The overall effect of the switch to "beyond budgeting" is a performance management process based on a relative improvement contract rather than on a fixed performance contract. It assumes that it is not wise to make managers commit to a fixed target and then control their future actions against it. The implicit agreement is that executives will provide a challenging and open operating environment and that employees will deliver continuous performance improvement using their knowledge and judgment to adapt to changing conditions. It is based on mutual trust, but it is not a soft alternative to the fixed performance contract. High visibility of individual and team performance offers no hiding place. Managers must perform to high levels of expectation (relative to peers) or face the consequences.
Process Principles (diagram)
The six principles of managing with adaptive processes are as follows:
1. Goals - set aspirational relative goals for continuous improvement, don't negotiate fixed contracts
2. Rewards - reward shared success based on relative performance, not on fixed targets
3. Planning - make planning a continuous and inclusive process, not an annual event
4. Controls - base controls on relative KPIs and performance trends, not on variances against plan
5. Resources - make resources available as needed, not through annual budget allocations
6. Coordination - coordinate interactions dynamically, not through annual planning cycles
The results of applying these principles include setting aspirational goals, reducing gaming, encouraging ambitious strategies and fast response, reducing waste, improving customer service, and promoting learning and ethical behaviour.
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The delegation of decision-making and spending authority has always been one of the key functions of budgeting. However, this delegation usually occurs strictly within a regime of compliance and control. It differs significantly from the approach taken by "beyond budgeting" organizations which have gone much further and transferred power from the centre to operating managers and their teams, vesting in them the authority to use their judgment and initiative to achieve results without being constrained by some specific plan or agreement. Thus, devolution of responsibility is about enabling and encouraging local decisions, not dictating and directing them.
Leadership Principles
(diagram)
The evidence from our cases is that there are six principles that leaders should adopt:
1. Outcomes - focus everyone on the outcomes, not on hierarchical realtionships
2. Processes - organize as alean network of accountatble teams, not as centralized functions
3. Autonomy - give teams the freedom and capability to act, don't micro-manage them
4. Responsibility - create a high responsibility culture at every level, not just at the centre
5. Transparency - promote open information for self-management, don't restrict it hierarchically
6. Governance - Adopt a few clear values, goals and boundaries, not detailed regulations
The effects of these principles include: a clear governance framework leads to the acceptance of local decision making by front-line teams throughout the organization; a high-performance climate leads to sustained competitive success; the freedom to decide fosters innovation and responsiveness; team-based responsibility results in a greater focus on creating value and reducing waste; customer accountability builds more commitment to satisfying customers profitably; and finally, an information culture based on openness and "one truth" promotes ethical behaviour. |
