Beyond Budgeting
Few years ago, a bunch of corporate planners joined together and started discussing if budgeting is really effective. The concept of beyond budgeting is to move away from the traditional budgeting process and look at budgeting as an exercise that would bring great value to every organization. The key themes around the beyond budgeting concepts are –
Continuous and Adaptive – a key theme around the budgeting cycle was to make the budgeting process more continuous and adaptive, rather than a rigid budget prepared a year ago which will not have any validity based on the changes that has occurred in the business. Let us take an example, firm A budgets for a marketing campaign to promote its cotton wear and boost sales in the annual budget drafted one year ago. But the climate conditions are such that its been raining during the summer. They have to change their marketing campaign plan based on the changes, else they are not going to succeed.
Relative – “We have far exceeded the budgeted sales by 10% this month” – have you heard this. But actually the industry segment may be growing at 20%, so you have not budgeted or forecasted the potential and you have an opportunity loss of 10%. Another key theme of beyond budgeting is to include industry, competitive and benchmark data in the budgeting process. For example, if a sales territory manager is committing numbers, he or she should provide what competition is doing and what they are likely to do in future. In case of production manager, he or she should indicate what the manufacturing kpis that other plants, run by competitive companies doing, and the budgeted target for future. Each of these managers could obtain external benchmark data to help, but it would be imperative for every person involved in the budget process to indicate these information and incorporate that into their budgets. This will ensure that there is no opportunity lost and would increase forecast accuracy. No more it is budget vs actual, but it is own vs industry.
Rewards on relative performance – It is very important that rewards should be fixed based on relative performance and not based on fixed targets on annual budgets. This will make employees to think radically and go beyond the normal targets. For example, sales person who beats industry target should be rewarded handsomely rather than just beating the budget
Decentralized - another key theme is to allow line managers to have the scope, power and knowledge to deliver. The budgeting process should not be a mere centralized leadership activity but an organization wide activity that allows each manager to own up their target and offcourse for that the manager should be provided with adequate authority
Resources on demand – The process should allow resource allocation based on demand and as needed, instead of just allocating based on annual budgets. This would ensure best utilization of resources.
Benefits of Beyond budgeting
Faster response - Beyond budgeting companies operate with speed and simplicity, and simplicity comes from reducing complexity in the management process. Making strategy an open, continuous and adaptive process is perhaps the key element in a fast response organization. It enables the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan. To this extent regular rolling forecasts can be helpful and access to resources when they are needed can be critical. Underlying all these approaches is the shredding of the bureaucracy that still plagues most large organizations
Innovative strategies - In Beyond Budgeting companies, people work within an open and self-questioning environment. Clear governance principles set the right climate and builds the mutual trust needed to share knowledge and best practices. This is also encouraged by the move away from rewards based on budget 'cells' (a formidable barrier to a sharing culture) and toward rewards based on the results of a business unit or group. The knowledge sharing imperative is often driven by the need to achieve ambitious goals that can even lead companies to exchanging knowledge with suppliers and contractors.
Lower costs - By eradicating the budgeting mentality, managers will be encouraged to challenge fixed costs and seek sustainable cost reductions. Beyond budgeting companies have lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects, and structures with their strategy. Operating managers also challenge resources used rather than seeing them as 'entitlements'. Just asking the question, "Does it add value to the customer?" is often sufficient to ensure that unnecessary work is eliminated. More loyal customers - Beyond budgeting companies place customer value needs at the centre of their strategy and adapt their processes to satisfying them. Fast response to customer requests is also important. Thus people at the front line must have the authority to make quick decisions. The 'right' customers must also be profitable. Thus measuring order line profitability (after charging all costs are serving customers) is crucial.
These concepts led to the formation of beyond budgeting round table.
I know what you are thinking, ‘how can we achieve all these with spreadsheets and complex software that we have, to be so adaptive, and allow the marriage of strategy to execution seamlessly.
This is where the SAP EPM solutions can be very helpful. SAP Business Planning allows for very adaptive planning processes that can be managed by business users. The collaboration features like comments and business process flows allows easy coordination to ensure making changes to budgets/forecasts. These solutions have evolved over the technologies and would suit the current and future needs to execute on the beyond budgeting concepts.
SAP Strategy Management product allows tracking of objectives, the initiatives to achieve the objectives and metrics that tracks those objectives.
SAP Profitability and Cost Management product allows modeling of various activities of the business and complex allocations, easily managed by business users, to ascertain the right products/customers who bring profits to the business.
With close integration to the underlying transaction data, these solutions ensure Empower the Business User through the value of SAP – Business Objects combine, and ensuring beyond budgeting.
