Discuss about the concepts of beyond budgeting.
Corporations around the world prepare budgets as a procedure for controlling as an important management accounting tool for setting desired targets (Dugdale, 2011). The budget is intended for managers to take decisions and make them binding on the employees such that actual performance can be can be generated near desired output. Daum(2002) in his research works deeply criticized fixed budgets that organizations make and proposed that budget are a static instrument that are ineffective in today’s global markets with high competition and changing value of customers (Dugdale, 2011). Works of several researchers inspired the creation of Beyond Budgeting Round Table by more than 50 odd companies around the world, who questioned the relevance of traditional budgeting in modern organization. The essay is an evaluation of the statement, “Advocates of the beyond budgeting philosophy claim that it supports decentralization and employee empowerment initiatives that are required for firms to compete in today’s fast changing environment.” There are arguments that support as well as criticize the application of Beyond Budgeting philosophy with relevant cases from business organizations (Hope, 2013).
Critical Assessment of Beyond Budgeting
Organizations today compete in larger global framework with greater competitive pressures, demand from shareholders, complex market conditions and creating greater value for customers, which creates a need for new budgeting model. Horngren(2003) through his research supported the idea of Beyond Budgeting as it had positive implications on the managers, management as a whole due to its improvised systems of control (Aldrich, 2008). The Beyond Budgeting Round Table (BBRT) suggested that new tools and techniques had been accommodated in the system, and defined it as, “a management philosophy based on a set of principles developed from real cases leading to adaptive performance management.” (Cameron, 2014). The concept focused on two set of principles, process principles and leadership principles. The concept was designated to increase adaptability of organizations for improving their performances in the competitive business environment. The process principle focuses on adaptive management processes such that organizations are able to react in their competitive environment and divergent customer demands. The leadership principle is focused on decentralization of responsibility and creating accountability in teams that perform tasks such that customer demands can be adequately met (Marquardt, 2011).
The Beyond Budgeting has Key Performance Indicators (KPIs) which are a set of measurement tools for assessing critical success factor for organizations. According to Daum (2002) the KPI is used by companies to create estimates for sales in accordance to industry trends, share within the market and sales that can be generated from channels, as against fixed budget (Ashkenas, 2015). Hence the focus of beyond budgeting is focused on enterprise capability to maximize customer along with shareholder’s value surpassing financial objectives (Osborne, 2007).
Figure 1 : Comparison of budget and beyond budgeting
Source : (Dugdale, 2011)
The concept of beyond budgeting does not uses performance contracts as in traditional budgeting but fixes a reward system for continuous improvement on basis of relative performance. Thus applying Beyond Budgeting helps the organization have faster response, greater innovation, low cost with loyal customers (Holtkamp, 2011). Borealis a company with its headquarters in Copenhagen, Denmark was formed by merger between petrochemical divisions of two Scandinavian oil companies had long back adopted the tools and techniques of beyond budgeting (Holtkamp, 2011).
Advocates of beyond budgeting have argued that in traditional budgeting approach managers are more likely to bargain on targets that can lead to conflicting interest with the organizational goal. When managers in organizations are faced with challenges like market price volatility they are more likely to use cheap quality raw materials in order to conform to budgetary trends, which lowers overall product quality. The lower product might face severe and fierce competition in the market and dislikes from customers which will in turn hamper company’s profitability from lower sales. The company on the other hand have invested to ensure quality process engineering and quality programs for creating new ideas that caters to the budget, but efforts go useless (Bogsnes, 2008). The approach of beyond budgeting is based on a central control system along with multilevel controls which is influential to create effective governance, generate proper trend analysis, set key performance indicators, achieving financial outcomes, achieve performance ranking which in turn results in management by exception.
James Creelman in his book on ‘Business Intelligence report Reinventing Planning and Budgeting for the Adaptive Enterprise’ highlighted that organizations that have more focus on cumbersome and complex budgets end up being dysfunctional (Bogsnes, 2008).
Volvo Cars had also adopted beyond budgeting in the year 2000 as the finance director had stressed on the ineffectiveness of budgets and long range planning that cease to render usefulness to the company. The financial director realize the more complex and divergent set of problems that face business organization in the globalized age hence organizations should be well equipped to deal with these challenges (Cameron, 2014).
The researchers who have argued against the application of beyond budgeting as companies in order to apply methods and techniques will need to train employees (Savitz, 2012). Employees will have to devote their time from productive hours in order to study the method and understand the way beyond budgeting is conducted; the company might have to additionally hire employees who are expertise in the area (Savitz, 2012). In small and medium scale organization application of the beyond budgeting tools and techniques might require unnecessary costs and the tools might not be applicable foe the organization. as in small and medium enterprises balance scorecards have no relevance as they do not require to improve communication, thus adopting beyond budgeting might be time consuming for them. In most organizations abandoning budgets will not have significant effects as the traditional method have let control mechanisms and enabled managers to take decisions (Marquardt, 2011). Budgets have rendered an effective methods for ensuring performance in employees, hence beyond budgeting is an appropriate tool for larger corporations compared to smaller ones.
The concepts of beyond budgeting have been adopted by large corporations as they visualize it as a tool for increasing their effectiveness and efficiency in the market and within the corporation. Managers within organization uses beyond budgeting tools as benchmarking, balance scorecards and other measures to increase employees overall performances in order to attain organizational goal. On the other hand it has been argued that discarding traditional budgeting methods can have negative impacts on the company’s overall profitability and performances, as budgeting has been providing these corporations with enhanced competitiveness and a standard for measurement. Though budget is time consuming and outdated it is still required to evaluate performances and entail communication as well as coordination. Managers can easily distort data in budget which had created a need for extended measurement techniques. When organizations grow and they are faced with greater level of challenges which are non-financial in nature but affect financial results of the company, they need to have a new improvised tool for tackling and diagnosing the new age challenges, beyond budgeting has been able to meet these challenges in corporations.
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