Beyond Budgeting explained simply
The idea for agile planning came about as a response to the ever more rapidly changing environment. The still common practice of a fixed budget, as usually prepared in the autumn of each calendar year for the coming calendar year, fails to recognise the volatility of opportunities and risks. It even leads to opportunities and risks not even being perceived. Managers and staff are caught up in the mission to meet their budget. This creates the risk that they actually fail to take up opportunities that are within their grasp and are exposed to risks without protection.
Managers often see the future as a continuation of the past. This is another reason why they largely fade out the new. Instead, they sometimes frantically try to do what their company is doing even more efficiently in the future. If these same managers were to think together about a new business, they would consider completely different possibilities. They would also be much freer to recognise opportunities and risks and prepare accordingly.
A remedy can be an open-ended approach to the future. In concrete terms, this means dispensing with budgeting and introducing rolling planning instead. Because budgeting is dispensed with, this alternative approach is called “beyond budgeting”. Rolling planning has the advantage that new information can and should be used at any moment to adjust the planning. Whereas budgeting in practice is always about absorbing deviations through countermeasures, rolling planning is about making the best decisions at any given moment – without being tied to what has gone before. This completely different approach encourages agile action.
However, agile planning also contradicts fixed objectives. This is because goals can also change with changes in planning. Relative goals are appropriate, i.e. goals in comparison to other companies in the sector, such as an “above-average yield for the sector”, as well as sufficiently general goals goals such as a “flexibilisation of contracts” or a “professional qualification” or a “contribution to cooperation”. Set goals that your customers would set, that your customers are interested in fulfilling. These are precisely not the contribution margins that your customers are sure to grant you, but aspects such as innovative ability and design competence, but also the ability to deliver and a top service. Customers are meaningful.
Example for Beyond Budgeting
Example: An illustrative example is a perception test that has been conducted in the USA with many test persons. The spectators are asked to count the number of rallies performed by a basketball team wearing a white jersey. To their surprise, there are two balls in play. Nevertheless, many spectators answer the question correctly. What they have not noticed is a black “moonwalking bear” walking through the picture and even waving both arms at the spectator. The example vividly shows that our perception completely ignores other aspects given the mission. This is a well-known phenomenon that also occurs in business.
The 12 principles of Beyond Budgeting
The 12 principles of Beyond Budgeting are divided into six principles concerning the planning and management process and six principles concerning the corporate culture.
Principles for the planning and steering process
- Targets are agreed for continuous improvement and aligned with internal or external competition.
- Recognition is given for successes at team level to promote cooperation.
- Planning and budgeting are not cyclical (annual) tasks but a continuous process.
- Resources are allocated when they are needed, not through a fixed annual allocation of funds.
- Initiation and coordination of business opportunities and projects is dynamic and according to current market needs, not in rigid planning cycles
- Business units are coordinated in a decentralised manner to allow as much flexibility and autonomy as possible; the next higher management level only gets involved if decentralised management cannot solve a problem or asks for support.
Principles for corporate culture
- Established values are shared and lived, strengthening decentralised decision-making within fixed boundaries.
- Responsibility is encouraged to enable autonomous decision-making and action.
- Teams are given sufficient freedom of action to avoid micro-management.
- The organisation works in a network structure, not in hierarchically organised silos.
- Every activity is focused on customers, not on superiors.
- Business-relevant information is made transparently available to the teams and not withheld from them.
Agile planning also encourages free thinking and free decisions at every point in the organisation at every moment. This makes the Beyond Budgeting method superior to the classical budgeting routine, especially in changing markets and times. In changing markets, budgets are merely an illusion of control. They get in the way of agile adaptation and are therefore more of a hindrance than a benefit. Rolling planning with a higher level of detail in the respective current month, for which the framework conditions are already largely known, is much more suitable. Beyond budgeting should be underpinned by a Foresight dialogue to keep the business close to market developments.
Conclusion: Plan more agilely!
The success of a beyond budgeting approach can be supported by intensive internal and inter-company networking. Because networking creates opportunities. Through communicative exchange, ideas are honed until they become marketable.
Beyond Budgeting also suggests staying flexible and adaptable with products. A modular product design can help in adapting to changes in demand.
A Beyond Budgeting planning approach also suggests an appropriate organisation that supports agile action. Depending on the market, business area and business model, a process-oriented organisational form, a project organisation or even a fractal organisational structure may be appropriate.
The Beyond Budgeting approach can develop its full benefit when the way of working in the company is agilely oriented. You can draw inspiration from agile project management with Scrum and from agilisation for ongoing adaptation. This requires completely different leadership qualities than top-down leadership according to the principles of order and obedience. Agile work needs “the licence to experiment”, the testing of hypotheses. Experiments differ from project work in what is expected of them: The result of experiments does not necessarily have to be a marketable product or a functioning process. The expectation is a gain in knowledge – and that will be had in any case. Experiments increase the adaptability of organisations.