Traditional Budgeting vs. Beyond Budgeting - CFO Edge (2024)

An interestingcounterpoint to signs of economic recovery is the problem the U.S. Governmentis having as it tries to pass a new budget.

Even though theFederal budget debate is being acted out in the political arena, it illuminatesthe importance of budgeting processes in addressing needs and determiningoutcomes. It also serves as a reminder that companies can benefit from looking athow their own internal budgeting processes impact liquidity, credit, andshareholder value.

This article looksat the differences between two general approaches to the budgeting process, one– for the purposes of this article – we’ll call Traditional Budgeting, and theother being Beyond Budgeting.

Traditional Budgetingwe all know well: the top-down, command and control approach with authorityfirmly seated at the executive level. The Beyond Budgeting approach is asignificant shift: executives empower and coach decentralized teams that are moreclosely connected to customers and to changes in the marketplace.

Now just may be thetime to get beyond the classic fixes – cost cutting, increasing sales quotas,and investing in better software – for regaining profitability and growth. Atbest, these are Band-Aid solutions. At worst, focusing on them may leave the coremanagement approach issue unaddressed and limit future gains.

The followingsections compare Traditional Budgeting with Beyond Budgeting in three keyareas.

1. Managementstyle: Command and control vs. empower and coach

The two managementapproaches are fundamentally different in how they position executiveleadership.

TraditionalBudgeting: command and control

TraditionalBudgeting is grounded in command and control. The core approach: the executiveteam is best equipped to translate objectives into operational goals, plans,and initiatives for all business units and employees.

Anunderlying assumption can be that managers and employees do not have the skillsets, motivation, or honesty to act in a way that supports company objectives.Skepticism around how much employees can be trusted extends to how muchinformation is shared and when, both factors tightly controlled at the C-leveland relaxed only on an “as needed” basis.

Acommand and control approach is too often driven by an end-over-means focus onshort-term profits that can foster questionable and even dishonest behaviors.Occurrences like these drove Sarbanes-Oxley reforms nearly a decade ago, butthe new regulations did not prevent disastrous financial outcomes during themost recent financial crisis.

BeyondBudgeting: empower and coach

Bycontrast, Beyond Budgeting is grounded in empowering and coaching. The coreapproach: results improve when management relinquishes control and allowsbusiness units and teams to leverage customer proximity and act autonomously ongoals, plans, and initiatives.

Theexecutive role shifts toward a coaching role characterized by entrustingbusiness units and teams with executing on high-level goals – and thenchallenging and supporting them as needed.

Managersand employees are seen as trustworthy and entirely capable of assumingresponsibility for actions and outcomes. They see their work from a holistic,partner-based vantage point, and their efforts are characterized by high levelsof collaboration and cooperation.

Executivemanagement supports high levels of access to needed information as thistransparency is essential to better and quicker decision making, as well asenhanced accountability.

Theempower and coach approach emphasizes the means or process of reaching goals.The core belief is that business units and teams will act in more responsibleand accountable ways to support company growth and success.

2. Seat of authority:centralized bureaucracy vs. decentralized teams

Applying an empowerand coach model drives the seat of authority out to the business units andteams most in contact with internal and external customers.

TraditionalBudgeting: centralized bureaucracy

Undera Traditional Budgeting approach, authority is centralized at the top of amanagement bureaucracy. Objectives, plans, and initiatives are handed downthrough multiple levels of the organization, and business units and teams aremicromanaged to deliver results aligned with these mandates.

Thiscentralized management structure is a hungry beast that consumes enormous amountsof dollars, resources, and time just to support it. And the layers ofmanagement structure insulate executives from fast-paced market developmentsthat can lead to missed opportunities and business going to competitors.

BeyondBudgeting: decentralized teams

Witha Beyond Budgeting approach, power is delegated to decentralized business unitsand teams that are now empowered to act autonomously. Because these groups arecloser to customers and engaged with them on a daily basis, they are more awareof shifts in customer needs and able to respond to these shifts moreeffectively and more quickly.

TheBeyond Budgeting approach is a change in where decisions are made rather than achange in the structure of the organization itself. Charged with innovating andexperimenting based on more intimate day-to-day customer interactions, front-linegroups are empowered to obtain the resources they need, as well as the freedomto act as they see fit.

Theresult: decentralized, front-line groups deliver better products and servicesmore quickly. Satisfied customers are more likely to turn into loyal advocates andlong-term champions.

3. Performancemeasurement: fixed targets vs. relative targets

With BeyondBudgeting, traditional fixed targets are replaced by relative comparisons topeers, benchmarks, and best practices.

TraditionalBudgeting: fixed targets

Undera Traditional Budgeting approach, executive management sets fixed targets andassigns them to the appropriate business unit or individual in a silo-like orstandalone manner. Executives see fixed stretch targets – in budgets, servicelevel agreements, incentives, and other key performance indicators – as thebest way to predict and manage to desired results.

Butunforeseen shifts in the economy, new competitor offerings, or other constantlychanging market conditions can result in significant plan-to-actual variances.When this happens, the focus on end-over-means, short-term results can set thestage for questionable management and accounting practices.

BeyondBudgeting: relative targets

ABeyond Budgeting approach foregoes fixed targets in favor of relative targets.Contrasted with comparing business unit and individual performance to fixedbudgets, service level agreements, and incentives, Beyond Budgeting comparesteam performance to dynamic and more relevant performance indicators like peerperformance, benchmarks, and best practices.

Thegoal is not to meet or exceed rigid stretch targets, but rather to achievesuccess by cooperating as a team to continuously improve relative performance.Evaluation criteria are cooperatively developed using comparative, weightedmetrics that lead to incentives based on these relative goals.

While bothapproaches seek improved performance and shareholder value, the paths toachievement are very different. Beyond Budgeting and its shift of authority to front-linebusiness units and teams results in quicker and more agile responses tocustomer needs. Employees gain motivation and pride as they experience greaterownership of strategic planning, and executing on product and servicedelivery. The bottom line: companies applying the principles of BeyondBudgeting see continuous improvement in performance and shareholder value.

Perhaps this is atime for executives to take a deep breath and consider a business paradox: lessbureaucratic control can yield better long-term results.

Arthur F. Rothberg, Managing Director, CFO Edge, LLC

© 2011-2024 CFO Edge, LLC - This article is only for general information and should not be used in lieu of professional advice.

As an expert in business management and budgeting processes, I bring extensive knowledge and practical experience to the discussion. With a background in advising companies on financial strategies and organizational effectiveness, I have witnessed firsthand the impact of different budgeting approaches on liquidity, credit, and shareholder value.

The article discusses two contrasting budgeting methodologies: Traditional Budgeting and Beyond Budgeting. Let's delve into the concepts used in the article and explore the key differences between these approaches:

  1. Management Style: Command and Control vs. Empower and Coach

    • Traditional Budgeting (Command and Control): This approach relies on a top-down hierarchy where executive leadership holds centralized authority. The belief is that the executive team is best suited to translate objectives into operational goals, plans, and initiatives for all business units and employees. The management style is characterized by skepticism about employees' capabilities and limited transparency.

    • Beyond Budgeting (Empower and Coach): In contrast, Beyond Budgeting emphasizes empowerment and coaching. Executives empower decentralized teams closer to customers and market changes. The focus is on entrusting business units and teams with autonomy in setting and achieving goals, with executives playing a coaching role. Trust, transparency, collaboration, and cooperation are central to this approach.

  2. Seat of Authority: Centralized Bureaucracy vs. Decentralized Teams

    • Traditional Budgeting (Centralized Bureaucracy): Authority is concentrated at the top of a management hierarchy. Objectives, plans, and initiatives are dictated from the executive level and cascaded down through multiple layers of the organization. This centralized structure can be resource-intensive and may insulate executives from rapid market developments.

    • Beyond Budgeting (Decentralized Teams): Beyond Budgeting delegates power to decentralized business units and teams, empowering them to act autonomously. The emphasis is on front-line groups that are closer to customers, allowing for quicker responses to market shifts. This approach does not necessarily change the organizational structure but shifts decision-making to more responsive units.

  3. Performance Measurement: Fixed Targets vs. Relative Targets

    • Traditional Budgeting (Fixed Targets): Traditional approaches involve setting fixed targets for business units or individuals. These fixed stretch targets encompass budgets, service level agreements, incentives, and other key performance indicators. The focus is on meeting or exceeding these predetermined goals.

    • Beyond Budgeting (Relative Targets): Beyond Budgeting replaces fixed targets with relative comparisons. Performance is evaluated by comparing team performance to dynamic indicators such as peer performance, benchmarks, and best practices. The goal is continuous improvement through cooperative efforts rather than rigidly defined stretch targets.

In conclusion, the article advocates for executives to consider moving beyond the traditional fixes of cost-cutting and sales quotas. It suggests that embracing the principles of Beyond Budgeting can lead to continuous improvement in performance and shareholder value, emphasizing the importance of trust, empowerment, and a more adaptive management approach.

Traditional Budgeting vs. Beyond Budgeting - CFO Edge (2024)
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