managing risk and uncertainty in beyond budgeting implementations by matthew leitch, july 2003 contents managing

Managing risk and uncertainty in
Beyond Budgeting Implementations
By Matthew Leitch, July 2003
Contents
Managing risk and uncertainty in
Beyond Budgeting Implementations
Introduction
------------
If you’re thinking of moving to a Beyond Budgeting model then, as with
any important change, you face risk and uncertainty. Will people
accept what you propose? What happens if your CFO is replaced? What
should you do about the bits of your vision that aren’t very clear?
Others are looking at your proposals and wondering if they will work
and what could go wrong.
Even the best supported and quickest Beyond Budgeting implementations
have not been done overnight. (The most aggressive implementation yet
documented - Rhodia - took 2 or 3 years to complete even though the
initial changes to remove fixed performance contracts were very
quick.) There are scores of things that must be changed and some of
the steps some companies have taken, such as implementing rolling
forecasts, can be technically difficult.
Managing risk and uncertainty for your project is one of the most
important keys to success. There are two aspects:
1.
Devise a project plan with an inherently excellent risk profile.
1.
Think about areas of uncertainty and specific things that might
happen but which are not the most likely or planned outcome, and
consider how to control or influence them.
Devise an inherently robust project plan
----------------------------------------
This first aspect is the most important as it is the most effective in
managing risk. This section offers some guidelines for structuring
projects, a list of typical implementation steps based on the content
of the book “Beyond Budgeting”, and some suggestions for relatively
easy yet very beneficial early steps to get you started.
The golden rule is to divide the total project into around 50
deliveries, each of which is beneficial on its own. Beneficial changes
are delivered (often in groups) every few weeks or even more often,
rather than in a big bang after months of analysis and design. You
should also be flexible and prepared to change your approach based on
what you learn from work completed.
This approach is called “Evolutionary Project Management” and there
are many excellent technical reasons why it is the best known method
of structuring projects. It slashes risks of failure, accelerates
benefits, increases learning from experience, reduces the risk of
working towards obsolete requirements, and enables real progress to be
tracked instead of imagined progress. It is also the only style of
project management that is philosophically compatible with Beyond
Budgeting, as it emphasises adaptive processes.
However, the reason most Beyond Budgeting implementations to date have
been achieved through small changes that were individually beneficial
is simply that top management would not approve any work that did not
deliver benefits quickly and easily.
In response people have instinctively turned to some kind of
evolutionary approach, without realising it is the state of the art in
project management.
Quite often there has been one delivery of particular importance that
has been seen as the Beyond Budgeting implementation. This is where a
new procedure for adaptive planning is rolled out for people to follow
instead of budgetary control. However, there are many other activities
that go on before and after this crucial step so the true scope of a
Beyond Budgeting implementation is always wider than this.
The BBRT strongly recommends that the entire vision for Beyond
Budgeting be explained before approval for specific changes is sought.
However, this does not prevent organisations from taking their
implementation a step at a time, or approving specific actions in
stages.
Your Vision
You should already have ideas about what you want to do instead of
budgetary control. This grand design, or “vision”, may have some gaps
and will certainty be missing a lot of detail.
No matter. Your vision will be extremely helpful in planning, and in
adapting your plans as implementation unfolds.
Some companies have faced many obstacles on their way to a Beyond
Budgeting model and had to implement parts of it when management
recognised a need. It helps to know what you want to build so that you
can seize such opportunities and resist pressure to make changes that
would undermine your vision.
Some companies have sketched a series of designs showing how their
performance management systems and processes can be transformed, in
phases, from bad old budgetary control to the adaptive, effective
Beyond Budgeting model.
At Unilever, Steve Morlidge has devised a grid that allows group
companies to locate themselves on each of 6 aspects of the Beyond
Budgeting model according to where they are between traditionally
fixed, and fully adaptive. Steve’s scheme has two intermediate
management models. It is possible to show where you currently think
you are and where you would like to get to.
Developing your vision is outside the scope of this guidance, but it
helps to develop your vision and the outline of your implementation
plan together.
It is not necessary, or even possible, to design your new approach in
every detail in advance. Trying to do that is a good way to kill your
project before it even starts. Done correctly, your implementation
plan will give you the opportunities you need to learn from experience
and design the details so they work in practice.
Planning your route
Planning your route is something you need to do once you have assessed
the case for change and started telling people in your organisation
about the Beyond Budgeting model. If you can see interest in Beyond
Budgeting in principle it may be time to develop some much more
concrete proposals.
Even the best vision won’t tell you what to build first or what steps
to take to do so. Sometimes, the exact sequence of steps does not
matter, but often it does.
Planned well, management performance will improve from the very first
step of your Beyond Budgeting implementation, with no transitional
dip, and as all the elements of the Beyond Budgeting model fall into
place the benefits will be magnified by increasing coherence. The
tendency for the old model to reassert itself while key elements
remain can be managed by obtaining Board support for the whole vision
at the outset and by other actions that manage this particular risk.
It is not necessary to plan every step of your project from start to
finish in detail. Have an overall plan and work on the details of the
first things you will do.
There is no sequence of steps for implementing the Beyond Budgeting
model that is the best for every organisation. Discussions between
Beyond Budgeting members, and experience from implementation projects
so far, shows that every Beyond Budgeting implementation plan must be
crafted to fit the circumstances of the organisation involved.
Take steps in the sequence that accelerates benefits and hastens the
day when budgets are abandoned. Do things in a sequence that
accelerates delivery of benefits rather than because it looks like a
logical train of thought towards a perfect end result. Don’t aim for
perfection every time, just for improvement.
For example, imagine a case where management is currently based on
detailed financial budgets, with no other information available. What
would happen if the details were ignored and only summary financials
used? The purely financial perspective is far from ideal, but it is no
worse than it was before. People are used to the issues and to some
extent already work around them. Also, time is saved through the
reduced detail and more freedom is given to managers.
With hardly any effort a significant step towards a Beyond Budgeting
model has been taken and conversations about the figures will be more
strategic. Over time, new KPIs can be added and systems enhanced. Each
improvement will make the management model better still.
The Road Map
Associated with this guide is an Excel file containing a list of
typical steps in a Beyond Budgeting implementation. (It does not cover
the initial work of generating enthusiasm and winning Board approval -
just the implementation.)
This “Road Map” is designed to help you think through the alternative
routes to a Beyond Budgeting model. It does not propose a route.
Steps are grouped under typical elements of a beyond budgeting model
or implementation project to help you link them to your vision. The
groups are graded GOLD, SILVER, and BRONZE as a very general
indication of which are best to do first.
There are also suggestions for how each group of steps might be
repeated in iterations. For example, you might need to do something
once initially, then a second time after introducing more
decentralisation. Or you might have to redesign a management
information pack more than once to accommodate trend graphs, then new
KPIs, improved cost analysis, external benchmarks, and so on, as they
become available. Waiting for everything to be finished before
redesigning management information packs would lead to a long delay to
even simple improvements.
Looking at the list of typical tasks and iterations it is easier to
see how you can break a large programme of change into around 50
beneficial deliveries.
How to use the Road Map
If you want to make use of the Road Map as a source of ideas, link it
to your vision and start amending the list of steps to fit.
You may also want to tackle your organisation in sections. For
example, head office then units, or a trial unit or division first, or
tackle divisions one by one. If your approach to each part of your
organisation is likely to be different then you will need to produce
more than one list of tasks. If not, it may be enough to create the
tasks once and copy them.
It may be helpful at this point to consider and list the resources
needed to do each task. Who can do them? How much work might be
involved? Does money need to be spent? Some very important steps may
take only a few hours of spreadsheet editing, while others may be
three year IT projects.
Remember to put most detail into the earliest steps.
For large groups of companies it may be impossible to plan in detail
for each company. Sometimes, a member company moves to the Beyond
Budgeting model but the group does not. In other examples, budgets
have been abandoned at the group level but are still used by some or
all member companies.
You will need to devise a plan for the group level, and a way to
change performance management in each group company. Some groups
enforce the same procedures and systems on every group company, but
others give more freedom to member companies and would expect each one
to have its own vision and implementation plan.
Ideas for sequencing changes
A good sequence brings benefits quickly, uses resources efficiently,
provides opportunities to learn from experience, and manages risks
such as rejection and loss of control.
This section lists many considerations that may help in sequencing
deliveries and steps. Consider if there are any over-riding
considerations that determine your approach. Then consider each task
or delivery, and each organisational unit and see what sequencing
constraints and considerations apply. As necessary, go back to
modifying the steps. Give ratings to tasks (e.g. priority numbers or
colour coding). Gradually build up a picture of what you want to do,
in what sequence, when and why. Many things can be done in parallel.
Some important sequencing rules of thumb are:
1.
Do the most beneficial things first.
1.
Do the easiest things first, and that includes working with the
most receptive and enthusiastic people first.
1.
Do things early that will produce visible evidence of change and
benefits.
1.
Do things early that reduce fear of internal control failure.
1.
For things that might prove difficult to design give yourself time
and a chance to learn from experience.
1.
Reduce delays and dependencies by using iterations instead of
waiting for one area to be complete and perfect before moving on
to the next.
1.
Replace annual processes with more frequent adaptive processes
early if possible. As long as you are locked into an annual cycle
it is hard to make improvements more often than annually so
learning and progress are slow. Once you operate faster cycles,
improvements can be delivered more quickly.
1.
Do not be too concerned if you cannot decide a sequence all the
way to the end of the implementation. Have a plan to the end, but
put most detail into planning for the next few steps, and be
prepared to change the route on the basis of what is learned and
what happens as steps are completed.
Consider a step as potentially having a high value if, for example,
it:
1.
directly dismantles the fixed performance contract (because until
you do this other improvements will have little effect);
1.
replaces or removes something that currently takes a lot of time
or is very damaging;
1.
helps your organisation be better at something that is important;
and/or
1.
uplifts something that is currently very weak and undermining
other things (e.g. very poor selection of KPIs).
Consider a step as potentially being easy to do if, for example, it:
1.
just involves stopping doing something;
1.
requires help only from the most enthusiastic and competent
people;
1.
requires very little new design work;
1.
avoids extensive software engineering;
1.
does not involve difficult negotiations;
1.
involves (re)educating only a few people; and/or
1.
will disadvantage nobody, or at worst only a small minority, and
therefore should face little political resistance.
Here are some reasons for considering a step as potentially reducing
fear of internal control failure:
1.
It mitigates the risk that some managers will actually perform
worse as a result of being asked to work differently. This risk is
greatest where managers are given greater authority, and there is
also some risk when the fixed performance contract is removed.
This is due to the amount of learning needed by managers. Useful
mitigation of this risk includes training, increased cycle
frequency (because of more opportunities to learn and less to
forget), improved central monitoring of actuals, and improved
central monitoring of skill.
1.
It gives senior management a clearer picture of what is happening
in the business than can be gained from budget variance analysis.
For example, improving management information packs to show trends
and better analysis of existing information will increase
confidence and quickly make the variance analysis against budgets
seem less important;
1.
It involves internal auditors and gets them on side. They will
appreciate being helped to understand what is going on and will
want to feel that they have an excellent understanding of the new
model and the project so that they can report on it.
1.
It involves external auditors and gets them on side. External
auditors do not have "control requirements" but some (e.g.
PricewaterhouseCoopers) do like to place reliance on management's
use of management information and budgets. They will appreciate
being fully informed and helped to understand how the Beyond
Budgeting model works and why it will decrease the risk of
creative accounting while increasing management's ability to spot
problems.
1.
It deliberately adjusts internal controls to support the new model
appropriately rather than simply removing old controls.
Coherence and consistency
Fixed performance targets and the Beyond Budgeting model are not
compatible. Also, despite the fact that nearly everyone has
instinctively understood the principles of Beyond Budgeting since
childhood there is still intellectual conflict between the Beyond
Budgeting approach and “traditional” management control thinking.
Most Beyond Budgeting implementation teams have had to continue
promoting the value of their vision throughout the implementation and
for years beyond.
During your implementation project there will be periods where you
have elements of old and new management models running side by side.
In the book “Beyond Budgeting” this is described as an incoherent
management model. That is not to say it is less effective than pure
budgetary control, but it does mean it is less effective than a pure
Beyond Budgeting model and that there will probably be some conflict
between the models.
If you break the annual fixed performance contract early this will
reduce the tension between old and new management models. Other
management tools you introduce will also be more beneficial as a
result of removing the fixed performance contract.
The fixed performance contract is, in reality, often several fixed
performance contracts. For example, a manager in a subsidiary company
may be influenced by:
*
personal objectives, agreed annually;
*
annual budget or other departmental or company
internal targets;
*
annual budgets submitted to Group; and
*
annual company and group external financial
reporting.
All these make it difficult for managers to update their plans and
expectations more often than once a year. The more of these that can
be removed, or at least made less detailed, the easier it is to behave
adaptively. However, if this freedom is not granted no amount of
decentralisation, empowerment, improved information, or exhortations
to be responsive will have much effect.
On the other hand, as the fixed performance contracts are loosened and
removed each improvement in information, governance, empowerment, and
so on can translate into better, faster adaptation.
At a more detailed level there are practical matters of consistency to
consider when planning the steps to your vision. For example, imagine
you have just decided that a certain set of measures are the most
important in your business and have begun monitoring a new scorecard
that shows them. You have a problem if people are still rewarded for
achievement on the old set of measures.
Breaking down large tasks
Problems of consistency can make it look like you have no alternative
but to make large bundles of changes together rather than delivering
smaller improvements more frequently. However, these apparent
difficulties can be overcome by devising convenient ways to roll out
coordinated changes rapidly. Rather than large, complicated rollouts
that change everything your rollouts will be smaller, easier, and
introduce change in increments that people can adapt to.
For example, consider again the problem of changing the measures that
are used in a business. Even if you debate long and hard in a country
hotel with consultants in attendance the first rethink of measures
will still be based on a certain amount of guesswork. If you only
allow yourself one chance to get it right you won’t. Furthermore, some
numbers will not be available at first. You won’t want to wait until
all are available before you start showing the ones that are.
The first scorecard design and cause-effect model is just a starting
point and experience from doing things differently and watching the
effects should allow you to revise those ideas and make your model
more reliable.
You will need to tell people that a series of improvements is coming,
and then establish a pattern of rolling out small changes frequently.
People will have to accept that their management information pack will
change slightly from month to month, that not all numbers have a full
past history or comparatives, and that some numbers will change their
definitions. They will have to understand that the scorecard on which
their rewards might be based will change from time to time to better
reflect the true needs of the business and that they will be expected
to take note of the changes and adapt.
It would be wrong to roll out radical changes frequently as different
theories about how the business works are considered and rejected.
This kind of vacillation is damaging. You need to think clearly about
the uncertainty that remains and focus on delivering early the
improvements that look most likely to be well chosen while working to
reduce the uncertainty over other ideas.
Of course, if the position your project starts from is one of
inconsistency, then if you need to you can remain inconsistent as you
deliver improvements, and also gain from increasing consistency when
you can.
Once you get used to thinking in terms of small deliveries that are
beneficial on their own it is easy. However, at first it can sometimes
be hard to see how some parts of your vision can be delivered
incrementally. Here are some examples to show how apparently large
deliveries can be broken down into more manageable ones.
*
Rolling forecasts: Producing 5 quarter rolling
forecasts every quarter is often something that
companies want to do. It is technically demanding
and companies have found that it sometimes exceeds
the power of MS Excel. Nevertheless you can break
it down in various ways:
1.
Company by company around a group, or division by
division.
1.
Getting progressively more accurate.
1.
Start with one quarter ahead and then extend.
1.
Don’t try to forecast everything. Consider what
decisions you will actually make on the basis of
forecasts and start by trying to forecast just the
things that you need to know for the most
important of those decisions (e.g. hiring,
Christmas stocks).
1.
Do “best guess” forecasts first, then add
probability distributions to show your uncertainty
explicitly.
*
Decentralisation: Another big step? Not
necessarily. Even radically decentralised
organisations like Svenska Handelsbanken got there
in stages. The limiting factors are the skill and
appetite for responsibility of the people to whom
more responsibility is being given. Add new
responsibilities gradually and keep pouring on the
training and coaching.
*
Internal trading: One might think that to work at
all internal trading has to be realistic and
comprehensive, so the natural first step is to
list all the things that could be traded
internally before devising a negotiating process,
and so on and on. An alternative view is that you
can get there in stages. For example, you might
move from approximate cost reallocations between
divisions (based on progressively more accurate
and comprehensive records of services and goods
provided), through a period where more and more of
the most important services come to be traded
according to negotiated prices. Gradually,
competitive pressures increase and pricing
accuracy improves.
Your first steps
By now it should be clear that a Beyond Budgeting implementation is
not a burst of “quick wins” followed by a tough and lengthy project
that delivers the more fundamental change. Your project is going to be
a continuing series of quick wins from start to finish. Nevertheless,
there are certain changes that stand out as a good way to start.
Eject the fixed performance contract. A previous section gave many
characteristics of steps that should be done early on. On many of
these factors it is steps that dismantle the fixed performance
contract that come out on top. Not creating budgets is just a matter
of stopping doing something. It saves vast amounts of time in the
Finance department and 8 – 10 times as much elsewhere (which is often
time needed for implementing other steps), and lots of other changes
bring little benefit until the fixed performance contract is removed.
By comparison, just simplifying the fixed performance contract (e.g.
by moving to high level KPIs) saves far less time (because the time is
taken by negotiation, not computation) and does not magnify the
benefits of other steps.
Removing the fixed performance contract creates opportunities for
improvements in many areas that were not possible otherwise. The case
of Rhodia is a good example of this. Svenska Handlesbanken shows what
can be achieved over a longer period.
What if you have just built a new budget? Surely you don't want to
waste that work by abandoning budgets now. Why not? As everyone knows
sunk costs are irrelevant to decisions. The sooner you stop budgeting
the sooner you can stop calculating variances and negotiating
explanations. The sooner the fixed performance contract is dismantled
the sooner people will turn their attention to what matters, stop
playing with numbers, and start managing risks properly. Don't wait
another year to enjoy these benefits.
Sight Savers International actually prepared a budget as the starting
point for abandoning budgeting. This meant they had just been through
a planning cycle, which made the first rolling forecasts easier and
provided the perceived security of a fallback if the new approach did
not work.
Appraise people differently. This is really just part of breaking the
fixed performance contract, but it is perhaps the easiest and most
important except with employees who are union members. The easy part
is to say you will evaluate performance retrospectively, taking into
account actual conditions rather than using a target negotiated far in
advance. Then provide what data you have on performance in a form that
allows people to make comparisons.
In an organisation that aspires to adaptive processes it makes little
sense to discuss personal plans with people annually. Accelerate the
cycle up to quarterly and each cycle will become much easier and
quicker to do, you will have more opportunities to make refinements,
and what people decide to do will be relevant for them instead of
embarrassingly obsolete for most of the year.
If frequency is increased the process must be simpler and the
paperwork shorter. This will be welcomed by everyone but also makes it
much easier to design, agree, and roll out the simple forms needed. As
always, plans that are written out in detail and at length, with much
debate and negotiation tend to be plans nobody wants to change, even
when they should. So keep it simple and encourage people to respond
appropriately to events.
Read about the Svenska Handelsbanken approach in the book, “Beyond
Budgeting” (at the top of page 63 in the hardback first edition).
Make better use of existing data, e.g. in your management accounts.
Steps that do this rank highly because they give senior people a feel
for what they are going to rely on instead of variance analysis, are
typically done monthly so changes can be very rapid, and often amount
to little more than modifying some relatively simple spreadsheets.
Start providing graphs of past history so that trends leap off the
page at readers. Add league tables – often it’s just a matter of
sorting existing tables. Make an effort to refine the designs so they
are clear and packed with interesting data.
Not everyone has the design skill to do this well but if you do it can
make an impact out of all proportion to the time and effort needed.
Pretty soon readers will be looking at the trends and league tables
and ignoring the variance analyses. When you cut out the budget they
may not notice.
Another area for improving the way you use existing measurements is
monitoring of actuals. The better your scrutiny of trends and
fluctuations the more obvious it will be that budget variances have
nothing useful to say.
Do a pilot. Pilots are useful because they allow you to try a lot of
things on a small scale. There is no need to wait for a pilot to
complete before starting in other areas, however.
Stop saying “budget”. Set an example by not saying words that
reinforce fixed performance contracts, annual cycles, and all the
other things you are trying to replace.
Summarising your plan
Resist the temptation to upload hundreds of tasks into Microsoft
Project and start printing Gantt Charts and network diagrams. That’s a
lot of work and will discourage you from changing your approach in
response to events and better ideas.
Try to summarise your plan on one or two sheets of paper. There will
probably be some work going on in parallel. Suggest rough dates based
on assessments of how long it might take to do things. Add detail for
the initial stages, showing what beneficial change is delivered each
time and how.
A simple plan showing milestones of achievement (i.e. things done,
delivered, and working rather than intermediate steps of work) is
easier to explain and revise.
Link your plan to your vision, for example by colour coding or
numbering elements of your vision.
Workshop outline
You can involve more people in implementation planning by running a
workshop. Here’s a suggested approach:
1.
Pull together what has already been done on a
vision and link the Road Map steps to it in some
way as preparation for the workshop. Expand/edit
the list of steps to give a reasonable starting
point.
1.
Start the workshop as usual with an explanation of
the agenda and explain the Evolutionary approach.
1.
Then discuss priorities in general. For example,
most needy/easiest divisions or subsidiaries,
easiest ways to start, etc. You might put up
tables and do ranking on the various factors that
affect priority. Alternatively, list things that
are distinctive about your organisation and
consider what they imply for your project.
1.
Survey constraints such as when people will be
available, constraints imposed by the timing of
existing annual cycles, related systems projects,
organisation changes, etc.
1.
Discuss overall implementation strategies.
1.
Have a go at some possible sequences and see if a
favourite emerges.
1.
After the workshop it is likely that you will need
to do some extra work to tidy up the output, check
for silly mistakes and generally validate the
logic of what is being proposed and flesh out
details.
1.
You may need a follow up session to deal with
unsolved problems. Otherwise it could be just a
matter of collecting agreement to the conclusions.
Manage areas of uncertainty and specific risks
----------------------------------------------
Project risk management is a well established discipline and there is
plenty of general guidance on how to do it and how to organise for it.
Most of this is useful but one thing is different for a Beyond
Budgeting implementation.
Conventional project management is based on budgetary control and risk
management is seen as a way to achieve the original objectives no
matter what happens.
If you apply this approach it will not work well and you will be seen
as a hypocrite. Therefore, the adjustments that let you live your
principles through the project are included in the suggestions below.
Typical areas of uncertainty
This section just discusses the risks that are characteristic of
Beyond Budgeting implementations, and gives some ideas on how to
manage them.
As your implementation proceeds you will have the opportunity to learn
and to revise designs and plans. It is vital to make good use of these
opportunities. Start by becoming aware of your current uncertainties.
For example:
Time and resources needed, and benefits that will be delivered. You
can’t know for sure. The conventional way to try to deal with this is
to set a budget, a deadline, and it is now fashionable to set targets
for benefits at the outset as well. Usually there will be a
contingency or “risk budget”. Through the project you are supposed to
monitor variances and take corrective actions to get back on track.
This is budgetary control and, not surprisingly, it does not work very
well.
Instead, make a forecast in the form of a range of outcomes and revise
it often. Your forecasts for the next stage should be fairly tight,
but your long range forecasts will be looser. If you think you should
be able to achieve more try changing your implementation steps and
reforecast.
One of the huge advantages of evolutionary projects is that you are
delivering benefits frequently, rather than laying the groundwork for
benefits that eventually might be delivered.
From time to time get your stakeholders together to discuss what has
been achieved so far, what benefits have been enjoyed and what has
perhaps been disappointing. Rethink your ideas about what the benefits
should be and apply this new understanding to the rest of your plan.
Current state of the management model. One reason for prioritising an
improvement is that the current situation is so poor. However, you may
not know the current situation in some areas so this uncertainty needs
to be reduced by some enquiries performed early in the project.
The detailed designs for elements of the model. What KPIs should we
use? How will we organise for adaptive planning? What framework of
values or policies should we use to guide people as we decentralise?
It is very difficult to judge how long it will take to design new
solutions. Wherever there is uncertainty it is worth considering how
to trial ideas quickly and learn from them, and how to avoid getting
paralysed by not having a complete answer at the outset.
The true level of resistance/enthusiasm across the organisation. It is
very difficult to judge the true level of support or resistance to
Beyond Budgeting in an organisation because what people say and do are
not consistent. Ask someone to write a guide to performance management
and most will write about targets and monitoring. Watch the same
people doing their jobs and you will see them behave quite
differently. Therefore, judging resistance from what people say when
debating management methods at the planning and approval stage tends
to give an overestimate of resistance.
For example, when people see league tables they respond to them, even
if they have been instructed not to. The instinct to compete is so
strong that when people receive a spreadsheet showing their team's
performance and the performance of others, even if it is not sorted
into a league table, they will sometimes sort it themselves to see how
they are doing against their rivals.
Furthermore, a lot of the resistance is likely to come from
specialists who have been the champions of elements of the old model,
and these will often be the people who have most to say when Beyond
Budgeting is discussed. For example, the Human Resources team may feel
strongly that evaluation against fixed targets agreed in advance is
fundamental to performance management but their view probably is not
reflected in the behaviour of people across the organisation who
actually do the performance evaluations. It may be that compliance
with the old model is already very poor. Build in activities to gather
this information as you go, and use it.
Of course the specialists who are most likely to cling to budgetary
control are those of the finance team – the usual champions of Beyond
Budgeting. The irony is that if you are a finance manager championing
Beyond Budgeting it is your own colleagues who are likely to put up
the greatest resistance.
When Bulmers started looking at the Beyond Budgeting model they
surveyed views outside the finance function to find out what people
thought of what was being done at that time. The results were so
shocking and dismaying to the finance team that they refused ever to
run a budgetary control system again.
Resistance may also arise from politics unrelated to the Beyond
Budgeting implementation. It may simply be seen as sponsored by one
group and another group may stall it for that reason alone.
Cultivate relationships with supportive groups. You may find allies in
risk management, HR, and internal audit, for example.
Are Beyond Budgeting principles hard to understand? Not at all. From
childhood just about everyone knows that rethinking your plans when
something important happens is sensible (adaptive processes), that the
way to see how well you are doing is to compare yourself with others
(relative measures and goals), and that team work is better than
trying to do everything yourself (radical decentralisation).
Which managers will perform worse initially, and when. Some changes in
a Beyond Budgeting implementation demand new learning by managers. The
risk of worse performance by some managers is greater when there is a
lot to learn, so you need to bear this in mind, avoid piling too much
learning on at one time and provide appropriate support and
safeguards.
The changes that require the most learning are those to do with
increasing authority (e.g. decentralisation, internal markets, SLAs,
customer allocation). For example, if someone has never had the
authority to hire and fire staff that is a significant new skill to
master. Managers have to learn how to pull their new levers and what
effects they will have.
Changes that replace fixed performance contracts with more flexible
guidance and direction also demand a lot of learning by managers. They
must learn more about how their business works as a system, how to
steer it, and how to be more aware of risk and external factors. The
proportion of managers who perform worse initially is lower, however,
because fixed performance targets cause such dysfunctional behaviour
that it is difficult to do worse, especially as managers get extra
time from not doing budgets.
Changes that provide better information (e.g. new KPIs, league tables
and benchmarks, open IT systems, faster actuals, customer
profitability analysis, cost analysis) require some extra learning
initially, but if the reports are clear and self explanatory they
should not lead to a drop in performance for anyone.
Changes that strengthen governance by clarifying values and setting
limits also require some initial learning but, again, if they are
simple and self explanatory they should be helpful very quickly and
the risk of any managers getting worse as a result is very low.
To mitigate the risk of worse performance by some managers during the
more demanding changes there are a number of things you can do:
*
Avoid removing fixed performance contracts and
increasing authority at the same time;
*
Increase authority gradually;
*
Provide appropriate training;
*
Improve information;
*
Strengthen governance;
*
Improve monitoring of actuals and follow up with
managers; and
*
Improve monitoring of skill and coping, and follow
up with managers.
Monitor the extent to which managers are coping with change and adjust
your pace accordingly.
The timing and chances of success for related projects on which the
Beyond Budgeting implementation may have become dependent. There is an
obvious temptation to link a Beyond Budgeting implementation to
related projects such as systems enhancements to support rolling
forecasts, revisions to management accounting methods and chart of
accounts, and new sets of performance indicators. While these may
offer the chance to start the Beyond Budgeting model with better
systems the downside is that problems with these projects will delay
Beyond Budgeting. Be cautious. The extra work needed to implement the
Beyond Budgeting model once imperfectly with existing systems and then
again with new systems may be well worth it, no matter how confident
the managers of other projects appear to be.
Future support and resources for the Beyond Budgeting implementation.
Top management support for initiatives is very important, but in
practice top management's attention and interest come and go as new
priorities and crises arise. Mergers and acquisitions, divestments,
strategic reviews, an accounting scandal, rows about executive
remuneration, funding problems - a CEO's work is never done.
Actual level of conceptual understanding among managers. It you are
used to controlling by fixed targets the Beyond Budgeting model can be
hard to get your head around. Even when you think you understand, it
is easy to slip into old habits when talking about management methods.
This can lead to confusion, especially if a senior person delivers a
briefing on the Beyond Budgeting model but gets it only half right.
Reactions to running old and new models together. The likelihood is
that most Beyond Budgeting will go through a period where elements of
the old model are operating alongside elements of the new model.
Reactions may be difficult to anticipate as they vary according to
enthusiasm for Beyond Budgeting. Which is the best sequence?:
*
Swap. Take away the old process at the same time
as introducing the new one.
*
Vacuum. Take away the old process to create a
desire for some new process, then introducing the
new one.
*
Parallel run. Introduce the new process alongside
the old one to provide the security of a fallback,
then take away the old process once people feel
safe with the new.
The answer can be different for different elements of the model.
Competition for resources from other projects. The competing projects
for many companies are currently Sarbanes-Oxley compliance (mainly
sections 302 and 404), and International Financial Reporting Standards
(especially in the EU). Mergers and acquisitions are a huge
distraction when they happen.
Whether the new model will work. Is there any real doubt? In some of
the cases studied by the Beyond Budgeting Round Table the idea was
that a contingency plan would be laid so that they could go back to
budgeting if the new scheme failed. In fact it did not fail as it is
very easy to do better than budgetary control.
Risk and uncertainty considerations may suggest alterations to your
tasks and priorities so go back to earlier work and see what should
change.
Managing specific risks and potential opportunities
As mentioned earlier the conventional style of risk management in
projects aims to achieve the original objectives no matter what
happens. Not very adaptive.
If you want to manage risks in a more adaptive way use it to open your
mind to the full range of things that might happen. As well as
considering bad things that might happen and how you can avoid them or
limit their impact, consider unexpectedly good things that might
happen and how you could encourage and exploit them.
Workshop outline
Once again, a workshop is a good way to get input from more people,
which is useful in risk and uncertainty management. However, be aware
that risk and uncertainty management are surprisingly tricky to do and
many attempts are less valuable than they seem to be.
There are two benefits to aim for:
*
Prepare your project team mentally for what is to
come so that they recognise more quickly when
certain scenarios are unfolding.
*
Improve your plan by adding actions to alter the
probabilities of uncertain events and their
impacts.
The first benefit is relatively easy to obtain but the second is where
technical mistakes can undermine the work, leading to meaningless risk
registers that quickly get out of date.
Here’s a suggested outline:
1.
Prepare by pulling together everything you have
already about your vision and project plan.
1.
Start as usual with an agenda and an explanation
of the importance of risk and uncertainty
management.
1.
Initially stay high level by just surveying areas
of uncertainty. Even if you think the list given
in this guide seems pretty accurate to your
organisation it is still worth thinking about how
they apply specifically to you – or not – as well
as trying to come up with others. Think about how
you could monitor or reduce these uncertainties
and if those actions are worthwhile.
1.
Next get down to more detail for specific events
that could happen and require a change in your
approach. Consider what you can do to modify the
likelihood and impact of events (but do not rate
them in this way unless you are certain they are
single outcomes rather than sets of outcomes).
1.
Finally, pull all the previous thinking together
by summarising them into a control system for your
project, featuring research and monitoring
activities, contingency planning, and so on.
1.
As usual the output will need to be tidied up
later and probably fleshed out.
Acknowledgements
I would like to thank the Beyond Budgeting Round Table team for their
cooperation and the following individuals for giving their time to
help me: Adrian Poffley, Barbara Blaber, Jacky Pincon, Jean-Michel
Segui, and Steve Morlidge.

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