Initial Reflections

Imagine that you need to borrow money from your local bank. It is April, and the bank assistant politely tells you, “Sorry, we only lend out money in October. And if you have any money left on your current account by year-end, we will take it!”.

Fortunately, no bank would tell us anything that stupid. It still happens, however, all the time in all the organisations that are still managed through traditional cost budgets. The budget bank is open once a year only, and unspent budget funds are lost.

It is just some of the many highly problematic aspects with maybe the most loathed process in organisations. Others include:

• A massive amount of time is spent on both making and following up on budgets;
• Budget assumptions which quickly are outdated, sometimes even before the year starts;
• A blind focus on the calendar year;
• Spending decisions made too early and too high up;
• Centralised command-and-control management;
• Unethical behaviours; gaming, lowballing and resource hoarding.

I have shared this list of budget problems with hundreds of thousands of people around the world during my 30-year-long Beyond Budgeting journey: executives, managers, finance people and many others. Guess what? Almost everybody agrees! There are always lots of nodding heads and guilty smiles when this list is coming up.

At the same time, almost all of them continue believing in a process they are quite unhappy with, even if that, fortunately, has started to change. Maybe because they regard these problems as inevitable and are unaware of a better alternative.

What most have in common, however, is a lack of reflection about the underlying assumptions behind their management thinking. If asked if they find the future uncertain and unpredictable, they would all agree. Asked about their employees, most would claim that they only recruit the best.

The management model most of the apply is, however, based on the very opposite assumptions: that the future is predictable and plannable and that employees can’t be trusted. Without addressing this mental model, few, if any, of the problems above can be solved because we need to change not just what we do but also how we think. Tinkering with process changes alone, like introducing Rolling Forecasts, new KPIs, etc., does not address the problem's root causes.

That does not mean that process changes aren’t needed. They are necessary but not sufficient. If done with old mental models, not much will happen.

The Need for Coherence

Coherence is key in Beyond Budgeting. There are three different types of coherence we must keep in mind.

The first is a horizontal coherence between the six leadership principles and the six management processes, between what is said and what is done in organisations. It does not help that executives talk about how fantastic employees are and how much they are trusted if there are rigid and detailed budgets, for instance, on travel costs. This creates poisonous gaps between what is said and what is done, and nice words and good intentions (hopefully!) become hollow when management processes have the opposite message.

What is said in the leadership principles in Beyond Budgeting, for instance, purpose, values, and autonomy, is in no way unique, as there are many other models and communities sharing the same recommendations. However, these seldom have clear views on what kind of management processes are needed to activate these leadership intentions. Beyond Budgeting has an equal focus on both, with the leadership principles providing inspiration and guiding for management process design.

It is possible, but not recommended, to address management process design only, without this leadership inspiration, and just let the external VUCA level (Volatility, Uncertainty, Complexity and Ambiguity) of the business environment drive the new design. What is not possible, however, is to address the leadership side only. That is nothing but wishful thinking.

This leads us to the second coherence needed, the external coherence between the management model and the business environment. Here, it is useful to keep Ashby’s Law in mind, which, inspired by biology, simply says that the adaptability of an organism must always exceed the variety and volatility of its environment. If not, the organism will die. The same applies to organisations.

The third coherence required is like the first one also internal, a vertical coherence, mainly between the management processes. These start out in the Finance territory, addressing target setting, forecasting and resource allocation, before moving into the HR territory of performance evaluation and rewards. The philosophy and message from all must be aligned and consistent. That is why we so strongly recommend these two functions to work together in supporting a Beyond Budgeting implementation.

Figure 1

A common concern about going Beyond Budgeting is the fear of losing control. The fact is, however, that many of the controls the budget offers are nothing but illusions of control; for instance, the belief that the more detailed we have described next year, the better prepared we are. Or that exactly hitting a cost budget means great cost control. What if we could have spent less or should have spent more?

These are not just illusions; they are also bad controls we should eliminate. Beyond Budgeting offers a number of alternatives and much better control mechanisms, like, for instance transparency and relative performance thinking. I wouldn’t call less bad and more good controls for losing control!

Can Beyond Budgeting Work in the Public Sector?

Let me start with the answer to this question. It is a clear “yes.”  Not only can it work. The public sector needs Beyond Budgeting just as much as its private counterpart. There are many reasons why the question keeps being raised, and most believe the answer is no.

Today, the public sector suffers from the same management problems that the private sector has struggled with for decades. It has ended up in the same misery because it blindly copied beliefs and thinking from private sector management. The “New Public Management” concept, which started in the United Kingdom and Australia, has today spread across the Western World. Even progressive Scandinavia hasn’t been immune to these ideas, which are heavily inspired by business thinking about targets, measurement, markets and contracts.

The irony is that this happened at the same time as the private sector was starting to realise that its traditional management beliefs and practices didn’t work that well. New Public Management was born in the 1990s, the same decade as Beyond Budgeting, but the two represent very different philosophies.

Maybe the public sector needs this sad detour into management and leadership wilderness to fully understand how dysfunctional it is. Maybe it increases the appetite for something different and better.

So why do so many believe that Beyond Budgeting can’t work in the public sector? It starts, of course, with the name, which draws attention to the budget word and the public funding regime through annual budgets. But even if there is an annual process, a big bag of money from above once a year, why must we immediately turn around and split this bag into thousands of smaller bags handed out as next year’s detailed budget for every cost category and every tiniest box on the organisation chart?

Why not instead treat this overall funding as a constraint, something we need to optimise within as effectively as possible? This means pre-allocating as little as possible and instead making cost decisions more continuously, at the right time, at the right level, and for the right reasons. This continuous delivery of decisions and funding is combined with unbiased cost forecasting. If the forecast shows that the constraint will be exceeded, one needs to say more “no” for a period, and vice versa.

Even if many dynamic resource allocation mechanisms in Beyond Budgeting were developed with private companies in mind, some would work just as well in the public sector. Take, for instance, “burn rate guiding,” which means “operate at an activity level that expressed in money is in the range of x until something else is decided.” No micromanagement, no travel or consultant budgets.

The “monitoring only” alternative can also work. No budget, no pre-allocation — just monitoring of cost trends, with intervention only when unacceptable trends are observed. Even relative targets can work, if applied in a Beyond Budgeting and not in a New Public Management context.

In 2020, the contact centres in the Norwegian labour and social services organisation NAV tested the “monitoring only” alternative. Two of 12 units across the country were allowed to operate without a cost budget for administrative cost, although hiring still required approval. The message was simple. Spend what is needed to do a good job and not more. The results were amazing. As the experiment took place during the pandemic, all centres had lower external activities and costs that year, but no one had higher cost reductions than the two pilots. Minus 50% in both! The experiment was extended to six units in 2021, and from 2022 all 12 operate without traditional costs budgets.

All the other Beyond Budgeting principles should also be as relevant in the public sector. Don’t tell me that purpose, values, and transparency are less needed here. The same goes for internal relative targets, Rolling (or dynamic) Forecasts, and a holistic performance evaluation. Although less prevalent, the individual bonus does just as much damage here as in the private sector.

The Dutch home care organisation Buurtzorg has for many years provided solid evidence that public services can be delivered in much more human and effective ways than what new public management offers. The world has started to notice, and many home care institutions have adopted a similar model. A few failed, mainly because they just copied the structure and not the philosophy behind it.

A recent exciting case I have been involved in is the Norwegian municipality Sogndal, with around 12,000 inhabitants, based in one of the beautiful fjords on the west coast. The municipality is on a major transformation journey and has found strong inspiration in the Beyond Budgeting model. The head of the project insisted on choosing his job title himself, and it became “Challenger”!

The municipality did not want to embark on a successful pilot journey and afterwards being told by numerous public stakeholders that this was not possible due to authority rules and requirements. They, therefore, spent a significant amount of time upfront with all relevant bodies, explaining what they wanted to do and why. They ended up with a green light from everybody and have now started a journey that I really look forward to following.

Closing Remarks

If you are new to Beyond Budgeting, this article will probably trigger many questions not addressed here, like, for instance, how to manage costs without a budget. I have written about this and much more in previous FP&A Trends articles, including including this one about how to manage costs without a traditional budget.

For a more thorough deep dive into Beyond Budgeting, check out my book “Implementing Beyond Budgeting” with a foreword by Robert Kaplan, or my latest one “This is Beyond Budgeting – A Guide to More Adaptive and Human Organizations” with a foreword by Gary Hamel. More info at bogsnesadvisory.com.

There is also a wealth of information on the Beyond Budgeting Roundtable website bbrt.org, where other book recommendations can be found.