Beyond budgeting is a philosophy which seeks the abandonment of budgets. Using relative target measure this approach seeks innovation and value-added activities to measure the success of a department, under a devolved process.
Many of the issues with traditional budgeting, such as setting targets based on fixed budgets rather than focusing on what was strategically important to the company, was the impetus for the beyond budgeting philosophy evolving.
The argument behind the beyond budgeting philosophy is based on five issues, all identified as problems arising from using traditional budgeting:
- Using fixed budgets to set targets will only ever achieve small improvements.
- Setting incentives based on fixed targets can create fear, rather than encouraging innovation.
- Fixed targets create a sense of compliance rather than adding value.
- Allocating resources through traditional budgeting encourages managers to hoard resources rather than use them where they are needed.
- Centralization ignores market reactions.
Following an increase in companies moving towards a beyond budgeting philosophy the Beyond Budgeting Round Table (BBRT) have developed 12 principles (see Table 1) for any company wanting to adopt this management philosophy.
Table 1: 12 Principles of Beyond Budgeting
Governance and Transparency
|1. Values||Bind people to a common cause; not a central plan|
|2. Governance||Govern through shared values and sound judgement; not detailed rules and regulations|
|3. Transparency||Make information open and transparent; don’t restrict and control it|
|4. Teams||Organize around a seamless network of accountable teams; not centralized functions|
|5. Trust||Trust teams to regulate their performance; do not micro-manage them|
|6. Accountability||Base accountability on holistic criteria and peer reviews; not on hierarchical relationships|
Goals and Rewards
|7. Goals||Encourage teams to set ambitious goals, don’t turn goals into fixed contracts|
|8. Rewards||Base rewards on relative performance; not on fixed targets|
Planning and Controls
|9. Planning||Make planning a continuous and inclusive process; not a top-down annual event|
|10. Co-ordination||Co-ordinate interactions dynamically; not through annual budgets|
|11. Resources||Make resources available just in time, not just in case|
|12. Controls||Base controls on fast, frequent feedback; not budget variances|
From Table 1, you can see that the philosophy is based on four issues; governance and transparency, creating accountable teams, goals and rewards, and planning and control.
What makes this philosophy different from using the traditional budgeting systems is that companies who follow these principles should be able to overcome the problems discussed earlier by doing the following:
- Moving away from fixed targets, by using relative targets through bench-marking, will encourage employees to improve their own performance.
- Using relative targets will encourage employees to be innovative and provide the confidence to take (positive) risks they would not have done before.
- Continuously readdressing plans, employees are encouraged to think about value creation rather than achieving set numbers within the budget.
- Using on demand allocation of resources rather than allocating for the year ahead reduces costs.
- Using decentralization and passing the decision making to small local teams means market feedback is used within the process.