The Problem with Budgets and How to Improve Performance by Implementing a New Approach

Most organizations base their business plan or strategy on an entrenched budgeting process that is repeated due more to familiarity than to effectiveness. But today's high market volatility makes the assumptions needed to drive most budgets almost impossible accurately determine. These uncertain economic times, coupled with related factors such as unprecedented levels of government participation and oversight make surviving more a measure of agility and adaptability than traditional budgeting allows. According to a recent study by the Aberdeen Group, best-in-class companies are half as likely as they were a year ago to leave budgets fixed throughout the year. They are also 45 percent less likely to simply prepare budgets based on historical data. The top pressure facing planning, budgeting and forecasting is the need to improve agility to adapt to ever-changing conditions.

Traditional budgets are static and do not easily adapt to changes in marketplace. Recent economic downturns have exposed inherent flaws in traditional budgeting. Its' processes are time-consuming, add little value, create a climate that can foster unethical behavior and actually discourage the achievement of maximum performance levels. The limitations and deficiencies of traditional budgeting have been pointed out for years. Jack Welch, former GE CEO and noted author, said in his book Winning,” …the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.”

The good news is that a group of leading edge organizations have found ways to overcome these problems through the Beyond Budgeting Round Table. Beyond Budgeting offers practitioners a set of 12 guiding principles that can transform any company and elevate it to a whole new level of competitiveness. The Beyond Budgeting Principles are:

Leadership actions

1. Customers – Focus everyone on their customers, not on hierarchical relationships
2. Processes – Organize as a lean network of accountable teams, not as centralized functions
3. Autonomy – Give teams the freedom and capability to act, don't micro-manage them
4. Responsibility – Create a high responsibility culture at every level, not just at the centre
5. Transparency – Promote open information for self-management, don't restrict it hierarchically
6. Governance – Adopt a few clear values, goals and boundaries, not fixed targets

Aligning management processes with leadership actions

1. Goals – Set relative goals for continuous improvement, don't negotiate fixed contracts
2. Rewards – Reward shared success based on relative performance, not fixed targets
3. Planning – Make planning an continuous and inclusive process, not a top-down annual event
4. Controls – Base controls on relative indicators and trends, not variances against a plan
5. Resources – Make resources available as needed, not through annual budget allocations
6. Coordination – Coordinate interactions dynamically, not through annual planning cycles

Attendees to the AICPA Controllers Conference-West will be able to learn of these techniques by attending either of the sessions on July 21, at 9:05 a.m or 12:50 p.m. The course will also be offered at the AICPA Controllers Conference-East in Orlando, Florida on November 10-11. If you have questions about how Beyond Budgeting is improving planning and control please contact me at steve@theplayergroup.com.

Steve Player, North American Managing Director of the Beyond Budgeting Round Table, will show attendees how best-in-class organizations have used Beyond Budgeting to not only survive but thrive in today's challenging economic times. You can learn more about this program and Beyond Budgeting by logging on to www.bbrtna.org.