Beyond Budgeting as a Control

¶ … Beyond Budgeting as a Control Strategy for a National Health Service Hospital Accident and Emergency Unit

Almost all types and sizes of organizations must plan their costs and activities well in advance, and many organizations have used a traditional budgeting process for this purpose. The traditional budgeting process, though, has been the focus of a growing amount of criticism for being irrelevant and inflexible for the modern public sector environment in general and in the United Kingdom in particular. In response to these criticisms, a growing number of enterprises are electing to employ the Beyond Budgeting approach for these purposes. This paper provides a review of the relevant literature to identify why traditional budgeting practices have been criticized, how the Beyond Budgeting approach has become an important alternative approach to traditional budgeting for achieving strategy in the public sector and how and why Beyond Budgeting can be implemented to control strategy in a National Health Service Hospital Accident and Emergency Unit. A summary of the research and important findings are presented in the conclusion.

Review and Analysis

Why Traditional Budgeting Practices have been Criticized

Any business process that requires so much time, effort and resources demands careful scrutiny to ensure that it is providing a worthwhile return on investment and this has certainly been the case with traditional budgeting practices in recent years in the private sector (Kaplan 2008; Novak 2009) as well as the public sector (Wiener, Tilly, Alecxih 2002; Master 2003). In this regard, de With and Dijkman (2008) recently emphasized that, "Budgeting is a well-known subject. In the last few years, many articles have criticized the traditional budgeting process and have stated, among other things, that the process costs too much time in relation to the benefits and reduces innovation and changes" (26). Likewise, Shastri and Stout (2008) report that, "The value of the budgeting process has been the subject of intense debate over the past few years. The traditional budgeting process is outdated and dysfunctional and, therefore, should be abandoned" (18).

Like activity-based budgeting, Beyond Budgeting was developed by Hope and Fraser (2003) in an effort to overcome the constraints involved in the traditional budgeting process. Moreover, also like activity-based budgeting, Beyond Budgeting originated at the Consortium for Advanced Manufacturing-International (CAM-I) (de With & Dijkman 2008). According to Bunce (2008), the concept of the Beyond Budgeting approach is based on 12 fundamental principles that are described further in Table 1 below (principles 1-6 relate to performance management process principles and 7-12 relate to leadership):

Table 1

The12 Beyond Budgeting performance management process principles

Principle

Description

Leadership actions

1. Outcomes

Focus everyone on the outcomes, not on hierarchical relationships

2. Processes

Organize as a lean network of accountable teams, not as centralized functions

3. Autonomy

Give teams the freedom and capability to act, do not micro-manage them

4. Responsibility

Create a high responsibility culture at every level, not just in the centre

5. Transparency

Promote open information for self-management, don't restrict it hierarchically

6. Governance

Adopt a few clear values, goals and boundaries, not detailed regulations

Management processes to support leadership actions

1. Goals

Set aspirational relative goals for continuous improvement, do not negotiate fixed contracts

2. Rewards

Reward shared success based on relative performance, not on fixed targets

3. Planning

Make planning a continuous and inclusive process, not an annual event

4. Controls

Base controls on relative key performance indicators and performance trends, not variances against plan

5. Resources

Make resources available as needed, not through annual budget allocations

6. Coordination

Coordinate interactions dynamically, not through annual planning cycles

Source: Bunce, 2008, p. 3

A survey of European companies conducted by de With and Dijkman (2008) determined that although most companies are not using Beyond Budgeting throughout the entire company, fully 38.6% of the companies surveyed were shown to be using Beyond Budgeting in some part or parts of their enterprise (de With & Dijkman 2008). The results of the above-cited de With and Dijkman (2008) survey found that on average, the budgeting practices of European companies are as follows:

1. A budget covers a fixed period and will generally not be changed during this period. During this period, regularly revised forecasts are prepared next to the original budget.

2. The budget covers one year, broken down by months, and supports the firm's strategy.

3. Business unit managers participate in setting targets of the business units. In most cases, the standards are developed by lower-level management and are reviewed and approved by higher levels of management.

4. The budget targets are attainable with some extra effort.

5. Targets are used in the budgeting process. These targets are developed through participation of subordinate levels of management. These standards are tight but attainable.

6. Budgets have several uses. They are used most frequently to motivate and reward managers, for planning purposes, to evaluate activities, and for communication purposes.

7. Budgets are related to long-term plans.

8. The profit-conscious style is used to evaluate the performance of managers. Any overspending of budgets is evaluated in relation to the long-term goals of the firm.

9. A great majority of respondents used slack to deal with environmental uncertainty.

10. Overall, there is no significant association among size (revenues), the kind of industry, and the findings of the research (de With & Dijkman 2008).

Given the natural human tendency to resist change, the fact that almost 40% of the companies surveyed by de With and Dijkman had adopted the Beyond Budgeting approach, at least in some fashion, is a clear indication that many executives have recognized the limitations and disadvantages inherent in the traditional budgeting approach and are searching for superior alternatives. For example, in their book, How Europe's Economies Learn: Coordinating Competing Models, Lorenz and Lundvall (2006) advise, "There is now a strong school among academic management accountants arguing that it is necessary to go Beyond Budgeting to [achieve] a more long-term and flexible system of financial controls and performance targets" (186). The Beyond Budgeting initiative is "dedicated to improving upon traditional corporate budgeting, forecasting and planning processes -- primarily by eliminating the expensive, time-consuming, headache-inducing, and often worthless annual budgeting process" (Krell 2009, 4). In fact, a recent survey of business leaders found that more than a quarter (28%) of North American corporate finance executives reported their organization's budgets were irrelevant by mid-year (Krell 2009). Organizations of all types and sizes, though, must have some method whereby they can determine where their money is coming from and where it is going (Anderson 2004; Shim & Siegel 1999), and it is in this area that Beyond Budgeting can help and these issues are discussed further below.

"Beyond Budgeting" as an Alternative Approach to Traditional Budgeting for Achieving Strategy (Public Policy) in the Public Sector

Disadvantages. Some of the disadvantages related to the Beyond Budgeting approach are less relevant for the public sector, but provide some indication of the constraints that are generally involved. For example, according to Lorenz and Lundvall (2006), "The difficulty for a typical British shareholder-capitalist firm in going Beyond Budgeting is that the conventional budget fits rather neatly with the arm's length relationship between institutional shareholders and management. The former effectively say to the latter, 'don't bemuse us with too much information, focus on telling us what profits and dividends we can expect and then make sure you deliver them next year" (186-187). In addition, in those cases where compensation is tied to traditional budget targets, managers may act in unethical ways by seeking to negotiate lower numbers during the budgeting process to help ensure that they receive an incentive payment (Krell 2009).

Advantages. The Beyond Budgeting approach appears to be well-suited to the public sector in general and the National Health Service in particular because of the nature of the products and services being provided and the long-term nature of the commitment involved on the part of the stakeholders. In this regard, Lorenz and Lundvall note that, "Beyond Budgeting goes much more with the grain of a corporate governance style in which the shareholder has a long-term commitment" (187). These advantages and the commitment of the Beyond Budgeting method to eliminate bureaucratic waste and red-tape make it especially well suited to some public sector agencies and these issues are discussed further below.

How and Why "Beyond Budgeting" can be Implemented to Control Strategy (Public Policy) in an NHS Hospital Accident and Emergency Unit

Public sector healthcare organizations are faced with some unique challenges that are not typically experienced by their private sector counterparts and Beyond Budgeting appears to provide a more flexible framework in which scarce resources can be allocated as part of an overall larger effort to establish healthcare priorities and mandates. For instance, according to Byrne (2006), "Official accountancy terminology defines budgeting as an integral part of the control process whereby monthly budgetary variance analysis can cue corrective action by operational managers. However, such managers may not be able to influence their budgets" (68). The management control strategy for an NHS hospital accident and emergency unit is therefore by definition a top-down process that is used to guide an organization in establishing control strategies that will enable the agency to achieve its goals based on ongoing input from lower-level managers. According to de With and Dijkman (2008), "Management control is the process by which managers influence other members of an organization to implement the organization's strategies. This process consists of four different phases-strategic planning, budgeting, measurement and reporting, and evaluation-each of which leads to the next phase" (27). Beyond the foregoing formal phases, management control also includes informal communications and interactions such as meetings and conversations (de With & Dijkman 2008). In a National Health Service setting, though, a control strategy must recognize the need for flexibility throughout the budgeted period of time in ways that might not affect a private sector counterpart. In this regard, Byrne (2006) notes that, "Ideally, the annual budgeting process sets the performance agenda for the year ahead. However, healthcare budgets are often only an estimate of income and expenditure, with incremental budget setting the dominant budget type employed" (67).