BOOK REVIEW

Accounting Beyond
Budgeting

E
very business leader wants competitive
It is no secret that annual success, the best management team,
budgeting processes are continuous innovation, low costs, loyal
time-consuming, add little customers, and high standards of corporate
value, and prevent managers governance and control. But for most
from responding quickly to managers, these goals remain pipe dreams.
changes in a competitive And despite spending huge sums on
environment. In this book, enterprise-wide information systems and a
the authors show how range of tools such as the Balanced
organizations can break free Scorecard, they appear to be just as far
from the annual budget trap away as ever. Some might point to the pursuit
once and for all. The book of ineffective strategies. The failure is, by and
large, not one of strategy. It is a failure of
presents an alternative,
execution. The budgeting process has much
coherent management model to answer for. There is no doubt that it is too
that enables companies to long, too expensive, and adds little value.
manage performance
Budgets don’t exist in a vacuum. They
through processes specially determine how people behave in any given
tailored to today’s volatile situation. Focusing leaders’ minds on the
marketplace. stewardship of shareholders’ funds and
ensuring that managers worried about
controlling costs were the original functions
of budgets, and leaders and managers, by
and large, behaved accordingly. One large
survey of US companies concluded that
managers either did not accept the
budgetary targets and opted to beat the
system or felt pressured to achieve the targets
at any cost.
Beyond budgeting is not a toolset
designed to fix a specific problem with
budgets or anything else. Nor is it a set of
processes that can be cherry-picked to suit
the requirements of senior managers who
Authors: Jeremy Hope, Robin Fraser claim to have identified particular
Pages: 336; Price: $35.00; weaknesses in their information systems.
Publisher: Harvard Business School Press

B©e s2003
t B o oHarvard
k s • M a yBusiness
2 0 0 4 School Publishing Corporation. All Rights Reserved. The ICFAI University
43
Press holds the copyright for the review.
 BOOK REVIEW

Plastering over the cracks of the existing About the Authors

management model based on central
control is not its purpose. Rather, it offers an Jeremy Hope and Robin Fraser are
alternative management model based on Directors of the Beyond Budgeting Round
the decision-making needs of front-line Table (www.bbrt.org), a collaborative that
managers. It is a coherent set of alternative offers shared learning, performance
processes that support relative targets and management research, and consulting
rewards, continuous planning, resources on support.
demand, dynamic cross-company
coordination, and a rich array of multilevel processes and a new style of leadership.
controls. Though there is still an implied Moreover, it requires a new coherence
contract to meet high performance among these management processes and
standards, the key difference is that it is leadership principles to liberate the full
based on a set of relative measures. potential of the organization and its people.
The Annual Performance Trap Breaking Free
The budgeting process is universally disliked. Abandoning the annual budgeting process
Budgets provide poor value. They fail to opens up two opportunities. One is to
address current competitive imperatives. And enable a more adaptive set of management
they lead to dysfunctional behavior. processes, and the other is to enable a
Shareholders now demand that firms be at radically decentralized organization. The first
or near the top of their industry peer group can be achieved without fully embracing the
on a range of measures. Intellectual capital, second, but the second cannot be realized
including brands and loyal customers, has without fully embracing the first.
risen to be the primary driver of shareholder Beyond budgeting provides benefits for
value. Product and strategy cycles have investors and strengthens corporate
shortened. Prices and margins are constantly governance. Governance is strengthened
under pressure, requiring action to slash through greater transparency and
structural costs and reduce bureaucracy. eradication of the gaming practices that are
Budget is a simple estimate of future income so pervasive within many organizations
and expenditure and has few behavioral today.
implications. However, the budgeting • Rhodia, a France-based speciality
process typically results in a fixed chemical company, had around $7.2 bn,
performance contract between superiors and 27,000 employees and 19 worldwide
subordinates and is one of the primary enterprises. It abandoned budgeting in
drivers of managerial behavior. Budgets and 1999. Its aim was to implement more
fixed performance contracts are now being relevant and useful processes. It now uses a
used to drive and evaluate managerial short-and medium-term performance
performance. This can cause managers to management cycle to monitor progress and
behave in dysfunctional ways at every stage decide on further action.
in the budgeting process, particularly, if they
feel that they cannot meet these contracts. The old planning and budgeting process
At the best, this results in “managing the was based on extrapolation of targets from
numbers”. At the worst, it results in outright the past, which were subject to adjustments
misrepresentation and fraud. by managers. As a result, there was little
ownership and little ambition.
We need an alternative management
model that supports the goals of businesses In the new process, broad five-year goals
in the 21st Century. But, achieving this vision were prepared, which were updated every
requires more than just fixing broken budgets. year. Managerial bonuses were linked with
It requires a new set of management business/enterprise/corporate results.

44 May 2004 • Best Books

 BOOK REVIEW

Designing a new performance management • Always do your best; never fudge the
methodology and implementing this process numbers
in a top-down manner have galvanized this • Always challenge conventional wisdom.
traditional organization. Today, the
company has a well-established forecasting Insights into Implementation
process, which is increasingly accurate and • Making a clear case for change is the
relevant. first step.
• Borealis is a Danish company that is now • A key role for the project team is to
one of Europe’s largest producers of convince members of the board that
petrochemicals, with sales of $4 bn. It managing without budgets will bring
abandoned budgeting in 1995. Almost significant benefits without too many
immediately, the focus of management adverse side effects.
attention shifted from the financial accounts • The traditional budgeting process (for all
available to KPI-based charts posted on its flaws) represents a coherent model.
open websites and office walls. • The success of managing without budgets
The major problem at the company was will be short-lived unless the role played
one of uncertainty. The petrochemicals by the finance team is realigned with the
industry is subject to well-defined but new processes.
unpredictable business cycles that have • This is a time of maximum uncertainty
dramatic impact on performance. Project for the finance group, and the members
leaders replaced the budgeting process with of the group need to know, in advance,
a set of tools that included benchmarking, exactly where they stand.
the Balanced Scorecard, activity-based
management, and rolling forecasts. Tools • The recognition that behavior change
such as the Balanced Scorecard and rolling follows process change is supported by
forecasts can help to manage the many cases.
organization effectively without the need of • Demonstrating short-term wins is
budgets. important to keep the resistors at bay.
Principles of Adaptive Process How Three Organizations
The following behavior is reflected in Removed the Barriers to Change
organizations that have abandoned the A number of organizations have seen the
budgeting process: opportunity of abandoning budgeting in
terms of radically decentralizing their
• Always aim to improve upon and beat organizations i.e., to transfer responsibility
the competition for strategic thinking and decision-making
• Never let the team down and be the one from the center to front-line people.
that drains the profit-sharing pool
Leaders in these organizations are saying
• Always aim to know and care for that, if people are given the responsibility
customers and scope to perform and, if they have clear
• Always share knowledge and resources goals, a framework of values, and reliable
with other teams—they are our partners information, then they will be self-motivated
• Never acquire mere resources than you to improve their performance. Such
need individuals will also behave in the interests
of the team and organization and will
• Always aim to challenge (and reduce)
support their value systems, pursue quality
costs
outcomes, focus on satisfying internal and
• Always have the ability to understand root external customers, and operate within ethical
causes boundaries. Although managers need some

Best Books • May 2004 45

 BOOK REVIEW

operating guidelines and different ways of based on clear principles and

evaluating performance (including relative boundaries rather than on rules,
performance measures), they don’t need regulations, and budgets.
budgets. • Principle 2: To motivate people and
The organizations which have used ensure sustainable success, leaders
adaptive processes to empower their should create a high-performance
front-line people are: climate that is based on relative success
• Ahlsell is a Swedish wholesaler with sales rather than on fixed performance
of around $1 bn. The creation of over contracts and fear of failure.
200 profit centers and the devolution of • Principle 3: To foster innovation and
responsibility to unit managers were responsiveness, leaders should
among the key changes that led to its empower front-line teams to make local
success. decisions that are consistent with
• Leyland Trucks is a UK truck governance principles and the
manufacturer (now part of the US-based organization’s goals rather than with
PACCAR Group). The story of the rules, central plans, and the narrow self-
transformation of Leyland Trucks is about interest, departmental goals.
how behavior and performance can be • Principle 4: To increase adaptability
completely changed by unifying the and reduce waste, leaders should place
whole organization through a clear the responsibility for value-creating
purpose, shared values and decisions on front-line teams rather than
commitments, a focus on satisfying trying to exert control from the center. But,
customers, and fair rewards. implementing this is far from easy.
• Svenska Handelsbanken is the best Changing functional mindsets (follow the
example of beyond budgeting. As early budget) to team-based mindsets (satisfy
as the 1970s, Dr. Wallander had a clear the customer) is a major cultural
vision of an adaptive and devolved challenge, but if done successfully, it can
organization within which regions and bring major benefits.
branches would be accountable for • Princi p l e 5 : To satisfy customer needs
competitive results. He approached his profitably, leaders should make people
task by spending time talking to accountable for customer outcomes
managers and employees across the rather than meeting functional plans
company about the principles of and budgets.
decentralization. He then abandoned • P r i n c i p l e 6 : To promote ethical
budgeting at a stroke. Since that time, behavior, leaders should support open
Handelsbanken has maintained a information systems throughout the
significant cost advantage over all its organization rather than having
rivals. middlemen filtering information and
Principles of Radical making it available on a need-to-know
Decentralization basis.
There are six principles that leaders should Insights into Changing Centralized
adopt to make the radically decentralized Mindsets
organization work effectively. Each principle Changing the centralized mindset is a tough
is associated with best practices. challenge. It crucially depends on rooting
• P r i n c i p l e 1 : To enable local out the budgeting and dependency culture.
d e c i s i o n -making and safeguard The problem is a lack of understanding of
stakeholders’ interests, leaders should what leaders need to do to make
provide a governance framework that is empowerment work effectively. A number of

46 May 2004 • Best Books

 BOOK REVIEW

issues are common to a successful transition. 7. Maintaining the momentum: The

These include the following: process of devolving responsibility is
1. Selling the benefits: Trying to convince continuous. The case examples tell us
people to abandon the central planning that constant reinforcement is
and control functions and devolve power necessary to ensure that the changes
to front-line managers is a tough become the new conventional wisdom
challenge. and the new practices are passed
down from one managerial
2. Changing processes precedes the generation to the next.
devolution of responsibility: The
main benefits of empowerment are The Role of Systems and Tools
unlikely to be realized until the budget Changes in the external environment
contract has been abandoned and are wreaking havoc on traditional
alternative processes put in place—only control-oriented organizations and their
the new processes change actions and notions of planning and budgeting. For
behavior. solving these problems, a number of tools
3. Devolving responsibility: It takes time have been developed and marketed as
for people to realize that senior managers follows:
mean what they say. Abandoning the
• Shareholder Value Models
budget is one of the most positive actions
that send a clear message to all Models such as EVA and VBM enable
employees about the extent of the managers to make decisions that create
change process. value greater than the cost of capital.
4. Overcoming the resistors: There will However, their potential is more likely to be
always be people who block and resist realized if leaders abandon the focus on
change. However, they need to be annual numbers and redirect their attention
proved wrong. Leaders need to spend to value creation.
most of their time with those who • Benchmarking Models
support the initiative rather than Benchmarking approaches enable firms
wasting time trying to convince those to compare their performance with best-
who don’t. in-class results elsewhere as well as with
5. Letting go: Most leaders struggle with internal peers. Benchmarking sets goals
the idea that management actions don’t that are based on external measures or
need central coordination and control. internal cross-functional comparisons.
Relative improvement contracts and Benchmarking models can offer significant
adaptive processes can go a long way potential if leaders are prepared to elevate
in convincing leaders about the new relative success to the top of the performance
system’s effectiveness. The role of the agenda.
leader changes from planning actions
through plans and budgets to inspiring • The Balanced Scorecard
people through a clear vision of change The Balanced Scorecard enables managers
and success. to build a “strategy-focused organization.”
6. C h a n g i n g r e c o g n i t i o n a n d This means setting medium-term goals that
rewards: The turning point for some enable action plans to be executed
companies came when they changed successfully. But, it is more likely to reach
the way people were recognized and its full potential if there is no budgeting
rewarded, particularly when the barrier to act as a counterforce that drives
companies included values in the managers toward meeting the budget
performance appraisal system. year’s targets.

Best Books • May 2004 47

 BOOK REVIEW

• Activity-based Mana gemen t

Models Book Excerpts
Activity-based management models
are particularly useful for identifying non- • Budgets don’t exist in a vacuum.
value-adding costs and estimating the • Uncertainty—in the economy, society,
resources needed to support future
politics—has become so great as to render
capacity requirements. Activity-based
futile, if not counterproductive, the kind of
management enables the creation of
multiple profit centers, and can lead to planning most companies still practice.
radical decentralization, with local • Always negotiate the lowest target and the
managers having the freedom and highest reward.
capability to act with minimal central control • Never share knowledge or resources with
and without budgets. other teams—they are the enemies.
• Customer Relationship • It is universally apparent that we are living in a
Management Models world so uncertain that authoritarian control-
These models more clearly identify what oriented companies are bound to fail.
people need to do not only to satisfy • If you cannot know what your customers will
customers, but also to build their loyalty and need or your competitors will offer next year,
profitability. These models are in direct or even who are the customers or competitors
contrast to the budgeting process because,
will be—you cannot develop an effective plan
under budgeting, salespeople are invariably
for achieving targeted levels of sales and
focused on achieving fixed targets based
on revenue, product volume, or gross profits.
margin and, thus, have little interest in • One of the primary benefits of managing
whether the firm is meeting customer needs without a predetermined plan or budget is that
or whether customers are satisfied and managers are able to focus all their attention
profited. on responding to changing events and
• Enterprise-wide Information providing value to customers and
Systems and Rolling Forecasts shareholders.
Enterprise-wide information systems • Shareholder value models such as EVA and
ensure that everyone receives the VBM enable managers to make decisions that
information they need. These systems have create value greater than the cost of capital.
the potential to empower front-line people • The Balanced Scorecard enables all employees
by providing the capabilities they need to to focus on strategy.
make fast decisions.
• Replacing the budgeting process and fixed
The new vision of a management model performance contract is the key to creating a
that is fit for the 21 st century can be
more virtuous organization and building trust
achieved by an adaptive and decentralized
with investors.
organization.
• By removing the budgeting process and fixed
performance contract, firms are able to change
the attitudes and behaviors of people at every
level of the organization. In particular, they
? — Dr. S Vijayalakshmi,
are likely to eradicate the undesirable
Faculty Member,
behaviors that result from setting a fixed target
The ICFAI Business School,
that must be met even though the outcome is
Hyderabad. highly uncertain.
Reference # 13M-2004-05-09-03

48 May 2004 • Best Books