Beyond Budgeting - Feasible in a contemporary organisation?

Student Name: Daniel W Jenkins Student Number: 11006662 Subject Name: Accounting Information for usiness Word !ount:

Executive Summary
A business re"ort t#at e$"lores %#et#er it is %ort#%#ile for a contem"orar& business to ada"t to t#e "rinci"les outlined in ' e&ond udgeting'(

Contents
) 1(0* Abstract (page 1) ) 2(0* Introduction (page 1) ) 2(1* +istor& ,f udgeting (page 1) ) 2(2* A Need -or !#ange (page 1) ) .(0* /ain od& (page 1) ) .(1* ,rigins ,f e&ond udgeting (page 1) ) .(2* 01olution ,f e&ond udgeting (page 1&2) ) .(.* Strengt#s ,f e&ond udgeting 1s 2raditional 3ractices (page 2) ) .(4* !riticisms ,f e&ond udgeting (page 3) ) 4(0* 5ecommendations (page 3) ) 6(0* !onclusions (page 3) ) 5eferences (page 4)

- 1.0) bstract

2#is re"ort aims to e$"lore %#et#er it is ad1antageous for an organisation to ado"t to t#e "rinci"les of e&ond udgeting( 2#e re"ort looks at secondar& sources of data to gi1e t#e reader a %ider understanding of e&ond udgeting and aims to #el" a "erson to come to a conclusion %#et#er or not its feasible to ada"t to e&ond udgeting( 2#e re"ort also looks at t#e #istor& of t#e notion and its e1olution in t#e "ast decade(

- !.0) "ntroduction
- !.1) #istory $% Budgeting Since time immemorial7 budgeting #as been an im"erati1e "art of t#e econom& and ci1ili8ation( -or e$am"le7 t#e go1ernment uses budgets to "lan on %#ere s"ending is allocated %#ilst a famil& %ould use budgets to allocate mone& to different "riorities( !om"anies use budgeting as a means to measure managerial "erformance and it is argued t#at management is not "ossible %it#out it 9:ibb& and :indsa&7 200;*( - !.!) &eed For C'ange

udgets can fail miserabl& or be t#e forefront to success7 it all de"ends on "lanning( An e$treme or im"ractical budget causes man& conse<uences7 like a decline in economic gro%t#( 2#is room for error left man& #oles in traditional budgeting and +o"e and -raser argued t#at organisations s#ould go be&ond t#e normal means of budgeting and do more 9+o"e et al7 200.* it %as t#en %#en t#e ' e&ond udgeting' notion %as born( is a set of "erformance management "rinci"les %#ic# #olds budgeting at t#e #eart of decision making( 2#e idea %as to formulate an a""roac# %#ic# abolis#es t#e strict bureaucratic nature of traditional budgeting 9Dugdale et al7 2010*( 2#is is a ke& "art of as it eradicates traditional "erformance contracts and de1ol1es more "o%er to management %#ic# ensues more enter"rising and inno1ati1e a""roac#es to%ards meeting organisational targets 9 err& et al7 200;*(

- (.0) )ain Body

- (.1) $rigins o% Beyond Budgeting 2#e notion of came to lig#t o1er ten &ears ago and it "romised to #el" organisations meet success targets and be more ada"ti1e to c#ange in t#eir business en1ironment( In an inter1ie% Jerem& +o"e said t#at #e and -raser #ad gro%n tired of t#e strenuous e$istence of traditional budgeting tec#ni<ues %#ic# %#ere outdated for contem"orar& use( 2#is is %#ere +o"e suggested t#at organisations s#ould start to incor"orate t#e ideas from into "ractice( 9J(+o"e7 200.* - (.!) Evolution o% Beyond Budgeting In t#e last decade t#ere #as been muc# debate on %#at models managers s#ould c#oose in order to increase efficienc&( Alt#oug# t#ere are still man& com"anies %#o #a1e not ada"ted to com"letel& t#ere are ot#ers %#o #a1e managed to go e1en furt#er( It is im"ortant to note t#at com"anies use "rinci"les to different e$tremes7 for e$am"le a S%edis# bank called 'S1enska +andelsbanken' #as gone e1en furt#er and #a1e de1ol1ed "o%er from t#e centre to its managers and teams7 gi1ing t#em freedom to ac#ie1e results t#roug# initiati1e and entre"reneurs#i" as a""osed to strict contracts( 2#is c#ange in a""roac# #as lead to an annual economic gro%t# and S1enska #as out matc#ed its S%edis# ri1als since ado"ting to "rinci"les( Since t#en7 #as used

S1enska as a model e$am"le of #o% organisations can effecti1el& use release t#e "o%er of "eo"le in t#e front line( 9S( 3la&er7 200.*

conce"ts to

2#e abo1e object is ada"ted from t#e %ork of ecker and s#o%s #o% e&ond udgeting #as e1ol1ed from 1;;6)2010( +ere %e can clearl& see t#at t#e conce"t %as de1elo"ed as budgeting %as a 'barrier for economic gro%t#' 9 ecker et al7 2010*( We can also see t#at t#e idea is a some%#at %ork in "rogress and #as "otential for man& more models and room for im"ro1ement( - (.() Strengt's o% Beyond Budgeting vs *raditional +ractices +o"e and -raser de1elo"ed si$ ke& fundamental "rinci"les for %#ic# in turn "in "oint #o% t#ese im"ro1e efficienc& %#en com"ared to traditional budgeting tec#ni<ues( In o""osition to t#e bureaucratic nature of traditional budgeting7 allo%s more room for initiati1e and more efficient decision making7 t#is allo%s front line teams to react faster to c#anges in t#e en1ironment or %#en met %it# a decision to make( fa1ours t#e coac# and su""orti1e leaders#i" from management %#ic# "romotes a li1el& communit& and in effect com"anies re"ort #ig#er customer ser1ice 95( +ouse7 1;;6*( +o"e and -raser also state t#at be&ond budgeting creates a #ig# "erformance climate because of its abilit& to gi1e more room for success to all le1els in t#e organisation( /an& com"anies using t#is su""ort t#e idea of "eer based "erformance re1ie%s %#ic# effecti1el& creates internal com"etition %#ic# constitutes too a #ig# le1el of em"lo&ee "erformance( Additionall&7 ensues t#at because front line teams #a1e more "o%er o1er decision making t#is abolis#es t#e ner1ous 'safet& first a""roac#' t#at is a conse<uence of t#e e$acting nature of traditional budgeting( 2#is a""roac# bolsters faster res"onse times and makes organisations as a %#ole more ada"ti1e to c#ange and situations %#ere a <uick res"onse is demanded7 t#ese are t#e t%o "rominent ad1antages of using ( !I/A=:, A: conducted researc# %#ic# resulted in t#e majorit& of managers belie1ing t#at traditional budgeting is "roblematic 9!I/A=:, A:*( 2#e& re"orted t#at budgets are e$"ensi1e to

set u" and %it# t#e ra"id c#ange in economic en1ironment in recent &ears t#at budgets #a1e to be c#anged e1er& &ear to meet t#ese demands 9Sardjoe7 200;*( ,)- (.,) Criticisms o% Beyond Budgeting +orngren #as obser1ed t#at t#ere are "eo"le %#o belie1e t#ere is no need for a c#ange to budgeting7 t#at t#e traditional "ractices are still t#e best for contem"orar& organisations( +e states t#at t#ere is not#ing contradictor& about budgeting but t#at t#e "roblems t#at do arise are not because of budgeting itself but because of #o% "eo"le use it and it makes it im"ossible to get t#e "romised results( 9+orngren et al7 2004* An e1ident discre"anc& %it# is t#e lack of ackno%ledgment for #uman error( models assume t#at t#e "eo"le %#o gain res"onsibilit& are> full& trained7 ada"table to c#ange7 inno1ati1e #uman beings and t#is delegation of trust can be some%#at subjecti1e and "rone to "oor judgement( 2#e model assumes t#at t#e "eo"le %orking for t#e organisation are some%#at "erfect and doesn't look at t#e fact t#at7 just like traditional budgeting7 t#ere is s"ace for error( 2#is is a big reason %#& t#ere are still "lent& of organisations %#o #a1e not ado"ted to t#e "rinci"les of and %#ere trust is delegated can be debatable %it# management(

-)- ,.0) .ecommendations /)- -.0) Conclusion 0)

?* ;*

10*Jerem& +o"e Inter1ie% 11*'ttp122333.beyondbudgeting.de2articles2"ntervie345eremy4#ope.pd%

BEC6E.7 S.7 )ESS&E.7 ). 8 SC# FFE.7 9. !010. *'e evolution o% a )anaging ccounting "dea1 *'e case o% Beyond Budgeting. $tto Beis'eim :raduate Sc'ool o% )anagement. B".&BE.:7 5. :. 8 S&$;:
!I/A=:, A:

Bu d g e t s Is t h e u s e of b u d g e t s o u t of d a t e ?

S.A.D. S a r djo e 298142ss July 1 2 , 2 0 0 9