Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap [Hardcover]

This book does not describe how to budget better, but instead asks the fundamental questions: “Why is so much time wasted on such an unproductive process as budgeting and why do it at all?”. Because we have all grown up with budgets, we have not questioned the basic tenets of how businesses are run. Each argument that you can propose in favour of budgeting is systematically demolished by this book. After much detailed research after many years, the authors have concluded that the culture of most organisations is fundamentally flawed and budgeting is a symptom. Starting from the CEO, businesses must be open, honest, not driven only by short term goals and allow people to use their initiative. If all you knew about this book was its title, you might conclude, incorrectly, that it is aimed at the number-crunchers. Look beyond the title, behind it is one of the most significant business books of the decade. I have read many business books. This is one of the few that I have read to the end, because it is clearly written and consistently interesting. Excellent

Given what Hope and Fraser perceive to be an obsolete core management model driven by the annual budgeting process, they offer an alternative to that model. It is based on "the decision-making needs of front-line managers [as well as] a coherent set of alternative processes that support relative targets and rewards, continuous planning, resources on demand, dynamic cross-company coordination, and a rich array of multilevel controls." In Part I, they explain how to break free from the annual "performance trap" and how this trap is sprung whenever managers are pressured to meet fixed targets by fixed dates. They provide an overview of two opportunities to think and act "beyond budgeting." In Part II, they examine the first opportunity and explain how a number of organizations have used beyond budgeting principles to implement more adaptive processes. Then in Part III, they examine the second opportunity and explain how and why abandoning the traditional (and ineffective) budgeting process can help to achieve what they characterize as "radical decentralization." In the last Part, Hope and Fraser examine how and why the adaptive and decentralized organization (as opposed to one with a traditional budgeting process) "meets the vision of business leaders in the 21st century."

Of special interest to me is what Hope and Fraser have to say about the differences between the fixed performance contract (FPC) and the relative improvement contract (RIC). For example, here are two of the six cited:

In terms of targets,

FPC: "Your [sales/profit] target is fixed at [$]"

RIC: "We trust you to maximize your profit potential to continuously improve against the agreed-upon benchmarked KPIs [key performance indicators] and to remain in the top [quartile] of your peer group."

In terms of resources,

FPC: "The agreed resources to support the capital and operating budgets are set out in the attached budget statements."

RIC: "You trust us to provide the resources you need when you need them. We trust you to keep within agreed KPI boundaries."

Note the references to "trust." Hope and Fraser insist (and I wholly agree) that there must be mutual trust between and among everyone involved when making a commitment to beyond budgeting principles. It is important to emphasize that Hope and Fraser did not write this book solely for CFOs. On the contrary, what they propose requires that all senior-level executives in a given organization understand and actively support the beyond budgeting principles. Although CFOs and heads of HR have responsibility for the implementation of strategy, more often than not, they are not centrally involved in the formulation of strategy. That is a serious mistake. Beyond budgeting initiatives will succeed only if a CFO can be trusted to make prudent and effective use of resources provided, and only if she or he trusts the given organization to make sufficient provision of them.

Otherwise....

This book and its associated Harvard Business Review articles (by Hope and Fraser) from 2003 has not attracted the attention it deserves.

When this was written it was seen as the antidote to the endless budgeting cycle based on the 'prediction' fallacy and the ensuing corporate gaming they create.

All of us have said at one time or another this process (budgeting negotiation etc.) is a joke, but we all continue to play our part in maintaining the joke, playing the game, fighting for survival in a world created by the madness of the corporate budgeting processes.

Hope and Fraser have clearly demonstrated that the current process is not only wasteful in terms of human effort but downright detrimental the the enterprise, employees and customers. They go further and show us all a way out of the trap.

There is an alternative, but it needs study and it needs more companies other than the ones illustrated in the book to lead the way. Only then can we change the current paradigm where 'Accepted ideas are no longer competent and competent ideas are not yet acceptable'