You are exploring a webpage on www.juergendaum.com
The new New Economy Analyst
Report – May 22, 2001
Juergen Daum’s new New
Economy Best Practice service
©2001 Juergen Daum. All rights reserved.
Beyond Budgeting: How to become
an adaptive sense-and-respond organization
News categories: the New Economy Economics,
strategic enterprise management and business performance management
One of the main value drivers for companies in
the New Economy is innovation – both technological or product innovation and
organizational innovation. Organizational innovation represents the capability
of an organization to change continuously to adapt to changes in its
environment in order to preserve or expand competitive advantage positions
which are otherwise threatened by competitors or changing customer preferences.
The problem is, that the traditional management tool - the budget, against
which actual data is compared, usually on a monthly basis - does not help here
and represent a major obstacle to become a “sense-and-respond” organization,
which is able to react to such changes nearly automatically.
“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
|
The problem with the budget as steering aid
The ‘budgeting model’ was developed at the begin
of the last century to help financial managers in large organizations as
General Motors, Siemens or DuPont to control costs and resource allocation.
When Alfred Sloan at GM invented the multidivisional organization, the
budgeting process was a major control instrument to subject all these now
independent divisions to the financial discipline of a strong corporate staff.
The strategic plan, agreed by senior executives, was translated by planners
into operational plans and handed down the hierarchy to operational managers
who prepared the divisional budgets. Once they were agreed, all that was
demanded was adherence to the plan. Head office did not like surprises and
should the performance get out of track, new directives would come down from
the head office to operational units.
the traditional budgeting model
With today’s highly dynamic market environment
and with the emergence of the knowledge worker, the model does not work very
well anymore. The people at the top of organizations are today often so far
away from the day-to-day business of their operational units, that they simply
do not have the knowledge anymore, to make good operational and resource
allocation decisions in order to better compete or satisfy customers. To
compete more effectively in the New Economy, firms must break free from the
incremental planning and budgeting mentality and involve all their people and
brains in business decisions to respond more quickly to competitive threats and
opportunities and to changing customer needs.
And budgets are barriers to fast response. Once
the annual budget is agreed, the organization is locked into the budget. Every
manager is “sitting” on his budget and there is usually no way to change
resource allocations during the fiscal year from one cost or profit centre to another
one. Research has shown, that 78 percent of companies do not change their
budgets within the fiscal cycle. The budgeting process also ties up large
amounts of management and staff resources - its is an extremely expensive
exercise. A 1998 benchmarking study showed the costs of operating with the
budgeting model: the average company invests more than 25000 person days per
billion dollars of revenue in the planning and performance measurement
processes; the average time taken for developing a financial plan is 4.5
months. Another study showed, that inefficient budgeting is eating up 20-30
percent of senior executives’ and financial mangers’ time. And when the new
budget is released, after some months
or even weeks it is already outdated: the world has changed and has moved away
from the reality built into the budget.
The Beyond Budgeting model
The Beyond Budgeting model, developed by the
Beyond Budgeting Round Table
(BBRT), an
international program funded by more than 50 global companies, seems to break
out of these restrictions. And a number of companies have succeeded in
embedding the Beyond Budgeting principles into their management processes with
dramatic results:
Svenska Handelsbanken – a Swedish universal bank with revenues of
around $2bn, 8500 employees, and 600 profit centres has replaced the fixed
annual budget by a system of market driven target setting, continuous
forecasting and resource allocation processes for frontline profit centres, 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,
total shareholder return, earnings-per-share, cost-to-income ratio, and
customer satisfaction. It 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 Statoil of Norway and Neste of Finland, faces a notoriously cyclical
petrochemical market 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 und reduced costs by
30% over 5 years.
And an international drinks company,
which abandoned the bureaucratic budgeting process, carried out in the past on
a very detailed level across the entire group, and which replaced it with a KPI
based performance management system, realized annual savings of $100 million –
just by eliminating the extensive budgeting process. The new system is now
based on a few performance goals communicated from the head office down and
actual performance KPIs communicated from operational units to the head office
up, leaving rolling forecasting and detailed planning tasks strictly on an
operational level.
The Beyond Budgeting model is based on two major
principles (see also J.H.D's
Beyond Budgeting Info Center):
- Changing the performance management climate
through
1.
Self-governance
2.
Responsibility
culture
3.
Empowered managers
4.
Network structure
5.
Market-like
internal coordination
6.
Supportive
leadership
- Changing the performance management processes
through
1.
Relative, market
driven targets based on external benchmarks
2.
Adaptive
strategies
3.
Anticipatory
systems
4.
Just in time
resources
5.
Fast, distributed
controls
6.
Relative, team
rewards
The
Beyond Budgeting model
But the Beyond Budgeting model requires not only a new
approach to budgeting itself, but a holistic view on strategy management,
business planning, target setting, rolling and event driven forecasting and
business performance management based on financial and non-financial KPIs. To
make that happen and to support organizational and management process models
according to the Beyond Budgeting principles, organizations are using
increasingly analytical applications like SAP
Strategic Enterprise Management, one of the first solutions on the market
that supports the necessary flexibility and provides integrated applications
for strategy management, business performance management, rolling and event
driven forecasting. Essential for the Beyond Budgeting model is a continuous
process approach like depicted in the following graph.
The
continuous Beyond Budgeting process approach
Additional
resources
(updated Jan. 2005):
Juergen Daum’s Beyond Budgeting
Information Center New!
Website of the Beyond
Budgeting Round Table (BBRT)
Interview with Jeremy Hope
(co-founder of the BBRT):
The Origins of Beyond Budgeting and of the
Beyond Budgeting
Round Table (BBRT)
Enterprise
Management, Leadership and
Business Control for Value Creation
- presentation from
Juergen H. Daum, held at the
Executive Briefing on
Performance Measurement of
the Centre for
Business
Performance, Cranfield
School of Management, 27
January 2004 in London, UK
program
of the briefing
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 Approachand the role
of Information Systems
Presentation
held by Juergen Daum at the BBRT
member's meeting,
26 June 2003in
Walldorf/Germany, 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
Presentations
held by Juergen H. Daum at the Beyond Budgeting Round
Table member's meetings:
-
Dec 07,
2000,
London/UK: Strategic
Enterprise Management
- May
16, 2002,
London/UK: Information
System Requirements for
Performance Management Beyond
Budgeting
SAP’s White Paper “Beyond
Budgeting”, which was co-authored by colleagues at SAP AG,
Juergen Daum, and the Consortium for Advanced Manufacturing International
(CAM-I) 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, Jürgen 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 (updated Jan. 2005):
Mai 02, 2004 - Panel discussion: Beyond Budgeting – breaking free from the annual fixed budget
Febr 24, 2003 - Interview with Lennart Francke: Managing without budgets at Svenska Handelsbanken
December
28, 2002 - Approaching the next level of shareholder value management – the art
of corporate performance management
(part 2)
December
20, 2002 - “Intangibel Assets and Value Creation” – English version of Juergen
H. Daum’s book is now
available!
August 03, 2002 – Approaching the next level of shareholder value management – basics (part 1)
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
More about Enterprise Management Best Practice and related topics will be continued here in the new New Economy Analyst reports. To subscribe for Juergen Daum’s free-of-charge e-mail newsletter (a regular summary of the recent reports) click here.
You are
exploring a new New Economy Analyst Report at
www.juergendaum.com
©2001 Juergen Daum. All rights reserved.
Copyright,
Trademarks and Disclaimer