Many companies that have rejected detailed budgets in favor of KPIs also use rolling forecasts. Created every few months, these forecasts typically cover five to eight quarters. The Swedish international bank Svenska Handelsbanken replaced budgeting with new organizational structures and performance metrics. To promote a sense of ownership and accountability, it created profit centers—making them responsible for reducing costs, satisfying customer needs, and boosting income.
Regions and branches compete with one another—spurred by prominently displayed standings. Branch managers determine resource allocation, staffing levels, and salaries.
Rolling forecasts signal cash-flow improvements or declines and trigger the actions required to ensure adequate liquidity.
The payoff? Since the early s, the company has outperformed its Scandinavian rivals on almost every measure, including return on equity, total shareholder return, and customer satisfaction.
Budgeting, as most corporations practice it, should be abolished. That may sound like a radical proposition, but it would be merely the culmination of long-running efforts to transform organizations from centralized hierarchies into devolved networks that allow for nimble adjustments to market conditions.
Most of the other building blocks are in place. Companies have invested huge sums in IT networks, process reengineering, and a range of management tools including EVA Economic Value Added , balanced scorecards, and activity accounting. But they have been unable to establish a new order because the budget and the command and control culture that it supports remain predominant.
Senior executives have been heard to proclaim that their people have all the authority of the chairman. Fearing the consequences, the team will lean on customers to order goods they have every intention of returning.
And if by some chance the team thinks it will exceed its targets, it will press customers to accept delivery in the next fiscal period, delaying valuable cash flows. In extreme cases, use of the budget to force performance improvements may lead to a breakdown in corporate ethics. A number of companies have recognized the full extent of the damage done by budgeting. They have rejected the reliance on obsolete data and the protracted, self-interested wrangling over what the data indicate about the future.
And they have rejected the foregone conclusions embedded in traditional budgets—conclusions that render pointless the interpretation and circulation of current market information, the stock-in-trade of the knowledge-based, networked company. In the absence of budgets, alternative goals and measures—some financial, such as cost-to-income ratios, and some nonfinancial, such as time to market—move to the foreground.
And business units and personnel, now responsible for producing results, are no longer expected to meet predetermined, internally selected financial targets. In companies using these standards of performance, business units become smaller, more numerous, and more entrepreneurial. Strategy becomes a grass-roots endeavor.
The aggregate result of many small teams exploiting local opportunities is a much more adaptive organization. In fact, they require employees to do something much tougher than meet a fixed target. Business units, plants, branches, and other groupings can measure their progress against comparable units within the company through the use of a few key financial measures.
In order to measure themselves against external peers, they can use operational benchmarks based on industrywide best practices. In some cases, companies that have rejected budgets rely on benchmarks collected and prepared by specialist firms that understand the particular industry.
As in sports, the objective is to keep improving your position until you become the league leader. Abandoning budget targets—those solemn but ultimately hollow promises to investors—frees a business to give a wide variety of emerging information its due.
Sharing that information can form the basis of a new kind of relationship with the capital markets. In effect, we show analysts and investors how the business works. This shifts the emphasis from meeting short-term promises to improving our competitive position year after year.
The result is much more accurate interpretation of our results and news flow, meaning less volatility in our shares. Analysts like and respect our approach.
They no longer ask for numbers-based forecasts. Though the first companies to reject budgets were located in Northern Europe, organizations that have gone beyond budgeting can be found today in a range of countries, industries, and cultures. They include two banks, a petrochemicals company, a distributor, a car manufacturer, a brewer, a furniture retailer, a truck manufacturer, an eye-care company, a computer manufacturer, a telecommunications company, a ball-bearings manufacturer, a food producer, and a specialty chemicals company.
They range from small—a employee charity dedicated to preventing and curing blindness—to huge and complex, as in the case of one global industrial organization with thousands of products. At these companies, an annual fixed-performance contract no longer defines what subordinates must deliver to superiors in the year ahead. Budgets no longer determine how resources are allocated or what business units make and sell or how the performance of those units and their people will be evaluated and rewarded.
Instead of adopting fixed annual targets, business units set longer-term goals based on benchmarks such as return on capital. The elements or factors measured are key performance indicators—KPIs—such as profits, cash flows, cost ratios, customer satisfaction, and quality. But the opposite has occurred; Hope cites this as evidence that the further out toward the customer-facing nodes of an organization you push the profit responsibility, the more cost-conscious and innovative the employee behavior you get.
Indeed, since Handelsbanken abandoned budgeting in the early s, it has bested its Scandinavian rivals on return on equity, total shareholder return, cost-to-income ratio, and customer satisfaction. Other experts are not as eager for a complete overhaul. Harvard's Bruns suggests keeping budgets but restructuring compensation programs so that managers no longer have an incentive to favor short-term goals over the longer-term health of the company.
By getting rid of the inflexible approach to short-term targets, you answer the problem that lies at the heart of Hope and Fraser's critique of budgeting. Although Marakon's Baxter also doesn't advocate the wholesale replacement of traditional budgeting, he does believe that changes must be made to reforge the link between a company's strategic planning and resource allocation.
Often, the two processes aren't well integrated, resulting in strategies that are often dictated by the budget process instead of vice versa. When it comes time for senior management to review the units' investment proposals, their decisions are often blind to their impact on long-term value. He recommends creating an all-in-one process in which the CEO takes the lead in setting the strategic planning goals for all units, reviewing alternative strategies with business units, and linking resources to delivery of the alternatives with the highest value and best performance characteristics.
With this approach, you're more likely to get not only the level of performance you're seeking, but also the particular implementation path that you're after. Although you want to encourage bottom-up thinking about how best to achieve the desired performance, you also need to create some discipline.
Senior management can provide valuable top-down guidance here by using three- to five-year strategic plans to define the boundaries of these discussions and then making sure they're clearly communicated at the outset of the resource allocation process. Next, charge each business unit with developing several alternatives as a way of helping the corporate center understand the highest-value, highest near-term profit, and lowest-cost options that exist in each unit.
This helps create a genuine dialogue between the corporate center and the units about the resource and performance tradeoffs involved in choosing a particular alternative. When you're clear on your strategic goals and have a process that integrates strategic planning with resource allocation and performance management, budgeting can actually work, Baxter says.
It becomes a mechanism for ensuring not only that funds flow first to the strongest opportunities, but also that those opportunities actually deliver on their promise. Why Budgeting Kills Your Company. Read what experts say about not only changing your budgeting process, but whether your company should dispense with budgets entirely.
Around large global companies used zero-based budgeting as of , according to Accenture PLC, an advisory firm. Write to Kristin Broughton at Kristin. Broughton wsj. All Rights Reserved. Talent is one of the biggest issues facing C-suite executives today. Leaders should not only understand the big shifts at play but also reimagine workplace systems, policies, and culture to deal with the current crisis and withstand future shocks.
At a time of shifting workforce models, including remote and hybrid environments, and with access to corporate networks expanding to include IoT-enabled tools, companies are adopting a Zero Trust framework to tighten security, restrict user access, and block cyber attackers.
The Wall Street Journal news department was not involved in the creation of this content. And naturally the amount in question depends largely on your industry and location.
Aside from salaries, managing payroll comes with other, less obvious costs. The time and effort it takes each month to ensure that everyone is paid can really add up. Clearly, the more you can let the machines take care of menial tasks , the less you need to rely on people to get them done. And that means more room for people who add real value to your business. Not just that, but automation tends to be a lot more accurate. And as it turns out, people make a lot of mistakes:. Industry Reports.
On more of a day-to-day basis, companies also need to spend on items and services to keep employees happy in the office. At the small end, this can include drinks and snacks on a Friday evening. But as employees start to get used to more elaborate perks, the importance of these grows for business owners.
Especially if companies want to attract the best talent available. Legal fees are another cost that every business hopes to keep low, but which inevitably blossoms when you least expect. And of course, this can go hand-in-hand with taxes - especially if your books have not been handled well.
And it can pay to plan ahead.
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