Analysing progress in changing budgeting systems

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Budgeting, annual and otherwise, has been integral to the internal planning and control mechanisms of British public sector organisations for many years (Dugdale & Lyne, 2006). Such budgeting processes, it has traditionally been accepted, enable public sector organisations and public departments to prioritise their operations and plans and control their spending (Dugdale & Lyne, 2006). Traditional budgeting and planning processes have in recent times however been subjected to severe criticism, both in the public and in the private sector (Dugdale & Lyne, 2006). Traditional budgeting processes are now felt to be too expensive, both in terms of costs and money; they add little by way of value to the functioning of organisations and often result in dysfunctional behaviour (Dugdale & Lyne, 2006).

The tightening of the budgeting and target setting culture in public sector organisations, pursuant to the entry of the conservative party into the corridors of power in the early 1980s, introduced significant dilemmas in the working of public departments and organisations (Dugdale & Lyne, 2006). Whilst there is a growing realisation of the severe limitations of traditional budgeting practices in the public sector, real progress in changing budgeting systems to make them more relevant and value generating is yet to happen (Dugdale & Lyne, 2006).

Beyond Budgeting, a recently introduced holistic system of budgeting, planning and organisational performance improvement attempts to eliminate many of the limitations associated with traditional budgeting.

This short study assesses the limitations of traditional budgeting in the public sector environment, analyses the concept of Beyond Budgeting and examines its relevance to public sector working. The working of a specific public sector service area, namely Local Waste Management Services, has been taken up for special analysis in order to see whether the formulation, optimisation and management of its strategies and its working can be helped with the use of Beyond Budgeting techniques.

Traditional Budgeting

Budgeting forms an integral component of the management control techniques that are used by organisational managements for planning and prioritising their actions in line with their strategic objectives, and thereafter, for monitoring the progress of such activities and controlling them, whenever they appear to be deviating from the original plan. Such budgeting techniques are used extensively by both private and public sector organisations (Cooper, 2004). Budgeting is essentially an annual organisational exercise, wherein an extensive multi-departmental and multidisciplinary effort is made to assess the existing organisational situation in areas of operations and finance, crystallise the organisational objectives for the coming year, and then plan out the various activities required across functions and departments to achieve such objectives (Cooper, 2004). The construction of budgets, detailing operational and financial plans and targets for forthcoming periods is usually an elaborate and extensive multi departmental process (Cooper, 2004). Departmental budgets are thereafter consolidated into organisational budgets for a complete year, broken up into quarters or months as per individual organisational practices (Cooper, 2004). The budget establishes responsibility centres and determines individual and collective accountability for achievement of targets (Cooper, 2004).

Such budgets provide grand organisational plans and forecasts that are then used as yardsticks for monitoring and comparison of actual operational and financial results (Daum, 2001). Periodic monitoring exercises help in determining the performance of individual departments as well as of the organisation as a whole and corrective action is taken wherever variances between actual performance and budgeted targets appear to be cause for concern (Daum, 2001).

The very survival of such budgeting techniques for decades and their continued use by most public and private sector organisations reinforces their usefulness in controlling organisational activities (Jensen, 2003). Recent years have however witnessed extensive criticism of traditional budgeting techniques and the emergence and consolidation of a widespread opinion that whilst such techniques were possibly suitable in the past when activities were simpler and business was more linear and not subject to the numerous environmental forces that shape modern day activity, such techniques have become substantially inadequate and even self defeating in the complex and dynamic modern day environment (Jensen, 2003).

Traditional budgeting has arisen from the Fordist and Taylorist principles of management, which hold that (a) people do not like to work and will try to avoid working if they can, (b) people need to be forced to make the correct effort, (c) people prefer to be directed rather than to accept responsibility, (d) people prefer to avoid responsibility, (e) people are motivated mostly by money and job security fears and (f) people are not creative, except when it involves circumventing management rules (Jensen, 2003). It is essentially associated with the Theory X type of employee and organisational control and felt to be grossly unsuitable in the modern day environment of flat hierarchies and knowledge organisations (Jensen, 2003). Apart from the de-motivating impact of such techniques on organisational employees, traditional budgeting is also felt to be time and money extremely expensive (Jensen, 2003).

With regard to the public sector, traditional budgeting is now associated with a number of specific disadvantages (Dugdale & Lyne, 2006). Such budgeting techniques are mostly used to establish internal targets with regard to cost or activity, which have little connection with the satisfaction of external customer needs or with the achievement of organisational objectives (Dugdale & Lyne, 2006). They are felt to be inadequate in establishing the extent of organisational improvement that has occurred during past periods (Dugdale & Lyne, 2006). Such budgets do not encourage organisational units to stretch or to enhance their performance (Dugdale & Lyne, 2006). Employees become more concerned with meeting budget targets than with maximisation of potential (Dugdale & Lyne, 2006). Such budgeting encourages the development of a "spend the money or lose it" attitude, which in turn leads to the wastage of valuable resources in a specific area, even whilst there is the desperate need for such resources in another (Dugdale & Lyne, 2006).

Hope and Bunce, (2003), state that such budgeting approaches have led to the growth of an inspectorate bureaucracy that seeks satisfaction of multiple targets that are specified by different agencies, thereby causing distraction and demoralisation of professional staff. The increasing application and use of targets for driving of performance improvement at every level has been a particularly insidious development (Hope & Bunce, 2003). The failure to satisfy specific targets can have unfavourable implications for schools, hospitals and service agencies (Hope & Bunce, 2003). A number of media stories have highlighted how managers have been driven to taking irrational decisions for satisfaction of targets, even as they have neglected patients and service users (Hope & Bunce, 2003).

The inadequacy of traditional budgeting techniques in the public sector has been evident for some time now.

"the command and control approach used in the Labour Government's first term across local government, education, health and much else saps morale…It destroys innovation and experimentation, it fails to allow different policy areas that must in fact be interconnected to be joined up…In a complex world it is simply not possible to run economic policy or deliver strong public services using the old, top-down 'one size fits all' solution". (Hope & Bunce, 2003, P 2)

Beyond Budgeting

Whilst the government appears to be clearly dissatisfied with the functioning of numerous public service agencies, actual corrective measures have ironically increased target detailing and micromanagement, neither of which has been able to produce desired results (Jensen, 2003). It is however also evident that the present system of budgeting has to be continued with until a viable option is found (Jensen, 2003). Whilst the private sector has started using tools like zero based budgeting and rolling budget techniques, these tools are not felt to be wholly appropriate for public sector agency work (Jensen, 2003).

The Beyond Budgeting Round Table (BBRT) has been working with a number of public and private sector organisations in order to understand the problems associated with traditional budgeting and derive workable solutions (Daum, 2001). The BBRT incorporates an idea, "BB", as well as a community "RT" (Daum, 2001). The BBRT forms the core of a movement that is seeking ways and means for construction of adaptive and lean organisations that can sustain a higher level of competitive performance (Daum, 2001). The Beyond Budgeting model is derived from the best of the "best practices" established by global leading edge organisations (Daum, 2001). The model comprises of two sets of principles that aim to redefine performance management (Daum, 2001). The first set of six principles is process oriented and support adaptive performance management systems, enabling organisational teams to improve their responsiveness to their competitive environment and to the needs of their customers (Daum, 2001). The second set of six principles is leadership oriented and aims to provide a suitable framework for the progressive devolution of responsibility in organisations to frontline teams, thus enabling such teams to respond swiftly to events and become accountable for continuous improvement of internal and external customer related outcomes and relative performance (Daum, 2001).

The first set of six budgeting process principles relate to targets, rewards, planning, resources, coordination and controls (Jensen, 2003). With regard to targets such principles call for the setting of aspirational goals that are based on continuous relative improvement and not on fixed rewards (Jensen, 2003). Rewards should be based on relative performance with hindsight and not on the meeting of fixed targets. Planning should be an inclusive and continuous process rather than an annual event (Jensen, 2003). Resources should be made available on demand and not through annual budgetary allocations (Jensen, 2003). The coordination of cross company actions should be dynamic and not through annual plans and budgets (Jensen, 2003). Controls should be based on Key Performance Indicators, trends and relative indicators and not on variances against plans (Jensen, 2003).

The six beyond budgeting leadership principles relate to governance, performance, freedom to act, accountability, customer focus and information (Daum, 2001). Governance, as per BB principles, should be based on clear values and boundaries and not on detailed budgets, rules and regulations (Daum, 2001). A high level performance culture should be built on the basis of relative success rather than on satisfaction of targets (Daum, 2001). Authority to make decisions should be devolved to frontline teams and micromanagement should be eliminated (Daum, 2001). Accountability should be achieved through the creation of a network of small units that are accountable for results and not on central hierarchies (Daum, 2001). The organisation should be focused on improvement of customer outcomes, rather than on satisfaction of internal targets (Daum, 2001). Information should be shared and open and not purposely restricted from "those who do not need to know it" (Daum, 2001).

Beyond Budgeting is very obviously in many ways the anti thesis of traditional budgeting and is derived from Theory Y principles, which state that people need to work and wish to take interest in what they do. In fact under the right conditions they can enjoy their work (Player, 2009). Theory Y also states that people will willingly work towards a target that they accept, will seek and take responsibility, and will be motivated by the need to realise their potential (Player, 2009). Creativity, according to Theory Y experts is actually widely distributed and grossly underutilised (Player, 2009).

BB principles, some experts feel, can be used with very good effect in the public sector for improvement of strategy (Dugdale & Lyne, 2006). Application of such principles can help in improving organisational agility and adaption to change (Dugdale & Lyne, 2006). Its introduction will pave the way for the elimination of traditional budgeting processes, which are expensive, protracted and add little by way of value to organisational working (Dugdale & Lyne, 2006). BB principles can help in improvement of organisational focus on value maximisation for customers and stake holders (Dugdale & Lyne, 2006). They can help in achievement of significant long term reduction in costs and bureaucracy (Dugdale & Lyne, 2006). BB techniques can assist in the elimination of dysfunctional behaviour and lead to better governance. Introduction of BB principles should help greatly in releasing the enterprise and energy of organisational workers (Dugdale & Lyne, 2006). The use of Beyond Budgeting can radically help in achievement of strategic objectives because of its commitment to people, to customers, and finally to principles, values and fairness (Dugdale & Lyne, 2006). The elimination of unneeded bureaucratic practices will enable organisations to focus on key objectives and reduce employee distraction (Dugdale & Lyne, 2006).

Beyond Budgeting has been criticised by some people as being too general in its approach and in being a set of well known and oft repeated homilies, rather than an effective method for improving organisational planning and performance (Player, 2009). Most organisations, critics of BB principles argue, run on the basis of well structured systems, and unfounded criticism of existing systems, which have produced results for years and years in directing and controlling organisational performances, may lead to the bringing in of change for its own sake rather than for improvement of performance (Player, 2009).

Application of Beyond Budgeting in Waste Management Services

Waste management refers to the extremely vital civic and social activity of management of waste that is produced by human activity (Local…, 2010).

Waste management is essential to modern day society because of the extremely adverse effects that such waste can have on the health of people, as well as on the environment in which they live (Local…, 2010). It involves a number of processes like the collection, transportation, recycling, processing, disposal and finally monitoring of generated waste (Local…, 2010). Waste can come about in different forms, solid, liquid, or gas and can often yield useable resources (Local…, 2010). Radioactive waste can on the other hand pose serious threats to humans and their environment and needs to be carefully managed (Local…, 2010).

The management of residential and institutional waste in the UK usually lies with local government authorities, even as the management of commercial and industrial waste is usually considered to be the responsibility of the waste originator (House…, 2003). The governmental policy on waste management in the UK was established with the publication of the Waste Strategy in 2000 (House…, 2003). Whilst the strategy concerns wider wastes, its key focus is on diversion of municipal waste from landfill in accordance with the targets laid down in the EU's landfill directive (House…, 2003).

Local government responsibility for the management of waste in the UK is divided between county and district councils, other than where a unitary authority controls local affairs (Greenfield, 2009). Local authorities bear the major portion of the responsibility for delivery of sustainable waste management (Greenfield, 2009). Whilst the government makes substantial demands upon local agencies, they are often sent directives that are somewhat vague, if not directly contradictory (Greenfield, 2009). It is the responsibility of local authorities to divert waste from landfills (Greenfield, 2009). With such recovery and reuse being expensive, incineration is felt to be an attractive alternative but is often being rejected by the public because of safety concerns (Greenfield, 2009). Whilst the money availability with local authorities for the purpose of sustainable waste management has been increased through the setting up of challenge funds, such funding is inadequate for meeting the increased burdens on such authorities that have come about because of greater waste generation, increased regulation and higher disposal costs (Greenfield, 2009).

Application of BB principles essentially requires senior officials to go beyond traditional methods of top down target fixing and the laying down of specific objectives without the involvement of frontline officials who are expected to provide service delivery. The budgetary funding and various operational targets for local authorities for their different activities are clearly detailed by the government and leave little scope for innovation at the ground level.

BB principles call for introduction of changes both in areas of processes and in areas of leadership and care needs to be taken to assess how such principles can be introduced in the working of specific departments. With the costs of waste management increasing with every passing year the application of innovative processes for meeting of land filled targets are required.

Home composting for example can prove to be a suitable way of tackling garden waste on a sustainable basis, wherever residents have adequate space as well as the knowledge and willingness to engage in composting activities. There is however little motivation for local authorities to push for greater home composting because it does not add to the recycling figures of the relevant councils. Such a decision has been made because of the lack of ways of systematic checking for such activities. Such practices represent the inadequacies of traditional budgeting systems where critical functions or activities are avoided or ignored because of inadequacy in accounting and measuring mechanisms. The actions of community waste management projects are also restricted by certain aspects of waste policy. The application of BB principles can lead to greater revolution of responsibility and accountability to the levels of local authorities, thus enabling them to set priorities in their waste management efforts. Recycling of certain material streams for example provides greater environmental benefits and recycling targets should progressively move towards being material specific rather than weight specific.

Local authorities should be encouraged to produce joint waste strategies for minimisation of disposal and encouragement of waste minimisation, reutilisation and recycling. The introduction of incentives for encouragement of recycling and composting would also help in reducing waste disposal requirements. The publication of a report on use of incineration, stating its advantages and disadvantages for different situations could also make the working of local authorities easier and transparent.