Management & Budgetary Control and the Beyond Budgeting debate
Part 1
What is budgetary control?
Budgetary control is the “establishment of budgets relating the responsibilities of executives to the requirements of a policy,” and the constant checking of the adherence to the budgeted results (FAO, 2014). It sets targets for income and expenditure to monitor and adjust the performance when necessary (Weygandt et al., 2009). It develops goals and forecasts for the major financial indicators, such as profits and revenues, costs, and cash flow (Horngren, 2012).
Why use traditional budgetary control?
Traditional budgeting is often described as the most reliable and effective tool used in managerial accounting (Pietrzak, 2014). Budgetary systems are the most common way to set strategic goals (Raghunandan et al., 2012). It is an easy tool to use for managers; it helps to plan, specify deadlines and move beyond the day-to-day processes (Hope, 2009). This is the case for Sheffield Surgical, as they have an extensive experience of working with budgetary control. Indeed, budgets help communicate and coordinate major corporate goals; help different departments to understand what is required and see the overall picture (Van Riel and Fombrun, 2007). Thus, traditional budgeting helps regulate the financial activities of an organization, communicate the expected performance and motivate different layers of the management (Horváth, 2008). It often helps in the facilitation of cost reduction and optimization (Lal, 2009). Budgets are the major “guide for action”; realistic budget is an effective motivational tool (Horngren et al., 2012). Monitoring the performance against the agreed targets is the core of the performance management systems for many organizations (Fisher et al., 2002). It may be an effective way to control overheads and costs, it helps to “keep the organization fit” and can be very useful for decision-making (Weygandt et al., 2009). Hence, there are many reasons why Sheffield Surgical of Sheffield Surgical defends the existing system.
What are the limitations of traditional budgetary control?
Budgetary control is effective only in a predictable business environment (Berland and Boyns, 2002). However, modern environment is unpredictable, as the situation with Sheffield Surgical shows. Most of the businesses implement the annual budgeting cycle, while the current business environment is very volatile and requires flexibility; two-third of the companies cannot look and monitor the details of their budgets instantly (Yvanovich, 2012). This is true for Sheffield Surgical, the market for surgical instruments is very volatile, often, medical companies try to cut the costs by keeping the existing surgical instruments (Novumed, 2012). Budgetary controls are often overly bureaucratic; budgets often fail to reflect the real situation in the organizations, especially large and public (Blais and Dion, 1991). However, Chenhall (2003) states budgetary control limits flexibility and decreases performance in organizations with very concentrated authority. This is the case for Sheffield Surgical, as many managers and employees do complain about inflexible and rigid managerial philosophy. Indeed, Barnat (2014) notes that problems only occur when the budgetary control is used “mechanically and rigidly”. Tight budgetary control may result in underperformance of organization as employees are encouraged to meet the lowest set target, it leads to short-termism and low flexibility because of low tolerance of the deviations from interim budget targets (Van der Stede, 2001). In addition, budgets are often seen as coercive tools that demotivates employees and managers; sometimes achieving the target goals is more important than achieving the performance beyond these target goals (Gopal, 2009). Budgetary control may face the resistance and lack of cooperation on different layers of management; it often decreases motivation and initiative at lower levels (Gopal, 2009). Budgetary control results in competition for resources among different groups and departments in organizations, harming overall performance and promoting dysfunctional organizational culture (Barnat, 2014). Finally, budgetary control may be expensive and often unbearable to SMEs (Hope, 2009).
Why use Beyond Budgeting?
Goode and Malik (2011) noticed that Beyond Budgeting may be useful to target the drawbacks of traditional budgeting. With the growth of IT solutions, complex analysis can be used in beyond budgeting (Drury, 2008). Volatile environment should means traditional budgeting should be supported by new approaches (Goode and Malik, 2011). Beyond budgeting uses quarterly or monthly budgets, instead of annual, it uses Key Performance Indicators (KPIs) that formulated based on the balanced scorecard and overall strategy of the organizations; it promotes external benchmarks that are not based on past performance, it also promotes decentralization, focus on innovation and value creation and flexibility of the departments (Kaplan Financial, 2015). Hope and Fraser (2013) notice that beyond budget is a good way to address the problems of the annual budget trap, expensiveness and rigidity of traditional approaches. It focuses on creating the high-performance climate based on decentralization and empowerment and uses adaptive, relative and responsive system of setting targets (Hope and Fraser, 2013). Beyond budgeting can help Sheffield Surgical because it will boost the international sales. Similarly to Handelsbanken, empowered and autonomous foreign partners and sellers would be focused on the increasing the sales and offering the best value and help the headquarter to adjust the product assortment according to the requirements of local customers, as they would be interested in growth of revenues and profits, and not only meeting the minimum targets for a particular year. Indeed, Neely et al. (2003) suggest that beyond budgeting helps to promote value creation instead of cost reduction. Similarly, Player (2003) notes that beyond budgeting helps to increases the adaptability of organizations, leading to decreased costs, improved strategic alignment and enhanced value creation by financial departments; it also helps to decentralize organizations to enhance profits, innovations and customer satisfaction.
Reasons for resistance to changes
However, in many cases, organizations do not want to abandon traditional budgets and budgetary control. Financial Director is not the only person who does not want to change. One of the major reasons is the fear of going out of “comfort zone” by the management and its resistance to changes (Bourmistrov and Kaarbøe, 2013). Moreover, real-life research shows that firms do not spend excessive resources on budgeting, and most of the firms operate in rather predictable environment, most of the respondents note budgets are useful in implementing and communicating organizational strategy (Libby and Lindsay, 2010). Moreover, For many companies, centralization is crucial for their survival; in other case decentralization might face huge resistance from the top-management and other major stakeholders (Drury, 2008). CIMA (2007) notes that two other major reasons are the framework of control, which often ensures stability and effectiveness in planning, coordinating and controlling the activities, especially with a well-trained specialists in large organizations. The finance department is thus resistant to change because they believe they might lose their power, while others believe there might be a decrease in the quality of control. However, the evidence presented earlier shows that control does not always mean a good performance; and the greater autonomy is required for Sheffield Surgical. Sometimes, the major reason for keeping the budgetary control is the existing organizational culture and desire of major stakeholders to keep the status quo (CIMA, 2007). Indeed, the change of the organizational culture at Sheffield Surgical might be painful but the changes are required to be more successful in the current business environment.
References
Barnat R., (2014) Strategic Management: Formulation and Implementation, Available from: http://www.strategic-control.24xls.com/en211 [Accessed 14 February 2016]
Berland, N., & Boyns, T. (2002) The development of budgetary control in France and Britain from the 1920s to the 1960s: a comparison. European Accounting Review, 11(2), 329-356.
Blais, A., & Dion, S. (1991) The budget-maximizing bureaucrat: Appraisals and evidence (pp. 205-230). Pittsburgh, PA: University of Pittsburgh Press.
Bourmistrov, A., & Kaarbøe, K. (2013) From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas. Management accounting research, 24(3), 196-211.
Chenhall, R.H., (2003) Management control systems design within its organizational context: findings from contingency-based research and directions for the future. Accounting, organizations and society, 28(2), 127-168.
CIMA, (2007) Beyond Budgeting Topic Gateway Series No. 35, Available from: http://www.cimaglobal.com/documents/importeddocuments/cid_tg_beyond_budgeting_oct07.pdf [Accessed 14 February 2016]
Drury, C. (2008) Management and Cost Accounting. 7th Edition. Andover: Cengage Learning.
FAO, (2014) Chapter 4, budgetary control, Available from: http://www.fao.org/waicent/w4343e05.htmadvantages and disadvantages,(2013). THE ADVANTAGES AND DISADVANTAGES OF BUDGETING,(2014). Chapter 4,207-214.
Fisher, J. G., Maines, L. A., Peffer, S. A., & Sprinkle, G. B. (2002) Using budgets for performance evaluation: Effects of resource allocation and horizontal information asymmetry on budget proposals, budget slack, and performance. The Accounting Review, 77(4), 847-865.
Frow, N., Marginson, D., & Ogden, S. (2005) Encouraging strategic behaviour while maintaining management control: multi-functional project teams, budgets, and the negotiation of shared accountabilities in contemporary enterprises. Management Accounting Research, 16(3), 269-292.
Goode, M., & Malik, A. (2011) Beyond budgeting: the way forward. Pakistan Journal of Social Sciences, 31(2), 207-214.
Gopal, C. R. (2009) Accounting for managers. New Age International.
Hope, C. T.,D. E. (2009) Managerial accounting: Tools for business decision making. John Wiley & Sons.
Hope, J., & Fraser, R. (2013) Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.
Horngren, C. T., & Datar, S. M. M. Rajan (2012) Cost Accounting: A Managerial Emphasis.
Horváth, C. (2008) Management and Cost Accounting. 7th Edition. Andover: Cengage Learning.
Kaplan Financial, (2015) Beyond Budgeting, Available from: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Beyond%20Budgeting.aspx [Accessed 14 February 2016]
Lal, J. (2009) Cost Accounting 4E. Tata McGraw-Hill Education.
Libby, T., & Lindsay, R. M. (2010) Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), 56-75.
Neely, A., Bourne, M., & Adams, C. (2003) Better budgeting or beyond budgeting?. Measuring business excellence, 7(3), 22-28.
Novumed, (2012) A SAFE HAVEN for VOLATILE INDUSTRIES?, Available from: http://www.mtic.dk/sites/default/files/novumed_spotlight_medtech_market_overview-web_0.pdf [Accessed 14 February 2016]
Pietrzak, Ż. (2014) Traditional versus Activity-based Budgeting in Non-manufacturing Companies. Social Sciences, 82(4), 26-37.
Player, S. (2003) Why some organizations go “beyond budgeting”. Journal of Corporate Accounting & Finance, 14(3), 3-9.
Raghunandan, M., Ramgulam, N., & Raghunandan-Mohammed, K. (2012). Examining the behavioural aspects of budgeting with particular emphasis on public sector/service budgets. International Journal of Business and Social Science, 3(14).
Van der Stede, W. A. (2001) Measuring ‘tight budgetary control’. Management Accounting Research, 12(1), 119-137.
Van Riel, C. B., & Fombrun, C. J. (2007) Essentials of corporate communication: Implementing practices for effective reputation management. Routledge.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009) Managerial accounting: Tools for business decision making. John Wiley & Sons.
Yvanovich R., (2012) Traditional budgeting approach: advantages and disadvantages, Available from: http://blog.trginternational.com/bid/162036/Traditional-budgeting-approach-advantages-and-disadvantages [Accessed 14 February 2016]
Yvanovich R.,C. B.,C. J. (2007) Essentials of corporate communication: Implementing practices for effective reputation management. Routledge.
Part 2
Two articles
The two chosen articles are written by Libby and Lindsay (2010) and the second one is prepared by Østergren and Stensaker (2011). First focuses on the analysis of budgeting practices in the companies of different industries operating in the United States, while the second research focuses on the analysis of the implementation of beyond budgeting in the Norwegian-based multinational oil and energy company (Oilco).
The article by Libby and Lindsay (2010) will be called as Article 1 and Østergren and Stensaker will be called as Article 2.
Article 1 attempts to update the literature on the current budgeting practices in North America, reveal the perception of managers about budgets, analyze the criticism of budgeting and reveal the areas of future research. Meanwhile, Article 2 is aimed to analyze the beyond budgets in particular and the ways of its implementation in practice. Specifically, it focuses on the analysis of the rules of actions that are used instead of budgets and the ways the new management philosophy influences the interaction patterns in the company.
Methodology
Article 1 used the web-based survey of senior managers in medium and companies (i.e. VP, CFO, Division Manager, etc.). More than 550 surveys were completed most of the companies had $1-10 million and $10-50 million business unit revenue.
The case study is used in Article 2. The paper states that the Beyond Budgeting is a new practice, hence exploratory approach is used. The research focuses on Norwegian Oilco because in 2005 it decided to end any budgets completely and use Beyond Budgeting. The data collection took place in 2006-2007, it mainly used semi-structured interviews. Hence, the focus was on qualitative data to gain in-depth knowledge.
However, such an approach means greater bias, because interviewees were only from Oilco and mainly from the top and middle layers of management and thus that may overly positive attitude towards Beyond Budgeting. Indeed, while case study method is revealed to be useful way to investigate new phenomena, it may face the issues of limited validity and external reliability (Eisenhardt, 1989; Flyvbjerg, 2006).
Comparing and contrasting the two articles
Findings in Article 1 show that budgetary control is still very popular and most of the companies have no plans to abandon it. Most of the respondents are neutral or even positive about their budgeting control practices. Only few companies consider using beyond budgeting. The Article 1 shows that many of the arguments by Hope and Fraser are not true in the real life, budget control is not so burdensome for managers nor it leads to large costs and huge inflexibility. The paper concludes that ‘traditional’ budgeting companies are still successful. Another conclusion is that there should not be “either/or” focus in analyzing the topics of Beyond Budgeting vs. traditional, since most of the very successful companies use both approaches. The article features bias towards traditional budgeting as major share of respondents were related to Finance departments, it was also descriptive in nature.
Article 2 does not focus on the drawbacks of traditional approach, but it notices that using beyond budgeting makes targets more strategic and ambitious, decentralization results in decreased short-termism; it shifts focus of managers towards new possibilities and flexibility in targeting these possibilities. Removing budgets leads to increased horizontal integration between divisions and the shift of power towards the controllers. The major conclusion is that empowerment may succeed only if results control is replaced by the controls grounded on corporate visions and values. In addition, it shifts the attention of local managers from being within budget towards achieving their goals. The findings and conclusions of the article are rather positive towards beyond budgeting and are in line with the suggestions of Hope and Fraser (2013). The results are somewhat similar to the findings by Bourmistrov and Kaarbøe (2013), they used multiple case study approach to study beyond budgeting in two MNCs and revealed similar changes. The major limitation of the article is that it only studied the company during the start of the new strategy; hence, it could not analyze how the company would manage the growing ambition problem, sub-optimization game problem and employee exchange problem. In addition, it only analyzed the Beyond Budgeting in the positive climate as all the divisions implemented Beyond Budgeting voluntarily. Another limitation it did not continue the study during the harsh environment of financial crisis when cost reduction was crucial.
Thus, the two articles have different conclusions but essentially do not contradict each other. Article 2 notices the positive outcomes of beyond budgeting; Srticle 1 states that traditional budgeting can be still a good option, while the combination of traditional and beyond budgeting may be even more successful than replacing the traditional budgetary control with beyond budgeting.
References
Bourmistrov, A., & Kaarbøe, K. (2013) From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas. Management accounting research, 24(3), 196-211.
Eisenhardt, K. M. (1989) Building theories from case study research. Academy of management review, 14(4), 532-550.
Flyvbjerg, B. (2006) Five misunderstandings about case-study research. Qualitative inquiry, 12(2), 219-245.
Hope, J., & Fraser, R. (2013) Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.
Libby, T., & Lindsay, R. M. (2010) Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), 56-75.
Østergren, K., & Stensaker, I. (2011) Management control without budgets: a field study of ‘beyond budgeting’in practice. European Accounting Review, 20(1), 149-181.
