Should budgeting, as most companies practice it, be abolished? In effect, should the old-fashioned, slow-to-respond, fixed-performance contract be replaced by a more flexible form of budgeting (along with other types of goals and measures) that tracks the performance of the company relative to its peers and world-class benchmarks? It certainly seems to make sense—but only to a point.
This is the focus of Jeremy Hope and Robin Fraser’s book, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap.2 Hope and Fraser point out that the same companies that vow to respond quickly to market shifts cling to a budgeting process that slows response to market developments until it is too late.
Though we agree with the book’s premise, a company’s financial toolkit will always have room for the traditional budget. True, the use of a new, more dynamic form of budgeting—such as the rolling forecast—is now needed to support more responsive overall corporate strategy development. However, the traditional bud-get will continue to play a role. For example, the conventional budget is the most effective tool for controlling costs.
The use of more flexible budgets and alternative performance measures is be-coming more prevalent, as part of the new concept of corporate performance management (CPM). For instance, a survey from CFO Research Services found that three-quarters of companies polled want the capability to develop rolling fore-casts. A Hackett Group study revealed that most companies have already adopted a balanced scorecard, which combines financial and non financial metrics to track corporate performance.
As Hope and Fraser correctly point out, companies have a lot of work to do to revamp their budgeting processes—and their book provides some valuable insights into this process.
