By Rebecca Macfie
Sunday 1st February 2004 |
Text too small? |
Well, that's according to UK management guru Jeremy Hope. Hope is an advocate of abandoning the annual budget-writing ritual, and with it the fixed targets and incentives embodied in performance management contracts. He cites research showing the annual budget process consumes up to 20-30% of senior management's time, yet often adds little or no value to the business. By setting fixed targets, deciding what resources are available to meet them, and tying management performance bonuses to those targets, it creates a management straightjacket. Indeed, he claims the budget process leads to dysfunctional behaviour - at best, the "spend it or loose it" mentality; at worst, outright fraud. (Enron, he claims, was an extreme example of the deceit managers can be drawn into when required to meet fixed targets.)
Instead, Hope advocates going "beyond budgeting". In this model, company bosses focus on articulating strategy and vision, and responsibility for delivering on the vision is dropped down to the level of individual business units. They come up with their own rolling quarterly forecasts in which they are able to anticipate and respond to events as they occur. Not that business units are free to overspend and underperform: it's the role of the chief executive to challenge their forecasts and establish other measures of performance, such as cost-to-income ratios, growth targets, current performance against historical, and other key indicators relevant to the business.
"It's a case of moving away from measuring where we are at against the [budget] target, and asking questions like, 'Why are we not retaining our customers? How can we improve the value we are providing our customers?'. It allows the creativity of the people in the organisation, including the finance people, to move away from managing numbers to managing the business."
The flag bearer for Hope's model is Swedish bank Svenska Handelsbanken, which abandoned the budget 30 years ago and has gone on to outperform its peers on virtually every measure. It operates according to one overarching objective: to have a higher return on equity than the weighted average of other listed Nordic banks. Responsibility for delivering on the vision is devolved to branches, which are expected to do whatever it takes to achieve better customer service at a lower cost than other banks.
What about New Zealand? Hope visited recently to deliver a series of seminars on life without the budget. One organisation that has taken the message to heart is electrical, electronics and technology training organisation, ETITO, with $10 million in annual revenue. Chief executive Marilyn Brady said the traditional regime of explaining variances from budget figures was "constipating" innovation in the organisation, with good ideas often squashed because they weren't allowed for in the budget. As a first step to abandoning the budget Brady asked budget holders to come up with a first quarter activity plan, which will be signed off against the organisation's strategy and vision. Budget holders will then work out the cost of delivering that plan, with actual costs fed progressively into the organisation's accounting system. Brady aims to move the ETITO to a system of rolling forecasts that look six quarters out.
Essentially, she says, it's a case of getting staff to come up with plans for achieving the organisation's goals, figuring out what it will cost, monitoring those costs, and keeping her abreast of changes to the plan.
No comments yet
Second St John withdrawal of labour takes effect tomorrow with further strikes likely
Sanford Appoints Independent Director
CRP ADVISES CLOSURE OF SHARE OFFER TO EXISTING INVESTOR
Devon Funds Morning Note - 14 August 2024
OCR 5.25% - Monetary restraint tempered as inflation converges on target
Consumers still need due diligence as new deposit takers emerge.
Woolworths strike: staff asked to dress up in Disney costumes for a week on their own dollar
Turners Invests in Quashed Online Insurance Platform
PGW Reports on Challenging Year
Arvida Announces Executive Team Changes