Welcome to 2008, and with it the end of one budgeting process, and the initiation of another. It's one of the most depressing business cycles anyone can engage in, and, as noted in the previous Industry Insight in this series, it's something to which many business folk pay no more than lip service.
That's because in far too many cases it consumes time, effort and money without necessarily adding value to organisations.
There's quite a backlash coming. Companies as large as Boston Scientific, Herman Miller, Nordea, Statoil, Tomkins and UBS GWMBBB have had either abandoned the budget altogether, or fundamentally altered its role and function.
Amazingly, Boston Scientific enjoyed a 62% rise in global sales, along with greater predictability in performance once it had abandoned the annual budget in favour of a 12-month rolling plan, updated quarterly along with other performance management changes.
It's also why a wide number of organisations have collaborated to form the Beyond Budgeting Round Table (BBRT). They include ALG Software, Applix, Cognos, SAS, CorVu and Hyperion, among software vendors; and the Chartered Institute of Management Accountants and the Institute of Chartered Accountants of England and Wales.
Set in stone
BBRT positions itself as "the first great management idea of the 21st century". It states: "Budgeting, as most corporations practise it, should be abolished. That may sound like a radical proposition, but it is merely the final (and decisive) action in a long-running battle to change organisations from centralised hierarchies to devolved networks. Most of the other building blocks are in place. Firms have invested huge sums in quality programmes, IT networks, process reengineering, and a range of management tools including EVA, balanced scorecards, and activity accounting. But they are unable to establish the new order because the budget, and the command and control culture it supports, remains predominant."
Wally Bock, writing in Three Staring Leadership.com, notes: "The budget process takes up too much time, sets things in stone for a year or more, and affects performance in ways that may have only a nodding relationship with company strategy."
Jack Welch, in Fortune, says: "The budget is the bane of corporate America."
Bob Lutz, ex COO of Chrysler, notes: "The budget is a tool of repression rather than innovation."
Dr Jan Wallander, honorary president, Svenska HandelsbankenBudgeting, comments: "Budgeting is an unnecessary evil."
New approach
The solution is to move towards a mix of adaptive management processes along with significantly devolved business processes, principles and practices.
Adrian van der Merwe is MD of 8th Man Consulting.
The picture is consistent: most forward-looking and progressive managers agree the budgeting process doesn't work, and it needs to be replaced with something more accurate, which adds value, and which people will take seriously.
The solution, consistently, as various analysts, authors and consultants have interpreted it, is to move towards a mix of adaptive management processes along with significantly devolved business processes, principles and practices.
For instance, finance experts Jeremy Hope and Robin Fraser argue in their book, "Beyond Budgeting", that organisations must embrace a radical new model that links performance measurement to evolving competitive benchmarks - and shifts the firm's focus from controlling employee behaviour to delivering customer value.
These are all innovative and constructive ideas, but they need a systemised foundation. In my experience working on some of the largest corporations in the UK and SA, this systemisation must of necessity be based on enterprise performance management (EPM).
EPM integrates budgeting into the entire strategic business process, and allows it to be informed by prior business processes such as forecasting, and then to be subsequently informed and updated by actual business events, such as ongoing performance, missed deals, new contracts, and mergers and acquisitions.
The trick here is to have the entire performance management cycle informed by one, uncontested view of the truth (typically, a high-performance OLAP application which has drawn its data from production systems, and allows speed-of-thought what-if scenarios to be developed).
Such a scenario integrates planning, forecasting, budgeting, financial consolidation, monitoring, query and reporting, activity-based costing, the balanced scorecard, and more.
So, as you close off one budgeting cycle and enter another, consider changing approach, and give yourself a significantly happier 2008!
* Adrian van der Merwe is MD of 8th Man Consulting.
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