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The Seven Reasons to Adopt Beyond Budgeting Principles

  • By Nilly Essaides
  • Published: 4/5/2016
budgeBeyond Budgeting remains a controversial concept for financial planning and analysis (FP&A). While there’s a growing consensus that the traditional budgeting process is obsolete, not everyone is willing to ditch it altogether. Many companies feel uneasy about operating with no annual budget at all, and are instead supplementing it with a rolling forecast in order to stay on top of changing market conditions.

According to the Beyond Budgeting Round Table (BBRT), the methodology yields a number of key benefits.

It allows companies to respond rapidly to both threats and opportunities. According to the BBRT, adaptive organizations can operate with speed and simplicity, by giving managers the scope to act immediately and decisively within clear values and strategic boundaries.

It attracts and keeps the best people. It is no coincidence that adaptive organizations such as Google, Handelsbanken and W.L. Gore regularly appear on the lists of “best companies to work for”. Talented people want to learn and develop; they value time to think, reflect and try new ideas; they want decision-making responsibility and a friendly, collegiate culture.

Beyond Budgeting enables and encourages continuous innovation. In adaptive organizations, people work within an open and self-questioning environment, while clear governance principles set the right climate and build the mutual trust needed to share knowledge and best practices.

The approach drives operational excellence. Companies that use Beyond Budgeting typically show lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects and structures with their strategy. Operating managers also challenge resources used rather than seeing them as entitlements.

Consequently, this process leads to more loyal and profitable customers. Adaptive organizations know how customers want to conduct business with them. Key issues are whether customers just want the lowest-cost transaction, added-value services, or customized solutions. Under this “outside-in” approach, firms know how to satisfy customers’ needs profitably. This means not only knowing their needs, but also their net profitability.

It enables companies to support good governance and ethical behavior. Adaptive companies are held together by strong values and inviolate principles. However, it is not a soft option. It exposes nonperformers. It challenges people all the time. You cannot just agree on a number. You have to show people that you can actually achieve real performance improvements, and must always be prepared to be judged against others with similar problems and opportunities.

Finally, it leads to sustained value creation. Leaders in adaptive organizations focus their attention (either explicitly or implicitly) on creating wealth over the longer term. In particular, they focus on setting high performance expectations and stretching people’s ambitions. Those companies that operate this way tend to beat the competition not just this quarter or this year but year after year.

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