THE BEYOND-BUDGETING CONTOVERSY: CAN ENTERPRISES FUNCTION WITHOUT THE BUDGET?Raphael Etim Department of Accounting, University of Uyo, Nigeria Iwora G Agara Consultant/Practitioner- Accounting and Management, Nigeria Abstract Budgeting is the single most discussed topic in management, finance and accounting literatures. Most of the discussions on budgeting had focused on the strong side of the control model with passive attention on its evil side. However, from the late nineteen nineties, after the maiden criticism of the traditional budgeting system by the duo of Jeremy Hope and Robin Fraser, there was a paradigm shift in the reverence hitherto given to budgeting especially by practitioners leading to a renaissance in the challenge of budget as an effective management control mode . Thus currently there two divides in the debate about the budget: those who call for the complete abandonment of the budget and the other that supports the restructuring of the ex ante budgetary system to sustain its usefulness. This article is the first part of our two-part discussion of the relevance or otherwise of budgeting in today’s information age. The article focuses on the theoretical and empirical evidences from the survey of some companies in American and Europe. We have provided the basic insight into the concept of Beyond Budgeting and reflected the opinions of the two blocks: those for and those against, budgeting. From the empirical evidences the traditional budgeting, although gravely criticised by Hope and Fraser, is unlikely to be binned in the near future but rather shall continue to remain a dominant management tool for an appreciable length of time. Nevertheless, there are indications that the emerging management philosophy, the Beyond Budgeting, is a potential alternative to the ex ante traditional budgeting system suggesting that its application, within the framework of its suggested success pillars, could find place in developing economies in no distant time. Keywords: Budgeting, management accounting, paradigm, innovation, beyond budgeting, N – form. 1 INTRODUCTION The emergence of the factory system and the industrial revolution of the nineteen century brought with it concomitant managerial challenges. Some of these challenges are the control of operations, evaluation of the performance of managers and sub-ordinates, basis for employee reward, and motivation of managers for greater performance. The most popular management control mechanism adopted by firms to assist in resolving these challenges is Budgeting and Budgetary Control System (BBCS). The Budget is single accounting or financial control instrument that permeates the entire organization: every aspect or unit of the organization tends to be affected by the provisions and direction of the budget. The budget, according to Becker, et al.(2010) is the cornerstone of the firm’s management accounting and control system. This is why the budget continues to remain dominant as a management control and performance evaluation mechanism in most organizations, despite the rage of criticisms against it. In fact, the result of several surveys, and in particular that of some North American companies by Libby and Lindsay (2007) indicate that, most managers feel budgets are indispensable and they (managers) are yet to settle for a better alternative fearing that they could not manage their companies without the budget. Jacobs (2003) also confirms that many managers cannot conceive of managing a company in any other way than using the budget while companies that do without the budgeting system run the risk of being considered poorly managed. One of the explanations for the seeming indispensability and the ubiquitous use of budgets and budgetary control system as Hansen et al(2003) observe is “ largely due to its ability to weave together all the disparate threads of an organization into a comprehensive plan that serves many different purposes, particularly performance planning and ex post evaluation of actual performance vis-a`-vis the plan”(p.96) 2 Said to have commenced in the 1920s as tool for managing costs and cash flows, by the 1960s the budget has become a fixed performance contract between superiors and subordinates basing rewards and punishments on it (CIMA, 2005). However, in spite of its integrative function and as the basis for performance evaluation, budgetary control system is said to have many limitations, which have resulted to intense debate as to whether or not to abandon the traditional budgetary control system. There are currently two broad camps in this debate. These camps, we refer to as the extreme radicals camp and the conservative camp. The extreme radicals camp, is spearheaded by the Beyond- Budgeting Roundtable (BBTR) of Hope and Fraser. The camp postulates that the traditional budgeting practice should be abandoned because it is repressive and a major bane of corporations. The conservatives, made of a conglomerate of some popular accounting scholars such as Collins Drury, Charles Horngren, T Lucy, David Dugdale and a host of practitioners, appear to support the continuous use of the traditional budgeting system, but with modification in its implementation to reflect the dynamics of the individual industries and economic blocks. Unfortunately, as observed by Hansen et al.(2003), scholarly literature has largely ignored the budgetary concerns but have continued to promote budgeting as an ideal managerial tool. This article has been compelled by this controversy especially as it concerns the developing economies which are still fragile and need to be protected and nurtured managerially to maturity. There certainly exist concerns with budgeting. Is there a solution in sight to this rage of discontentment against the budget? What do the criticisms against the budget potent for enterprises, especially in developing economies, and their ability to perform in the global information age in terms of innovation and response to customer complexities and expectations? The theoretical and empirical evidences on the subject of budgeting have help to provide an insight into the understanding of budgeting process and how it is being used, the status of the traditional budgeting practices among 3 et al. costs and expenses. UNDERSTANDING THE DYNAMICS OF BUDGETING Accounting. the budget is often referred to as the cornerstone of the management accounting system. expressed in quantitative terms. that specifies how resources will be acquired and used during a specified period of time. Several definitions of budget abound in literature. and whether there is any need to be worried about the ongoing controversy. usually a year to achieve specific objectives. Becker. broken down by sub-periods. finance and management literature is replete with discussions on budgeting.(2010) indicate that budgeting is one of the first management accounting practices to attract researchers’ attention because of its dominant role in corporate financial management. Drury (2000) considers budget simply as the plan of activities to be undertaken in an organisation in the future.e. liabilities. Elbert and Aagtje (2008) also see the budget as a plan of action for a unit or activity covering a fixed period. We shall specify a few in this article. revenue or other cash inflows) are to be obtained and how such resources are to be 4 . John (2007) sees budget as a quantitative plan of activities and programs expressed in terms of assets. liabilities and cash flows” (P. Hence. The budget is a plan. revenue and expenses. which is expected to enable an organisation to manage her resources efficiently and achieve her targets within set time horizon. It may include planned sales volumes and revenues.5) Agara (2006:50) defines budget as a detailed plan. resource quantities. All the definitions of budget recognise that a budget is a plan of how resources (i.majority of the companies. The CIMA Terminology (2005) defines a budget as a: “quantitative expression of a plan for a defined period of time. assets. et al (2007). to be able to decide on whether a budgetary item is irrelevant in the current circumstance calls for motivation of the managers to enable them to think about the success of the company and not about themselves. Carolyne. Managers would be more motivated to achieve success in an environment where there is leverage for them to apply their acumen legitimately to further the 5 .both profit oriented and non-profit oriented organisations. Drury (2000) indicates further that the budget serves several functions which include planning of annual operations. In other words. This suggests that implementation of budgets must consider the needs of the organization. communication of plans to the various responsibility centre managers. However.applied( i. coordination of the operations of various departments and units of the organisation.e expended) during a specified period of time. according to the authors. All organisations have objectives which are expected to be facilitated by the budget. motivation of managers to strive to achieve the goals of the organisation. The focus should not be compliance with budgetary provisions but rather on achieving the objectives of the firm using the available resources efficiently. They explain the word “effective level of budgetary control” to mean one that is reflective of the needs of the organization and meets the objectives of the analyst. say the budget is one tool that has provided the link between control and performance. This implies that budgets are relevant to all organisations. However. controlling and evaluation of the performance of managers via budget variance analysis. effective level of budgetary control has a positive effect on performance. Motivation means managers have the opportunity to operate flexibly within the framework of the strategic objectives of the firm by using their resources to achieve set objectives rather than tying them to the inflexible contract. that an expenditure item is in the budget does not justify the spending of resources on it but rather resources are expected to be expended according to the needs of the organization. called the budget. The Swedish bank. former Chief Executive of Svenska Handelsbanken. It sucks the energy. It brings out the most 6 . for the reason that budgets have become a major resource allocation mechanism in organizations. fun and big dreams out of an organization. are blamed for not spending their budgets which confirms one of the criticisms against the continued use of the budgeting system as it is said to promote inefficiency . This underscores the prominence given to budgeting by managers. but the budgeting process at most companies has to be the most ineffective practice in management. sees budget as “bane of corporate America”. Unfortunately. According to Jensen (2003). Quoting Welch further. says budget is a “tool of repression” . According to Hope and Fraser (1999) Jack Welch. Bob Lutz. as noted by Morlidge(2005) most managers.interest of the company. A critical assessment of the functions of budgets reveals its pivotal role in the management of organisations. at least if not for any other reason. Chief Executive of General Electric. regards budget as an “unnecessary evil”. Elbert and Aagje(2008) report Welch’s anger against the budget as follows: “ Not to beat around the bush. there have been severe criticisms against the traditional budgeting system . This explains probably why managers are so passionate about the use of budgets. CRITICISMS AGAINST THE TRADITIONAL BUDGETING SYSTEM In spite of the seeming indispensability of the budget as a management tool. the budget is so prominent in the management of organisations that managers of organizations or companies cannot conceive of managing their organizations in any other way except through the use of the budget. former Vice Chairman of Chrysler. Jacobs (2003) believes strongly that there is no alternative to budgeting and budgetary control. It hides opportunity and stunts growth. time. and Jan Wallander. when companies win. and command and control 7 . management is deprived of market information since the front line managers have no incentive to share their experiences. What a waste!” Central among the criticisms against the traditional system of budgeting are: • That the budget is a tool of repression and encourages cheating. without concomitant benefits to the firm(Daum. Therefore.unproductive behaviours in an organization. not because of them. • That in managing performance. And yet. Budgets are seen as obstructing organisations adaptation to the challenges of the information age (Hope and Fraser: 2001 a and b). • That budgeting process consumes too much of the valuable executive time. skimming and lying and therefore the bane of corporations (Hope and Fraser. 2003). 2003). • That budgets reinforce the features of centralization which emphasizes coercion. at its current state. from sandbagging to settling mediocrity. forcing managers to co-operate against their will. as with strategy formulation. • That the budget. about 20% of management time in crunching figures that completely distort peoples’ behaviours. does not enable the front managers to make quick decision in response to the complex customer demands in an information age and global economy with stiff competition because of the cap placed by the budget. 2002). in most cases it is despite their budgets. In fact. companies sink countless hours into writing budgets. budgets represent fixed term performance contracts and such a performance management system does not help to ensure teamwork and agility (responsiveness to changes in the market) required for organisational success( Hope and Fraser. inflexible planning. Hope and Fraser(2003) agree with Daum(2002) and that at extreme. the continuous use of the budget as a management tool is questionable. et al. budgets do not facilitate the imperatives of innovation because whereas innovation demands creativity and risk-taking budgets encourage courteousness and riskaverseness. and punish them for telling the truth” Jensen(2003:380) 8 . and for lying about their lying. traditional budgets are said to be antithetical to innovation.e. Jensen (2009) adds that budgets lack integrity and sincerity to support their use as a basis for compensation or any form of reward and suggests that to ensure good corporate governance and systems integrity the budgeting system has to be reviewed because: “budget-based systems reward people for lying. inflexible planning and command and control and wondered why organisations would still cling to a system( i. There are also other serious concerns raised about the budget. a sine qua non condition for enterprises to withstand global competition. in the attempt to meet budgetary targets . therefore. traditionally budgeting system) that reinforces these tendencies? • On the issue of innovation. Becker. According to David.which are inappropriate for modern companies(Gre van Mourik:2006. The effect of this is that line managers engage in gaming as part of their normal business life style (Jensen. while economic entities are expected to be innovative to survive the global competition .(2010) submit that budgets do have some level of dysfunctional attributes. Daum(2002) observes that budgets are fast loosing their relevance in the contemporary business world and are outdated by reality. et al(2006).). Hope and Fraser( 2003) observe in this connection that modern organisations reject centralisation. 2003). corporate governance of the company may break down. . Information flows from top to bottom and the bottom is only to carry out instructions with little 9 .This means efficiency in the use of resources is not encouraged by the traditional budgetary system.181) CIMA (2007) identifies some of the pitfalls of budgets to include that budgets: • • • • • • • rarely focus on strategy and are often contradictory are time consuming and costly to put together constrain responsiveness and flexibility often deter change add little value. which provides fixed plans that guide actions of managers while the plans themselves(i. Budgets are suitable for centralized organization with a vertical commend structure. Bad behaviour: the quality of budget data is compromised by cautious behaviour and.e. Steve (2005). fosters political agitation instead of entrepreneurship Inflexibility: It takes too long (usually about six months) to complete the process and as a consequence plans are often obsolete before the results are published” (p..181) He. “ You didn’t spend your budge… how can you be so stupid?”(p. the budgets) quickly become obsolete soon after being made.. especially given the time taken to prepare them focus on cost reduction rather than value creation strengthen vertical command and control Scarlett(2007) calls budget a dependency model. also observes that budgets lead to: “Cost and bureaucracy: Resources are wasted in this exercise and . benefits are dubious. Steve (2005) confirms this opinion and notes some constant clichés among superiors: “Yes I know it’s the right thing to do … but it isn’t in the budget”.. 9. especially given the time required to prepare them. This approach.inputs into the budget. Budgets make people feel undervalued. Budgets are time-consuming and too costly to put together. usually annually. 2. Budgets are developed and updated too infrequently. 6. et al(2001) presents a summary of the most cited weaknesses(concerns) about the traditional budgeting system. Claims 2. Budgets concentrate on cost reduction and not value creation. 7. Budgets strengthen vertical command and control. (2003) synthesizes the sources of dissatisfaction against budgeting by relating the above twelve most acknowledged weaknesses of budgeting to the popular criticisms. to include the following: 1. Neely. reducing the value of the budgeting process and weakening the ability of the company to handle current competition and customer challenges. 3. Budgets constrain responsiveness and flexibility and are often a barrier to change. Budgets add little value. 6. Budgets do not reflect the emerging network structures that organizations are adopting. Budgets are based on unsupported assumptions and guesswork. also according to Scarlett (2007) breeds various organizational challenges and has been linked to some high-profile business failures. Budgets are rarely strategically focused and are often contradictory. Budgets encourage ‘gaming’ and perverse behaviors. 5. their assumptions are typically outdated. Hansen et al. 8. and 8 relate to another common criticism that budgetary controls impose a vertical command-and10 . 4. 3. 10. drawn primarily from the practitioners literature. and 10 relate to the recurring criticism that by the time budgets are used. 9. 4. Thus those further down the organizational strata are judged by the extent to which they comply with such orders. 11. He posits that claims 1. Budgets reinforce departmental barriers rather than encourage knowledge sharing. 5. and 12. time to market. profit margin. cash flow. command-and-control. 11. in this regard argue that vertical. claims 7. ‘freedom and autonomy’ (56%) and ‘exciting challenge’ (51%). budgets have a lot to answer for” p. enterprises would perform better using other financial and non-financial measures such as cost to revenue ratio. the company must have operational democracy. stifle initiative. quality of service index. Budgets are well known for reinforcing the command and control culture. (Hope and Fraser. Hope and Fraser(2003) argue that the growing discontent against the budget and its inability to support innovation in organisations amid stiff competition in the information calls for a better planning and control system to immediately replace it. and adopt internal external benchmarking of performance 11 . Finally. Hope and Fraser(1999c) argue that the value of the company is dependent on the calibre of staff that work in it.17. 2003) . Continuing. customer responsiveness. responsibility centre-focused budgetary controls are incompatible with flat. They advise that in the absence of the budget. or value chainbased organizational designs which are required for companies to be effective in the information age. network. and 12 reflect organizational and people-related budgeting issues. They observe that : “In a recent McKinsey survey the top three reasons why managers chose one firm over another were ‘values and culture’(58%). and stifling the very challenges that excite prospective managers.control structure. constraining freedom and autonomy. So in the battle for management talent. For a company to attract the right calibre of staff and management talents with adequate motivation to engender innovation. centralize decision making. and focus on cost reductions rather than value creation. and impede empowered employees from making the best decisions . return on capital. Submitting further on why the traditional budgets must go. de-motivate them and reduce their entrepreneurial skills and innovation. customers and partners. The journey to the new paradigm started in the mid 1990s following the discussions on budgeting organised by the CAM-I an international research organisation based in Europe and USA. But this trust can be easily undermined when managers are faced with short-term difficulties and are quickly driven back to “managing by the numbers”. value-adding processes and knowledge management. The budgeting system is acting as a barrier to fundamental change. Daum(2003) quotes Hope’s explanation for the drive to propose the new management concept as follows: “ The budgeting system influences the behaviour of managers and employees in a way that is counter productive to strategic management. The budget ties managers and people to the old management system and its paradigms. it is crucial that the model is built on trust between managers. is there an alternative to budget as a management tool? Daum(2003) provides an insight into a possible alternative. During the 25th CAM-I’s Anniversary meeting in 1997 the Beyond-Budgeting Round Table (BBRT) was established to propagate the ideals and imperatives of the new management concept. we ask. given the rage of criticisms against the budget. Again. workers. People know that if 12 . In the excerpts of the interview with Hope in 2003..BUDGETING MANAGEMENT PHILOSOPHY The Beyond-Budgeting. THE BEYOND. is the new management philosophy proposed by the Jeremy Hope and Robin Fraser in the nineteen nineties in response to the mounting discontent against the traditional budgeting system. .against the best internal or world standards among external and internal competitors.If the new management model for the 21st century organization is to focus on strategic performance.The Beyond Budget Management Philosophy of Jeremy Hope and Robin Fraser. This is the reason why many change management projects are failing. which means looking beyond budgeting. they will survive. 2008). gaming and spinning of numbers as there would be no motivation for this. This calls for trust between the managers and the superiors without which the purpose for this new revolution would be defeated because building the tortoise-like(adapt and ensure) organisations is based on truth. each manager is evaluated on how well he or she has improved against the past performance in relation to other benchmarks such as peers and best practices. if they fail to meet their contracted numbers they will be punished. P21 . the culture of greed and unethical behaviour would still hold sway as long as the command and control management model of the traditional budgeting exists. no budgets. Conversely. as opposed to the command hierarchical model. 13 Culled from Management Accounting. Rather. that he called the N-Form. no annual resources allocations and no actual-budget-variance type reports. This can mean people losing bonuses and possibly their jobs. December 1997. no annual plans. This would lead to elimination of sandbagging. He adds that where there are no negotiated fixed targets. transparency. The pressure this exerts can lead to actions that defy common sense and that ultimately destroy the value of the company” (p168). then management would be continuous and does not stop and start according to accounting deadlines. and trust is the new agenda for business leaders(Hope. Defending the new ideology. Hope and Fraser(1997) canvas for the complete abandonment of the traditional budgeting model and the adoption of a devolved and network model of organisational structure. Hope(2008) adds that even with incessant review of regulatory frameworks aimed at ensuring efficient resource utilisation and elimination of fraudulent activities in companies. In support of this mindset. no budget based rewards.they follow the plan and meet their annual fixed target. As long as budgets are left in tact.budgets. customers and partners. which they grouped into process principles and leadership principles as follows: Beyond Budgeting Process Principles • Targets: Set aspirational goals based on continuous relative improvement not fixed targets. They assert therefore that the traditional budgeting process should completely be abandoned for a more responsive management practice to be based on twelve principles. • Rewards: Base rewards on relative performance with hindsight not on meeting fixed targets. according to Hope and Fraser (1997) can easily be undermined in companies that manage with numbers. the value of the firm would erode and corporate governance and acceptable corporate ethics cannot be achieved. workers. Above all. Trust. • Resources: Make resources available on demand not through annual budget allocations. • Planning: Make planning an inclusive and continuous process not an annual event.The devolved model is considered better able to support the management of organisations in the current information age which calls for highly customer responsive management models that would allow the frontline manager the space to take actions quickly in response to available opportunities in the interest of the company. The N-Form model has processes and teams that focuse on aligning operations with the needs of the customers and offers the manager a clearer view of which work is to be done and how to do it faster and more efficiently. • Co-ordination: Co-ordinate cross company actions dynamically not through 14 . Hope and Fraser (1999b) believe that all efforts by managers of enterprises would fail. the model is based on trust between managers. 15 . • Controls: Base controls on KPIs. trends and relative indicators not variances against plan Beyond Budgeting Process Principles • Governance Base governance on clear values and boundaries not on detailed rules and budgets. According to him the idea would make organisations to: • • • Be more agile and adaptive to change.(2004) posit that the adoption of the Beyond-Budgeting brings with it some immeasurable benefits. • Performance Build a high performance culture based on relative success not on meeting targets. Eliminate a process that is too protracted. • Accountability Create a network of small units accountable for results not centralized hierarchies. • Freedom to act Devolve decision making authority to frontline teams don’t micromanage them.annual plans and budgets. expensive and adds too little value. Focus everyone on maximising value for customers and shareholders. • Customer focus Focus everyone on improving customer outcomes not on meeting internal targets • Information Promote open and shared information don’t restrict it to those who ‘need to know’ Hope et al. be accountable for performance. stand by their targets. performance measurement and reward systems. None of this is new. contained in the budgets. attract the best talents. P23 Organizational success according to Hope and Fraser(1998) does not come through beating a rigid set of numbers. therefore. The added further that in today’s world the managers of Strategic Business Units need to: make fast decisions to counter competitive threats and take new opportunities as they arise. but so many companies attempt to implement this type of business model without appreciating the hidden barriers that lie in wait within the budgeting. 16 . that were set six or nine months previously that become irrelevant at the implementation target but rather from beating one’s contemporaries in other parts of the business and beating the external competition. they will be more willing to take risks. Eliminate gaming an other dysfunctional behaviour leading to better governance. There is no time for approval procedures and management meetings.• • • Effect a permanent(and significant) reduction in bureaucracy and costs. Hope and Fraser. and improve the bottom line. Hope and Fraser(1998) indicate further that the new model is capable of providing the platform for managers to think and act like owners. Release the energy an enterprise of all people. They need the self confidence to act and the right tools and information to improve their chances of success. believe that the adoption of the new management model would address the challenges of the traditional budgeting system and provide companies a platform to be innovative. and perform maximally. it was discovered that Svenska Handelsbanken. Descarpentries was recruited from Carnaud Metal Box (CMB) to transform this French government owned mainframe Computer Company in the early 1990s.5BN in 1993 to making a profit of FF600m in 1997.They defended their position with case studies of companies that have operated without budgets and have performed creditably well over time. • Fokus Bank. We reproduce here some of the testimonies by companies that have operated without budgets: • Carnaud Metal Box. Fokus 17 . paving the way for a successful privatization. the Scandinavian financial giant. After abandoning the budgeting model in 1997. at the time the new model was being popularised. Under the leadership of Jean-Marie Descarpentries. EMPIRICAL SUPPORT FOR ABANDONMENT OF BUDGETING. had abandoned the budget in the 1970s about two decades before the Beyond-Budgeting renaissance. • Groupe Bull. By abandoning the fixed performance contract and encouraging business unit teams to set stretch targets (disconnected from a rewards system based on relative performance) he achieved what Fortune Magazine described as one of the best European corporate performances of the 1980s. In fact. the company turned around from losing FF5. this small bank transformed itself from the worst performing bank in Norway with the highest costs to the best performing bank with the lowest costs and the highest return-on-capital-employed. this an AngloFrench packaging company was transformed from a debt-laden company worth only $19m in 1982 to a market value of $3bn in 1989. By deploying the same management principles that he used so successfully at CMB. The home page of the Beyond Budgeting Round Table (BBRT) indicate that several companies have operated without the budget while others are in the process of abandoning the traditional budgeting. a major turnaround from its position in the early 1990s.Bank was acquired by Danish bank. the company reduced its operating costs by 24 percent (halving its breakeven level). • Leyland Trucks. consistently beating all its rivals in Europe on the key ratios of cost-to-income and costs-to-total-assets. and improved its return on sales to over ten percent (beating most of its European rivals).org 18 .bbrt. refrigeration. and electrical products) . and electrical products abandoned budgeting in 1995. It is interesting how it communicates with investors. plumbing. PACCAR. in 1999 at almost three times its flotation value four years earlier. Den Danske Bank. open information system with a strong emphasis on relative performance now provides the necessary controls for self-governance by local units. The difference came when CEO John Oliver abandoned piece work and the fixation with volume on the assembly line. Since abandoning the budgeting model in the 1970s Handelsbanken has produced outstanding returns for shareholders. It also spells out how its radically decentralized management model is a major source of competitive advantage Source: www. It shows a league table of costto-income and share price performance against its main competitors. Ahlsell is now the sector's most profitable company in Sweden in both of its main lines of business (heating and plumbing. It was later sold to the US company. This Swedish wholesaler of heating. to gain access to greater sources of development capital. • Ahlsell. A fast. The CEO's annual message in the shareholder's report focuses on competitive performance. This UK truck manufacturer had tried every improvement initiative from total quality to process reengineering but none of them led to improved performance. Svenska Handelsbanken. In the first two and a half years after making these changes (from 1989 to 1991). 19 . However. The survey results by (Libby and Lindsay. etc) agree with Hope and Fraser that budgeting is time wasting but defer in terms of the length of time used in the budgeting process. 2008. Shastri and Stout. released the budgeting time (about 20% of management time) and transformed the company into an action oriented company in which decisions are made in time by managers at the appropriate levels to meet changing conditions. 2007. a non-profit health institution serving the Minneapolis-St. CIMA. 2005. Gustafsson and Parsson. 2010. 2007. Paul has abandoned budgeting in 2003 and has ever since operated successfully. 2006. 2004. ICAEW/CIMA. empirical results show a not too frustrating picture.3 weeks to complete in contrast to the cycles of 10 to 15 weeks alluded to by Hope and Fraser. after abandoning the traditional budgeting system. According to Libby and Lindsay (2007) the average budgeting cycle is 10. Hope and Fraser (1999c) indicate that Volvo Cars recovered from huge losses of the early nineteen nineties to one of the most profitable and highly innovative car manufacturers in the world . The theory behind dumping the traditional budgeting according to Hall (2007) is that cost is not reduced just by operating budgets but by adopting better processes that are more responsive to the needs of the organization. the management of Park Nicollet Health Services recognized that their organisation had operated a system loaded with waste. Mitchell. Dugdale. The abandonment of budgeting by Volvo Car enabled it to build a intense management model that has helped it to face the intense competition in the auto industry. Hall continues that soon after abandoning budgeting.Also. Hope and Fraser (2001b) state that budgeting consumes between 20% and 30% of management time. Hall(2007) reports that Park Nicollet Health Services . balanced score card.On the challenge of basing compensation on achievement of budgets. Neely.e. Mitchel(2005) reports that the six leading North American-based financial services organizations agree that basing compensation on budgetary achievement is faulty therefore there is urgent need to review the bases of compensation. the survey of some US based companies by Shastri and Stout(2008) indicate that many companies (about 78% of the surveyed respondents) adopt a budget based compensation system. etc. The incorporation of slacks is a tacit encouragement of inefficiency which the critiques of budgeting say has resulted in companies expending resources that are not needed. 20 . the need to plan and budget more quickly in response to the needs of the fast changing environment using less resources and freeing up managerial time is yet a challenge with the traditional budgeting process still in place. over-estimating expenditure and under-estimating revenue) to have personal benefits over the building in of budgetary slacks. This lobby system. activity based costing.(2001) also note that even with the attempts by practitioners to use other advanced management tools such as Zero based budgeting. This result agrees with the indication by Libby and Lindsay (2007) where budgets have been identified to promote gaming and unethical practice in some organisations where it is used as the basis for compensation. et al. According to Elbert and Aagtje (2008) budgetary slacks are in some cases allowed by the budget approving authorities of companies Their survey of Netherlands companies indicated that over 71% of companies’ top management sometimes allows budgetary slacks in the business units to cater for environmental uncertainty. They agree that some modification would need to be made to the traditional budgeting approach as annual budgets are almost meaningless in today’s turbulent environment. Also managers have resulted to lobbying those in authority and responsible for approving budgets to consider theirs (managers’) interests. according to Agara(2005:61) leads to budget padding (i. IS THE TRADITIONAL BUDGETING SYSTEM SOON TO GO? On the surface. To them budgeting is indispensable. have potential to be extremely useful if appropriately applied. where it wants to go and how it can get there” (p. one may be tempted to conclude that the end of budgeting is near. Also in a survey report presented by Dr Stepen Lyne and Professor David Dugdale. a whopping 71. the traditional budgeting is still very much alive(ICAEW/CIMA. according to the duo.. involving 40 financial managers. But. This opinion agrees with the opinion expressed in the ICAEW/CIMA Report wherein it states the budget “. Also the study conducted by Libby and Lindsay (2007) among 212 IMA members in North America confirms that over 70% of the firms receive good to excellent value from budgeting. co-ordinate and control without such a framework. the survey also indicate some companies review their yearly budgets during the year to cater for environmental dynamics. But as indicated in the report of the joint round table discussion on Budgeting hosted jointly on 24 March 2004 by the Institute of Chartered Accountants of England and Wales(ICAEW) and the Chartered Institute of Management Accountants(CIMA). 2004). Large companies in particular would struggle to plan.8% indicate that the budget is very or extremely important in the management of the affairs of companies. a budget can provide a road map detailing where the business is.. On the issue of the inflexibility of the budget in response to the environmental dynamics. otherwise budgets. Libby and Lindsay(2007) also indicate that the respondents overwhelmingly agree that they could not manage their companies without the budget. 21 .2). according to Libby and Lindsay (2007) has to do with how budgets are applied and some of the roles budgets are made to play. it provides an overall framework of control without which it would be impossible to manage. even in small companies. The problem with budgets. North America. Obiajulum and Ngoasong(2009) also recognised the prominent role the budget places in the management of companies in Nigeria so much that companies are unwilling to discuss their budget practices 22 .4) In Malaysia. Asia. that budgeting is the most practiced management accounting technique with a mean point of 3.99 point occupying an enviable first position is the list of 28 techniques measured in the survey. using 5-point assessment criteria. Dugdale and Lyne(2010) indicate in their survey of 40 respondents from UK companies that all the companies survey have budgets adding that ‘ There was little evidence that budgeting fails to meet the needs of managers in competitive environments(p. In Nigeria. cutting across banking.(2001) also indicate that in spite of the criticisms against the traditional budgeting system. Mahfar and Omar (2004) indicate in their survey of management accounting practices by some Malaysian companies. 70% of the companies surveyed operated without changing their planning and budgeting processes. Elbert and Aagtje (2008). Adelegan(2001) indicates in her 1998 survey of some 55 Nigerian companies. Middle East. Africa. manufacturing and service industries. indicate that over 73% of Netherlands companies are happy with budgeting with over 81% operating budgets and 88% indicate that budgets support their corporate strategies and that budgets are also used for motivating and for rewarding managers. research results also indicate that most Nigerian companies operate with budgets. that about 96% of the companies use budgets although information on whether managers are prepared to manage their firms without budgets was not provided. and other parts of the world on the use of management tools by companies. Australia. the use of budgets topped an enviable 80% or more percent. Neely et al.In a survey conducted by the Chartered Institute of Management Accountants (2009) covering companies in Europe. In a survey conducted in Netherlands. agreed that budgets consume time. This time frame like the results of Libby and Lindsay (2007) is in contrast to the time the 10 to 15 weeks budgeting time alluded to by Hope and Fraser. In this preliminary survey. He established. in his survey of Nigerian companies in the Food and Beverages Industry in 2008. All the companies studied by Isola operated budgets which. the traditional budgeting should be abandoned. THE POSITION OF THE TWO DIVIDES We have taken a look at the views of the two schools of thought: those that believe that budgets are indispensable and that improvement on budgeting process would redeem the perceived limitations of budgets and the other school that believes that no efforts could redeem the budget because the budget is inherently flawed with significant inhibitions to corporate development. In the course of writing this article. later to conduct a full research on the status of budgeting in some listed companies in Nigeria. we conducted a preliminary mail survey of some chartered accountants in Nigeria on the status of budget. all the respondents (100%) say ‘NO’ when asked whether in their opinion. he noted.publicly for fear of exposing their strategies to other competitors. We intend. Although a negligible proportion agree that the value of budgets to their companies does not justify the time spent on finalising their budgets. Given the quality 23 . that there exist a strong relationship between budgets and corporate performance. All respondents. however. should be reviewed regularly to enable the budgets to be useful in supporting the dynamic economic environment. taking about 6 weeks to 10 weeks on the average to conclude a budget. We opine that the evidences from the expected study may not be significantly different from the results of this preliminary survey in terms of the readiness of Nigerian companies to abandon the ex ante budgeting process. Ishola(2008) also notes the prominence of budget as a driver of performance. Charles Knigt. • Traditional budgeting is usually centrally coordinated and often covers all organisational activities. there are also examples of very extremely successful companies whose budgets lie at the heart of their management control system. the traditional ended up being Again. et al(2001) explains that companies still practice traditional budgeting widely because of the following factors: • • High cost of overhauling the budgeting system. one could easily be in a dilemma as to which block to follow. one wonders why in the face of the criticisms the traditional budget is still regarded as the sacred management tool of many organisations. Becker. that is ranked as one of the best-managed firms in Fortune’s annual survey. • Organisations that attempt to effect the change to overwhelmed and give up the attempt.of the case studies marshalled in support of their opinions. Neely. and Emerson Electric whose former CEO. From available empirical evidences. Libby and Lindsay (2007) provide the examples of such companies like Johnson & Johnson. extols the value of the company’s budgeting system. But what is the noise all about? Just as Hope and Fraser have provided examples of companies that have successfully operated since abandoning the budget. The benefits of changing the budgeting system is less quantifiable unless the change of technology which can immediately be noticed. et al. They assert that 24 .(2010) offers further explanation why traditional budgeting practitioners are sceptical about the introduction of the Beyond Budget phenomenon. What the proponents should consider is perhaps to suggest a modular implementation of the new paradigm such that there could easily be a retreat to the old tract where problems manifest themselves in the course of implementation. explains the reason why practitioners may continue to adore the ex ante traditional budgeting in spite of its manifest limitations. then the issue perhaps is not in the management tool but on how the tool is applied. If some companies operate extremely with budgets and have done well and others operate without budgets and do well too. now know that if they allow some conditions to prevail in running their internal processes. the staff should be able to take actions in the interest of the companies they work in as if 25 . they could be more responsive and attain their objectives without budgets provided of course managers are prepaid to run a devolved organisations built on trust with employees adequately empowered and motivated to perform with the mindset of and entrepreneur. should be made to be implementable in semiorganisational set ups. That is. But Hope and Fraser and several publications of the Beyond Budget Roundtable indicate that more and more company are embracing the new model. Organisations.‘the way in which the identity of the concept was defined – namely as a comprehensive management model rather than a tool – did not allow for much plasticity in its interpretation and use’. Probably this opinion. implementing Beyond Budgeting in some departments or Units of organisations for observation. but an indication that at least there is an alternative to the budgeting. We have not read literature indicating that Beyond Budget practitioners have reverted back to budgeting as a result of the failure of the new model. to determine whether it a viable project. This development in our opinion does not in any way reinforce the alleged frustration of budgets in corporate management. that is. much more than other reasons. Beyond Budgeting. Further. (2) Focus should be on the big picture rather than details. companies are expected to be innovative and customer responsive. there would probably not be any need to spend management time in preparing budgets where there is an alternative to budgeting. can companies in developing economies compete effectively in the global market with the budgetary control system? • Is there any way to marry the two models to take advantage of the two ends since from empirical evidences. some questions beg for immediate answers: • Would companies in developing economies be ready for this new concept now or it is a concept for a much later time? • In the face of global trade and economic integration. We thin.they own the company. (3) Focus should be on possibilities and flexibility rather than constraints. companies who operate budgets still attach significant importance to budgeting vis a vis the opinion of other practitioners in the Beyond Budgeting block that see nothing good in retaining the traditional budgeting system? The authors think that the above questions when answered would provide some indication as to whether Beyond Budgeting is a concept to be contemplated in developing economies. that since companies could manage without budgets and have recorded success. Given this prerequisites for the installation of the Beyond Budgeting model. the authors noted that there are at least three challenges organizations that are considering removing budgets should be aware of: 26 . however. Katarina and Inger(2011) noted in their field study of beyond budgeting in practice that three new rules will emerge after removing budgets: (1) Goals should be strategic and based on ambitions. from a pool of common resources.. The authors of this article have worked in both public and private organisations operated on the basis of the traditional budgeting and state that practitioners do agree that budgets are inhibitions but given the popularity given budgeting in literature. CONCLUSION We think that rather than feigning ignorance of the new management philosophy accountants and other management practitioners should begin to acknowledge the frustrations of budgeting and 27 .(1) The ambition problem. especially in the developing economies without education on assurances that companies could in fact operate without the budget. have worked in a firm that have operated for over three years without a formal budget. Expenditure is incurred after considering the needs of the organisation. The experience has not been disappointing but interesting. The employee exchange problem refers to a situation where the staff of one sub-unit department may have to exit or remain without adequate schedules in the event of their department not having resources allocated to it because the allocation of resources is based on good projects and value-generating activities agreed upon during the project selling stage. is required is the change of mindset to embrace the new paradigm shift the embrace the new wave of change in the management of companies in the global competitive environment. it becomes very difficult perhaps to propose the abandonment of budgeting in organisations.using targets set by competitors and other sub-units rather than those set by the departmental manager being assessed may result in pushing the departmental managers too hard and top management operating on the basis of unrealistic dreams. In this way no every resource is active and available to support any unit or department of the company. (3) The employee exchange problem. there are potential new games new games around the dynamic resource allocation that will emerge with the new conditions can appear. One of the authors. (2) The sub-optimalization game problem. is full of uncertainty therefore no thing on the surface earth is static. to keep records straight. The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom 28 . Yes. sincerity and drive for perfection which are some of the pillars of the new model. we agree with the new thinking purely on the strength of the empirical evidences and conviction. Martin. REFERENCES 1. Lest we be mis-understood and new recruits of Hope and Fraser. Utz(2010) The Evolution of a Management Accounting Idea: The Case of Beyond Budgeting [Online] Available at SSRN: http://ssrn. and Schäffer. as we view it. Sebastian. Abuja. 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