He is particularly dismayed at the way budgets are applied to compensation. "The minute a budget sets revenue targets--and ties compensation to hitting those targets without thought of whether those targets are achieved in a way that is in the company's best interest--you have a problem," he notes.
The most valuable of Beyond Budgeting's principles, in Osborne's view, are those that call for financial planning to be continuous and inclusive, and that make resources available as needed rather than allocating them in advance. "A lot of people end up spending dollars simply because, under the budget, they can," Osborne says. The worst question a business owner can hear from a manager, he contends, is: "What's my budget for this?"
That's not a question you'll hear too often at Omgeo, a Boston-based outfit that processes financial-market trades. Kevin Ennis, chief financial officer, traced his decision to abandon traditional budgeting to the implosion of the bull market--which occurred at about the same time as his company, a joint venture of Depository Trust & Clearing Corp. and Thomson Financial, was founded.
The way Ennis sees it, just as a long line in the coffee shop or a late train derails your plan to get to work by a specific time, unforeseen events in the business landscape have a way of rendering budgets irrelevant. In Omgeo's case, Ennis had drafted a budget based on the volume of financial trades he expected the company to execute--only to find that his painstakingly drafted numbers bore little resemblance to the post-crash market reality. His budget in tatters, he thought about writing a new one. Then he heard about Hope's Beyond Budgeting Movement. While the idea of running a company sans budget seemed bizarre--"Like something out of Star Trek," he says--he was intrigued by a strategy that would allow him to guide Omgeo through a world that was frustratingly fast-moving and unpredictable. "We felt that this was something we could use to create a new culture and address the new realities of our business," he says.
Omgeo made the shift last year while planning for 2003, replacing its traditional budget with what's known as a "rolling forecast." Much has remained the same: Companywide and departmental goals are set for the next 12 months, and resources are allocated accordingly. But rather than institutionalizing those targets and requiring all managers to stick to them, goals are reviewed monthly in an effort to account for any changes in the client mix or the general business climate. Some months, nothing at all may change. But the system lets Omgeo easily shift gears if, say, a new marketing opportunity presents itself or it makes sense to hire a supertalented employee. "The bottom line isn't hitting budget targets," Ennis says, "but adding to shareholder value."
What's more, because there are no fixed goals, no one has reason to manipulate or fudge the numbers. Rather than basing compensation on the ability to meet specific budget targets, Omgeo asks employees to evaluate their own achievements in meeting a variety of companywide goals--including nonquantitative targets like finding new and innovative ways to serve clients and anticipating customer needs. (The self-assessments are double-checked by supervisors.) The system requires a tremendous amount of discipline, Ennis admits. But the result is a fundamentally different kind of company. "Instead of asking, 'Did you make your sales and profit numbers?" he says, "we want to know the quality of their work: 'What did you do to save those dollars?' It becomes a question of thinking about what's good for the whole company and not just what's good for their corner of it."
Ennis recently left Omgeo, but the flexible system that he created for the company remains in place, says Kevin Cabral, Omgeo's director of planning and analysis. And while it's still too early to gauge the impact on Omgeo's revenue or margins, Cabral is enthusiastic. "It's going to help us respond speedily to the needs of our customers and therefore improve our own business," he says.
Omgeo's approach may seem unusual. But it's the way many entrepreneurs run their companies--at least in their early days. Then, as small businesses mature, according to Hope, their attitudes about budgeting begin to change. "The big organizations become their role models," says Hope. The business owner "starts thinking, or being told by investors or a new CFO, that having a strict budget is the right thing, the professional thing to do."
Not that there isn't a good reason for that. Nate McKelvey, founder and CEO of CharterAuction.com, a Quincy, Mass., company that matches unused private jet capacity with well-heeled business and leisure travelers, looks at companies like Swiss-American and Omgeo and shakes his head in disbelief. McKelvey learned from his entrepreneur father that budgeting is the cornerstone of any successful business. And so, like his dad, McKelvey has imposed budgetary discipline ever since founding CharterAuction in 1999. Each year, for example, the company's marketing manager receives a fixed amount that he can spend however he sees fit. But the spending must result in an agreed-upon number of solid business leads--and it can't be exceeded, under any circumstances. "If he wants to put money into a new kind of advertising, he can," McKelvey says. "But it has to come out of somewhere else."
We gave up budgets, says a CFO, "to create a new culture and address the realities of our business."
And he sees no reason to change. CharterAuction, which now has 25 employees and about 350 clients, just turned its first profit. This year, the company is projecting revenue of about $15 million, up from $6.7 million in 2002 and $1.2 million in 2001. As his company grows in size and complexity, budgetary discipline is more important than ever, McKelvey says. When he started the company, "I was able to get involved in every decision, large or small," he says. "It's easier to operate from the gut, without a formal budget, when you're really small. But now we're outgrowing that."
But anti-budgeting forces insist that disposing of a budget doesn't mean relinquishing control of a business, as much as passing more of that control to people on the frontlines who are better able to gauge what resources are actually needed. That attitude permeates all levels of the company at Swiss-American. Even shipping department employees feel empowered to shift gears, says Ede Payne, the company's vice president and general manager.
Boxes of Swiss-American products were traditionally packed with foam peanuts--which employees found were both more expensive to purchase and less efficient to work with than crumpled brown paper. A shift was suggested and approved. It may not have been the sexiest strategic move, but since it occurred four years ago, the company's packaging costs have plunged 20% and productivity is up about 10%. Could such a shift have happened if Swiss-American had a more traditional approach to budgeting? Perhaps. But Payne, whose last job was at a company where top-down budgeting ruled the day, doesn't think so. When expenses and goals are carved in stone, Payne says, employees feel that they are expected to live according to the budget--not challenge it. "If a budget had existed, [the shipping department staff] probably would have just said, 'Well, the guys running this know what they're doing because they budgeted for this," she says. "Instead, they felt they could use their initiative to suggest a change."
