Ideas for a Fundamental Redesign of the Management Control Model

According to prevalent criticism, budgeting takes too much time, budgets are too inflexible, and the whole process is too bureaucratic and impedes the use of a company’s full potential. Fixed, annual and usually too conservative budgets do everything but motivate managers and employees to persue ambitious goals. They prohibit independent and entrepreneurial activity. Their inflexibility makes it impossible to react fast to changes in the market.
Quite obviously, the old planning and controlling concepts are no longer sufficient to drive companies successfully in a global, highly dynamic, and competitive environment. That’s why Péter Horváth, a German expert, consultant and professor in management accounting, rightly questions the very existence of budgeting – and offers a clear answer. “Traditional budgeting, as developed almost 100 years ago, no longer has a future,” he says. According to Horváth, an alternate concept must use appropriate procedures to supplant the motivating, coordinating, and orienting function of budgets.

The Beyond Budgeting Management Model as an Alternative

The Beyond Budget Management Model is just such an alternative. It was created by the British Beyond Budgeting Round Table (BBRT) based on more than 30 case studies of companies that are successfully managed without fixed budgets. Jeremy Hope, one of the founders of the BBRT says, “Compared with the traditional management model, Beyond Budgeting has two fundamental differences. First, it is a more adaptive way of managing. In place of fixed annual plans and budgets that tie managers to predetermined actions, targets are reviewed regularly and based on stretch goals linked to performance against world-class benchmarks, peers, competitors and prior periods. Second, the Beyond Budgeting model enables a more decentralized way of managing. In place of the traditional hierarchy and centralized leadership, it enables decision-making and performance accountability to be devolved to line managers and creates a self-managed working environment and a culture of personal responsibility. This leads to increased motivation, higher productivity and better customer service. Individually these two main features can produce significant benefits, but it is in their combination where its real strength lies.”

The most popular case study of the BBRT involves Svenska Handelsbanken, a Swedish universal bank that had abolished budgets more than 30 years ago and beat every Scandinavian competitor in terms of customer satisfaction, profitability, and return on investment since. The secret of the success of Svenska Handelsbanken is its decentralized organization. The lack of a budget is more of a result of the dezentralized leadership model rather than a goal in itself. “If we have good people out there and they know what the company’s corporate goal is and they have the tools to be able to do good business and they know we will measure their performance in a realistic way comparing them to peers, then they will do a good job. When you have this kind of decentralized profit center organization that is characterized by personal responsibility, you really don’t need a budget any more,” says Lennart Francke, chief financial officer (CFO) of Svenska Handelsbanken.
In Germany, ALDI is also a case study for managing without a budget and for decentralized management. Dieter Brandes, a former member of the ALDI executive board, states that ALDI has neither budgets nor controllers. “Management and controlling are the tasks of each manager,” says Brandes. He also says, “Budgets are inappropriate as a management and controlling instrument. . . . The measures for an entire year should . . . not be predecided in all detail in a few weeks and so much ahead of time. That has to be day-to-day work – not the result of a big effort in the fall for the following year.”

Dynamic Performance Management

Not every company is in a position to take as radical a step as Svenska Handelsbanken or ALDI – to subject the leadership model and the company’s controlling and performance management system simultaneously to radical change. The majority of companies that have worked with the Beyond Budgeting Model have so far drawn inspiration from beyond budgeting to redesign their planning, controlling, and performance management systems. This group includes Unilever, one of the largest consumer products companies in the world.
Steve Morldige, who is heading the dynamic performance management project at Unilever, which is the Unilever Group’s “beyond budgeting” project, explains how Unilever is implemented beyond budgeting. The company uses a systematic approach. To achieve success, individual concepts or processes for target setting, planning, investment management, performance management and reporting, and incentives must be examined together. “Perhaps the most important insight given to us by the Beyond Budgeting movement is that we are talking about a performance management system,” says Morlidge. “A system made up of a series of interdependent and interlocking processes. If we don’t fully understand how these processes come together to shape practices and collective behaviour and deal with the problem holistically our attempts to bring about change will be doomed to failure.”
Even among the pioneers of beyond budgeting management we are finding companies whose primary goals were to create an effective controlling and performance management system rather than to change the entire leadership model. BHI, a division of the English Boots Group, is such a company. It replaced fixed annual budgets with a flexible controlling process that put each business area into a position to get a better handle on the dynamics of the environment. Matthias Steinke, CFO of BHI Germany, explains the objectives when he says, “It’s no longer a matter of going through monthly plan–actual comparisons to find out later on how yesterday differs from what he had planned the day before yesterday. I can’t change the past, but I can very likely change the future. That’s why monitoring the opportunities and risks plays such an important role for us in the controlling and performance management process. Opportunities and risks indicate where you can design the future and how you can use specific measure to achieve your goals – even if the original assumptions and conditions constantly change in a dynamically changing environment.”

Beyond Budgeting: Initiative for Profitable Growth?

Many companies that are now redesigning their controlling and performance management systems keep an eye on the beyond budgeting concept – at least as a source of stimuli and ideas. They also look at the pioneers of beyond budgeting. Even if most of the companies at first think “only” about redesigning their controlling and performance management systems, the last word has yet to be spoken.
Handelsblatt, a German business newspaper, reported in a recent article titled ”UBS Abolishes the Budget” that the large Swiss bank, UBS, had decided to realign its organization to make better use of opportunities for growth in the wealth management market. This objective has led to the decision to abolish the budget. The budget had nurtured a too defensive posture among managers and employees – a counterproductive behavior that doesn’t fit to the growth strategy of the company.
The management teams of many other companies are pursuing goals similar to those of UBS: trimming the enterprise for profitable growth. It will be exciting to see the consequences this will have for controlling and performance management, organizational development, and the leadership model. In the future, we might look to beyond budgeting management more as an initiative for profitable growth than simply as a controlling and performance management project.

(Note of the editor: The quotes used in this articles are extracts from the author’s book “Beyond Budgeting” that has been published in June 2005 (German edition). An English edition will be available end of 2005.)

Jürgen H. Daum
Jürgen H. Daum