This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
The purpose of this assignment is to draw the problems of traditional budgeting in the modern public sector environment and discusses its alternative management model of beyond budgeting, how and why it can be implemented to control strategy in public sector organization.
The used of traditional budgeting is frequently a subject for debate over years.
According to Lutz, budget is a tool of repression rather than innovation (Hope and Fraser, 2003, p.xvii). Similarly, Welch (cited in Pierre, 2007) explained budget is the bane of America organization, which should never be exist, as making budget is an exercise in minimalisation. Furthermore, this statement had been further enhancing by Wallander that budgeting is an unnecessary evil (Hope and Fraser, 2003, p.xvii).
Traditional budgeting is way too inflexible to the company, as it does not provide incentives to search new growth opportunities (Daum, 2002). Moreover, it fixed the thinking and response of company to events in a dynamic environment (Johnson, 2005). Concentrate on numerical budget frequently cannot observe the black side in reality to the business environment.
The detailed planning and preparing the budgeting process require far too much time on activities that are relatively low (Johnson, 2005), due to its nature of forecasting whole organization, approximately take up 20% to 30% of valuable management time (Daum, 2002) and up to 5 months to complete (Pierre, 2007) because of the fact that numerous meetings are generated for discussion, negotiation and agreement between departments, of the company resources throughout the department (Hope and Fraser, 2003). It is frequently out-of-date by the time satisfy shareholder value and customers' relationships (Pierre, 2007).
The measurement of traditional budgeting is on the base of past data; hence the information may be unreliable. The budgets reflect the previous year's reality; therefore the organizations and its managers place an undue focus on past events than ponder about organizations current and future issues (Johnson, 2005). All management processes are not based and aligned to company's strategy and goals.
The develop and update of traditional budgets are infrequently, only a few companies update their budget during the fiscal year, purely due to its complexity and time-consuming. The budget number may change daily in today's market; hence it would be out-of-date before financial year has even begun (Pierre, 2007).
Link to Strategy
Budgets do not link to company's strategy. Many companies are bad in executing strategy, due to their instrument used to implement; the traditional budget is not monitor against same measurement which is used to set up the organization's strategy (Pierre, 2007). Furthermore, conformance to budget does not see as compatible with a drive towards continuous improvement (Hope and Fraser, 2003).
Barrier to Change
Traditional budgeting is inflexible to adapt priorities when the world is changing (Daum, 2002). It cannot be effectively use in dynamically changing environment, as it locks managers into things that they thought and found right at end of previous fiscal year. Moreover, it restricts the ability and performance of managers, due to its agreed budget which has significantly influence on production and strategy innovation, most time is spent on data collection and reconciliation. The company will unable to capitalize on opportunities to achieve market goals, satisfied customers, and move leaps and bounds ahead to its competitors (Pierre, 2007).
Management / Dysfunctional Behaviour
Traditional budgeting purely reliance on the agreed budget and provide little values and fail to address current competitive imperatives, which has an adverse impact on management behaviour result in dysfunctional behaviour with regard to organization's objectives as a whole (Hope and Fraser, 2003).
Traditional budgeting is a costly process. A report by Daum (2001) reported average company invest more than 25000 billion person days on planning and performances measurement process per US$ 1 billion turnover. Moreover, companies who are unable to thrive in new knowledge and intangible based economy may result in higher cost (Daum, 2002).
Furthermore, budgeting do not help to minimize cost, instead they are protecting them. It brings a hint as showing the people "use it or lose it". Nevertheless, people understand if the budget does not being used, it will get pulled from the next budget year as the management see it as unnecessary (Pierre, 2007).
A main issue lies in the fact is the business environment does not well considered, as the situation would be difference when budget was set and subsequent comparison is made as well as management decisions required (Johnson, 2003). Due to the primary focus of budgeting is based on organization's internal process (Hope and Fraser, 2003). Moreover, the increase of competitive business environment further enhances this issue.
Many budgets do not based on rational, causal model of resource consumption, but they are frequently as a result of protracted internal bargaining process (Hope and Fraser, 2003), because of the limit resources of organizations.
A survey by U.S. companies concluded managers either not to accept the budgetary targets or opt to beat the system or under pressure to achieve the targets at any cost (Hope and Fraser, 2003, p.xviii). The pressure of fixed target is squeezing the sprit and life out of many employees and organizations. It is necessary for company to work efficiently to meet the growth in the dynamic markets, nevertheless this budget had tightens their cost and expenses for product innovation. The company are not able to grow faster to achieve the market goals and satisfied their customers without innovation (Pierre, 2007).
Many financial engineers employed budgets as remote control devices to manage by numbers, transfer it into fixed performance contracts, which forces managers to commit and deliver specify outcomes, even though many variables are underpin those outcomes are beyond their control (Hope and Fraser, 2003). Moreover, managers are familiar with "making the slack" and making the budget "presentable" to the board (Pierre, 2007). Another reason is due to its fixed target induce undesirable.
According to Plaeging (2006), budgeting is the heart of performance management process in many companies. Therefore, beyond budgeting is designed to overcome traditional barriers, concern releasing people from burdens of stifling bureaucracy (http://www.bbrt.org/beyond-budgeting/bbwhat.html, 2010), and to create flexible, adaptable organizations which provide managers with self-confidence and freedom to ponder differently, decision make quickly and collaborate on innovation projects (CAM-I BBRT and Daum, 2001).
Hope and Fraser (2003, p.ix) described beyond budgeting is not a negative idea that trashes budgeting, instead it is a positive idea which employs abandonment of budgeting as a trigger to improve whole management control process by forcing deeper and broader examinations how people manage organizations in a post-industrial world where innovative management models represent the only sustainable competitive advantage (http://www.bbrt.org/beyond-budgeting/bbwhat.html, 2010).
Furthermore, it know as a leadership philosophy based on integrate and a coherent set of alternative process (Plaeging, 2006) that supports relative targets and rewards, continuous planning, resources on demand, dynamic cross-company coordination, and a rich array of multilevel controls (Hope and Fraser, 2003, p.xix).
The starting point of beyond budgeting was run by Consortium for Advanced Manufacturing International (CAM-I) in the mid 1990s (Daum, 2003). The Beyond Budgeting Round Table (BBRT) of CAM-I was therefore founded in 1998 in London to solve the problems of budgeting by established 12 beyond budgeting principles which describe the performance management, controlling processes that support the budgeting concept and a new leadership principle (Daum 2001, 2003) as shown in figure 1.
Figure 1: The beyond budgeting model.
C:\Documents and Settings\iv3lyn da b3sT\Local Settings\Temporary Internet Files\Content.Word\ccc.bmp
Source: CAM-I BBRT & Daum, 2001.
According to Daum (2001), CAM-I BBRT described the 12 principles as "devolution". This process enables the organization for better degree of flexibility rather than rely on agreed targets and resources plans. Figure 2 represent its four key elements.
Figure 2: The four key elements of beyond budgeting.
Rolling forecast had been described as a catalyst for change in organizations, which is a forecast for sales, costs or extends a set number of financial periods into the future. It is typically updated monthly or quarterly. There are two reasons for interest in rolling forecasts. It assist lift the blinkers put in place by the budget and annual finishing line to look at risks and opportunities further into the future. Secondly, it relates to the employ of performance measurement frameworks, for instance balanced scorecard (Plowman, 2009).
An earnings forecast "miss" may have an immediate and devastating impact on share price, and effective allocation of resources mandates that the organizations understand the short and long-term future brings in the public sector (Montgomery, 2002). According to Parmenter (2007), there are several barriers to implementing a quarterly rolling forecast as show in Table 1.
Table 1: barriers to implementing a quarterly rolling forecast.
The lack of understanding of the application
The lack of faith in the reliability of the forecast
Lack of management ownership
Inaccurate and late data
The "stop and start" annual planning syndrome
Lack of budget holder skills
The lack of linkage to strategic decision
Source: Parmenter, 2007.
Many organizations may face difficulties in separating their forecast from and coordinating forecast with operational budget, which may end up preparing mid-year or quarterly "re-budgets" instead of preparing a right forecast to the organizations (Montgomery, 2002).
The scorecard is a tool for helping the organizations with strategic planning and management system, which is employ extensively in the business and assist to improve internal and external communications, monitor organization performance against targets (http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx, 2010), and ensuring the targets and actions are consistently aligned (Hope and Fraser, 2003, p.185). Furthermore, it provides clear prescription to the organizations as the scorecard balances the historical accuracy and integrity of financial numbers with the drivers of future success (Niven, 2006, p.27).
"The balanced scorecard retains traditional financial measures. However, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
Barriers may occur in beyond budgeting when the organizations incline to be more adaptable towards changing, due to the desire operating reality to gain faster response, innovation, process improvement, customer focus and shareholder value. The management would be easily facing inefficiency as they will keep remain stuck in an old-fashioned ways of command and control and these may bring barriers (CAM-I BBRT and Daum, 2001).
Moreover, the short-term performance divers of annual budget constrained the full power of scorecard, this remain focus on 'managing' the next year-end rather than supporting medium-term strategy (BBRT, 2005).
Figure 4 represent how the model enables the lean, adaptive and ethical enterprise (Plaeging, 2006).
Figure 4: How beyond budgeting enables the lean, adaptive and ethical enterprise.
C:\Users\jojo\Documents\Northumbria sem 2\FN0364\bbrtslide2.gif
Source: Plaeging, 2006.
According to Johnson (2005), beyond budgeting model places considerable to emphasis the organization need, managerial and cultural changes in order that it may be successfully applied by them in public sector. Nevertheless, this will induce considerable behavioural challenges, due to the complicacy of decision-making in a dynamic environment.