Becoming Lean, Adaptive, and Ethical: How to Move Beyond Budgeting
Principles of Beyond BudgetingArticle ToolsResource Center
advertisement GOALS: Set stretch goals aimed at relative improvement (not focused on negotiating incremental numbers). a. Enable local teams to set goals based on maximizing their performance potential. To encourage managers to go for "maximum stretch," goals should be disconnected from evaluations and rewards. (There must not be a "fixed-performance contract.") b. Base goals on medium-term (two- to five-year) outcomes, with action plans to support them. c. Base goals on achieving better results than peers, competitors, or external benchmarks (i.e., being at the top of the league table). d. Transfer ownership of goals to local teams and encourage the right (virtuous) behavior. REWARDS: Base evaluations and rewards on relative improvement contracts "with hindsight." (Don't relate incentives to a fixed performance contract.) a. Base rewards on the relative success of teams against a mix of measures with the benefit of hindsight based on a known formula. b. Base rewards on teams (e.g., whole company, business unit team, front-line team). c. Base the bonus pool formula on a range of KPIs consistent with goals and strategy. d. Adopt rewards that balance the need to encourage both short- and medium-term results. e. Ensure that rewards are seen to be fair and motivate the right actions and behavior. PLANNING: Make action planning a continuous, inclusive approach (not a top-down annual event). a. Devolve strategy planning and decision-making to lower-level teams. b. Involve the whole team in strategy discussions. c. Base reviews on short- and medium-term performance management cycles (or continuous reviews). Reviews can be based on the calendar (e.g., quarterly) or triggered by events. d. Focus teams on continuous value creation rather than negotiating numbers. e. Derive key value drivers, action plans, and KPIs from goals and strategies. f. Manage action plans as an integrated portfolio. RESOURCES: Make resources available as required. (Don't allocate them in advance.) a. Use "fast-track" approvals for major projects with frequent reevaluation of priorities. b. Devolve authority for smaller projects to local teams. c. Provide an internal market for operational resources. Make central services available through an internal market at agreed-upon transfer prices. d. Set KPI goals and controls to manage operational resources within which units must operate. COORDINATION: Coordinate cross-company actions with prevailing demand. (Don't rely on annual planning.) a. Make periodic service-level agreements with other units for products and services. b. Ensure that teams are seen as suppliers and customers within an internal market. Internal customers have needs that are subject to conditions of satisfaction. c. Manage short-term capacity in real time by adjusting it to customer demand. d.Manage customer profitability information by enabling front-line people to see and respond to the "net" profitability of customers. e. Listen and respond to individual customers, and provide customized solutions. CONTROLS: Base controls on effective governance and on a range of KPIs (not just annual budgets). a. Base internal controls on a clear governance framework. b. Produce fast actual financials, and make information open to all. c. Use trend analysis and moving averages. d. Use rolling forecasts. e. Use key performance indicators to set goals and controls. f. Use league tables. g. Use patterns and trends to manage by exception. |
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Principles for Front-Line ActionGOVERNANCE: Provide a governance framework based on clear principles and boundaries (not on rules, regulations, and budgets). To enable local decision-making and safeguard stakeholders' interest, leaders should: a. Provide clear principles and boundaries. b. Bind people to a common purpose and shared values. c. Adopt a "coach and support" leadership style. CLIMATE: Create a high-performance climate based on relative success (not on fixed performance contracts and fear of failure). To motivate people and ensure sustainable success, leaders should: a. Champion relative performance. b. Challenge ambition. c. Balance internal cooperation and competition. FREEDOM TO ACT: Give people freedom to make local decisions that are consistent with governance principles and the organization's goals (not with rules, central plans, and the narrow self-interest of departmental goals). To foster innovation and responsiveness, leaders should: a. Challenge assumptions and risks. b.Involve everyone in strategy. CAPABILITY TO ACT: Place the responsibility for value-creating decisions on front-line teams (not on trying to exert control from the center). To increase adaptability and reduce waste, leaders should place the responsibility for value-creating decisions on front-line teams by: a. Creating a network of small, customer-oriented teams. b. Base recruitment on "fit with the team." RESPONSIBILITY: Make people accountable for customer outcomes (not for meeting functional plans and budgets). To satisfy customer needs profitably, leaders should: a. Enable teams to respond to customer demand. b. Encourage teams to share knowledge across the business. ACCESS TO INFORMATION: Support open and ethical information systems that provide "one truth" throughout the organization (not on having middlemen filtering information and making it available on a need-to-know basis). To promote ethical behavior, leaders should: a. Make information fast and open. b. Set high ethical standards of information flow. |
Steve Player serves as the North American director for the Beyond Budgeting Round Table (BBRT), an organization dedicated to helping firms improve their performance management processes.
Jeremy Hope is the author of a number of articles and books on performance management and associated leadership issues. He also serves as the research director for the Beyond Budgeting Round Table.
Robin Fraser is the director of international relations for the Beyond Budgeting Round Table. He is also co-author (with Jeremy Hope) of the new book entitled "Beyond Budgeting" published by the Harvard Business School Press in March 2003.
