rather as a scarce resource that should only be used when it adds value to the customer.
More loyal customers
Organisations using beyond budgeting, put customer value at the core of their strategy and then adapt their processes to satisfy and delight them.
Written by Steve Willis, finance and accountancy trainer