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The new New Economy Analyst
Report – Jan 10, 2004
Juergen Daum’s new New
Economy Best Practice service
©2004 Juergen Daum. All rights reserved.
Interview
with Jeremy Hope: The Origins of Beyond Budgeting and of the Beyond Budgeting
Round Table (BBRT)
News categories:
Enterprise and business strategy, Finance and accounting, Performance management
and controlling
Interview with
JEREMY HOPE of Baildon, West Yorkshire, UK, founder and research program
director of the Beyond Budgeting Round Table (BBRT):
The Beyond Budgeting management model is a new emerging concept for
adaptive performance management that has been developed by the Beyond Budgeting
Round Table (BBRT). The founders of the BBRT
have conducted an extensive research and investigated companies that use no
budgets at all or use budgets in a very different way than they are used in
most other organizations. Jeremy Hope is, together with Robin Fraser and Peter
Bunce, the founder of the Beyond Budgeting Round Table (BBRT). Together with
Robin Fraser he has led the Beyond Budgeting research program of the BBRT since
its inception in 1997. His recent book, co-authored with Robin Fraser, “Beyond
Budgeting: How Managers Can Break Free from the Annual Performance Trap”
(Harvard Business School Press, 2003) is the outcome of the first five years of
the BBRT research program.
In this interview with Jeremy Hope I wanted to learn more about the
origins of the Beyond Budgeting “model” and of the BBRT itself as well as about
Jeremy Hope’s and Robin Fraser’s motivation for starting their Beyond Budgeting
journey. This interview is a shortened version of an interview from my new
forthcoming book on Beyond Budgeting (“The Beyond Budgeting Field Book”).
This shortened version has been
published in the Austrian Magazine “ControllerNews” (issue 5/03, Nov 2003).
Juergen
Daum[i]: Mr Hope, you and Robin Fraser are the founders of the
Beyond Budgeting Round Table and the authors of the Beyond Budgeting model that
has now gained awareness worldwide. What was your initial motivation to start
to work on “Beyond Budgeting”? What raised your interest?
Jeremy
Hope: Robin and I initially came
from different angles. However, we ended up with the same issue: we both
recognized that the budget was one of the major problems and barriers for
successful management in today’s economy. We both sensed a growing
dissatisfaction across the whole business community with the traditional
general management approach, which is based on and much influenced by
traditional budgeting as well as the pervasive budgeting culture with all its
negative implications for successful enterprise management. It was in 1997 at
CAM-I’s[ii]
25th anniversary meeting that Robin and I first met after both
speaking on the problems of budgeting. We spontaneously decided to join forces
and do something about the budgeting problem. It was this meeting that led to
the BBRT.
Juergen
Daum: And how did your own Beyond
Budgeting journey begin?
Jeremy
Hope: In addition to my
experiences as a finance person and controller in several UK companies in which
I had first hand experience of ‘managing with the numbers’, a major foundation
for my Beyond Budgeting journey was the research work I did for two earlier
books[iii].
My brother, Tony Hope, and I recognized that traditional accounting was no
longer able to provide managers with relevant information for decision making.
Recording assets and liabilities, costs and revenues does not tell you how
companies are creating value in today’s information and knowledge economy. So
we tried to develop new concepts to measure and manage the performance of an
organization. We presented these concepts in “Transforming the Bottom
Line”. In our next book, “Competing in
the Third Wave”, we developed these concepts further.
Juergen
Daum: Why did you end up with
this emphasis on budgeting or, should I say, Beyond Budgeting?
Jeremy
Hope: What we found in reality was
that most of the new tools and techniques that companies were trying to develop
and implement were not fully working. Take the Balanced Scorecard as an
example. The Balanced Scorecard focuses on how well firms are meeting their
customers needs, how well their internal processes are organized and how well
they are preparing for the future. In other words, it says something about how
successful the firm is at innovation. This has created in many organizations a
framework for a more flexible strategy management process geared much more to
value creation. But if the budgeting system and culture remains in place, there
is no way that the strategic management process will really change the operational
manager’s day-to-day behaviour in the company.
Juergen Daum: Why?
Jeremy
Hope: When the budgeting system is
as pervasive in organizations as it is today, it influences the behaviour of
managers and employees in a way that is counter productive to strategic
management. The budget ties managers and people to the old management system
and its paradigms. So when companies start to implement pieces of a new
management model but leave the budgeting system as it is, a fundamental
conflict arises. This is the reason why many change management projects are
failing. The budgeting system is acting as a barrier to fundamental change. If
the new management model for the 21st century organization is to
focus on strategic performance, value-adding processes and knowledge
management, it is crucial that the model is built on trust between managers,
workers, customers and partners. The value creation models of the information
and knowledge economy cannot work without that trust. But this trust can be
easily undermined when managers are faced with short-term difficulties and are
quickly driven back to “managing by the numbers”. So what we learned was that
it is not the budget as such, but the behaviour it stimulated that creates the
problem. It’s the central control mindset and what we call the “fixed
performance contract” that are the root causes of the problem.
Juergen
Daum: Can you explain what you
mean by the central control mind set and fixed performance contract?
Jeremy
Hope: Organizations used to be
smaller, more intimate places, where people trusted each other to do what was
in the best interests of the business. But as the economy became one global
market place and companies grew into multinational and transnational
corporations, this trust broke down as these organizations gradually introduced
systems of compliance and control that became more and more intrusive. Top
management was afraid to lose control of these now very large organizations and
tried to manage them by budget numbers instead of direct personal relationships
– which seemed not to be possible any more due to their size and number of
people to be managed. The result has been more time spent in internal
negotiations, more parochial attitudes, and more value destroying gaming.
People know that if they follow the plan and meet their annual fixed target,
they will survive. Conversely, if they fail to meet their contracted numbers
they will be punished. This can mean people losing bonuses and possibly their
jobs. The pressure this exerts can lead to actions that defy common sense and
that ultimately destroy the value of the company.
Juergen
Daum: Can you give an example for
such actions?
Jeremy
Hope: Sure. Think about the
actions of the sales force. When meeting the numbers proves impossible,
the sales force leans on customers to order goods they have every intention of
returning. And if by some chance a business unit looks like exceeding its
target, customers are persuaded to have their major orders delivered in the
next fiscal period even if this means delaying valuable cash flows. The result
is that no one trusts the numbers. It is more how the budget system is used
rather than the budget system itself that creates the problem. It’s driven by
greed and a need for instant gratification and immediate results. This became
evident recently at both Enron and WorldCom. But most managers still dance to
the tune of fixed plans and annual budgets, as they did 30 years ago. This
process of engaging huge numbers of people in a protracted cycle of detailed
planning, and then making them march to the drumbeat of the budget, seems to us
not just a waste of time, but also an insult to their intelligence.
Juergen
Daum: And this belief is what
became your motivation for starting the Beyond Budgeting Round Table, the BBRT?
Jeremy
Hope: Yes. It was our belief
that this was the hidden barrier to change that persuaded us to form a
partnership with CAM-I and establish the BBRT. We thought that there must be an
alternative management model that allows even the large organizations to use
its full potential – without all the gaming and mistrust culture of the
budgeting system. We also became convinced that the solution might not be found
in a specific tool. We first need a new holistic management model within which
managers can select and adapt the right processes, decision support tools and
management culture that will enable them to build a lean, adaptive and ethical
organization.
Juergen
Daum: How did you start the
research program of the BBRT?
Jeremy
Hope: At the beginning we
were not aware of any companies that had already abandoned budgeting. And only
a few people shared our view. So the start was not an easy one. However, our
prospects changed when we heard through Pertti Akerburg, then group controller
at Valmet in Finland, that there were companies that had actually abandoned
budgeting. Several of them were in Sweden, and one of these had worked without
budgets for nearly thirty years – Svenska Handelsbanken, the most interesting
case.
Juergen
Daum: What was so interesting
about the Svenska Handelsbanken case? Can you give us some details please?
Jeremy
Hope: The most interesting thing
has been the philosophy of Dr. Jan Wallander, the architect of the Svenska
Handelsbanken Beyond Budgeting Management model. His philosophy has contributed
much to our understanding of Beyond Budgeting and radical devolution. When we
wrote our first case report on the Handelsbanken model, we described it as
“advanced”. After reading the draft, Dr. Wallander called us into his office to
tell us we had got it wrong. The Handelsbanken model, he said, isn’t advanced:
It’s simple! And we began to realize what he meant. A flat, simple hierarchy
with few controllers; well-trained staff; no budgets to act a barriers to cost
reduction; and a few simple-to-understand measures - these are all factors that
contribute to maintaining a simple organization and a low cost base. The
Handelsbanken management model introduced by Dr. Wallander is predicated on the
belief that the only sustainable competitive advantage available to a firm in a
fast-changing world, and especially in a service business, lies with its people
– especially their creativity, insights, and judgements – a model in vivid
contrast to the numbers-driven alternative so prevalent elsewhere.
Juergen
Daum: What had been your
objectives for the research program?
Jeremy
Hope: We focused our research on
three questions: First, how are leading companies that have abandoned,
radically changed, or significantly de-emphasized their centralized planning
and budgeting processes, now fulfilling their well-established purposes?
Second, is there a coherent new management model emerging that will enable
companies to introduce more effective management processes and steering
mechanisms? And third, what lessons have been learned by those that have
adopted the new model and how should it be implemented by others? In each case
we found a range of options. So it became clear that the Beyond Budgeting model
(as it has become known) is not a concept that you can apply quickly and
easily. Instead it is a principles-based model that must be adapted to each
organization’s processes and culture.
Juergen
Daum: Can you say more about the
Beyond Budgeting model? How does it differ from the traditional approach?
Jeremy
Hope: Compared with the traditional
management model, Beyond Budgeting has two fundamental differences. First, it
is a more adaptive way of managing. In place of fixed annual plans and budgets
that tie managers to predetermined actions, targets are reviewed regularly and
based on stretch goals linked to performance against world-class benchmarks,
peers, competitors and prior periods. Second, the Beyond Budgeting model
enables a more decentralized way of managing. In place of the traditional
hierarchy and centralized leadership, it enables decision-making and
performance accountability to be devolved to line managers and creates a
self-managed working environment and a culture of personal responsibility. This
leads to increased motivation, higher productivity and better customer service.
Individually these two main features can produce significant benefits, but it
is in their combination where its real strength lies.
Juergen
Daum: What are the Beyond
Budgeting principles you mentioned?
Jeremy
Hope: We identified for each of the
two foundations of the Beyond Budgeting model – adaptive processes and devolved
decision-making – six principles. The six principles of managing with adaptive
performance management processes are: 1. Set stretch goals aimed at relative
improvement based on external benchmarks; 2. Base evaluation and rewards on
relative improvement contracts with hindsight; 3. Make action planning a
continuous and inclusive process; 4. Make resources available as required; 5.
Coordinate cross-company actions according to prevailing customer demand; and
6. Base controls on effective governance and on a range of relative performance
indicators. And the six principles of radical decentralization are: 1. Provide
a governance framework based on clear principles and boundaries; 2. Create a
high-performance climate based on relative success; 3. Give people freedom to
make local decisions that are consistent with governance principles and the
organization’s goals; 4. Place the responsibility for value creating decisions
on front-line teams; 5. Make people accountable for customer outcomes; 6.
Support open and ethical information systems that provide “one truth”
throughout the organization. It is important to understand that these
principles represent the ‘best of the best’ common practices of the
organizations we visited and reported upon.
Juergen
Daum: What are the benefits
companies can expect from the Beyond Budgeting model and its principles?
Jeremy
Hope: The overall effect of the
switch to Beyond Budgeting is a performance management process based on a
relative improvement contract rather than on a fixed performance contract. It
assumes that it is not wise to make managers commit to a fixed target and then
control their future actions against it when in fact the world is constantly
changing. The implicit agreement is that executives will provide a challenging
and open operating environment and that employees will deliver continuous
performance improvement using their knowledge and judgement to adapt to changing
conditions. It is based on mutual trust, but it is not a soft alternative to
the fixed performance contract. High visibility of individual and team
performance offers no hiding place. Manages must perform to high levels of
expectations – relative to peers – or face the consequences. The result of
applying the adaptive performance management principles includes the setting of
more aspirational goals, reduced gaming, more ambitious strategies and fast
response, less waste, improved customer service, and a greater focus on
learning and ethical behaviour.
Juergen
Daum: And what are the benefits
related to the second area, the devolution of decision making to front line
people?
Jeremy
Hope: The delegation of
decision-making and spending authority has always been one of the key functions
of budgeting. However, this delegation usually occurs strictly within a regime
of compliance and control. It differs significantly from the approach taken by
Beyond Budgeting organizations such as Svenska Handelsbanken which have gone
much further and transferred power from the centre to operating managers and
their teams, vesting in them the authority to use their judgement and
initiative to achieve results without being constrained by some specific plan
or agreement. Thus devolution of responsibility is about enabling and
encouraging local decisions, not dictating and directing them. The result of
applying the six principles of managing with a devolved organization include: a
clear governance framework leading to the acceptance of local decision making
by front-line teams throughout the organization; a high-performance climate
leading to sustained competitive success; the freedom to decide leading to
innovation and responsiveness; team-based responsibility resulting in a greater
focus on creating value and reducing waste; customer accountability leading to
greater commitment to satisfying customers profitability; and finally, an
information culture based on openness and “one truth” leading to more ethical
behaviour. What makes Beyond Budgeting different from other management models
is that it provides a comprehensive management model that does not just look at
one area or tool while overlooking others, rather it seeks to ensure that all
the pieces of the management model are coherent with each other. It is because
it is a coherent model in which all of its components work in harmony that it
can produce outstanding and sustained success.
Juergen
Daum: Let’s come back to the
BBRT. What exactly is the BBRT and what are its aims?
Jeremy
Hope: The BBRT is both a research
project and an active network of companies who are sponsoring the continuing
research and are now at various stages of implementing the model. The aims of
the BBRT are to develop a management model “beyond budgeting” and to help its
members to implement it.
Juergen
Daum: How did the work on the
BBRT evolve over time and what is its actual focus?
Jeremy
Hope: Our work is driven mainly by
the interest of our member companies. The first focus of our work in the BBRT
was to identify those companies that had abandoned the budgeting model,
visiting them, and through case reports and presentations, reporting back to
the BBRT members, who were funding our research with their membership fees.
After this first phase, by extracting best practices, we gradually pieced
together a coherent set of common principles – the principles I just named that
form the framework of what has since become the Beyond Budgeting model. This
was the second phase. Having now successfully finished the two initial phases
of our mission, we are now focusing on implementation. That includes for
example the development of a so called web-based diagnostic tool: you can log
on to our website at www.bbrt.org and, guided
through a questionnaire, evaluate against your peers the effectiveness of your
performance management model according to the Beyond Budgeting principles.
Juergen
Daum: How do you see the future
evolution of the BBRT?
Jeremy
Hope: One of our focus areas for
the future is to grow the BBRT internationally. We found that the interest in
Beyond Budgeting is rising rapidly and we need to set up the infrastructure
from an organizational point of view to support this very positive development.
In fact we have already set up ‘sister’ BBRT’s, in addition to the European
BBRT, in North America and in Australasia. Other areas of focus are further
research in implementation issues and providing strategic support to our member
companies by helping them to make the case for change and to develop high level
change management programs. Another new initiative is the BBRT “Community of
Practice” which enables the leading group of implementers to share ideas and
experiences between themselves. We are also considering setting up special
interest groups for specific themes. We believe that Beyond Budgeting is just
in the starting phase of becoming one of the major management themes for the
future. Plenty of work is remaining to be done for us and our member companies,
as well as interesting and challenging times ahead.
Juergen Daum: Mr. Hope, thank you very much for this very interesting interview.
[i] Juergen H. Daum is an internationally recognized expert, author, speaker and consultant in enterprise management. As Chief Solution Architect at SAP AG he is advising enterprises and business managers in: strategy/organizational design for finance, financial and management accounting, controlling and enterprise management, management information systems and financial IT solutions. He was working with the Beyond Budgeting Round Table since a couple of years and he is actually helping several SAP customers to move to a management approach "beyond budgeting" and to redesign their enterprise management concepts, processes and systems accordingly. He is frequently publishing and speaking about Beyond Budgeting and other enterprise anagement topics and he is the author of the book "Intangible Assets and Value Creation" (website: www.juergendaum.com)
[ii] CAM-I is an international research organization that did some groundwork for what became known as Beyond Budgeting.
[iii] Tony Hope and Jeremy Hope: “Transforming the Bottom Line: Managing Performance with the Real Numbers”, Harvard Business School Press, 1995; and Tony Hope and Jeremy Hope: “Competing in the Third Wave: The Ten Key Management Issues of the Information Age”, Harvard Business School Press, 1997
“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
New!
-
visit J.H.D.'s
Beyond Budgeting Info Center
-
including latest BB insight
materials, interviews with BB
pioneers etc. - here an
extract:
| 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
|
Additional Resources:
"Intangible Assets and Value
Creation" by Juergen H. Daum: Introducing the
enterprise management concepts for the knowledge and information age – now
available!
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
Performance Management
Beyond Budgeting: Why you should consider it, How it works, and Who should
contribute to make it happen – article by Juergen Daum
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen Daum
Website of the Beyond Budgeting Round
Table
Juergen Daum’s Beyond
Budgeting Information Center
SAP’s White Paper “Beyond
Budgeting”, which was co-authored by colleagues at SAP AG,
Juergen Daum, and the Consortium for Advanced Manufacturing International Beyond Budgeting
Round Table
Beyond
Budgeting – article from Jeremy Hope and Robin Fraser (the initiators and
researchers behind the CAM-I BBRT concept), published in the U.S. Magazine
“Strategic Finance”, issue October 2000
Panel
discussion at the eCFO conference 2001
of the CFO Europe Magazine, Oktober 18-19, 2001 in Brussels, Belgium: "The
Beyond Budgeting Management Model". Participants: Janet Kersnar,
Editor-in-Chief CFO Europe Magazine; Guiseppe Biamino, manager Budgeting &
Controlling at SNAM Rete Gas in Italy; Robin Fraser, Program Director CAM-I
BBRT; Peter Herold, Senior Manager Deloitte Consulting UK; Juergen Daum,
SAP AG. Can a company really implement the Beyond Budgeting model? This
question was discussed by the participants on the panel: »video
(Real Player) »video
(Media Player)
Intangible Assets and Value
Creation – a book from Juergen Daum, focusing on a new enterprise model and
on the new management system “beyond budgeting” for the new knowledge and
intangible assets based economy of today, comprising many examples and case
studies. It describes the new environment and its consequences for businesses,
the rules that can be extracted from this understanding for the design of a new
management system, and it develops a framework for a new management system and
describes its elements, as well as how a company can set it up and bring it to
live.
Why
today's accounting, controlling and management systems fail - in an
interview with sapinfo.net, Juergen H. Daum explains the limitations of our
traditional management tools in our economies of today and why an overhaul is
necessary
Value Drivers
Intangible Assets – Do we need a new approach to accounting, controlling and
management systems ? – article by Juergen Daum
Performance
Management and Business Controlling in the 21st Century (Presentation
held by Juergen Daum at SAP's
European mySAP Financials Conference, June 2002, Strassbourg / France) deutsche
Version
Previous new New
Economy Analyst reports related to the topic of the new performance management
system:
January
20, 2003 - Adding Value Through IT Investments (part 2)
January
07, 2003 - Adding Value Through IT Investments (part 1)
August 03, 2002 – Approaching
the next level of shareholder value management – basics (part 1)
June 11, 2002 –
Intangible Assets: a central topic at the mySAP Financials conference in
Strasbourg
March 06, 2002 –
Interview with Baruch Lev: Accounting, Reporting and Intangible Assets
Dec 28, 2001 - How to
create value with Real Options based innovation management
Nov 27, 2001 - Leveraging
e-Business Opportunities for Finance – Q&A with Juergen Daum
Nov 13, 2001 - Interview
with Leif Edvinsson: Intellectual Capital: the new wealth of corporations
Oct 16, 2001 - E-Business
requires CFOs and CIOs to redefine their roles and relationships
Sept 11, 2001 - The book
of the month: “Managing the Professional Service Firm” by David H. Maister
July 26, 2001 - How
accounting gets more radical in measuring what really matters to investors
July 18, 2001 - Interview
with David P. Norton: "Intangible Assets and the Balanced Scorecard"
May 22, 2001 - Beyond
Budgeting: How to become an adaptive sense-and-respond organization
March 28, 2001 – The book
of the month: “The Innovator’s Dilemma” by Clayton M. Christensen
Febr 26, 2001 - eXtensible Business Reporting Language
(XBRL) is moving forward
Nov 01, 2000: The Book of
the Month: “Meta-Capitalism” by Grady Means and David Schneider
Oct 03; 2000: The book of
the month: “Future Wealth” by Stan Davis and Christopher Meyer
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