A lean enterprise focuses business leaders on managing the systems of product and service delivery rather than managing to meet budgeted targets. Tom Johnson, a professor at Portland State University, describes this as "management by means" instead of the traditional budget approach of management by results. Johnson's work draws heavily on the ideas of W. Edwards Deming, who advocated a systemic approach to management. In "The New Economics" (MIT Press, 2000), Deming notes, "Certainly we need good results, but management by results is not the way to get good results. It is action on outcome, as if the outcome came from a special [rather than systemic or common] cause. It is important to work on the [systemic] causes of results -- i.e., on the system."

Some companies have found this focus on means in the Balanced Scorecard methodology. Danish polymers producer Borealis did away with its budgeting process in 1996. To control operations in a budgetless environment, Borealis relies on the Balanced Scorecard as its key operational steering mechanism (see exhibit 1). The company monitors performance in terms of the scorecard's nonfinancial metrics to gauge its progress toward strategic objectives. The key difference between Borealis' processes and more conventional Balanced Scorecard implementations is one of the fundamental elements of the Beyond Budgeting model: Borealis has eliminated the budget box separating out operational planning -- which typically looks one year ahead -- from strategic planning three to five years in advance. Borealis tracks trends, but without linking them to artificial, accounting-defined time frames. This focuses managers on performance over the business cycle, which is often longer than one year and is more volatile.

Rolling forecasts are a key characteristic of a lean, adaptive organization. They typically project progress five to eight quarters in the future, on a continuous basis. They are not tied to the financial calendar year-end, and they do not seek to predict a finish line for performance in a given time frame, so financial results are not judged according to a stale, budgeted target. Rolling forecasts also avoid getting bogged down in details. They include only a few key variables, such as sales pipeline or order backlog data, revenues, key expenses, key operating statistics, and capital investment status. Thus, they can be prepared relatively quickly by very few people. Rolling forecast data can flow automatically into reports on a frequent basis. Updates can occur continuously, as the forecast presents managers' current best guesses of what will happen based on foreseeable trends.

Experience has shown that this approach yields far more accurate forecasts. Thomas Boesen, Borealis' manager of business planning, reports that when the company moved from budgeting to its rolling forecast model, the quality of its projections improved dramatically. Global drilling contractor Transocean has also recently implemented a rolling forecast. Although Transocean continues to budget, director of budgeting and planning Gary Taylor notes its forecasts stay much more up-to-date because the company's new Web-based system allows instant updates from virtually anywhere in the world. This continuous planning capability enables Transocean to focus on key drivers of rig utilization, which creates clear revenue opportunities, since each rig can earn more than $250,000 per day.

Exhibit 1