THE BEYOND-BUDGETING CONTOVERSY:CAN ENTERPRISES FUNCTION WITHOUT THE

BUDGET?

Raphael EtimDepartment of Accounting, University of Uyo, Nigeria

Iwora G AgaraConsultant/Practitioner- Accounting and Management,

Nigeria

Abstract

Budgeting is the single most discussed topic in management, finance and accounting literatures. Most of the discussions on budgeting had focused on the strong side of the control model with passive attention on its evil side. However, from the late nineteen nineties, after the maiden criticism of the traditional budgeting system by the duo of Jeremy Hope and Robin Fraser, there was a paradigm shift in the reverence hitherto given to budgeting especially by practitioners leading to a renaissance in the challenge of budget as an effective management control mode . Thus currently there two divides in the debate about the budget: those who call for the complete abandonment of the budget and the other that supports the restructuring of the ex ante budgetary system to sustain its usefulness. This article is the first part of our two-part discussion of the relevance or otherwise of budgeting in today’s information age. The article focuses on the theoretical and empirical evidences from the survey of some companies in American and Europe. We have provided the basic insight into the concept of Beyond Budgeting and reflected the opinions of the two blocks: those for and those against, budgeting. From the empirical evidences the traditional budgeting, although gravely criticised by Hope and Fraser, is unlikely to be binned in the near future but rather shall continue to remain a dominant management tool for an appreciable length of time. Nevertheless, there are indications that the emerging management philosophy, the Beyond Budgeting, is a potential alternative to the ex ante traditional budgeting system suggesting that its application, within the framework of its suggested success pillars, could find place in developing economies in no distant time.

Keywords: Budgeting, management accounting, paradigm, innovation, beyond budgeting, N – form.

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INTRODUCTION

The emergence of the factory system and the industrial revolution of the nineteen century brought

with it concomitant managerial challenges. Some of these challenges are the control of operations,

evaluation of the performance of managers and sub-ordinates, basis for employee reward, and

motivation of managers for greater performance. The most popular management control mechanism

adopted by firms to assist in resolving these challenges is Budgeting and Budgetary Control System

(BBCS). The Budget is single accounting or financial control instrument that permeates the entire

organization: every aspect or unit of the organization tends to be affected by the provisions and

direction of the budget. The budget, according to Becker, et al.(2010) is the cornerstone of the

firm’s management accounting and control system. This is why the budget continues to remain

dominant as a management control and performance evaluation mechanism in most organizations,

despite the rage of criticisms against it. In fact, the result of several surveys, and in particular that of

some North American companies by Libby and Lindsay (2007) indicate that, most managers feel

budgets are indispensable and they (managers) are yet to settle for a better alternative fearing that

they could not manage their companies without the budget. Jacobs (2003) also confirms that many

managers cannot conceive of managing a company in any other way than using the budget while

companies that do without the budgeting system run the risk of being considered poorly managed.

One of the explanations for the seeming indispensability and the ubiquitous use of budgets and

budgetary control system as Hansen et al(2003) observe is

“ largely due to its ability to weave together all the disparate threads of an organization

into a comprehensive plan that serves many different purposes, particularly performance

planning and ex post evaluation of actual performance vis-a`-vis the plan”(p.96)

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Said to have commenced in the 1920s as tool for managing costs and cash flows, by the 1960s the

budget has become a fixed performance contract between superiors and subordinates basing

rewards and punishments on it (CIMA, 2005). However, in spite of its integrative function and as

the basis for performance evaluation, budgetary control system is said to have many limitations,

which have resulted to intense debate as to whether or not to abandon the traditional budgetary

control system. There are currently two broad camps in this debate. These camps, we refer to as the

extreme radicals camp and the conservative camp. The extreme radicals camp, is spearheaded by

the Beyond- Budgeting Roundtable (BBTR) of Hope and Fraser. The camp postulates that the

traditional budgeting practice should be abandoned because it is repressive and a major bane of

corporations. The conservatives, made of a conglomerate of some popular accounting scholars such

as Collins Drury, Charles Horngren, T Lucy, David Dugdale and a host of practitioners, appear to

support the continuous use of the traditional budgeting system, but with modification in its

implementation to reflect the dynamics of the individual industries and economic blocks.

Unfortunately, as observed by Hansen et al.(2003), scholarly literature has largely ignored the

budgetary concerns but have continued to promote budgeting as an ideal managerial tool. This

article has been compelled by this controversy especially as it concerns the developing economies

which are still fragile and need to be protected and nurtured managerially to maturity. There

certainly exist concerns with budgeting. Is there a solution in sight to this rage of discontentment

against the budget? What do the criticisms against the budget potent for enterprises, especially in

developing economies, and their ability to perform in the global information age in terms of

innovation and response to customer complexities and expectations? The theoretical and empirical

evidences on the subject of budgeting have help to provide an insight into the understanding of

budgeting process and how it is being used, the status of the traditional budgeting practices among

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majority of the companies, and whether there is any need to be worried about the ongoing

controversy.

UNDERSTANDING THE DYNAMICS OF BUDGETING

Accounting, finance and management literature is replete with discussions on budgeting. The

budget is a plan, which is expected to enable an organisation to manage her resources efficiently

and achieve her targets within set time horizon. Becker, et al.(2010) indicate that budgeting is one

of the first management accounting practices to attract researchers’ attention because of its

dominant role in corporate financial management. Hence, the budget is often referred to as the

cornerstone of the management accounting system. Several definitions of budget abound in

literature. We shall specify a few in this article. The CIMA Terminology (2005) defines a budget as

a:

“quantitative expression of a plan for a defined period of time. It may include planned sales

volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows”

(P.5)

Agara (2006:50) defines budget as a detailed plan, expressed in quantitative terms, that specifies

how resources will be acquired and used during a specified period of time, usually a year to achieve

specific objectives. John (2007) sees budget as a quantitative plan of activities and programs

expressed in terms of assets, liabilities, revenue and expenses. Drury (2000) considers budget

simply as the plan of activities to be undertaken in an organisation in the future. Elbert and Aagtje

(2008) also see the budget as a plan of action for a unit or activity covering a fixed period, broken

down by sub-periods. All the definitions of budget recognise that a budget is a plan of how

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resources (i.e. revenue or other cash inflows) are to be obtained and how such resources are to be

applied( i.e expended) during a specified period of time. All organisations have objectives which

are expected to be facilitated by the budget. This implies that budgets are relevant to all

organisations- both profit oriented and non-profit oriented organisations. Drury (2000) indicates

further that the budget serves several functions which include planning of annual operations, co-

ordination of the operations of various departments and units of the organisation, communication of

plans to the various responsibility centre managers, motivation of managers to strive to achieve the

goals of the organisation, controlling and evaluation of the performance of managers via budget

variance analysis.

Carolyne, et al (2007), say the budget is one tool that has provided the link between control and

performance. However, according to the authors, effective level of budgetary control has a positive

effect on performance. They explain the word “effective level of budgetary control” to mean one

that is reflective of the needs of the organization and meets the objectives of the analyst. This

suggests that implementation of budgets must consider the needs of the organization. In other

words, that an expenditure item is in the budget does not justify the spending of resources on it but

rather resources are expected to be expended according to the needs of the organization. However,

to be able to decide on whether a budgetary item is irrelevant in the current circumstance calls for

motivation of the managers to enable them to think about the success of the company and not about

themselves. Motivation means managers have the opportunity to operate flexibly within the

framework of the strategic objectives of the firm by using their resources to achieve set objectives

rather than tying them to the inflexible contract, called the budget. The focus should not be

compliance with budgetary provisions but rather on achieving the objectives of the firm using the

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available resources efficiently. Managers would be more motivated to achieve success in an

environment where there is leverage for them to apply their acumen legitimately to further the

interest of the company. Unfortunately, as noted by Morlidge(2005) most managers, are blamed for

not spending their budgets which confirms one of the criticisms against the continued use of the

budgeting system as it is said to promote inefficiency .

A critical assessment of the functions of budgets reveals its pivotal role in the management of

organisations. This underscores the prominence given to budgeting by managers. According to

Jensen (2003), the budget is so prominent in the management of organisations that managers of

organizations or companies cannot conceive of managing their organizations in any other way

except through the use of the budget. Jacobs (2003) believes strongly that there is no alternative to

budgeting and budgetary control. This explains probably why managers are so passionate about the

use of budgets, at least if not for any other reason, for the reason that budgets have become a major

resource allocation mechanism in organizations.

CRITICISMS AGAINST THE TRADITIONAL BUDGETING SYSTEM

In spite of the seeming indispensability of the budget as a management tool, there have been severe

criticisms against the traditional budgeting system . According to Hope and Fraser (1999) Jack

Welch, Chief Executive of General Electric, sees budget as “bane of corporate America”, Bob

Lutz, former Vice Chairman of Chrysler, says budget is a “tool of repression” , and Jan Wallander,

former Chief Executive of Svenska Handelsbanken, The Swedish bank, regards budget as an

“unnecessary evil”. Quoting Welch further, Elbert and Aagje(2008) report Welch’s anger against

the budget as follows:

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“ Not to beat around the bush, but the budgeting process at most companies has to be the

most ineffective practice in management. It sucks the energy, time, fun and big dreams out of

an organization. It hides opportunity and stunts growth. It brings out the most unproductive

behaviours in an organization, from sandbagging to settling mediocrity. In fact, when

companies win, in most cases it is despite their budgets, not because of them. And yet, as

with strategy formulation, companies sink countless

hours into writing budgets. What a waste!”

Central among the criticisms against the traditional system of budgeting are:

That the budget is a tool of repression and encourages cheating, skimming and lying and

therefore the bane of corporations (Hope and Fraser, 2003).

That budgeting process consumes too much of the valuable executive time, about 20% of

management time in crunching figures that completely distort peoples’ behaviours, without

concomitant benefits to the firm(Daum, 2002).

That the budget, at its current state, does not enable the front managers to make quick

decision in response to the complex customer demands in an information age and global

economy with stiff competition because of the cap placed by the budget. Therefore,

management is deprived of market information since the front line managers have no

incentive to share their experiences. Budgets are seen as obstructing organisations

adaptation to the challenges of the information age (Hope and Fraser: 2001 a and b).

That in managing performance, budgets represent fixed term performance contracts and

such a performance management system does not help to ensure teamwork and agility

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(responsiveness to changes in the market) required for organisational success( Hope and

Fraser, 2003).

That budgets reinforce the features of centralization which emphasizes coercion, forcing

managers to co-operate against their will, inflexible planning, and command and control

which are inappropriate for modern companies(Gre van Mourik:2006,). Hope and

Fraser( 2003) observe in this connection that modern organisations reject centralisation,

inflexible planning and command and control and wondered why organisations would still

cling to a system( i.e. traditionally budgeting system) that reinforces these tendencies?

On the issue of innovation, a sine qua non condition for enterprises to withstand global

competition, traditional budgets are said to be antithetical to innovation. According to

David, et al(2006), while economic entities are expected to be innovative to survive the

global competition , budgets do not facilitate the imperatives of innovation because whereas

innovation demands creativity and risk-taking budgets encourage courteousness and risk-

averseness.

There are also other serious concerns raised about the budget. Daum(2002) observes that budgets

are fast loosing their relevance in the contemporary business world and are outdated by reality,

therefore, the continuous use of the budget as a management tool is questionable. Hope and

Fraser(2003) agree with Daum(2002) and that at extreme, in the attempt to meet budgetary targets ,

corporate governance of the company may break down. Becker, et al.(2010) submit that budgets do

have some level of dysfunctional attributes. The effect of this is that line managers engage in

gaming as part of their normal business life style (Jensen, 2003). Jensen (2009) adds that budgets

lack integrity and sincerity to support their use as a basis for compensation or any form of reward

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and suggests that to ensure good corporate governance and systems integrity the budgeting system

has to be reviewed because:

“budget-based systems reward people for lying, and for lying about their lying, and punish

them for telling the truth” Jensen(2003:380)

This means efficiency in the use of resources is not encouraged by the traditional budgetary system.

Steve (2005) confirms this opinion and notes some constant clichés among superiors:

“Yes I know it’s the right thing to do … but it isn’t in the budget”.

“ You didn’t spend your budge… how can you be so stupid?”(p.181)

He, Steve (2005), also observes that budgets lead to:

“Cost and bureaucracy: Resources are wasted in this exercise and ... benefits are dubious,

Bad behaviour: the quality of budget data is compromised by cautious behaviour and...

fosters political agitation instead of entrepreneurship

Inflexibility: It takes too long (usually about six months) to complete the process and as a

consequence plans are often obsolete before the results are published” (p.181)

CIMA (2007) identifies some of the pitfalls of budgets to include that budgets:

rarely focus on strategy and are often contradictory

are time consuming and costly to put together

constrain responsiveness and flexibility

often deter change

add little value, especially given the time taken to prepare them

focus on cost reduction rather than value creation

strengthen vertical command and control

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Scarlett(2007) calls budget a dependency model, which provides fixed plans that guide actions of

managers while the plans themselves(i.e. the budgets) quickly become obsolete soon after being

made. Budgets are suitable for centralized organization with a vertical commend structure.

Information flows from top to bottom and the bottom is only to carry out instructions with little

inputs into the budget. Thus those further down the organizational strata are judged by the extent to

which they comply with such orders. This approach, also according to Scarlett (2007) breeds

various organizational challenges and has been linked to some high-profile business failures.

Neely, et al(2001) presents a summary of the most cited weaknesses(concerns) about the traditional

budgeting system, drawn primarily from the practitioners literature, to include the following:

1. Budgets are time-consuming and too costly to put together.

2. Budgets constrain responsiveness and flexibility and are often a barrier to change.

3. Budgets are rarely strategically focused and are often contradictory.

4. Budgets add little value, especially given the time required to prepare them;

5. Budgets concentrate on cost reduction and not value creation.

6. Budgets strengthen vertical command and control.

7. Budgets do not reflect the emerging network structures that organizations are adopting;

8. Budgets encourage ‘gaming’ and perverse behaviors;

9. Budgets are developed and updated too infrequently, usually annually;

10. Budgets are based on unsupported assumptions and guesswork;

11. Budgets reinforce departmental barriers rather than encourage knowledge sharing; and

12. Budgets make people feel undervalued.

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Hansen et al. (2003) synthesizes the sources of dissatisfaction against budgeting by relating the

above twelve most acknowledged weaknesses of budgeting to the popular criticisms. He posits that

claims 1, 4, 9, and 10 relate to the recurring criticism that by the time budgets are used, their

assumptions are typically outdated, reducing the value of the budgeting process and weakening the

ability of the company to handle current competition and customer challenges. Claims 2, 3, 5, 6, and

8 relate to another common criticism that budgetary controls impose a vertical command-and-

control structure, centralize decision making, stifle initiative, and focus on cost reductions rather

than value creation. Finally, claims 7, 11, and 12 reflect organizational and people-related budgeting

issues. (Hope and Fraser, 2003) , in this regard argue that vertical, command-and-control,

responsibility centre-focused budgetary controls are incompatible with flat, network, or value chain-

based organizational designs which are required for companies to be effective in the information

age, and impede empowered employees from making the best decisions , de-motivate them and

reduce their entrepreneurial skills and innovation.

Submitting further on why the traditional budgets must go, Hope and Fraser(1999c) argue that the

value of the company is dependent on the calibre of staff that work in it. For a company to attract

the right calibre of staff and management talents with adequate motivation to engender innovation,

the company must have operational democracy. They observe that :

“In a recent McKinsey survey the top three reasons why managers chose one firm over

another were ‘values and culture’(58%), ‘freedom and autonomy’ (56%) and ‘exciting

challenge’ (51%). Budgets are well known for reinforcing the command and control culture,

constraining freedom and autonomy, and stifling the very challenges that excite prospective

managers. So in the battle for management talent, budgets have a lot to answer for” p.17.

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Continuing, Hope and Fraser(2003) argue that the growing discontent against the budget and its

inability to support innovation in organisations amid stiff competition in the information calls for a

better planning and control system to immediately replace it. They advise that in the absence of the

budget, enterprises would perform better using other financial and non-financial measures such as

cost to revenue ratio, return on capital, profit margin, cash flow, time to market, customer

responsiveness, quality of service index, and adopt internal external benchmarking of performance

against the best internal or world standards among external and internal competitors. Again, we ask,

given the rage of criticisms against the budget, is there an alternative to budget as a management

tool? Daum(2003) provides an insight into a possible alternative- The Beyond Budget Management

Philosophy of Jeremy Hope and Robin Fraser.

THE BEYOND- BUDGETING MANAGEMENT PHILOSOPHY

The Beyond-Budgeting, which means looking beyond budgeting, is the new management

philosophy proposed by the Jeremy Hope and Robin Fraser in the nineteen nineties in response to

the mounting discontent against the traditional budgeting system. The journey to the new paradigm

started in the mid 1990s following the discussions on budgeting organised by the CAM-I an

international research organisation based in Europe and USA. During the 25 th CAM-I’s Anniversary

meeting in 1997 the Beyond-Budgeting Round Table (BBRT) was established to propagate the

ideals and imperatives of the new management concept. In the excerpts of the interview with Hope

in 2003, Daum(2003) quotes Hope’s explanation for the drive to propose the new management

concept as follows:

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“ The budgeting system influences the behaviour of managers and employees in a way that

is counter productive to strategic management. The budget ties managers and people to the

old management system and its paradigms. This is the reason why many change

management projects are failing. The budgeting system is acting as a barrier to fundamental

change. ..If the new management model for the 21st century organization is to focus on

strategic performance, value-adding processes and knowledge management, it is crucial

that the model is built on trust between managers, workers, customers and partners. But this

trust can be easily undermined when managers are faced with short-term difficulties and are

quickly driven back to “managing by the numbers”. People know that if they follow the plan

and meet their annual fixed target, they will survive. Conversely, if they fail to meet their

contracted numbers they will be punished. This can mean people losing bonuses and

possibly their jobs. The pressure this exerts can lead to actions that defy common sense and

that ultimately destroy the value of the company” (p168).

Defending the new ideology, Hope(2008) adds that even with incessant review of regulatory

frameworks aimed at ensuring efficient resource utilisation and elimination of fraudulent activities

in companies, the culture of greed and unethical behaviour would still hold sway as long as the

command and control management model of the traditional budgeting exists. He adds that where

there are no negotiated fixed targets, no budget based rewards, no annual plans; no budgets, no

annual resources allocations and no actual-budget-variance type reports, then management would be

continuous and does not stop and start according to accounting deadlines. This would lead to

elimination of sandbagging, gaming and spinning of numbers as there would be no motivation for

this. Rather, each manager is evaluated on how well he or she has improved against the past

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performance in relation to other benchmarks such as peers and best practices. This calls for trust

between the managers and the superiors without which the purpose for this new revolution would be

defeated because building the tortoise-like(adapt and ensure) organisations is based on truth,

transparency, and trust is the new agenda for business leaders(Hope, 2008). In support of this

mindset, Hope and Fraser(1997) canvas for the complete abandonment of the traditional budgeting

model and the adoption of a devolved and network model of organisational structure, that he called

the N-Form, as opposed to the command hierarchical model.

The devolved model is considered better able to support the management of organisations in the

current information age which calls for highly customer responsive management models that would

allow the frontline manager the space to take actions quickly in response to available opportunities

in the interest of the company. The N-Form model has processes and teams that focuse on aligning

operations with the needs of the customers and offers the manager a clearer view of which work is

to be done and how to do it faster and more efficiently. Above all, the model is based on trust

between managers, workers, customers and partners. Trust, according to Hope and Fraser (1997)

can easily be undermined in companies that manage with numbers- budgets. As long as budgets are

left in tact, Hope and Fraser (1999b) believe that all efforts by managers of enterprises would fail,

the value of the firm would erode and corporate governance and acceptable corporate ethics cannot

be achieved. They assert therefore that the traditional budgeting process should completely be

abandoned for a more responsive management practice to be based on twelve principles, which they

grouped into process principles and leadership principles as follows:

Beyond Budgeting Process Principles

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Culled from Management Accounting, December 1997, P21

Targets: Set aspirational goals based on continuous relative improvement

not fixed targets;

Rewards: Base rewards on relative performance with hindsight not on

meeting fixed targets;

Planning: Make planning an inclusive and continuous process not an annual

event;

Resources: Make resources available on demand not through annual budget

allocations;

Co-ordination: Co-ordinate cross company actions dynamically not through

annual plans and budgets;

Controls: Base controls on KPIs, trends and relative indicators not variances

against plan

Beyond Budgeting Process Principles

Governance Base governance on clear values and boundaries not on detailed

rules and budgets;

Performance Build a high performance culture based on relative success not on

meeting targets;

Freedom to act Devolve decision making authority to frontline teams don’t micro-

manage them;

Accountability Create a network of small units accountable for results not

centralized hierarchies;

Customer focus Focus everyone on improving customer outcomes not on meeting

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internal targets

Information Promote open and shared information don’t restrict it to those who

‘need to know’

Hope et al.(2004) posit that the adoption of the Beyond-Budgeting brings with it some

immeasurable benefits. According to him the idea would make organisations to:

Be more agile and adaptive to change;

Eliminate a process that is too protracted, expensive and adds too little value;

Focus everyone on maximising value for customers and shareholders;

Effect a permanent(and significant) reduction in bureaucracy and costs;

Eliminate gaming an other dysfunctional behaviour leading to better governance;

Release the energy an enterprise of all people.

Hope and Fraser, therefore, believe that the adoption of the new management model would address

the challenges of the traditional budgeting system and provide companies a platform to be

innovative, attract the best talents, and perform maximally. Hope and Fraser(1998) indicate further

that the new model is capable of providing the platform for managers to think and act like owners,

they will be more willing to take risks, stand by their targets, be accountable for performance, and

improve the bottom line. The added further that in today’s world the managers of Strategic Business

Units need to:

make fast decisions to counter competitive threats and take new opportunities as they arise.

There is no time for approval procedures and management meetings. They need the self

confidence to act and the right tools and information to improve their chances of success.

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None of this is new, but so many companies attempt to implement this type of business model

without appreciating the hidden barriers that lie in wait within the

budgeting, performance measurement and reward systems. P23

Organizational success according to Hope and Fraser(1998) does not come through beating a rigid

set of numbers, contained in the budgets, that were set six or nine months previously that become

irrelevant at the implementation target but rather from beating one’s contemporaries in other parts

of the business and beating the external competition.

They defended their position with case studies of companies that have operated without budgets and

have performed creditably well over time. In fact, at the time the new model was being popularised,

it was discovered that Svenska Handelsbanken, the Scandinavian financial giant, had abandoned the

budget in the 1970s about two decades before the Beyond-Budgeting renaissance.

EMPIRICAL SUPPORT FOR ABANDONMENT OF BUDGETING.

The home page of the Beyond Budgeting Round Table (BBRT) indicate that several companies

have operated without the budget while others are in the process of abandoning the traditional

budgeting. We reproduce here some of the testimonies by companies that have operated without

budgets:

Carnaud Metal Box. Under the leadership of Jean-Marie Descarpentries, this an Anglo-

French packaging company was transformed from a debt-laden company worth only $19m

in 1982 to a market value of $3bn in 1989. By abandoning the fixed performance contract

and encouraging business unit teams to set stretch targets (disconnected from a rewards

system based on relative performance) he achieved what Fortune Magazine described as

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one of the best European corporate performances of the 1980s.

Groupe Bull. Descarpentries was recruited from Carnaud Metal Box (CMB) to transform

this French government owned mainframe Computer Company in the early 1990s. By

deploying the same management principles that he used so successfully at CMB, the

company turned around from losing FF5.5BN in 1993 to making a profit of FF600m in

1997, paving the way for a successful privatization.

Fokus Bank. After abandoning the budgeting model in 1997, this small bank transformed

itself from the worst performing bank in Norway with the highest costs to the best

performing bank with the lowest costs and the highest return-on-capital-employed. Fokus

Bank was acquired by Danish bank, Den Danske Bank, in 1999 at almost three times its

flotation value four years earlier.

Ahlsell. This Swedish wholesaler of heating, plumbing, refrigeration, and electrical

products abandoned budgeting in 1995. A fast, open information system with a strong

emphasis on relative performance now provides the necessary controls for self-governance

by local units. Ahlsell is now the sector's most profitable company in Sweden in both of its

main lines of business (heating and plumbing, and electrical products) - a major

turnaround from its position in the early 1990s. 

Leyland Trucks. This UK truck manufacturer had tried every improvement initiative from

total quality to process reengineering but none of them led to improved performance. The

difference came when CEO John Oliver abandoned piece work and the fixation with

volume on the assembly line. In the first two and a half years after making these changes

(from 1989 to 1991), the company reduced its operating costs by 24 percent (halving its

breakeven level), and improved its return on sales to over ten percent (beating most of its

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European rivals). It was later sold to the US company, PACCAR, to gain access to greater

sources of development capital.

Svenska Handelsbanken. Since abandoning the budgeting model in the 1970s

Handelsbanken has produced outstanding returns for shareholders, consistently beating all

its rivals in Europe on the key ratios of cost-to-income and costs-to-total-assets. It is

interesting how it communicates with investors. The CEO's annual message in the

shareholder's report focuses on competitive performance. It shows a league table of cost-

to-income and share price performance against its main competitors. It also spells out how

its radically decentralized management model is a major source of competitive advantage

Source: www.bbrt.org  

Also, Hope and Fraser (1999c) indicate that Volvo Cars recovered from huge losses of the early

nineteen nineties to one of the most profitable and highly innovative car manufacturers in the

world , after abandoning the traditional budgeting system. The abandonment of budgeting by Volvo

Car enabled it to build a intense management model that has helped it to face the intense

competition in the auto industry, released the budgeting time (about 20% of management time) and

transformed the company into an action oriented company in which decisions are made in time by

managers at the appropriate levels to meet changing conditions. Hall(2007) reports that Park

Nicollet Health Services , a non-profit health institution serving the Minneapolis-St. Paul has

abandoned budgeting in 2003 and has ever since operated successfully. The theory behind dumping

the traditional budgeting according to Hall (2007) is that cost is not reduced just by operating

budgets but by adopting better processes that are more responsive to the needs of the organization.

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Hall continues that soon after abandoning budgeting, the management of Park Nicollet Health

Services recognized that their organisation had operated a system loaded with waste.

The survey results by (Libby and Lindsay, 2007; ICAEW/CIMA, 2004; Gustafsson and Parsson,

2010; CIMA, 2007, Mitchell, 2005, Dugdale, 2006; Shastri and Stout, 2008, etc) agree with Hope

and Fraser that budgeting is time wasting but defer in terms of the length of time used in the

budgeting process. Hope and Fraser (2001b) state that budgeting consumes between 20% and 30%

of management time. However, empirical results show a not too frustrating picture. According to

Libby and Lindsay (2007) the average budgeting cycle is 10.3 weeks to complete in contrast to the

cycles of 10 to 15 weeks alluded to by Hope and Fraser.

On the challenge of basing compensation on achievement of budgets, the survey of some US based

companies by Shastri and Stout(2008) indicate that many companies (about 78% of the surveyed

respondents) adopt a budget based compensation system. Mitchel(2005) reports that the six leading

North American-based financial services organizations agree that basing compensation on

budgetary achievement is faulty therefore there is urgent need to review the bases of

compensation. This result agrees with the indication by Libby and Lindsay (2007) where budgets

have been identified to promote gaming and unethical practice in some organisations where it is

used as the basis for compensation. Neely, et al.(2001) also note that even with the attempts by

practitioners to use other advanced management tools such as Zero based budgeting, balanced score

card, activity based costing, etc, the need to plan and budget more quickly in response to the needs

of the fast changing environment using less resources and freeing up managerial time is yet a

challenge with the traditional budgeting process still in place. They agree that some modification

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would need to be made to the traditional budgeting approach as annual budgets are almost

meaningless in today’s turbulent environment.

Also managers have resulted to lobbying those in authority and responsible for approving budgets

to consider theirs (managers’) interests. This lobby system, according to Agara(2005:61) leads to

budget padding (i.e. over-estimating expenditure and under-estimating revenue) to have personal

benefits over the building in of budgetary slacks. According to Elbert and Aagtje (2008) budgetary

slacks are in some cases allowed by the budget approving authorities of companies Their survey of

Netherlands companies indicated that over 71% of companies’ top management sometimes allows

budgetary slacks in the business units to cater for environmental uncertainty. The incorporation of

slacks is a tacit encouragement of inefficiency which the critiques of budgeting say has resulted in

companies expending resources that are not needed.

IS THE TRADITIONAL BUDGETING SYSTEM SOON TO GO?

On the surface, one may be tempted to conclude that the end of budgeting is near. But as indicated

in the report of the joint round table discussion on Budgeting hosted jointly on 24 March 2004 by

the Institute of Chartered Accountants of England and Wales(ICAEW) and the Chartered Institute

of Management Accountants(CIMA), the traditional budgeting is still very much

alive(ICAEW/CIMA, 2004). Also in a survey report presented by Dr Stepen Lyne and Professor

David Dugdale, involving 40 financial managers, a whopping 71.8% indicate that the budget is

very or extremely important in the management of the affairs of companies. On the issue of the

inflexibility of the budget in response to the environmental dynamics, the survey also indicate some

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companies review their yearly budgets during the year to cater for environmental dynamics. Also

the study conducted by Libby and Lindsay (2007) among 212 IMA members in North America

confirms that over 70% of the firms receive good to excellent value from budgeting. Libby and

Lindsay(2007) also indicate that the respondents overwhelmingly agree that they could not manage

their companies without the budget. To them budgeting is indispensable. The problem with budgets,

according to Libby and Lindsay (2007) has to do with how budgets are applied and some of the

roles budgets are made to play, otherwise budgets, according to the duo, have potential to be

extremely useful if appropriately applied. This opinion agrees with the opinion expressed in the

ICAEW/CIMA Report wherein it states the budget

“.., it provides an overall framework of control without which it would be impossible to

manage. Large companies in particular would struggle to plan, co-ordinate and control

without such a framework. But, even in small companies, a budget can provide a road

map detailing where the business is, where it wants to go and how it can get there” (p.2).

In a survey conducted by the Chartered Institute of Management Accountants (2009) covering

companies in Europe, Asia, Middle East, Africa, Australia, North America, and other parts of the

world on the use of management tools by companies, the use of budgets topped an enviable 80% or

more percent. Neely et al.(2001) also indicate that in spite of the criticisms against the traditional

budgeting system, 70% of the companies surveyed operated without changing their planning and

budgeting processes. In a survey conducted in Netherlands, Elbert and Aagtje (2008), indicate that

over 73% of Netherlands companies are happy with budgeting with over 81% operating budgets

and 88% indicate that budgets support their corporate strategies and that budgets are also used for

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motivating and for rewarding managers. Dugdale and Lyne(2010) indicate in their survey of 40

respondents from UK companies that all the companies survey have budgets adding that

‘ There was little evidence that budgeting fails to meet the needs of managers in competitive

environments(p.4)

In Malaysia, Mahfar and Omar (2004) indicate in their survey of management accounting practices

by some Malaysian companies, using 5-point assessment criteria, that budgeting is the most

practiced management accounting technique with a mean point of 3.99 point occupying an enviable

first position is the list of 28 techniques measured in the survey. In Nigeria, research results also

indicate that most Nigerian companies operate with budgets. Adelegan(2001) indicates in her 1998

survey of some 55 Nigerian companies, cutting across banking, manufacturing and service

industries, that about 96% of the companies use budgets although information on whether managers

are prepared to manage their firms without budgets was not provided. Obiajulum and

Ngoasong(2009) also recognised the prominent role the budget places in the management of

companies in Nigeria so much that companies are unwilling to discuss their budget practices

publicly for fear of exposing their strategies to other competitors. Ishola(2008) also notes the

prominence of budget as a driver of performance. He established, in his survey of Nigerian

companies in the Food and Beverages Industry in 2008, that there exist a strong relationship

between budgets and corporate performance. All the companies studied by Isola operated budgets

which, he noted, should be reviewed regularly to enable the budgets to be useful in supporting the

dynamic economic environment. In the course of writing this article, we conducted a preliminary

mail survey of some chartered accountants in Nigeria on the status of budget. In this preliminary

survey, all the respondents (100%) say ‘NO’ when asked whether in their opinion, the traditional

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budgeting should be abandoned. Although a negligible proportion agree that the value of budgets to

their companies does not justify the time spent on finalising their budgets. All respondents,

however, agreed that budgets consume time, taking about 6 weeks to 10 weeks on the average to

conclude a budget. This time frame like the results of Libby and Lindsay (2007) is in contrast to the

time the 10 to 15 weeks budgeting time alluded to by Hope and Fraser. We intend, later to conduct a

full research on the status of budgeting in some listed companies in Nigeria. We opine that the

evidences from the expected study may not be significantly different from the results of this

preliminary survey in terms of the readiness of Nigerian companies to abandon the ex ante

budgeting process.

THE POSITION OF THE TWO DIVIDES

We have taken a look at the views of the two schools of thought: those that believe that budgets are

indispensable and that improvement on budgeting process would redeem the perceived limitations

of budgets and the other school that believes that no efforts could redeem the budget because the

budget is inherently flawed with significant inhibitions to corporate development. Given the quality

of the case studies marshalled in support of their opinions, one could easily be in a dilemma as to

which block to follow. But what is the noise all about? Just as Hope and Fraser have provided

examples of companies that have successfully operated since abandoning the budget, there are also

examples of very extremely successful companies whose budgets lie at the heart of their

management control system. Libby and Lindsay (2007) provide the examples of such companies

like Johnson & Johnson, that is ranked as one of the best-managed firms in Fortune’s annual survey;

and Emerson Electric whose former CEO, Charles Knigt, extols the value of the company’s

budgeting system.

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From available empirical evidences, one wonders why in the face of the criticisms the traditional

budget is still regarded as the sacred management tool of many organisations. Neely, et al(2001)

explains that companies still practice traditional budgeting widely because of the following factors:

High cost of overhauling the budgeting system;

The benefits of changing the budgeting system is less quantifiable unless the change of

technology which can immediately be noticed;

Organisations that attempt to effect the change to the traditional ended up being

overwhelmed and give up the attempt;

Traditional budgeting is usually centrally coordinated and often covers all organisational

activities.

Again, Becker, et al.(2010) offers further explanation why traditional budgeting practitioners are

sceptical about the introduction of the Beyond Budget phenomenon. They assert that

‘the way in which the identity of the concept was defined – namely as a comprehensive

management model rather than a tool – did not allow for much plasticity in its interpretation

and use’.

Probably this opinion, much more than other reasons, explains the reason why practitioners may

continue to adore the ex ante traditional budgeting in spite of its manifest limitations. What the

proponents should consider is perhaps to suggest a modular implementation of the new paradigm

such that there could easily be a retreat to the old tract where problems manifest themselves in the

course of implementation. Beyond Budgeting, should be made to be implementable in semi-

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organisational set ups, that is, implementing Beyond Budgeting in some departments or Units of

organisations for observation, to determine whether it a viable project.

If some companies operate extremely with budgets and have done well and others operate without

budgets and do well too, then the issue perhaps is not in the management tool but on how the tool is

applied. We have not read literature indicating that Beyond Budget practitioners have reverted back

to budgeting as a result of the failure of the new model. But Hope and Fraser and several

publications of the Beyond Budget Roundtable indicate that more and more company are embracing

the new model. This development in our opinion does not in any way reinforce the alleged

frustration of budgets in corporate management, but an indication that at least there is an alternative

to the budgeting. Organisations, now know that if they allow some conditions to prevail in running

their internal processes, they could be more responsive and attain their objectives without budgets

provided of course managers are prepaid to run a devolved organisations built on trust with

employees adequately empowered and motivated to perform with the mindset of and entrepreneur.

That is, the staff should be able to take actions in the interest of the companies they work in as if

they own the company. Given this prerequisites for the installation of the Beyond Budgeting model,

some questions beg for immediate answers:

Would companies in developing economies be ready for this new concept now or it is a

concept for a much later time?

In the face of global trade and economic integration, companies are expected to be

innovative and customer responsive, can companies in developing economies compete

effectively in the global market with the budgetary control system?

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Is there any way to marry the two models to take advantage of the two ends since from

empirical evidences, companies who operate budgets still attach significant importance to

budgeting vis a vis the opinion of other practitioners in the Beyond Budgeting block that see

nothing good in retaining the traditional budgeting system?

The authors think that the above questions when answered would provide some indication as to

whether Beyond Budgeting is a concept to be contemplated in developing economies. We thin,

however, that since companies could manage without budgets and have recorded success, there

would probably not be any need to spend management time in preparing budgets where there is an

alternative to budgeting.

Katarina and Inger(2011) noted in their field study of beyond budgeting in practice that three new

rules will emerge after removing budgets: (1) Goals should be strategic and based on ambitions, (2)

Focus should be on the big picture rather than details, (3) Focus should be on possibilities and

flexibility rather than constraints. Further, the authors noted that there are at least three challenges

organizations that are considering removing budgets should be aware of:

(1) The ambition problem- using targets set by competitors and other sub-units rather than those set

by the departmental manager being assessed may result in pushing the departmental managers too

hard and top management operating on the basis of unrealistic dreams.,

(2) The sub-optimalization game problem, there are potential new games new games around the

dynamic resource allocation that will emerge with the new conditions can appear.

(3) The employee exchange problem. The employee exchange problem refers to a situation where

the staff of one sub-unit department may have to exit or remain without adequate schedules in the

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event of their department not having resources allocated to it because the allocation of resources is

based on good projects and value-generating activities agreed upon during the project selling stage.

The authors of this article have worked in both public and private organisations operated on the

basis of the traditional budgeting and state that practitioners do agree that budgets are inhibitions

but given the popularity given budgeting in literature, it becomes very difficult perhaps to propose

the abandonment of budgeting in organisations, especially in the developing economies without

education on assurances that companies could in fact operate without the budget. One of the

authors, have worked in a firm that have operated for over three years without a formal budget. The

experience has not been disappointing but interesting. Expenditure is incurred after considering the

needs of the organisation, from a pool of common resources. In this way no every resource is active

and available to support any unit or department of the company. is required is the change of mindset

to embrace the new paradigm shift the embrace the new wave of change in the management of

companies in the global competitive environment.

CONCLUSION

We think that rather than feigning ignorance of the new management philosophy accountants and

other management practitioners should begin to acknowledge the frustrations of budgeting and

question the rationale behind the continued use of budgets when companies could operate without

budgets. Again, to keep records straight, Beyond Budgeting is not only appropriate to full

developed economies or those with static incomes which could be said to be predictable. The world,

as we view it, is full of uncertainty therefore no thing on the surface earth is static. We can indeed

run both corporate and public organisations with the budget. Lest we be mis-understood and new

recruits of Hope and Fraser, we agree with the new thinking purely on the strength of the empirical

28

evidences and conviction. We submit that, though Beyond Budgeting have been testing and proven

to work effectively in organisations that have excelled yet again the dead of the traditional

budgeting system is also not soon to come. However, we must be weary of the society, business and

management culture that permeate developing economies with high a propensity of employees and

managers that are not adequately trained and equipped to performed at the height of managerial

consciousness that promotes truth, sincerity and drive for perfection which are some of the pillars of

the new model. Yes, many companies that have abandoned budgets and are operating excellently

well, so enterprises can indeed operate without the budget if the operators are ready to do so.

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Raph Etim(BSc, MBA, ACA)Department of AccountingUniversity of Uyo, NigeriaEmail

Iwora G Agara(BSc, EMA, MSc, ACA)Freelance lecturer of several decades and consultant on budgeting and control systems. Currently Principal Manager (Finance and Accounts Dept)Geometic Power LtdAbujaEmail: iworagodfrey@yahoo.com

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