Blog

Beyond Budgeting

Author: Jeremy Hope, Robin Fraser

Publication Date: 2003

Book Description: What’s the key message?

Beyond Budgeting attempts to take on the problems that most companies face when setting budget targets and monitoring performance. Among the problems detailed:

1. Always negotiate the lowest targets and the highest rewards
2. Always make the bonus-whatever it takes (which often leads to corrupt behavior)
3. Put targets ahead o adding value for the customer
4. Failure to share resources with other teams, other internal teams are the enemy competing for scarce resources
5. Ask for more resources than necessary; keep large resource buffers
6. Always spend what is in the budget
7. Explaining variances is more important than countermeasures or improvements
8. Never provide accurate forecasts, especially if it is bad news
9. Strive to meet the numbers, not beat them
10. Avoid risks

Of course we all have our experiences with various budgeting processes, and probably most of these experiences have not been positive. A Bob Lutz quote, “Budgeting is a tool of repression, not innovation,” probably captures the central theme best.

The authors’ recommendation to attack these problems rests in three fundamental concepts:

1. Create adaptive processes for strategic planning, budgeting, and performance management. Since so many internal and external factors impact a business, it is critical to be adaptive, versus a fixed, annual business planning process. The primary way to build adaptive planning is to create more periodic planning and monitoring events. For example, many best practice organizations hold quarterly to bi-monthly business planning updates.
2. Eliminate fixed annual targets and replace them with relative, moving targets. The authors advocate that performance should be measured relative to peers, both internal and external. The goal should be to close performance gaps, and success in terms of rewards should be measured based on progress toward closing those gaps. Fixed targets potentially drive the wrong behaviors, whereas relative targets keep an organization focused on value creation, assuming they are chosen correctly. Also, metrics should be able to spot trends over time, not just snapshots of current state.
3. Radically decentralize the organization. Push decisions for improving performance and creating more value to the lowest units of the organization. The book profiles a bank which established each branch as being responsible for P&L. The corporate leaders objective was to provide them the resources and guidance to help make them successful. Decentralization puts decision making in the hands of those most capable of making decisions.

How does it contribute ot the lean knowledge base?

One of the underlying principles of the book is how to make the planning and budgeting process more focused on value creation. Many business planning processes focus on deconstructing an organization into its parts and establishing fixed contracts for service and performance. Very often, the individually pieces (business units, departments, etc.) become fixated on their goals and metrics. Resources are not shared, subordination of one department to another is difficult, and the overall business loses site of its value proposition. This book prescribes a system with tools and techniques to drive value creation throughout the business planning process.

While current reality is more than just measurements, the book also provides insights on how to better understand current reality through measurement systems. The book details a few specific mistakes that many organizations make with their performance metrics. First, they are often fixed at the beginning of the year without any mechanism for renegotiation as events emerge. Second, they ignore relative comparisons to peers. Benchmarking, according the book, is a critical tool behind any strong performance management system. Third, most performance measures tend to be snapshots at a point in time. Good metrics will show trends over time using charts, moving averages, etc.

What are the highlights? What works?

The authors provide some very tactical examples of governance systems, planning meetings, reward systems, benchmarking processes, etc. The book is anything but a conceptual dissertation. Instead a few companies are profiled which provides specific examples that can be easily adopted. Although none of the examples are particularly groundbreaking, the overall system prescribed helps the reader to see the budgeting process as a part of a larger planning process.

What are the weaknesses? What’s missing?

Although many of the concepts appear to make logical sense, the authors do draw many conclusions from a relatively few companies. The performance of these companies was very strong, but it was not clear how significantly the practices outlined contributed to their success versus other contributions. The result is a fair amount of redundancy with the same key points hammered home over and over.

Some of the concepts may not have universal appeal or fit. For example, the book advocates for radical decentralization and used the example of a large European bank as the case study. The bank made each of its branches stand alone businesses with full P&L responsibility. The theory was that each branch understood its customer best so it only made sense to make the branch leaders responsible for the business. From a performance standpoint it worked for this bank, however, it may not work for a much more integrated company such as a utility or product-centric organization.

How should I read this to get the most out of it?

There is a chapter summary after every chapter. First, read the introduction and each of the chapter summaries. This will give you a good idea of where to focus more of your attention, perhaps paying particularly close attention to the examples most like you. A deeper reading is the reader’s choice as the key points can be gleaned quickly.