New Management Concepts for a New Era

Deutsche Version

Beyond Budgeting

A model for flexible enterprise control - beyond fixed 
annual budgets and ineffective traditional management concepts
 

“Fixed budgets don’t work today. A budget is a too static instrument and locks managers into the past - into something they thought last year that it was right. To be effective in a global economy with rapidly shifting market conditions and quick and nimble competitors, organization have to be able to adapt constantly their priorities and have to put their resources where they can create most value for customers and shareholders. In order to do that, they need the right concepts, management processes and tools – concepts such as the Beyond Budgeting Management Model. The introduction of new management instruments such as the Balanced Scorecard, which help to better align the entire organization with corporate strategic objectives and to focus it on the essentials, has created the right foundation. Because if corporate strategy and the objectives are clear for all people in an organization, one can principally react faster to changing market conditions.  But then the fixed budget comes into their way and prevents them from really doing the right things. Though what is often missing is a more flexible operational planning and control model. The Beyond Budgeting model wants to fill exactly this gap.”   

Juergen H. Daum (about Juergen H. Daum)

| J.D.'s insight article "Beyond Budgeting" | Interview with Lennart Francke, CFO of Svenska Handelsbanken | Panel Discussion with Borealis, Nestlé, and Unilever | Interview with Jeremy Hope – co-founder of the Beyond Budgeting Round Table | Interview with J.D. on finance and IT | Public Speeches and Seminars 2005 |  



Budgetary control: a danger for lasting enterprise success 

For top executives and managers a burning platform exists in the their corporate world that requires some significant change: the budget and the budgeting process. Today, many managers regard the traditional budgetary control model as outdated and believe that it causes more damage than benefits. Traditional budgeting is too time consuming, too inflexible, too bureaucratic and prevents today's organizations from using their full potential. Budgets do not motivate managers and employees to set themselves ambitious targets. Budgets prevent them from taking action, when it is not planned for in the budget, but required. Budgets inhibit entrepreneurial behavior, and they are too inflexible in order to allow an enterprise to react to changing market conditions in time.    

Focusing just on meeting the budget numbers often blocks the view on reality - on markets, customers and competitors. Internal "politics" then become more important than the customer - with managers and employees occupied particularly with themselves as a result. And everyone is suffering under the burden of the endless ritual of the annual budgeting round, when, in a weeks and months effort, managers have to negotiate next year's budget, wading through mountains of spreadsheet data and Powerpoint slides. They neglect the operative business and customers, because everyone has to secure first his or her own turf. The consequence: the entire organization is nearly paralyzed during the budgeting round - creating an excellent opportunity for a competitor to attack. And finally, the just agreed budget is already outdated only after a few weeks into the new year - overtaken by reality.          

In addition, budgetary control is stimulating a culture of mistrust and intransparency. No one wants others to look into his or her cards in order to be able to negotiate the lowest possible targets and to get cost and revenue buffers into the budget. And once agreed, the budget presses managers into an inflexible corset. When a sudden market development, which was not foreseen in the budget, endangers the revenue target or threatens to cause additional costs, or offers a new opportunity for a simple extra business: they cannot react appropriately. In addition, in an market upturn, the budgeting culture is animating managers to not utilize the full potential available, because they fear to get higher targets for the following year. In the opposite case, if market conditions are deteriorating and they are not able to meet their targets, a tendency exist, to "massage" the numbers.   

Budgets, once meaningful control instruments, become so, in today's dynamic environment of the information and knowledge economy and of global buyer's markets, a danger for lasting enterprise success: they prevent fast and flexible adaptation to the market, they do not permit enterprises to use their full potential, and they often promote mistrust and deception and endanger so also the external corporate transparency demanded today. And finally, the budget process binds enormous resources. Experts estimate that executives spend 20 to 30 per cent of their time in some way with the budgeting process.  


What can we do?  

Often companies try to solve that problem by improving their controlling processes and instruments. But when the management culture is not in line with the intended change, the best controlling and performance management concepts do not work. Therefore, what is needed, is a more comprehensive approach that includes the controlling processes and tools and the management processes and the management culture. A "New Deal" is needed, beyond the traditional general management concepts that originated more than 80 years ago in the U.S. and that still serve as a foundation for today's management and controlling systems in companies (but these concepts that had been conceived for a totally different economic era and for a different enterprise environment as today's).   

Numerous case examples of enterprises, which successfully steer without fixed budgets, show that an alternative management model that works requires changes in several parameters. Successful enterprise management "Beyond Budgeting" requires a customer and market-focused management structure and an organization, which works rather according to the network principle than according to the too rigid hierarchy principle. It does require a team-based model and a customer and employee oriented leadership approach - also known as "empowerment", and relative and not absolute targets as well as appropriate incentive systems. 

In order not to endanger the "steerability" from a top management perspective, controllers have to contribute as well and have to provide the suitable controlling and performance management tools and procedures. The mission of the Beyond Budgeting movement is to move away from the "financial monoculture" in the enterprises, which has been often nurtured in the past years by a too simple and/or too extreme shareholder value management philosophy. Beyond Budgeting therefore stands also for moving the things and activities again into the foreground that really generate economic productivity, growth and value. This also requires a new approach to controlling and performance management. Controllers have to develop themselves into a new role of a business support service rather than acting just as accountants, keepers of the numbers, and corporate watchdog.
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The Beyond Budgeting Management Model - a real alternative

Beyond Budgeting is a management model that wants to overcome the restrictions of the traditional budget-based general management concepts. The Beyond Budgeting Management Model originated from about 30 case studies of the Beyond Budgeting Round Table/BBRT (www.bbrt.org) - case studies of companies that are managed successfully without fixed budgets. The BBRT has identified the common principles behind the individual solutions is working together with its member organizations on their further development.     

The aim of the the Beyond Budgeting management model is to increase the adaptability of enterprises. For this, controllers have to conceive and implement the required control instruments and processes. And management has to promote an appropriate performance management culture by supporting responsible behavior and market orientation on all levels in the organization. When this hapens, Beyond Budgeting promises new possibilities for strategic enterprise management by making resource allocation more flexible and adaptive.

That Beyond Budgeting works and that organizations can be managed successfully without a fixed annual budget has been demonstrated by companies like the German ALDI Group, by the Swedish furniture giant IKEA, by the French chemical company Rhodia, by the British retailer Boots and its subsidiary Boots Healthcare International, by the Danish petrochemical group Borealis and by Svenska Handelsbanken, a Swedish retail bank, which is managing for now over 30 years without budgets - and with enormous success. 
(Interview with the CFO of Svenska Handelsbanken).    


The author: Juergen H. Daum is an internationally recognized expert, author, speaker, and consultant in the field of enterprise management. He currently acts as the Chief Solution Architect of the Business Solutions Architect Group at SAP AG and advises senior executives, CFOs and finance professionals in finance transformation and enterprise performance management best practice. He is helping companies to develop and implement more flexible and effective steering and management systems. He is a frequent speaker on and management, finance and enterprise  performance management topics and a frequent contributor of articles for leading journals. He is the author of the book Intangible Assets and Value Creation (John Wiley & Sons, 2002) and  is actually working on a new book on "Beyond Budgeting and Enterprise Performance Management" that will be published soon and that will be based on his experiences from many Beyond Budgeting projects of European companies. He is connected with the Beyond Budgeting Round Table since several years.
website: http://www.juergendaum.com/     

 
Key article about "Beyond Budgeting" by Juergen H. Daum

Beyond Budgeting: Ideas for a Fundamental Redesign of the Management Control Model 
published in: SAP INFO.net, 08. August 2005
      

Event Review:

> Review of the First German Beyond Budgeting Summit, 8-10 June 2005 in Frankurt/Main (in German)


Juergen H. Daum - organiser and chairman 
of the First German Beyond Budgeting Summit,
8-10 June 2005, Frankfurt a.M./Germany

Juergen H. Daum @ Workshops, Seminars and Conferences:

Announcing:
» Seminar "Dynamic Business Performance Management" 
with Steve Morlidge, former change leader DPM Unilever, and Juergen H. Daum - organised by the International Institute of Enterprise - Heidelberg (IIOE).
How can organisations re-engineer their performance management systems to better prepare themselves for succeeding in a dynamic, competitive environment - while at the same time reducing the 'control overhead'? 
This one of the topics discussed at this seminar on 25-26 June 2008 in Heidelberg, Germany.
More information:
Seminar brochure and registration form
IIOE-Webpage about the seminar



» Juergen H. Daum @ conferences, seminars and workshops 2008







» About Juergen H. Daum
» Past speeches, workshops, seminars & conferences (2002-2007)
» List of publications 2002-2007

Books from Juergen H. Daum:
» "Intangible Assets and Value Creation" (Wiley 2003)
» "Beyond Budgeting" (2005) - so far only in German


Contact Juergen H. Daum:  

More Information and Material about "Beyond Budgeting":

» CFO Dialog: The Future of Enterprise Performance Management - From Best to 
   Next Practice: A discussion with the CFOs of four leading European companies.  
                    
» The Evolution of the Finance Function in European Companies and the Future 
   Outlook  

» Strategy & Performance Management at Siemens Belux and the role of the 
   Management Cockpit War Room. An interview with Guy Bourdon, Chief Consultant, 
   Siemens Belux  

» Beyond Budgeting: Ideas for a Fundamental Redesign of the Management Control 
   Model  article by Juergen H. Daum, published in: SAP INFO.net, 08. August 2005                         
» „Taming the Beast“ - (article published in the July 2005 issue of CFO Europe  
   Magazine) "Most firms continue to struggle with the budgeting behemoth.[...] To make 
   lasting improvements [...] companies need to focus on several key steps ..."

» Event review: First German Beyond Budgeting Summit held on 8-10 June 2005 in 
   Frankfurt/Main (in German only)

» „Planning on the Move“ - The Hackett Group publishes their 2005 "Planning on the 
   Move" study as a follow up to  the 2003 "Quo Vadis Budgeting" studyThe Hackett's Group 
   2005 European study on budgeting and planning 
   
» From Management Accounting to Business Support: “Beyond Budgeting” at 
   Boots/BHI. An Interview with Matthias Steinke, CFO BHI Germany    

» Interview with Patrick M. Georges: How can executives improve their personal
   productivity?  

» The Management Cockpit “War Room” at Iglo-Ola (Unilever Belgium): 
   An Interview with Iglo-Ola’s Financial Controller Ghislain Malcorps   

» Panel discussion: Beyond Budgeting – breaking free from the annual fixed budget
  (with representatives from Nestlé, Unilever and Borealis  

» Interview with Jeremy Hope (co-founder of the BBRT): The Origins of Beyond 
   Budgeting and of the Beyond Budgeting Round Table (BBRT)    (as PDF)

» Enterprise Management, Leadership and Business Control for Value Creation -   
   Presentation at the Executive Briefing on Performance Measurement of the Centre for 
   Business Performance, Cranfield School of Management, 27 January 2004 in London, UK 
  Agenda   J.D.'s presentation (PDF as Winzip-File)  

» Beyond Budgeting on the move: report from the First Annual Beyond Budgeting
   Summit in London, 1-2 July 2003 

» Enterprise Management in the 21st Century - A Blueprint for a New Approach 
   and the role of Information Systems  
   Presentation held by Juergen Daum at the BBRT members meeting hosted at 
   SAP AG in Walldorf/Germany, 26 June 2003, and held as well at the First Annual 
   Beyond Budgeting Summit, 2nd July 2003 in London/UK
   program of the summit         

» Interview with Lennart Francke, CFO, Svenska Handelsbanken, Stockholm:
   Managing without budgets at Svenska Handelsbanken   

» Successful Enterprise Management through Employee Empowerment and
   Financial Efficiency: "Beyond Budgeting"    
   Presentation of Juergen H. Daum prepared for the SAP Human Resources und 
   Financials Congress, December 2002, in Karlsruhe/Germany (the presentation has
   been canceled due to a flue illness of the speaker - here now the slides)

» Beyond Budgeting: A Model for Performance Management and Controlling in the  
   21st Century?
   Article by Juergen H. Daum, published in "Controlling&Finance", July 2002

» Fixed targets are a thing of the past   Article by Juergen H. Daum, published at 
   "sapinfo.net", July 15, 2002

» Performance Management Beyond Budgeting: Why you should consider it, How it  
   works, and Who should contribute to make it happen
  The new New Economy Analyst Report from Juni 08, 2002 (with information about the 
  updated version of the CAM-I BBRT concept)

» Performance Management and Business Controlling in the 21st centrury
   Presentation of Juergen H. Daum at the European mySAP Financials conference      
   in June 2002 in Strassbourg / France 

» Book tip: You will find more about the more flexible and adaptive management system 
   and about a controlling and accounting system "beyond budgeting" in the book 
   "Intangible Assets and Value Creation", by Juergen H. Daum (John Wiley Ltd., 2002).

» Presentations held by Juergen Daum at the CAM-I Beyond Budgeting Round Table:
   - Dec 07, 2000, London/UK: » Strategic Enterprise Management (2330 KB)
   - May 16, 2002, London/UK: » Information System Requirements for Performance
   Management Beyond Budgeting (1189 KB ) 

» Panel discussion at the eCFO Conference 2001, Oktober 18-19, 2001 in Brussels: 
"The Beyond Budgeting Management Model". Participants: 

- Janet Kersnar, Editor-in-Chief CFO Europe Magazine  
- Guiseppe Biamino, Budgeting & Controlling Manager at
  SNAM Rete Gas in Italy (Utilities) 
- Robin Fraser, Program Director CAM-I BBRT 
- Peter Herold, Senior Manager Deloitte Consulting UK
- Juergen Daum, Director Program Management mySAP Financials, SAP AG.

  Can an enterprise really use the Beyond Budgeting model and manage without budgets? 
  This was the question that has been discussed by the experts on the panel.
  Watch the video of the discussion:  video (Real Player)     video (Medial Player)

» Interview with Juergen Daum, published in "SAP Insider", issue Oct/Dec 2001:
   Leveraging E-Business Opportunities for Finance – How CFOs and IT can join
   forces to create Value , where Juergen Daum talks about "moving to rolling budgets" 

» Beyond Budgeting: Managing performance better without budgets
   Presentation of Robin Fraser (CAM-I BBRT) at the European mySAP Financials 
   conference in June 2001 in Basel / Switzerland

» Beyond Budgeting: How to become an adaptive sense- and-respond organization   
   The new New Economy Analyst Report from May 22, 2001

» SAP White Paper "Beyond Budgeting", written by (among others) Juergen Daum and   
   the CAM-I BBRT  Beyond Budgeting - SAP White Paper
  
» Beyond Budgeting - Article by Jeremy Hope und Robin Fraser (the two 
   initiators and  researchers behind  the CAM-I BBRT concept). This article was published 
   in the October 2000 issue of "Strategic Finance". 

» Unternehmenssteuerung und Unternehmensplanung mit Hilfe analytischer   
   Anwendungen - Unternehmensmanagment als Prozess verstehen
   article by  Juergen Daum, published in "is-report" issue 6/2000 (in German):

Overview: The Beyond Budgeting Model[1]:

by Jürgen H. Daum

The Beyond Budgeting concept was developed by the Beyond Budgeting Round Table (BBRT) of the Consortium for Advanced Manufacturing International (CAM-I), an international program funded by more than 50 global companies[2].

The objective of the program was to analyze companies that didn’t use budgets any more and to investigate the restriction of budgets in companies that used budgets. Both analysises culminated into what is called now the Beyond Budgeting concept.

The results are the 12 Beyond Budgeting principles that not only describe performance management and controlling processes that support a management concept “Beyond Budgeting” but also the required new leadership principles:

         The Leadership Principles:

1. Creation of a performance management climate that measures success against the competition and not against an internally focused budget

2. Motivation through challenges and transferring responsibility within clearly defined enterprise values

3. Delegation of responsibility to operational managers, who can make decisions themselves

4. Empowerment of operational managers by giving them the means to act independently (access to resources)

5. Organization based on customer-oriented teams, who are responsible for satisfied and profitable customers

6. Creation of a single “truth” in the organization with open and transparent information systems

        The Performance Management Principles:

7. The target setting process is based on the agreement of targets which are linked to external benchmarks

8. The motivation and reward process is based on the success of the team compared to the competition

9. Strategy and action planning is delegated to operational managers and takes place continuously

10. The resource utilization process is based on direct local access to resources (within agreed parameters)

11. The coordination process coordinates the use of resources on the basis of internal markets

12. The measurement and controlling process provides quick and open performance information for multilevel control

Therefore, the two fundamental elements of the Beyond Budgeting model are new leadership principles based on the principle of the empowerment of managers and employees, and new more adaptive management processes. The new leadership principles should unlock the full potential of managers and employees in order to enable the organization to react in an appropriate way and as quickly as possible to new chances and risks in the market environment. The CAM-I BBRT also calls this “devolution”. Adaptive management processes are not based on fixed targets and resource plans as it the case under the budgeting model. Instead, they enable an organization for a high degree of flexibility (see graph).

Some companies have already embedding the beyond budgeting principles into their management processes. Most have resulted in a significant step change in financial performance that has been sustained over many years. Of these first adopters, fourteen have so far been the subject of visits and case studies by the CAM-I Beyond Budgeting Round Table (BBRT).  Here are a few examples that are reported by BBRT: [3]:

SKF –  a Swedish company that is the world leader in roller bearings with sales in 2000 of SEK40bn ($4.7bn). While TQM had already taken root in the early 1990s, the company launched SKF100 in 1996 - a set of values and targets taking the company up to its centenary in 2007 – based on a multi-level series of balanced scorecards. These provide the broad “stretch” framework within which annual targets are now set for each division and segment. But these targets and measures set the company on a collision course with the traditional budgeting system, which was duly abandoned in late 1995. SKF is now a much more market-focused organization, and, after a period of retrenchment, is now growing strongly. 

Svenska Handelsbanken - a Swedish universal bank with revenues of around $2bn, 8,500 employees, and 600 profit centers (mostly branches). Svenska Handelsbanken has replaced the fixed annual budget by a system of market driven target setting, continuous forecasting and resource allocation processes for frontline profit centers, and market–like relationships between supporting and customer serving units. Since abandoning the budgeting model in the 1970s it has outperformed its Nordic rivals on just about every measure you can think of including return-on-equity (ROE), total shareholder return (TSR), earnings-per-share (EPS), cost-to-income ratio, and customer satisfaction. And it is has done this consistently, year-in, year-out, for the past 30 years. Svenska Handelsbanken is the most cost efficient bank in Europe and has recently been voted one of Europe’s best Internet banks.

Borealis A/S – a Danish company established in 1994 as a joint venture between two Nordic oil companies (Statoil of Norway and Neste of Finland). Borealis is at the leading edge of polymer research and development and is now Europe’s largest producer (sales of $2.5bn) and the fourth largest worldwide. The petrochemicals industry is notoriously cyclical with financial success largely dependent on oil prices. The introduction of the Beyond Budgeting model allowed the company to react now in a much more flexible way to market changes. Since it abandoned the budgeting model in 1995 Borealis has doubled its shareholder value and reduced costs by 30% over 5 years.

The Beyond Budgeting model requires not only a new approach to budgeting, resource allocation and operational planning, but also a more holistic approach in strategy and corporate performance management: from strategic planning, through target setting, to rolling and event driven forecasting and performance management based on financial and non-financial KPIs. To make that happen and to support new organizational and management process models according to the Beyond Budgeting principles, organizations are using increasingly advanced information systems like analytical software applications. But essential for the Beyond Budgeting model are continuous management processes. How fast and how at all a company should implement the CAM-I Beyond Budgeting model needs to be decided individually. Whereas Swenska Handelsbanken for example, implemented the model in a more radical way in a crisis situation at the begin of the 1970s, for other companies a more evolutionary approach might be more appropriate.

more about new enterprise management concepts (J.D.'s Website)

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