Consulting » INSIGHT – No budget for freedom of action.

Consider this: you discover that a significant proportion of your managers spend about one hour in every five at the office doing something that adds no value to the business. What would you do? That’s not a difficult question to answer. You’d scrap the activity and re-focus the managers’ freed-up time on value-adding work. But now you’re told that the work which wastes a fifth of their time is preparing the annual budget. Do you still scrap it? Chances are, there are few FDs who would think of scrapping the annual budget. But, in fact, companies that have taken this bold step (some would call it an unthinkable step) report rich benefits. One company that has taken it is Volvo Cars. By abandoning the traditional budgeting and control round, managers now spend more time focused on those issues that make the business succeed in the intensely competitive automobile market; namely strategy, action planning and beating the competition. It doesn’t mean that Volvo has abandoned financial planning. Instead, Volvo reviews strategy and forecasts during about four planning cycles every year. So facts are always up-to-date and managers are taking decisions based on what’s happening in the real competitive environment – instead of on what planners thought might be happening when they drew up a budget months earlier. It’s time for other companies to bin the budget, say the authors of a new “white paper” called Beyond Budgeting. Consultants Jeremy Hope and Robin Fraser have spent the past 18 months running the Beyond Budgeting Round Table which has more than 30 members, mostly big corporate names. They explored the experiences of successful companies that have abandoned budgeting such as IKEA, SKF, Schlumberger and Boots. Their conclusion is that abandoning the traditional top-down budget helps companies achieve the empowerment and culture change which lies at the heart of succeeding in fast-changing markets. The core of their argument is that old-style budgets are instruments of control – designed to lever managers into strait-jackets and stamp down on original thinking. If managers are to produce more imaginative strategies, they need to make faster decisions, be more responsive to customers, better prepared to anticipate threats and opportunities, and consistently improve quality. Not only do budgets not encourage any of these, they actually stand in the way – partly by using up time and energy, partly by limiting managers’ freedom of action. Fraser and Hope’s alternative is a more flexible planning regime in which managers consider a broader range of measures and react more quickly to fast-changing events. In their “emerging model” of a new budgeting process, targets, strategy, plans, forecasts and reporting are continuously reviewed in a process that involves rolling cycles and value focus within a culture in which the driving forces are enterprise and learning. They say: “Managing without budgets means a shift in management philosophy. Typical of such a shift would be accepting that ‘people are assets, not resources’, ‘profits come from customers not products’, ‘quality is a religion, not a series of trade-offs’ and ‘managing value is more relevant than managing costs’.” A sign that all this is happening is a change in the language. Out go words such as “procedures, budget, variance, compliance and control”. In comes a new lexicon of “process, customer, value, knowledge and loyalty”. Does it work? Fraser and Hope say that none of the 50 managers they interviewed who have made the switch want to move back to traditional budgeting. “They invariably wonder why they wasted so much time for so long, how they missed so many profit-making opportunities and how they consistently failed to respond quickly enough to customers. It’s only with hindsight that the real barriers become visible.” But for all their enthusiasm, Fraser and Hope’s paper is thin on the specifics of making the switch. It may well be that there are real benefits to gain after scrapping the conventional budget, but deciding precisely what to put in its place is not easy. Few companies have made a decision like that. Then there is the inevitable opposition that any far-reaching change is likely to stimulate. There are going to be plenty of managers in any large company that will feel distinctly uncomfortable with the leap in the dark that binning the budget implies. Finally, there’s the question of culture change. Making the new system a success depends on empowering managers – so what happens to all those legions of people clinging to the comfort blanket of the budget and control process? Fraser and Hope’s work has started a useful debate. But most FDs will want more evidence than this paper provides before putting such a revolutionary idea to their boards. Beyond Budgeting White Paper by Jeremy Hope and Robin Fraser published by CAM-I and Fraser Hope Associates. Details: 01202 670717.