A Brief History of Budgeting: Reflections on Beyond

Budgeting, Its Link to Performance Management

and Its Appropriateness for Software Development

Garry Lohan

J.E. Cairnes School of Business and Economics

NUI Galway, Newcastle Road, Ireland
garry.lohan@nuigalway.ie

Abstract. Beyond Budgeting is an innovation from the management accounting

literature that seeks to improve performance and manage organisations through
flexible sense-and-respond type mechanisms, rather than the more rigid
traditional command-and-control models. This contemporary thinking in
management accounting resonates strongly with contemporary thinking in
information systems development (ISD). In particular, the Beyond Budgeting
model shares many similarities with agile software development (ASD) with
both having a distinctly agile and flexible foundation. This paper discusses the
history of Beyond Budgeting, its relationship with performance management
and its appropriateness for the field of software development.

Keywords: Beyond Budgeting, Budgeting, Performance Management, Agile

Methods.

1 Introduction
Budgeting is regarded as the cornerstone of the management control process [1, 2]
and is one of the most extensively researched topics in management accounting [1-5].
The management accounting literature identifies multiple uses for budgets in
organisations, such as performance management and evaluation, strategy
implementation, and strategy formation, etc. yet, despite the fact that budgeting is so
widely used, recent years have seen the traditional, annual budget subjected to much
adverse criticism [6, 7]. Practitioners express concerns about the entire budgeting
process, arguing that budgets impede the allocation of organisational resources to
their best uses and encourage myopic decision making and other dysfunctional budget
games [1]. Tensions exist within firms regarding the importance of, and reason to
budget [4]. For example, firms that face competitive conditions find the budget
important for communication of goals and strategy formation but the same
competitive conditions negatively affect the importance of budgets for performance
evaluation. Although relatively few organisations are planning to abandon the annual
budget, it is widely accepted that the traditional budgeting model is cumbersome and
ineffective [6]. The major criticisms are that traditional budgeting is incapable of
meeting the demands of the competitive environment in the information age, it is

B. Fitzgerald et al. (Eds.): LESS 2013, LNBIP 167, pp. 81–105, 2013.
© Springer-Verlag Berlin Heidelberg 2013
82 G. Lohan

cumbersome and too expensive, and the extent of “gaming the numbers” has risen to
unacceptable levels [8]. Ekholm and Wallin [6], Dugdale and Lyne [9] and Hansen et
al. [1] identify the following criticisms relating to the annual budget process.
• Budgets are time-consuming to put together.
• Budgets constrain responsiveness and are often a barrier to change.
• Budgets are rarely strategically focused and often contradictory.
• Budgets add little value, especially given the time required to prepare them.
• Budgets concentrate on cost reduction and not value creation.
• Budgets strengthen vertical command-and-control.
• Budgets do not reflect the emerging network structures that organisations are
adopting.
• Budgets encourage gaming and perverse behaviour.
• Budgets are developed and updated too infrequently, usually annually.
• Budgets are based on unsupported assumptions and guesswork.
• Budgets reinforce departmental barriers rather than encourage knowledge sharing.
• Budgets make people feel undervalued.
Others are also starting to take a closer look at the budgeting process and are
beginning to question its value [10-13]. A series of articles in the MIT Sloan
Management Review has called for a new approach to strategic management [14-17].
A “pragmatic, coherent approach to thinking about change” is called for [18].
McFarland [18] suggests that strategic planning managers should follow the example
from the software community, who realised the problems with the traditional systems
development models and invented new development processes (agile methods) to
confront the new realities facing them. He says that “the insights upon which new
software development approaches are based may point the way for the development
of newer, faster and more effective strategy-making processes”.
In the next section we take a look at the evolution of budgeting, beginning with the
traditional management process. Section 3 discusses the introduction of the Beyond
Budgeting model and its theoretical underpinnings. We then explore the need for
Beyond Budgeting in ASD before looking at existing research on Beyond Budgeting
and conclude with some observations on past and future trends.

2 Evolution of Budgeting
2.1 Traditional Budgeting Process

A budget process is defined as a system of rules governing the decision making that
leads to a budget, from its formulation, through its approval, to its execution (Figure
1) [19]. The budgeting process frequently consumes six months of management time
in negotiations, planning and target-setting [7]. The process begins with a
formulation of the mission statement and strategic plans of the organisation for the
year. Once these are in place, budget packs are sent out from corporate centre to
operating divisions and an entire process of meetings and negotiations begin [8]. Once
the budget is agreed upon, regular reports are required by the corporate centre to
enable senior executives to control performance.