Few managers enjoy radical change, so what are the compelling reasons why you should take Beyond Budgeting seriously? Bear in mind that we use the word ‘budgeting’ as an alternative term for ‘command and control’ management. Budgeting was designed to enable senior executives to command and control the organization from the corporate center.
Here are 10 reasons why budgeting causes significant problems today and needs to be replaced:
- Budgeting prevents rapid response. You need to respond rapidly to unpredictable events but the annual budgeting process was never designed for this purpose.
- Budgeting is too detailed and expensive. Budgeting is highly bureaucratic and very expensive (absorbing around 20 percent of management time).
- Budgeting is out-of-date within a few months. Many of the key assumptions change frequently (such as commodity prices, exchange and interest rates and of course customer demand) causing confusion and much rework.
- Budgeting is out-of-kilter with the competitive environment. Today’s drivers of success are concerned more with fast response and continuous innovation than managing people and budgets.
- Budgeting is divorced from strategy. Budgets are based on functions and departments rather than strategic themes. The chances of the goals and plans of many disparate functions and department being aligned with a coherent corporate strategy are often negligible.
- Budgeting stifles initiative and innovation. Budgets tend to support an authoritarian management regime that stifles innovation
- Budgeting protects non-value-adding costs. Cost budgets are usually compiled and agreed based on prior year outcomes. There is little time or incentive to understand and challenge the root causes of costs allowing huge amounts of waste to fester and grow.
- Budgeting reinforces command and control. Budgets were designed to enable functional leaders to manage the organization from the center thus local decision-making is usually delegated within strict budgetary controls.
- Budgeting demotivates people. When starting a new job most people are highly motivated to maximize their performance. But soon they learn not to fight the system but to ‘go with the flow’. This means doing little more than their job description specifies and the minimum to achieve their targets. Budgets are aligned with McGregor’s Theory X. The assumption is that people will only do the minimum required unless there is an additional incentive to do more.
- Budgeting encourages unethical behaviour and increases reputational risk. Aggressive targets and incentives drive people to meet the numbers at almost any cost. This can lead to unethical selling and ‘creative’ accounting placing the CEO’s (and the company’s) reputation in jeopardy.
Command and control organizations, with their big, deep hierarchies, were designed to solve large, complex problems and excel at control, efficiency and accountability. They were not designed for undertaking many small tasks in parallel, with an emphasis on speed, flexibility and autonomy, and a high tolerance for redundancy and small failures. Devolved organizations operate without the layers of controls seen in most large organizations. There are few corporate staffers planning and controlling performance of front line teams. Information is produced to enable these teams to learn, innovate and adapt rather than to control their actions. The absence of these controls is one of the primary reasons why these organizations have such low costs that, in turn, make it so difficult for their rivals to compete.
However, the underlying problem is concerned with the traditional management model. These can be summarized in the following way (see figure 1):
- Too few people are engaged in strategy and decision–making which remain an exclusive, top-down process.
- Too many costs are incurred in setting targets and budgets, inspecting and controlling performance, implementing tools and, more generally, managing people and budgets from remote locations.
- Too many local trade-offs are made between long-term value creation and the demand for short-term results. This results in new ventures being rejected unless they produce immediate profits and other investment and arbitrary cost cuts being made to meet this quarter’s or this year’s numbers. The problem is that senior people are unaware that these decisions have been taken.
- The outcome is that there is no transparency in decision-making or results. The business is in the hands of a few decision-makers who have too much power.
- Another outcome is that this accountability structure makes the organization too rigid and fails to encourage initiative and innovation. Talented people do their jobs and little more.
- Accountability flows vertically up the organization and is expressed through meeting targets and “pleasing the boss” rather than flowing horizontally and aimed at pleasing the customer.
- Eric D. Beinhocker “The Origin of Wealth” Random
House, London, UK, 2006, 366