What's wrong with budgeting? A framework for evaluating and fixing public sector financial planning processes.

Rather than abandoning budgeting altogether or living with its defects, governments are using the National Advisory Council on State and Local Budgeting's recommended practices as an organizing framework to enhance the credibility and vitality of the budgeting function.

Budgeting is under attack. Critics contend that budgeting is incremental, consumes many months and thousands of hours of staff time, is dollar-centric and ignores performance, and leads employees to focus on the wrong targets at the expense of customer service and overall corporate goals. And the criticism does not stop here. Budgeting is argued to be autocratic because central oversight agencies are domineering and restrict the managerial flexibility of line departments and bureaus, limiting their capacity to innovate. The competition for resources forces bureaucrats toward the single-minded pursuit of budget maximization. (1) Budgeting is also seen as a regime that regenerates itself, as being cumbersome, and as one of the few administrative functions that technology hasn't done much to improve. Even corporate debacles such as Enron and WorldCom are being blamed in part on budgetary incentives that promote a "gaming" and a "massaging" of the numbers. Has budgeting simply outlived its usefulness?

BEYOND BUDGETING

Criticisms of budgeting have achieved prominence in a recent book by Jeremy Hope and Robin Fraser about budgeting in the private sector, Beyond Budgeting: How Managers Can Break Free From the Annual Performance Trap (2003). The authors define budgeting broadly as the entire "performance management process" and take the extreme position of urging companies to abandon budgeting altogether in favor of a more flexible model by which "front line managers are able to regulate their own performance," and financial planning processes and individual behavior are therefore better aligned with corporate strategy. (2)

According to Hope and Fraser, "abandoning the annual budgeting process opens up two opportunities. One is to enable a more adaptive state of management processes, and the other is to enable a radically decentralized organization." (3) The authors present case studies of companies based in Denmark, France, and Sweden that have jettisoned budgeting in favor of new processes. All of this brings us to the question: So what is the traditional budgeting function to be replaced with?

The beyond budgeting model focuses on six principles (Exhibit 1) that link the often disparate decision streams of strategic planning, budgeting, and performance management. It is hard to argue with the notion that resource allocation on the whole will be more effective when these areas are coordinated. The ideas in Beyond Budgeting are getting some play, as many companies are seriously considering scrapping budgeting. More than 60 are supporting the research of Hope and Fraser by funding a consortium known as the Beyond Budgeting Round Table. Should governments jump on the bandwagon?

 
Exhibit 1: The Six Adaptive Process Principles 
of Beyond Budgeting 
 
1. Set stretch goals aimed at relative improvement 
 
2. Base evaluation and rewards on relative improvement 
contracts with hindsight 
 
3. Make action planning a continuous and inclusive process 
 
4. Make resources available as required 
 
5. Coordinate cross-company actions according to prevailing 
customer demand 
 
6. Base controls on effective governance and on a range 
of relative performance indicators 
 
Source: Beyond Budgeting, pp. 69-89.