Going Beyond Budgeting!

I spoke last week at a conference hosted by the Beyond Budgeting Roundtable. I spoke, as you might expect, on the topic of decision management and how it can deliver the kinds of systems a modern company needs. The conference overall was on the (frankly very appealing) idea that budgets can and should be replaced as the primary vehicle for controlling the behavior of companies. The beyond budgeting model has a number of elements and guiding principles and you can get more details at http://www.bbrt.org.

Jeremy Hope, co-founder of BBRT, presented on implementing the beyond budgeting model and that seemed like the right topic to blog about.

First, some background. BBRT companies tend to be team-based, focused on total quality, knowledge-driven and customer-focused. They try to release people from stifling bureaucracy, use simple structures and flat hierarchies, empower front line teams that make decisions and have no management control bureaucracy. The bottom line is really about how businesses make decisions about what to do, how to do it, when to do it. And how to avoid a rigid, detailed budget as the primary mechanism for making sure this work. Perhaps most tellingly, leading BBRT implementers have a 30% reduction in corporate cost structures!

Jeremy ran through the basic premise:

• Companies wrongly believe that micro-management provides more effective accountability and control.
• This command and control model assumes that a strategy is developed and then a control bureaucracy pushes this down to find grained targets, incentives, budgets and balanced scorecards.
• People are then held to these measures giving the illusion of control and resulting in terrible micro management.

This immediately resonated with me and would, I suspect, resonate with anyone who has worked in a typical large organization! The budget-based approach is expensive and really hard to change. Recent studies show more and more control mechanisms and more control bureaucracy being added – at a rate much greater than the top line growth – so the situation is getting worse. And a survey BBRT conducted with IBM found that only 23% of the time spent by corporate planning groups was value-add, the rest was collecting, cleaning and rolling up data and other non-value-add activities.

All this structure and the software that supports it allows for fine-grained analysis and tracking (did we buy more blue pencils from small suppliers in the Midwest this year than last) but does not allow finance to answer important questions like where are we today, where are we going, how are we doing relative to our peers, how are our businesses adding value.

We are sleepwalking, he says, into greater complexity without understanding the behavioral implications of these things. This added complexity de-motivates people, reduces creativity and eliminates collaboration. In fact cheating, following the letter but not the spirit of the rules and other negative consequences abound.

To make progress, we need a more transparent organization and many more accountable teams and decision-makers. Going “beyond budgeting” is about going beyond the command and control model of typical businesses. The BBRT vision is nothing less than the fundamental change of the management model. Deming, Drucker, Pfeifer and others are fellow travelers in this objective. But many of their ideas have crashed on the budget and the budget process. No matter what the company is trying to change, the budget drives behavior in the end. The budget is, for instance, the enemy of Lean because budgets are fixed and Lean is dynamic. Balanced scorecards, too, become focused on variances and structure and their effectiveness is dragged down by the need to comply with the budget. The budget process has to go.

The new organization, those who go furthest with BB, has four types of permanent team:

• Executive team – focused on strategic  leadership
  Big picture, strategic direction, long term goals, portfolio management across the enterprise
• Value Center team – focused on value creation
  Business unit or profit-center teams around brands, customer segments, territories, branches. They are a P&L and should be focused on making decisions about customers and the business. The idea is to create as many value center teams as possible around smaller and smaller customer segments. Those that don’t add value get replaced, changed and cycled through.
• Operating Process teams – focused on performance improvement
  Developing new products and solutions and delivering them to the value centers
• Support Service teams – focused on being a business partner
  Like finance, marketing, IT.

The value center teams are the core of the business, with the executive team taking more of a venture capitalist mindset supporting the value centers delivering the most value at any given moment. Value stream thinking and Lean become more usable as they are embedded in the value center teams who interact directly with the customer.

Many companies set out to develop these kinds of flat, customer-focused organizations and find that the budget process is what prevents it or at least is the root cause of problems with implementing this approach. CEOs typically describe exactly the attributes of this kind of organization as part of their vision for their companies – adaptive, collaborative, customer-focused etc. But it cannot be done with a top-down, hierarchical budget process.

There’s a lot more on BB that I plan to write up but for now I will end by pointing out that Decision Management as a business discipline is highly complementary to a BBRT approach.

As Jeremy said, one of the key characteristics of these companies is that they define a standard decision-making process and encapsulate that in software so that all these independent groups can make decisions that are aligned with company objectives, compliant with regulations etc yet still devolved as far down the organization as possible. In other words they apply decision management principles to the systems they build.