Abandon The Budget, It Doesn't Work
Abandon the budget, it doesn't work, says visiting international management expert
6 October 2003
Can you imagine a company that runs without a budget? Not only is it possible but many successful companies that have thrown away the planning process are thriving.
Budgeting as practiced by most corporations should be abolished, say Jeremy Hope and Robin Fraser, the co-authors of Beyond Budgeting published by the Harvard Business School Press.
Their provocative message is being taken seriously overseas. It's not hard to understand why.
A 1998 study of CFOs by US consulting firm Hackett Benchmarking and Research found that the average budget process took four months. Two thirds of the CFOs said the budget was more influenced by politics than strategy; and nearly 90% of the CFOs were dissatisfied with the process.
Budgets are inflexible and backward looking, just not a sensible way to run a business in today's conditions, says Alec Reed, the Chairman of Reed Executive.
Budgeting can take up to 30% of management's time, and a growing number of companies are convinced that the annual numbers fest is a barrier not an aid to good management.
Getting rid of the budget avoids the annual scramble among divisions for resources, makes the 'spend it or lose it' philosophy irrelevant and ends the squabbles among managers, says international management expert Jeremy Hope.
He will be visiting New Zealand on a speaking tour in November. He'll present seminars and workshops in Wellington (4/5 November) and Auckland (6 November).
In a recent article in the prestigious Harvard Business Review (February 2003) he and co-author Robin Fraser said, "so long as the budget dominates business planning a self motivated workforce is a fantasy, however many cutting edge techniques a company embraces."
He cites Svenska Handelsbanken, the top performing Scandinavian bank. It abandoned traditional budgets 30 years ago, and attributes much of its success to that.
Charities like SightSavers, a UK based eye care charity, find the Beyond Budgeting approach appealing.
Eye care projects on the ground operated on a three to five year time scale, but the income was raised year to year creating much uncertainty and frustration. SightSavers abolished the budget and introduced flexible guidelines for local managers..
For corporate leaders the issue is often the relationship between the budget and remuneration and incentives for managers and staff. Tight and centralised budget processes go along with fixed performance agreements. 'Achieve this target and earn this reward'. Hope argues this makes organisations slow to respond if conditions change and the targets become irrelevant.
His message is simple. "Don't budget, It doesn't work and the smartest organisations don't do it any more. "
New Zealand businesses will soon have the opportunity to judge for themselves. Jeremy Hope is being brought to New Zealand, by waymark solutions, a Wellington based performance management company whose Chief Executive David Parmenter is a big fan of Jeremy Hope's work.
" So much of what he says about the annual plan and the budgeting round being a waste of time, just a huge encumbrance on the business, just rang true for me.
" Jeremy's work with the Beyond Budgeting Round Table has also demonstrated that companies that don't budget flourish.
" They are quicker to respond to changing market conditions and their managers and staff welcome the opportunity to take action faster because the approval process to get resources is much shorter and less rigid.
" That's a very positive message for New Zealand businesses who are generally quick to adapt to new ways of doing things
"This is an ideal opportunity for core government once again to lead public sector reform in the western world.
"Jeremy's message is relevant to both public and private sector organisations and has particular appeal to action oriented businesses.
"Throw out the budget process, it is your major barrier to success," Mr Parmenter says.
Jeremy Hope MA FCA is recognised as the world authority on a new management model that removes budgeting and other annual performance contracts. He is a recognised international speaker. He previously worked in the venture capital business with 3i and spent ten years in business management before becoming an independent international consultant, author, and speaker. He is co-author of "beyond budgeting" "Competing in the Third Wave" and "Transforming the Bottom Line", all published by the Harvard Business School. He is also co-author (with Robin Fraser) of many articles on performance management and is research director with Beyond Budgeting Roundtable
To find out more about Jeremy Hope's work see
" Who needs Budgets" in the February issue of the Harvard Business Review at
"Two reasons why organisations are going beyond budgeting"
" New Ways of Setting Rewards"
Both these are available on the waymark solutions website
To learn about the Beyond Budgeting Roundtable visit http://www.bbrt.org