is budgeting necessary? a discussion on the current perpsectives on budgeting

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Online CPD for Accountants & Professional Advisors

Is Budgeting Necessary? A Discussion on the Current Perspectives on Budgeting

Presenter: Des O’Neill CPA; A.C.I.S; ACCA

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Is Budgeting Necessary? A discussion on the current perspectives on Budgeting

Supporting Documentation Index

Contents Page Slide Set 1 – 32 Back Up Papers

Banish the Budget 33 – 35

Cooperation in the Budgeting Process 36 – 38

Abandon Budgets and set your Enterprise Free by David Parmenter 39 – 43

“Beyond Budgeting or Better Budgeting?” article 44 – 48


Is Budgeting Necessary?Is Budgeting Necessary?A Discussion on the Current Perspectives

on Budgeting

Michael Kealy FCCA1

Overview

A questioning approach to:

Budgeting & budgeting process

Budget participation

Theoretical perspectives – particularly S k H d l b kSvenska Handelsbanken

Beyond Budgeting

2

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Budgeting

Strategic planningStrategic planning

‘precedes budgeting and provides the framework within which the annual budget is developed.

A budget is, in a sense, a one-year slice of the organization’s strategic plan’

Anthony & Govindarajan

3

The strategic planning process

4



Strategy, Planning and Budgets

5

Planning cycle

• Relatively broad processes of thinkingabout the missions, goals and strategies.

• Normally a top-management process

StrategicPlanning

erm

, and

vels

Normally a top management process.

• Specification of specific action programsto be implemented over the next few yearsand specification of the resources eachwill consume.

• It involves many more people at differentorganizational levels (top-down/bottom-up).

Programming

CapitalBudgeting

peci

fic, d

etai

led,

sho

rt-t

e

at a

ll or

gani

zatio

nal l

ev

OperationalBudgeting

• Short-term financial planning.• Budgets match the organization’s

responsibility structure.• Emphasis on quantitative data.In

crea

sing

ly s

p

disp

erse

d

6



What is budgeting? Budgets

a plana plan

expressed in monetary terms

covering a future time period

based on a defined level of activity

Rolling budgets

Forecasts & re-forecasts

Profiling or time-phasing

7

What is budgeting? Or is it....Control over Financial results?

Financial responsibility centres Financial responsibility centres

The apportionment of accountability for financial results with the organisation

Formal management Process

Planning and budgeting to define performance expectations and standards for evaluating performance

Motivational contracts

to define the links between results and various organizational incentives

8



What is budgeting?

Produce written plans that specify: Produce written plans that specify:

Where the organization wishes to go?

How it intends to get there?

What results should be expected?

9

Why budget?

Purposes of the planning and budgeting Purposes of the planning and budgeting process?

To engage in longer-term thinking.

To achieve coordination (top-down, bottom-up, sideways).y )

To enhance management control.

To arrive at challenging but realistic performance targets.

10



Does our budget? Implement strategy by allocating resources in line

ith t t i lwith strategic goals

Co-ordinate activities and assist in communication between different parts of the organization

Motivate managers to achieve targets

Provide a means to control activities

Evaluate managerial performance

11

The characteristics of a budget It is usually stated in monetary terms.

It generally covers a period of one year.

It t i l t f t it t It contains an element of management commitment,i.e., the managers agree to accept the responsibilityfor attaining the budgeted objectives.

The budget is approved by an authority higher thanthe budgetee.

Once approved, the budget can be changed onlyunder specified conditions.

Periodically, actual financial performance is comparedto budget and variances are analyzed and explained.

12



The budget preparation process

Budget Committee

3 Negotiation

Top-Down

BudgetDepartment

3. Negotiation

4. Approval

Business ManagersBottom-Up

Does the budgeting process takes about three months in most firms???Is this largely a waste of time?

13

Budget participation1. Top down approach – Imposed Style

Top management prepare the budget with little or no input from junior staff or operating personnel

The budget is then imposed on employees

E l f d t k t th

14

Employees are forced to work to these targets




Imposed style budgets can be implemented effectively:effectively: In newly formed organisations

In very small businesses

During periods of economic hardship

When operational managers lack budgeting skills

15

p g g g

When the organisation’s different units require precise co-ordination

Budget participation Advantages of Imposed Style

1 Increased probability of strategic plans being1. Increased probability of strategic plans being incorporated into planned activities

2. Enhances the co-ordination of different departments or divisions

3. Senior managers are more aware of what resources are available

16

are available

4. Budgets are prepared quicker – no need for negotiation –

OR no need for budgets???



Budget participation Disadvantages of Imposed Style

Can produce dissatisfaction defensiveness ando Can produce dissatisfaction, defensiveness and poor morale – hard to be motivated to achieve imposed targets

o No feeling of team spirit

o Budgets are seen as a punitive device

17

o Lower level management initiative is stifled

Why Bother?


2. Bottom up approach – Participative Style

Budgets are developed by lower level management

Budgets are submitted to senior management for discussion and approval

18



Budget participation Participative Style budgets can be

implemented effectively:implemented effectively: In well established organisations

In very large organisations where junior managers have a better understanding of local circumstances

Where operational managers have strong budgeting skills

19

skills

Where the organisations’ divisions act autonomously

In industries with strong emphasis on innovation

Budget participation Advantages of the Participative Style approach

Budgets are developed by employees who are more informed as to the process – constraints, strengths

Knowledge from different units is shared

20

Morale and motivation is improved

Greater acceptance of organisation goals by operational managers




Targets are more likely to be realistic and hi blachievable

Operating managers are more likely to develop plans that tie with organisation goals and objectives

21

Senior manager’s overview coupled with operational managers attention to detail are a strong combination


Disadvantages of the Participative Style happroach

1. Time consuming2. Operational managers may be ambivalent to

the budget process3. Empire building

22

3. Empire building4. Individual unit plans can conflict with Goal

Congruence5. Budget Slack




3. Negotiated Style of budgetingBudgets are developed and agreed at different

management levelsOperational managers will negotiate where targets are

unrealisticSenior manager will review presented budgets and try

to locate any slack

23

Budgeting process becomes a bargaining processFinal budgets are likely to lie between what senior

management would like and what operational managers think is feasible


Four behavioural problems with budgeting p g gand budgetary control

1. Pressure device Budgets are seen as a pressure device used by

management to force lazy employees to work harder

24

harder

The intention of management is to improve performance but employees react adversely to it




2. Budgetees want to see failureA t t f l if th Accountants are seen as successful if they are able to report significant adverse variances and identifying the responsible managers

The success of the budgetee is at the expense of the responsible manager

Tension exists between both parties and

25

Tension exists between both parties and management may lose interest in the budget and their performance


3 Targets versus Goal Congruence3. Targets versus Goal Congruence

Achieving divisional targets becomes of paramount importance

The effects this may have on other departments or on the overall organisation are not usually

26

or on the overall organisation are not usually considered




4 Management Style4. Management Style Budgets can be used by managers to express

their character and style of leadership over subordinates

Subordinates resentful of the managers style

27

may blame the budget rather than the manager

Types of financial performance targets

Model-based (engineered)/historical/negotiated

Internally/externally-derived

Target costing

Benchmarking

Fixed/Flexible

Information asymmetry

Fixed/Flexible

Should managers be held accountable for achieving their plans regardless of the business conditions they face?

Relative performance targets.28



Budget target difficultyce

vati

on

/Per

form

anc

Goal DifficultyEasy Impossible

Mo

tiv

Performance target achievability29

Budget target difficulty (Continued)

In “theory” (lab experiments):

“Good targets” are about 25-40% achievable.

Pro

babi

lity

Target Performance

30Performance target achievability



In “practice” (field research):

Targets are about 80-90% achievable.


Targets are about 80 90% achievable.

Pro

babi

lity

Target Performance


Good vs. ineffective management teams


Pro

babi

lity

Target Performance





Low vs. high uncertainty

Pro

babi

lity

Target Performance


So what is a “good” budget target?

M ti ti

Purpose of Budgeting Target Difficulty

Motivation

Planning

Coordination

Cost control

Conservative

Best guess

Cost control

Evaluation Optimistic

Target should be after-the-fact assessment of what couldhave been accomplished, not any of the three choices listed.

34



Benefits of Budgets

Budgets offer feedback in the form of Budgets offer feedback in the form of variances: actual results deviate from budgeted targets

Variances provide managers withEarly warning of problemsy g p

A basis for performance evaluation

A basis for strategy evaluation

35

Methods of budgeting

Incremental budgets Approaches to budgeting Incremental budgets

Priority-based budgets Planning, programming &

budgeting system (PPBS)

Priority-based incremental budgeting

Zero base budgeting

Approaches to budgeting Top-down

Bottom-up

g g

Activity based budgeting

36



Incremental Budgeting Take previous year’s budget as a base and adds

(subtracts) a % to give this year’s budget( ) g y g

Advantages1. Simple to apply

2. Low cost

3. Less time consuming

37

4. Efficient in a slow moving environment – Public Sector

Incremental Budgeting

DisadvantagesD t i b hi d ti iti d1. Does not examine reasons behind activities and allocation of resources

2. Backward looking

3. Inappropriate in a fast paced environment

4. Not much thought put into the process

5. Participation with line management is minimal

38

5. Participation with line management is minimal

6. Does not provide management motivation

7. Waste and inefficiencies are carried forward from previous years



Priority based budgets

Allocate funds in line with strategy

If i iti h i li ith ’ If priorities change, in line with company’s strategic focus, budget allocations follow these priorities

The Planning, programming and budgeting system (PPBS) is a public sector version

39

y ( ) pdeveloped by the U.S. Space programme

Zero Based Budgeting (ZBB)

ZBB identifies costs necessary to implement y pagreed strategies and achieve goals... As if a new organisational unit was starting without any prior history

40



Zero Based Budgeting (ZBB)

Advantages

1 Identifies inefficient or obsolete operations1. Identifies inefficient or obsolete operations

2. Avoids wasteful expenditure

3. Increases motivation by employee involvement

4 Provides management with an in-depth

41

4. Provides management with an in depth appraisal of all operations

5. Challenges the status quo

Disadvantages of Zero Based Budgeting (ZBB)

1 Cost1. Cost

2. Emphasis on short term benefits

3. Calls for highly skilled management

4. Hard to quantify all packages

5 Ranking process can be subjective

42

5. Ranking process can be subjective



Other Budgeting Issues

Financial-planning software may be employed to conduct sensitivity (“what-if”) analysis to assist in the budgetary process

Kaizen Budgeting – incorporating continuous improvement factors in the budgeting process

43

Other Budgeting Issues

Activity Based Budgeting incorporating Activity Activity-Based Budgeting – incorporating Activity-Based Costing in the budgetary process

ABC identifies the activities that consume resources

Uses the concept of cost drivers to allocate costs to d t i di t h h f thproducts or services according to how much of the

resources they consume

44



Budgeting in practiceBusiness-wide strategies will affect the responsibility centre:centre:

the level of demand placed on the business unit and the expected level of activity to satisfy (internal or external) customers

the technology and processes used in the the technology and processes used in the business unit to achieve desired productivity levels, based on past experience and anticipated improvements

45

Budgeting in practiceBusiness-wide strategies will affect the responsibility centre:centre:

any new initiatives or projects that are planned and which require resources (especially capital investment)

the headcount and historic spending by the the headcount and historic spending by the business unit

46



How Complex is your budget?

Knowledge of past performance Knowledge of past performance

Understanding of the market

Marketing strategy: price maker or taker

Understanding of cost drivers

Controllability of costs Controllability of costs

47

Theoretical perspectives Good budgeting practice:

participation in the budget process; participation in the budget process;

frequent communications and information flow; frequent communications and information flow;

inclusion of the budget in decisions about salary, inclusion of the budget in decisions about salary, bonuses and career promotion;bonuses and career promotion;

clear communication by accountants to nonclear communication by accountants to non--accountantsaccountants

48



Theoretical perspectives Forecasting difficulties and error:

unpredicted changes in the environment; inaccurate assessment of the effects of predicted changes; and forecasting bias

bias: the reward system; the influence of recent practice and norms; and the insecurity of managersmanagers,

‘the desire to please superiors in a competitive managerial hierarchy’

49

Theoretical perspectives

Other issues: Other issues:

Problems of aggregation of divisional budgets

Budgeting systems help to represent vested interests in political processes; maintain existing power relationships and are rife with game playing

Risk modelled, risk considered and risk excluded budgets: the process of budgeting and the content of budgets are different

50



Theoretical perspectives

Other criticisms: Other criticisms:

Centralise power in the organization and stifle initiative

Focus on cost reductions, rather than value creation

Separate planning (thinkers) from execution (doers)

Cause too many costs and too few benefits

51

Theoretical perspectives‘‘a symbolic performance rather than a decision-making process;

a means of conversation rather than a means of control;a means of conversation rather than a means of control;

and an expression of values rather than an instrument for action …

Budgeting is seen as a ritual of reason; budgets are presented according to and conforming with prevailing norms of

rationality.

B d ti i l l f ’Budgeting is also a language of consensus’

Czarniawska-Joerges & Jacobsson

52



Beyond Budgeting

Some critics now suggest abandoning budgets

Hope and Fraser suggested that budgets should be replaced with a combination of financial and non financial measures

Judge performance against world class benchmarks and shift the focus from short-term profits to improving competitive performance year on yearcompetitive performance year on year

53

Beyond Budgeting http://www.bbrt.org - The Beyond Budgeting Roundtable’s

view is that:“Traditional budgeting should be abolished.That may sound like a radical proposition, but it is merely the final (and decisive) action in a long running battle to change organizations from centralized hierarchies to devolved networks.Most of the other building blocks are in place. Firms have invested huge sums in quality programs, IT networks, process

i i d f t t l i l direengineering, and a range of management tools including EVA, balanced scorecards, and activity accounting.But they are unable to establish the new order because the budget, and the command and control culture it supports, remains predominant.”

54



Beyond Budgeting principlesEffective organisation &

behaviourX Effective performance

management= Competitive success

1. Clear values

2. Responsibility for results

3. Freedom to act

4. Fast processes

5. Co-ordination in internal market

7. Relative targets

8. Adaptive strategies

9. Anticipatory management

10. Internal market for resources

11. Fast, distributed

Fast response

Best people

Innovative strategies

Low costs

Loyal customers

Satisfied customers

6. Challenge & stretch controls

12. Relative team rewards

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Is budgeting necessary? Svenska Handelsbanken was noted as the 2nd second

t t b k i th ld b Bl b i M 2011strongest bank in the world by Bloomberg in May 2011

It eliminated budgets in the 1970’s

According to its then C.E. O. Jan Wallander -traditional budgeting is ‘an outmoded way of controlling and steering a company. It is a cumbersome way of reaching conclusions which are either commonplace orreaching conclusions which are either commonplace or wrong’

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Wallander’s view Handelsbanken has an information system which is

focused on the information needed to influencefocused on the information needed to influence actual behaviour.

It incorporates both financial and ‘balanced scorecard’ measures at the profit centre level, and performance is benchmarked externally and internally. The bank rewards its staff through a profit-sharing scheme.‘This type of planning is something that is going on all the year round and has nothing to do with the annual budget’

57

Wallander’s view

It is still important to have an ‘economic It is still important to have an economic model’ which establishes the basic relationships in the company, such as the ability to plan production

58



Wallander’s view If there is economic stability and the business will

continue as usual, we use previous experience to budget. g

We do not need an intricate budgeting system in this case, because people will continue working as they presently are.

Even when conditions are not normal, the expectation is that they will return to normal.

If events arise that challenge economic stability then budgets will not reflect this, because “we have no ability to foresee something of which we have no previous experience”

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A response to Wallander’s view Staff performances are evaluated by comparison with

competitors on key performance indicators e.g. ROCE; C t/I ti fit l tCost/Income ratio; profit per employee etc.

Most firms are not are not in sectors as homogeneous as banking

They do not have such good relative performance data available to them Thus this modification is not feasibleavailable to them. Thus, this modification is not feasible

But the bank still has to engage in many of the planning and budgeting exercises discussed earlier

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Conclusion

Planning / budgeting systems are potentially powerful management tools that serve multiple purposes:g p p p

A vision organised into a set of tactics employed throughout

A standard to judge organisational success

Behavioural implications consideration of the future and Behavioural implications – consideration of the future and commitments for the present

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Conclusion

Many of the criticisms of the Beyond Budgeting movement focus on the flaws of negotiatingmovement focus on the flaws of negotiating performance targets

If budgets are negotiated; match business conditions; assign responsibility for accountability for performanceaccountability for performance.......

They turn plans into performance targets; empower and motivate employees to achieve organisational goals.

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Further Reading

Management Control Systems – Merchant & Van der Stede

Accounting for Managers – Paul Collier

Management and Cost Accounting – Colin Drury

Beyond budgeting – Hope and Frasier

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BANISH THE BUDGET!

A growing number of major European firms are managing without budgets

Ask a conventional chief executive to abandon his budget, and he is liable to think youeither a joker or a lunatic. The budget has become the central means of controlling the business, and without it he would feel dangerously exposed. Yet a growing number of companies have abolished the budget process or are in the course of doing so, and are all the better for it.

A European initiative

Unusually, the initiative for this move is European rather than American. In fact, it all began in Sweden nearly 30 years ago, when Dr Jan Wallander was called in to rescue Svenska Handelsbanken, whose retail banking operation at that time was suffering from too much business at too little profit. As a former government economic forecaster, Dr Wallander distrusted the forecasts built into the budget, and decided to base his control system not on figures calculated annually by head office to several places of decimals, but on targets set relative to competitors and to best practice within the bank.

It took five years for the Wallander reforms to take effect, but Handelsbanken has never looked back. In the past 18 years it has increased its value to shareholders by 25% per year. Modern technology holds no fears for it, either, so far at least. Some 20% of all its transactions now come via the Internet, and one-quarter of its corporate customers are using the bank's Internet services.

Another pioneer, working independently in France, was Jean-Marie Descarpentries, chief executive first of Carnaud and then Machines Bull. Both companies managed well without budgets, on lines remarkably similar to Dr Wallander's, but both have since reverted under new masters.

Also reverted, at least partly, is Volvo Cars, recently taken over by Ford. Finance director Ole Johannesson proclaimed in the past that: "The budget and long range planning systems are no longer efficient when the business environment is changing more and more rapidly." But now: "We work the Ford way. The Americans demand a lot more data, and we adapt. We're making figures all day long -- but we sell no more cars."

Altogether, some 20 or 30 major companies have abolished, or are in the process of abolishing, their budget processes, including SKF and Tetra Pak in Sweden, Borealis (the merged petrochemical interests of Finland's Neste and Norway's Statoil) headquartered in Copenhagen, Air Liquide and Schlumberger in France and Diageo (the Guinness and GrandMet combination) in the UK.

Small as it is, the number of companies showing interest in throwing away their budgets is increasing, says Robin Fraser, research director for the Beyond Budgeting Round Table, a group of some 40 interested companies, consultancies, etc. It is studying the problems and experiences of members, and has developed a manual of best practice and a series of seminars for newcomers.



A question of control

At finance directors' conferences run by consultancy PricewaterhouseCoopers (PwC), Brian Lever, a principal consultant, finds that delegates rate reforming the budget process among their top three concerns. Even GE's legendary chief executive, Jack Welch, considers that "the budget is the bane of corporate America ... an exercise in minimalisation. You're always getting the lowest out of people, because everyone is negotiating to get the lowest number."

Many US companies, like GE, are aware of the problems that budgets engender, but there is only one on record as having abandoned them. What is popular, on both sides of the Atlantic, is the balanced scorecard, which attempts to define what the company means by "performance" and develops a set of objectives and measures that contribute to it, covering finance, customer relations, productivity, innovation etc. But a subset of these is still enshrined in a budget, to which managers are expected to commit themselves in the normal way. The problems of rigidity, timing, remote control and so on therefore all remain.

So why the reluctance to abandon what most managers will admit is a time-wasting strait-jacket? Control is the central issue in the budget process, both in the sense of control of the business by the chief executive and his board of directors, and of the control that is delegated (or not) to subordinates. Chief executives may admit their budgets' shortcomings, but cling to them to secure a degree of stability in a complex organisation.

Budget opponents argue that the control it offers in practice is more illusory than real, since conditions may change -- even before the start of the year in question -- and staff will massage the figures to show the desired result. In any case, "variance due to market" is an easy and unchallengeable excuse for poor performance, while "budget constraints" is an equally easy excuse for doing nothing. If bonuses are in some way dependent on the outcome, "achievement of budget" may actually conceal serious distortions.

The roots of revolt

Borealis' financial controller, Thomas Boesn, recalls that when his company was formed in 1994, "we had a unique opportunity to review the management processes, which we fully re-engineered. We asked, 'What can we do better? What if we don't do a budget at all?'" A conventional budget, they decided, had four main purposes: high-level financial and tax planning; target-setting; control of costs; and investment allocation. Other companies might have added bonus calculation.

Borealis realised it was impossible for one set of figures, cast in bronze once they'd been finalised, to perform all functions effectively -- for example, between a sober and realistic estimate for financial planning, and a stretching target for sales performance. The inherent conflicts partly explained why the budget often took months to complete; Volvo calculated that it absorbed 20% of management time. What gets omitted in these negotiations, finds Mr Lever, is the key question: "What is going to drive the value? They should be asking not 'Can you cut costs by 10% next year?' but 'What do you need to do to beat the competition?'"



Instead of a fixed annual budget, therefore, the pioneers are using a continuous process that converts the business strategy into targets and plans, and unit managers are given responsibility for income and expenditure and action to achieve their targets. Often, they find themselves managing a profit rather than a cost centre, although the system is freely adapted to suit each stream of business: cost control may be the principal driver of value creation in one section, sales enquiry generation in another. Performance reviews are conducted as often as necessary, perhaps against a rolling forecast.

If there is no budget, responsibility has to be pushed down to operating levels, and the much-vaunted empowerment is at last given some real meaning. Control (in the second, tactical, sense) is located much nearer to the customer. But managers have to answer for themselves some much bigger questions than they normally face, and they have nowhere to hide when opportunities are missed. "People struggle if you take the budget away," finds Diageo's group financial controller, Pavi Binning. "They have to change, and some can't make the journey."

Abolishing the budget is therefore as much an issue for the HR director as for the finance director. Managers and staff alike may need new competences and skills to respond to the new demands, so that some retraining and new recruitment may be necessary. It seems to be worth the effort: when the Round Table interviewed more than 50 managers in companies where budgets had been abolished, not one wished to see them back again, and many wondered why they had wasted so much time on the budget process for so long.



Cooperation in the Budgeting Process

In this article I analyze the role of cooperation between firm divisions in the budgeting process. I study a setting in which cooperation is a necessary condition for information sharing among division managers, which in turn benefits the principal. The results in this article can help reconcile the differing views between practitioners and academic researchers on the desirability of cooperation in the budgeting process. The results also have implications for some common budgeting processes observed in practice, including bundling budgeting and bottom-up budgeting.

1. Introduction

In this article I analyze the role of cooperation between firm divisions in the budgeting process. I seek to identify conditions under which interdivisional cooperation may or may not be desirable from firm headquarters' perspective. Interdivisional cooperation is defined as division managers (the agents) compensating each other with explicit monetary payments, implicit favors, or both, with the intent of hiding information from headquarters (the principal). Therefore, cooperation carries the same interpretation and hence is used synonymously throughout this article as collusion in Tirole [1986,1992].

It is well documented that collusive behavior arises as part of social norms among agents who interact frequently with each other (Dalton [1959]). Because budgeting is a firmwide multidivisional activity and necessitates interactions among division managers, it is likely that firms' budgeting mechanisms are influenced by the agents' collusive behavior. A key question is then whether interdivisional cooperation is desirable from headquarters' perspective. Contrasting views exist between practitioners and academic researchers on cooperative behavior: although managerial accountants often stress the importance of interdivisional cooperation for successful budgets (Dugdale and Kennedy [1999]), academic research shows otherwise. In particular, Tirole [1992] shows that absent contracting frictions (e.g., communication costs between the principal and agents), the revelation principle and the collusion proof principle imply that the principal is always weakly better off without collusion because collusion imposes cost on the principal to obtain information.

In this article I obtain insights regarding the role of cooperation in the firm's budgeting process by studying a setting in which some contracting frictions lead to a beneficial role for cooperation. In my model, the principal delegates different activities to two agents: a worker and a manager. The worker exerts costly personal effort to produce output and the manager has access to a costly investment project. The firm's production technology exhibits strategic complementarities in that the investment project increases the marginal productivity of the worker's effort. The principal designs a budgeting system that determines whether to invest and, if so, the payment to the manager to implement the investment project. The budgeting system also specifies a production and compensation schedule for the worker. I consider only cases in which, absent information asymmetries, the investment project has a positive net present value and will always be undertaken.



A key result is that collusion may be desirable to the principal because without it, the agents have no incentive to communicate their private information to each other. Two conditions are needed for this result to hold: ( 1) strategic complementarities exist between the investment and production activities, and ( 2) the principal make the investment decision before he or she contracts with the worker (i.e., sequential contracting). In general, strategic complementarities suggest that the optimal investment decision will depend nontrivially both on the agents' reports when the agents possess private information about the investment and on production activities. Thus, when the principal has to make the investment choice before contracting with the worker, the investment may be inefficient relative to when the principal can condition the investment decision on both agents' reports. The extent of the inefficiency depends on whether the manager observes the worker's private information and whether collusion exists between the agents.

More specifically, I find that conditional on the manager observing the worker's private information, collusion imposes an additional cost on the principal to obtain the agents' private information relative to when the agents cannot collude. When the manager does not observe the worker's private information, however, collusion is a necessary condition for the worker to share his or her private information with the manager. Intuitively, this result obtains because without collusion, the manager is better off volunteering the worker's private information to the principal if he or she observes this information, which in turn implies that the worker would not share his or her information with the manager in the first place. I show that it is possible that, as a group, the agents obtain a higher total expected payoff when they cooperate. More important, the principal can also improve investment and production efficiency by taking into account the information (about the worker) contained in the manager's report.

Prior studies analyze the effects of strategic complementarities and sequential contracting on general issues regarding organizational designs. For example, Milgrom and Roberts [1990,1995] argue that many modern production environments exhibit strategic complementarities. Marschark and Radner [1972] and Radner [1992], among others, suggest that communication costs permeate organizations and influence organizational design. Sequential contracting represents a specific type of communication cost. It can arise in many situations including, for example, when the end-user of an investment (the worker in my model) cannot commit to staying with the firm, or when information about post-investment environments is unavailable or difficult to articulate, which is likely when investments are irreversible and have uncertain outcomes (Dixit and Pindyck [1991]).

Casual observation suggests that some observed budgeting practices are influenced by strategic complementarities and sequential contracting. I discuss two examples here: bundling budgeting and bottom-up budgeting. In bundling budgeting, budgets are set for a group of activities rather than for individual activities.( n1) The underlying premise is that the bundled activities are complements to each other. In bottom-up budgeting, lower level plant managers initiate the budgeting process by reporting their information to middle-level management; the latter then submits a formal report to headquarters. This practice is consistent with communication costs between headquarters and lower level managers. For bundling budgeting, my analysis identifies a situation under which cooperation can help exploit gains from production complementarities. My results also suggest that policies prohibiting side payments may reduce the effectiveness of



bottom-up systems when communication from lower level managers is essential to exploit production synergies.

Most research on optimal budgeting mechanisms under asymmetric information focuses on either the role of budgeting as a communication channel between headquarters and division managers (e.g., Baiman and Evans [1983], Kirby et al. [1991]) or the impact of information asymmetry on the efficiency (or the lack thereof) of a firm's internal capital-allocation process (e.g., Harris, Kriebel, and Raviv [1982], Antle and Eppen [1985], Harris and Raviv [1996,1998], Bernardo, Cai, and Luo [2001]). This article contributes to this literature by analyzing budgeting processes with multiple divisions, emphasizing the role of interdivision cooperation in encouraging communication between division managers. This article is closely related to Kanodia [1993], who shows that participative budgets (i.e., budgets based on all divisions' reports) help coordinate activities across divisions. It complements Kanodia's study by focusing on situations in which full participative budgets are not feasible and by identifying a potential role for cooperation in alleviating the inefficiency caused by the (exogenously given) communication costs. In this sense, this article is similar to Melumad, Mookherjee, and Reichelstein [1992,1995], who also take communication costs as given and analyze their effects on the desirability of delegation.

This article also relates to several studies on collusion (e.g., Tirole [1986,1992], Kofman and Lawarree [1993]). Similar to these studies, I sidestep the exact mechanisms in the agents' collusive agreements. Unlike these studies (in which only one agent performs productive activity and has private information), both agents in my model perform productive tasks and privately observe their own information. Demski and Sappington [1984] study a setting in which both agents perform identical tasks and have correlated private signals.( n2) The agents in my model have different tasks and their private information is uncorrelated; the only connection between the agents is the production complementarities.



Abandon Budgets - And set your enterprise free

The budget process has been around for a long time -- but a growing body of opinion believes budgeting has finally reached its managerial 'use by' date. Why do they feel like that? And is there really sustainable fiscal life beyond budgeting?

A growing clutch of companies in Asia, Europe, America and even New Zealand are starting to think that the budget process is a hindrance, rather than a help to management. One major international survey found that nearly 90 percent of chief financial officers (CFOs) were dissatisfied with their budget process and that there was often no link between the annual budget and the organisational strategy.

Jeremy Hope and Robin Fraser, the management gurus who wrote the book Beyond Budgeting and now head the United Kingdom-based Beyond Budgeting Round Table (BBRT), believe that not only is the budget process a time-consuming, costly exercise generating little organisational value but also, and more importantly, that budgeting is a major limiting performance factor. They quote numerous examples of companies that have adopted the philosophies they now expound and which consequently have "broken free" and achieved success well beyond their expectations.

They say, for instance, that "so long as the budget dominates business planning a self-motivated workforce is a fantasy, however many cutting-edge techniques a company embraces". And they ask that if "modern companies reject centralisation, inflexible planning, and command and control, why do they cling to a process that reinforces those things?"

According to an article entitled Who Needs Budgets? which Hope and Fraser wrote for the Harvard Business Review earlier this year, "The same companies that vow to respond quickly to market shifts ding to budgeting -- a process that slows the response to market developments until it is too late."

But why is the budget process, as it currently stands, a "no brainer"? A survey performed on CFOs in 1998 by US consulting firm Hackett Benchmarking & Research, came up with a frightening statistic. There were 25,000 person-days invested in the budget process for every USS 1 billion of revenue. The study also found:

• the average time for a budget process was four months;

• 66 percent of CFOs stated their budget was influenced more by politics than strategy;

• nearly 90 percent of CFOs were dissatisfied with their budget process;

• 60 percent of CFOs acknowledged that there was no link from their budgets to strategy.

In my experience, this level of dissatisfaction is similar among boards, CEOs, general managers and budget holders here. I have recently finished two consulting assignments, one with a public authority, the other with a manufacturing operation, and the findings were the same. Hope and



Fraser state that for companies that have adopted the "beyond budgeting management model", the "spend it or lose it" philosophy that is at work in traditional organisations, has no meaning. Or as another writer put it; "incessant game playing invariably extends the budget round and limits the need for stretch or to seek breakthrough solutions".

The answer is to throw the budget process out. It takes too long, is not linked to strategic outcomes or 'critical success factors' and is a major barrier to success.

The existing budget model is useless for the following reasons:

• Budgets do not help companies focus on the performance drivers of today's organisations such as innovation rates, service levels, quality, and knowledge sharing. These are, however, clearly shown in a balanced scorecard.

• Budgets have been turned into fixed performance contracts and have led to dysfunctional behaviour with dire consequences. Managers in one study were found to be inclined to either try to beat the system or felt pressured to achieve targets at any cost--behaviour that generated many of the recent 'managed earnings' scandals.

• Budgets treat all employees as costs, whereas a team's talent, innovation and commitment are more important in determining performance than the 'personnel costs' of the team.

• The budget process builds silos, effectively compartmentalising a company into small units.

• Hope and Fraser believe that the budget process limits the ability of organisations to make full use of new management philosophies such as economic value added (EVA), balanced scorecard, activity based management (ABM), customer relationship management (CRM) and rolling forecasts.

Now, however, there is hope--pun fully intended. European companies have joined the BBRT to free themselves from the budgetary process. The BBRT case study of the famous British cider maker, HP Bulmer, UK (www.info-edge.com/samples/BI-3037sam.pdf), sets out clearly the doubts and concerns that exist in most organisations and provides a pathway forward. If senior management, budget holders, the finance team and the board read this eight-page case study it will revolutionise your business -- I promise you.

Bulmer's breakthrough began with the CFO attending a BBRT seminar. The CFO obtained permission from his board to assess the implications of the approach. The first step was a series of in-depth workshops across the company to ascertain the net worth of the existing budget system. To the company's horror it didn't find anybody who supported the present budgeting process. "We were absolutely overwhelmed by what we heard" said the CFO. The accountants worked every weekend for two months on the budget. They had, effectively, sat at their desks until 10pm to rework budgets nobody used. The budgets delivered only the variance analysis that each month resulted in statements like: "this variance is due to a timing difference because... ". Again, sound familiar?



The company now works on a 12-week cycle. Managers focus on sales growth targets, comparing sales against last year's actuals. They focus on the brands that have the potential to perform and investment is targeted to enable this capability. Costs are managed by measuring against a set of key performance measures. For instance, the manufacturing function's performance is measured against the KPI of cost per hectolitre rather than a fixed budget. Manufacturing now plans its timetable on a rolling 12-week basis so it can be more responsive to product mix changes. As the CFO says: "It is pointless having a fixed budget when you do not know exactly how much is going to be manufactured."

Changes proposed by a beyond budgeting management model are challenging. Throwing out a process that has been around for centuries requires a quantum leap (in thinking). But the Bulmer case study is an inspiration and a practical start point.

There are, of course, homegrown examples though most of them are practices by the local offices of European multinationals.

A major telecommunications giant has replaced yearly budgets with four-quarter rolling forecasts. The word budget has been dropped. The new process provides forewarning of events it expects will take place and in turn this approach allows it to take corrective action at an appropriate time.

Another multinational company involved in innovation for a long time has been using quarterly forecasts, six quarters out, since the early '90s.

This process enables companies to finalise numbers for the next three months while giving flexibility to management provided they operate within key benchmarks and comply with existing strategy. This development, like the balanced scorecard in my opinion, is a major management breakthrough.

In some organisations, in the public sector for instance, budgets are a legal requirement. In this case, an annual plan can be set in a quick two-week process. The plan should not, however, be broken down into monthly budgets. Establish a quarterly forecasting regime in which management sets out the required expenditure for the next 18 months and seeks approval for expenditure for the next three months.

Each quarter, before approving these estimates, management sees the bigger picture six quarters out. They can also keep an eye on the new annual forecast. The annual plan fixes the goal posts (sets the ranges) and the new forecast is meant to pass through the posts as long as the assumptions have not changed. Hope and Fraser point out the necessity to ensure honesty with forecasts. It is important to give the best estimates no matter how unsavoury they may be.

Use the general ledger for this exercise by using the revised budget field. Rename it something appropriate, like forecast, target, expected etc. Then create reports from the general ledger comparing actual against forecast. The major benefit is that this forecast is at most only three months old.



Replace budgeting with a bottom-up forecasting regime and benchmarking. In my view there is no room for top-down forecasts. They exist only because organisations use Excel, an inappropriate tool to compile forecasts and budgets.

To do bottom-up forecasting every quarter you need a bolted down system. Some managers successfully use an intranet-based interface with their general ledger while others use enterprise-planning software like Advisor or Adaytum.

Benchmarking becomes more important as progress is compared against 'best in class', both internally and externally for teams and divisions.

Hope and Fraser blame the budget process for compromising the beneficial impacts of many newly introduced management tools (see chart on page 42).

The beyond budgeting success stories all suggest a strong corporate culture based on individuals taking personal responsibility both for their individual performance and for the performance of the team.

Hope and Fraser use a golfing analogy to explain it: "Golfers keep their own score. No one cheats on the course or misrepresents their score. Nor do golfers need anyone telling them what score to aim for. They know their handicap and what they have to do to improve relative to their peers. Their performance is continuously measured after each event and their aim is continuous improvement."

Legend for Chart: A - Model B - How the budget undermines the model A B Economic value added (EVA) The "silo based" budgeting approach is incompatible with an added process view of the organisation which EVA requires. Benchmarking The extent of under performance against best-in-class standards loses its visibility as the short-term budget (fixed performance contract) dominates thought and action. Balanced scorecard (BSC) It is easy to turn the BSC with its financial



and non-financial measures into yet another fixed performance contract with the same dysfunctional behaviour. The silo approach to budgets again wins over the strategic and cross-functional focus that a BSC needs. Activity-based management models The budget process does not focus on cost drivers or critical success factors but instead forces management to sail a course that was set many months earlier which may have no relevance to prevailing conditions. Customer relationship management (CRM) The inside-out budget process is at odds with the outside-in CRM strategies. Sales staff are too frequently hell bent on meeting internal goals rather than customer satisfaction and customer profitability.

~~~~~~~~

By David Parmenter



Augus t 2007 I S TRATEG IC F INANCE 47

B Y T H E R E S A L I B B Y , C A , A N D

R . M U R R A Y L I N D S A Y , C M A

Most organizations recognize budgets as a key element in their manage-

ment control systems, but the usefulness of budgets has generated much

recent discussion and debate. Though budgets are useful for coordination,

communication, and performance evaluation, many people consider

them the cause of gaming and earnings manipulation by managers, time-

consuming and costly to develop, and a barrier to change. Indeed, even

Charles Horngren, whose popular textbooks have promoted traditional

budgeting for more than 40 years, admits that “numerous managers are

extremely unhappy about budgeting.” In their book Beyond Budgeting:

How Managers Can Break Free from the Annual Performance Trap, Jeremy

Hope and Robin Fraser argue that traditional budgeting is counterproduc-

Budgeting

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BEYONDBUDGETINGOR BETTERBUDGETING?IMA members express their views.



tive in today’s fast-paced and highly competitive environ-

ment. Instead of tinkering with current budgeting sys-

tems, managers would be better off abandoning

budgeting altogether—that is, companies should move

beyond budgeting.

Hope and Fraser propose a new management model to

take the place of budgeting for control pur-

poses. This new model is based on

employee empowerment and alterna-

tive methods of performance manage-

ment. In their view, traditional

budgeting with its emphasis on the

fixed performance contract—where

targets are set at the beginning of the

period and results are evaluated relative

to this static plan—won’t support the types

of extreme decentralization and employee empowerment

initiatives that are required for firms to be competitive

today. The clarity and cogency of Hope and Fraser’s argu-

ment suggest that it deserves serious consideration.

Moreover, the authors have marshaled some impressive

case studies from which they have derived their new

model of control.

But even casual empiricism suggests that the budget

remains an important part of many organizations’ control

systems, particularly in North America. While budgeting

practices may require improvement, for many firms bud-

gets are deeply ingrained in the “way we do things around

here” and may be the only means of communication,

coordination, and control across the organization. That’s

why it may be difficult for managers to give up budgets.

There are also several well-known examples of extremely

successful U.S. companies whose budgets lie at the heart

of their management control system. For example, John-

son & Johnson relies extensively on budgeting systems and

is perennially ranked as one of the best-managed firms in

Fortune’s annual survey. Emerson Electric is another such

company whose former CEO, Charles Knight, extols the

value of the company’s budgeting system in a recent book

called Performance without Compromise.

To capture the pulse of U.S. managers in terms of

their views of budgeting, we surveyed IMA members in

the spring of 2005. To be included, the IMA member

must have held a senior management position in a for-

profit organization in the U.S. that employs at least 100

people and must have had some influence over budget-

ing. We e-mailed those selected and invited them to

complete the survey by logging in to a password-protect-

ed survey website. In particular, we tried to find answers

to the following questions:

◆ Are there widespread plans for firms in the U.S. to

abandon budgeting? In other words, are budgets

dispensable?

◆ Do managers generally agree with the major criticisms

that have been levelled at budgeting?

◆ Do managers view these problems as having more to

do with how budgets are used than with budgeting

itself? In other words, is budgeting inherently flawed?

◆ Do managers believe budgets are adding value in their

organizations?

A total of 212 IMA members completed surveys.

Approximately half worked for manufacturing organiza-

tions and the other half for service companies, such as

financial services, consulting, real estate, etc. Respondents

had been in their current position an average of about

five years and were employed on average about eight

years with their company. Average total revenues for the

business units surveyed was estimated to be between

$50 million to $100 million with total revenues ranging

from less than $1 million (four responding organizations)

to total revenues greater than $5 billion (nine responding

organizations).

We’ll now share the results.

ARE BUDGETS D ISPENSABLE?Respondents indicated their degree of agreement with the

statement “Budgets are indispensable; we could not man-

age without them.” With 1 indicating strongly disagree

and 6 strongly agree, the average response was 4.22, indi-

cating that managers tended to agree at least somewhat

with this statement. In fact, Figure 1 reveals that fully 50%

agreed or strongly agreed that budgets are indispensable

48 STRATEG IC F INANCE I Augus t 2007

0%

5%

10%

15%

20%

25%

30%

35%

Stronglyagree

AgreeSomewhatagree

Somewhatdisagree

DisagreeStronglydisagree

Figure 1: “Budgets are indispensable; we couldnot manage without them.”



and companies couldn’t manage without them. Only 15%

disagreed with this statement. This statistic supports the

view that budgeting won’t become an endangered species

anytime soon, but there are a minority of firms who may

be receptive to the beyond budgeting message.

CRIT IC ISMS OF BUDGETSNext we examined six key criticisms of budgets as deter-

mined by a review of the budgeting literature. Figure 2

presents the distribution of responses. Overall, 28% of

respondents disagree that budgeting is time-consuming

and costly, while an equal proportion agrees with this

statement. On average, the complete budgeting cycle took

10.3 weeks to complete in the responding organizations,

with each individual manager spending about two to

three weeks preparing the part of the budget under his or

her control. This time frame appears to be much less than

the 10 to 15 weeks alluded to by Hope and Fraser.

In addition, 64% of the respondents agree or some-

what agree that budgets are slow to detect problems,

while 51% of the respondents disagree or somewhat dis-

agree that budgets quickly become out of date. Fully 76%

of the respondents disagree or somewhat disagree that

the budget process lacks rigor and is based on unsupport-

ed assumptions, while 47% disagree with the statement

that budgeting causes adversarial relations rather than

cooperative behavior within companies.

We further explored the concern that budgets may

quickly become out of date. About half responded that,

once accepted, budgets were fixed and no

changes could be made to them. The other

half attempted to deal with the need for

budgets to be updated by allowing for revi-

sions during the year on an ad hoc basis

(25%), on a quarterly or semiannual basis

(15%), or on a rolling basis (10%).

Sixty-six percent of the respondents agree

or somewhat agree that comparing actual to

budget doesn’t measure a manager’s perfor-

mance reliably. Despite this concern, on

average, responding organizations tended to

place moderate to considerable reliance on

the budget for performance evaluation and

control purposes. To better understand this

issue, we examined in more detail the way

responding organizations use budgets. In

particular, we were interested in whether

companies use budgets rigidly in the sense

of a fixed performance contract as Hope

and Fraser have suggested. To this end, we asked respon-

dents to indicate the degree to which budgets were

emphasized in performance evaluation. Overall, 63%

indicated budgets were significantly emphasized in evalu-

ations, but 37% indicated they weren’t. We then asked

respondents from the first subset to select the statement

from the following list that best described how managers

were evaluated in their organizations. Here are the per-

centages of respondents who chose each of the following

statements:

◆ Budgets are used rigidly as a performance evaluation

standard (15%).

◆ Noncontrollable variances are backed out before com-

paring actual to budget (25%).

◆ Budgets are adjusted for actual values of key contin-

gency variables using a formula established at the

beginning of the period (5%).

◆ Evaluations are based on both meeting the budget

standard and performance on other nonfinancial

targets (25%).

◆ Evaluating managers consider performance relative to

the budget standard along with other considerations

incorporated subjectively into the evaluation (30%).

In summary, it seems that many organizations use

budgets as a basis for performance evaluation, but only

15% indicate actual performance is compared rigidly to

pre-established budget targets as the only basis for evalu-

ating managers’ performance. These results suggest that

budgeting may not be used as rigidly in many organiza-


0%

10%

20%

30%

40%

50%

60%

AgreeSomewhat agreeSomewhat disagreeDisagree

Disruptscooperation

Processlacks rigor

Quicklyout of date

Not reliable forperformancemeasurement

Slow to detectproblems

Too time-consuming

Figure 2: Criticisms of Budgeting



tions as the beyond budgeting literature might lead us to

believe. Indeed, many organizations incorporate bud-

getary performance subjectively into the overall perfor-

mance evaluation of managers.

The final—and perhaps most important—criticism

involves budget gaming. Hope and Fraser argue that tying

budget targets to compensation contracts encourages

managers to game the budgeting system to increase the

probability they’ll receive positive performance evalua-

tions and, therefore, any related bonus. To investigate this

matter, we asked respondents to indicate how frequently

they had observed budget games in their organizations

over the last two years. In particular, we wondered how

often managers:

◆ Spent money at the end of the budget period to avoid

losing it in the next budget period.

◆ Deferred necessary expenditures (e.g., maintenance,

advertising, R&D) to meet current period budget

targets.

◆ Accelerated sales near the end of the reporting period

to make the budget.

◆ Took a “big bath” when budget targets couldn’t be

attained.

◆ Negotiated easier targets to help ensure bonuses

would be received (i.e., sandbagging).

As Figure 3 indicates, all of these budget games occur

at least occasionally in many of the organizations sur-

veyed, but deferring necessary expenditures and sandbag-

ging occur most frequently.

Hope and Fraser are concerned that by tying the

achievement of short-term budget targets

to managers’ compensation contracts,

managers may focus on increasing short-

term profit to the detriment of long-run

performance. When asked whether gaming

impaired long-run organizational perfor-

mance, 61% indicated either not at all or a

little, 22% indicated long-run performance

was moderately impaired, and 17% indi-

cated it was impaired considerably or to a

very high extent. Thus, 39% of companies

who reported gaming behaviors indicate

they have at least a moderate impact on the

company’s long-run performance. This is a

potentially worrisome finding.

Overall, this data clearly indicates that

budgeting has problems and that many

criticisms are valid, but these problems are

far from universal in their application to all

companies. These results suggest that further analysis is

needed to determine the specific conditions giving rise to

these problems.

I S BUDGET ING INHERENTLY FLAWED?While no one would deny that budgets and budgeting

have their problems, there’s no consensus in the literature

as to whether companies can overcome these problems.

To investigate this matter, we asked respondents to indi-

cate whether they agreed that “The problems with bud-

geting are more to do with how they are used and some

of the roles they are asked to play; budgets have potential

to be extremely useful if used appropriately.” The average

level of agreement with this statement was 5 on a scale of

6. It’s interesting to note that 96.3% of respondents

agreed “at least somewhat” with the statement.

ARE BUDGETS ADDING VALUE?The previous analysis indicates the majority of organiza-

tions will continue to use budgets. Given this observa-

tion, we wondered to what degree respondents viewed

budgeting processes as adding value, so we asked respon-

dents to assign an overall grade to their budgeting system

using a scale of 0 (disaster) through 100 (excellent), with

scores below 50 indicating a failing grade. In assigning

this grade, respondents were supposed to take into

account the amount of management time spent on the

budgeting process, the budget system’s effectiveness in

assisting the business unit to achieve its goals, and any

dysfunctional behaviors that the budgeting system might

50 STRATEG IC F INANCE I Augus t 2007

0%

10%

20%

30%

40%

50%

60%

Occurs FrequentlyOccurs OccasionallyNever Occurs

Negotiatingeasier targets—“sandbagging”

Taking a“big bath”

Accelerating salesnear year-end tomake the budget

Deferringnecessary

expenditures

Spending moneyat year-end toavoid losing it

Figure 3: Budget Gaming



cause. The average grade assigned to the budgeting sys-

tem was 70 out of 100, indicating that, on average, good

value was being obtained from the budget—even after

considering the time and cost of budgeting and the dys-

functional behavior it can motivate. As Figure 4 shows,

66% assigned their budgeting system a grade of 70 or

above, indicating they received good to excellent value

from it. Of the remaining respondents, 25% indicated

that the budget was more helpful than harmful, and only

8% indicated they received no value or negative value

from their budgeting systems.

WE ST ILL WANT BUDGETSOur results indicate three main things. First, while many

criticisms levied against budgets are valid, they’re far

from universal. Second, respondents indicate overwhelm-

ingly that they couldn’t manage without budgets. To

them, budgets are indispensable. Third, instead of going

beyond budgeting, they’ve chosen to improve the budget-

ing process and carry on. That is, budgeting appears to be

a process that’s evolving. It’s interesting to note that a

budgeting forum held in the United Kingdom in 2004,

sponsored by the Chartered Institute of Management

Accountants and Institute of Chartered Accountants in

England and Wales, came to a similar conclusion (see

http://www.icaew.com/index.cfm?route=117649).

Do these findings invalidate the management model

espoused by the beyond budgeting movement? The

answer is clearly, no. The data does support the view that

problems exist with the budgeting systems in some com-

panies, especially with respect to budget

gaming. But the data also suggests that

claims that budgets are fundamentally

flawed are probably overstated. Although

an accurate assessment of this conclusion

would require a rigorously designed study

comparing performance data of firms

using budgets for control with those fol-

lowing the beyond budgeting model, the

data reported here suggests that such a

blanket statement appears unwarranted.

Organizations continue to use budgets

for control purposes, and they derive con-

siderable value from their use. It would

seem more fruitful to determine when tra-

ditional budgeting loses its effectiveness

and whether the way a budget is used

impacts the value that organizations expe-

rience. For example, the results indicating

that budgetary information is used in a variety of different

ways for performance evaluation across firms suggests the

fixed performance contract argument of the beyond bud-

geting movement is far from universal in its application.

It’s entirely possible, as the Johnson & Johnson and Emer-

son Electric examples indicate, that both the beyond bud-

geting and budgeting models can be highly effective if

designed appropriately, regardless of the specific condi-

tions faced. Alternatively, one approach may have a greater

propensity of success than the other under certain condi-

tions. Nevertheless, while many of us might be skeptical of

abandoning budgeting, the beyond budgeting movement

has sparked deeper thinking by us all about the usefulness

of budgeting for purposes of management control. ■

The authors would like to thank the Social Sciences and

Humanities Research Council of Canada and the Institute

of Management Accountants (IMA®) for support of this

project. In addition, we appreciate the help of IMA mem-

bers who participated in our survey.

Theresa Libby, CA, Ph.D., is an associate professor of man-

agement accounting and control in the School of Business

and Economics at Wilfrid Laurier University in Waterloo,

Ontario, Canada. You can reach Theresa at [email protected].

R. Murray Lindsay, CMA, Ph.D., is professor of accounting

and dean of the faculty of management at the University of

Lethbridge in Lethbridge, Alberta, Canada. You can reach

Murray at [email protected].


0%

5%

10%

15%

20%

25%

90+81-898071-797061-696051-5950<50

“Negative” or“No value”

“More helpfulthan harmful”

“Very good” to“Excellent” value

Average grade = 70%“Good value”

Figure 4: Are Budgeting Systems Adding Value?



is budgeting necessary? a discussion on the current perpsectives on budgeting

Education

proof of completion

budgeting purposes

budgeting presenter

better budgeting

financial results

comparedto budget

annual budget

online cpd