beyond budgeting Flashcards
what did hope and fraser believe
they believed that budgets should be abandoned and replaced with range of indicators and techniques
what problems do Hope and Fraser believe arise from budgets?
- Budgets meet only the lowest targets
- They use more resources than necessary
- Budgets are all about making a bonus – whatever it takes.
- They lead to competition between divisions, business units and departments.
- Lead to spending what is in the budget
- They provide inaccurate forecasts
- Lead to meeting the target but not beating it
- Lead to the avoidance of risks.
What other criticisms from budgets exist? (additionals from jane)
- Encouraging rigid planning and incremental thinking
- Time consuming (and costly)
- Producing inadequate variance reports (not answering why and how)
- Ignoring key drivers of shareholder value – focus on short term financial numbers
- A yearly fixed ritual
- 12-month commitment, risky due to uncertainty
what do hope and fraser believe is the result of the criticisms of budgeting
beyond budgeting.
what do Hope and Fraser believe should replace budgets (specifically)
a policy of radical decentralisation and implement appropriate KPIs, scorecards and rolling forecasts.
what is contingency theory and why should you consider this when thinking about Beyond budgeting
contingency theory says that there is no best way to lead an organisation, and there are too many internal and external constraints for a company. that will alter what really is best for a company.
this need to be considered for beyond budgeting as this theory might not work for all companies.
what are the 6 main principles for beyond budgeting?
- clear boundaries to organisational structure – responsibilities and authority known and understood.
- Managerial targets based on relative success and linked to shareholder value (KPI and benchmarks
- Managers have high degree of freedom (TQM and BPR)
- Front-line teams have responsibility for decisions that generate value
- Front-line teams responsible for relationships with customers, associates and suppliers
- Information support systems are transparent and ethical (ABB systems fit within this)
what are the four principles of beyond budgeting?
- faster response times
- greater innovations
- lower costs
- improved customer and supplier loyalty
what are the Dugdale and Lyne beliefs as to why Hope and Fraser want to abandon budgets?
- svenska handelsbanken influence
2. the focus on relationship between operating units and corporate centre
who did Dugdale and Lyne survey and interview
Dugdale and Lyne surveyed financial and non-financial managers in 40 companies and had interviews with 8 of them..
what was the main finding from Dugdale and Lyne?
budgets are still well and truly in use.
what did the financial and non-financial managers from the dugdale and lyne survey generally think about budgets?
(dugdale and lyne)
they thought they are important for control, planning, performance measurement, co-ordination and communication
what were the two areas of budgeting which was found from the financial and non-financial managers that caused problems for a company
(dugdale and lyne)
- budgets are time consuming.
2. managers are constrained by budgets and will therefore delay necessary actions
why may budgets be seen as good for large companies?
dugdale and lyne
as they have much more complex structures. for e.g. there are a lot more lines of management between the bottom and the top, therefore it can be complex in terms of communication. so budgets are seen to be very helpful for large companies.
how did all finance directors regard budgets in the dugdale and lyne research?
all said they regard budgets as a key element in their mix of structural and procedural planning and control mechanisms.
what kind of companies would be suited to beyond budgeting?
banks (svenska handelsbanken),
what is an example of a company that supports beyond budgeting? (apart from svenska handelsbanken)
Ahlsell (wholsaler). they have 200 decentralised profit centres. The KPIs are profit growth, return on sales, efficiency (determined by gross profit/total salary cost), and market share.
what do dugdale and lyne believe about budgets?
Dugdale and Lyne believe that when a co has internal differentiation and is complex that budgets help to manage this. And SH probably don’t have this.
why do dugdale and lyne believe these beliefs differ to hope and frasers?
Dugdale and Lyne believe the finding of Hope and Fraser differ to theirs due to their focus on managing operating units and Hope and Frasers focus on managing the relationship between operating units and the corporate centre. (see org structure for what a corporate centre is).
who are Svenska Handelsbanken?
where do they operate?
the are a swedish bank that operates beyond budgeting and very successfully
what is unique about svenska handelsbanken?
their business model
what is the svenska handelsbanken business model?
i.e. what are the principles it is based on?
- strongly decentralised org.
- so branch managers are fully responsible for their branch and for any transactions made with customers - Customer in focus
- they always focus on the customer and not on sales specific products..
- they do not perform any marketing, therefore. they only advertise at the local level as they know what local customers want and have the best knowlege of it
what do SH believe regarding brexit?
They think they will be able to deal with the tougher market conditions of Brexit due to their low tolerance of risk, sound capitalisation, and strong liquidity situation. They believe the business model based on local branches and tight control of credit and cost risk puts them at an advantage over others regarding Brexit.
what does bob Paladino describe indicators as?
one of the things Hope and Fraser believe budgets should be replaced with
“measures of success”
what indicators does paladino say exist for retail businesses?
Indicators:
- Revenue or same-store sales (SSS) percentage
o This compares the sales of stores that have been open for more than one year. It allows investors and management to see what sales increase or decrease has come from growth/contractions or sale closures/openings. - Gross margin percentage
o this is the diff between sales and COGS, divided by sales. - Inventory turnover.
o This is a measure of how many times inventory is sold or used in a time period such as a year.
o Inventory turnover = COGS/inventory
o Low turnover rate may indicate deficiencies in the product line or marketing effort, overstocking, obsolescence, and this low rate can potentially lower net income.
o High turnover rate indicates inadequate inventory levels, which may lead to back orders or a loss in sales.
what does Paladino say that indicators can be used for?
management for decision making, stakeholders, support benchmarking, comply with regulators, enhance operations, and share best practice.
what are the advantages of beyond budgeting?
i. More adaptive than traditional budgeting.
ii. Decentralised process, unlike traditional budgeting where leaders plan and control organisations centrally. When BBRT use the term budget they mean the entire performance management process.
what is decentralisation?
Decentralisationis the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. So the decisions are not all made by management.
Hope and Fraser said that budgets are not capable of keeping up with the current market trends. what are these new current market trends?
- shareholders now demand that the org is at top or near top of industry peer group.
- Intangible assets now key drivers of shareholder value. E.g. brand names
- Shorter product and strategy cycles.
- Now a focus on cost cutting and customer satisfaction
what are the disadvantages of beyond budgeting?
i. There is a lack of a road map which details where a business is and where it wants to go.
ii. Budgets may be very deeply ingrained in an organisation’s fabric and operating culture.
iii. It may be very difficult or impractical for organisations to adopt the culture of decentralisation on which successful BB depends.
what seven things do hope and fraser say beyond budgeting users do differently to the users of traditional budgets?
- setting targets
- rewarding people
- action planning
- managing resources
- coordinating actions
- managing and controlling performance
- relative improvement contracts
how are targets set differently in beyond budgeting from traditional?
a. Targets previously set centrally and based on financial number. Under BB targets set using KPIs (e.g. ROCE, cost to income ratio). BBRT argue this is a faster than budgeting. Remember budgeting said to be long process.
how are people rewarded differently in BB than traditional budeting
a. In traditional budgeting rewards linked to fixed outcome agreed in advance. In BB it is based on relative performance, meaning best performers are recognised and rewarded.
how is action planning different in BB compared to traditional budgeting?
a. In traditional budgeting planning driven by top management. Now develop responsibility for strategy review to business units or front line teams. This allows teams to create value as they can respond to changing demand and id business threats and opportunities.
how are resources managed differently in BB rather than traditional budgeting?
a. In traditional budgeting resources managed on the basis of pre-negotiated business contracts. Now resources available to the front lime teams as and when they are required. As resource decisions are devolved to front lime teams it makes them more responsive. Managers are more accountable.
how are actions coordinated differently in BB compared to traditional budgeting?
a. Previously plans were linked through central co-ordination of annual departmental and business unit budgets. Co-ordination now occurs through cross-company interaction. This means that operating capacity increases and decreases according to demand. less waste. Org is now an integrated unit.
how is managing and controlling performance different in BB compared to traditional budgeting
a. Performance used to be controlled against predetermined budgets and corrective action was taken where necessary. Under BB, executives and managers see the same information simultaneously. There is a greater focus on trends and forecasts.
what are hope and frasers 9 essential steps for implementing a beyond budgeting approach?
- Define the case for change and provide an outline vision
- Be prepared to convince the board
- Get started
- Design and implement new processes
- Train and educate
- Rethink the role of finance
- Change behaviour – new processes, not management orders
- Evaluate the benefits
- Consolidate the gains
what are hope and frasers criteria needed for implementing beyond budgeting
- Needs to be clear case for change to the BB system, with the benefits fully explained
- managers should consider carefully the degree of decentralisation that might be possible within their organisation.
- there must be a governance framework with clear priorities and boundaries.
- a high performance ethos based on visible and relative success at all levels will be necessary
- front line teams need the freedom to take decisions within agreed parameters
- trust and openness at all levels of the organisation will be paramount.
why is traditional budgeting still used by so many companies ?
(i.e. 99% of EU companies still use budgets, also dugdale and lyne findings)
- traditional budgets give companies a framework for control.
- control is one of the roles of budgets and his control therefore can add value to companies. - organisational structure
- budgets deeply ingrained in organisational structure and therefore might not be able to move away from this. - some companies find it easier to decentralise than others. larger companies wouldn’t find it as appropriate as banks such as Svenska Handelsbanken.
what did dugdale find about the budget processs over the last 20 years?
they found that budgets have chaned significantly over the last 20 years and 60% of companies claimed to be improving the budget process.
what is one of the main reasons as to why budgets have been able to evolve over the last 20 years?
Technology. this has changed the way data is collected and stored in organisations. Enterprise wide collection of information is another reason why the budgeting process has been able to evolve.
