In my last blog, I promised to give you some tips about how to introduce some Beyond Budgeting ideas into your business to help make it more flexible and reduce the gaming behaviour associated with the budgeting game.

Traditional budgeting has three major weaknesses:

1. It is rigid and inflexible because every process element – targets, plans, and resource budgets are tied to a single budget number which is also used to measure performance and coordinate activities.
2. It forces management to work within the narrow constraint of a financial year.
3. Its reliance on negotiated fixed targets fosters dysfunctional behaviour and an internal focus.

A good way to set about introducing Beyond Budgeting is to tackle each of the weaknesses progressively.

First, introduce flexibility by relaxing the ties between process elements.

Rather than tying everything to one number, recognise the differing purposes of different processes by using different numbers. Base targets on aspirational stretch goals, but make sure that plans – or forecasts – are realistic expectations grounded on fact. Allocating resources in a way that encourages people to use them efficiently and effectively while breaking the link between bonuses and targets reduces the incentive to game the target-setting process. Finally, find ways to coordinate activities and measure performance that does not rely on budgets.

Freeing the business from the straightjacket of traditional budgeting provides freedom to move without the loss of control.

The second straightjacket to escape from is that which ties everything to the financial year. The fact that results need to be reported to shareholders annually does not mean that the business has to be managed on this basis.

Rather than tying everything to the financial calendar, align processes with the natural rhythm of the business. Adopt perpetual targets based on KPIs or trends and Rolling Forecasts linked to decision-making lead times. Allocate resources based on need rather than on an annual calendar and continuously coordinate activities based on ‘one set of numbers’.

Breaking the tyranny of the financial year eliminates the annual budgeting ritual and frees management to engage with the world as it is rather than the way we would like it to be.

Finally, seek out ways in which you can bring the outside world and market-based thinking into your management processes.

Use benchmarks - ideally based on external reference points - as targeting mechanisms and the reference point for performance measurement and use market-like mechanisms to guide resource allocation and the organisation and coordination of activities. Use formal planning and forecasting processes only when they are needed to support specific decision-making processes rather than as the central pillar of a bureaucratic control system and base rewards on the principle of sharing the fruits of collective success.

Borrowing concepts from markets and adapting them to the needs of your business helps to create a lean control system that adapts quickly and effectively and fosters an externally focused, self-motivated mindset.

Beyond Budgeting isn’t a magic pill that cures all ills, nor is it a prescription for how you should run your business. It is a set of guiding principles that helps you build an effective and efficient control system tailored to the needs of your own business, in place of the ‘one size fits all’ approach of traditional budgeting.

None of the unique ideas I have just shared are in themselves revolutionary. At various times, various authorities have advocated most of them. What is different about Beyond Budgeting is that they are tied together as part of a coherent set of practices underpinned by a guiding philosophy.

The only unique feature of Beyond Budgeting is that these process principles are explicitly tied to a complementary set of organisational or leadership principles.

Process changes on their own will deliver incremental benefits. This is good news but probably won’t transform the performance of your business. But coupled with complementary changes to organisational behaviour, your operating model – based on BB principles - can become a potent source of competitive advantage.

I recognise this idea might make many people uncomfortable – particularly those from the finance community - since it feels like we might be straying away from the familiar, tangible world of reasonable business procedures.

In the final blog in this series, I will explain how organisational practices need to change and why it makes good business sense to explicitly factor the human dimension into the design of your business’ operating model.

The article was first published in Prevero Blog