Breaking Free from Budgets

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What it does mean is the ability to be flexible when circumstances demand it. Last April, for example, Kling was surprised to discover that the costs for testing new products had ballooned to $22,000, compared with $6,000 in a typical month. In other words, the testing department had busted its budget, big time. The problem? Swiss-American had been developing several new products simultaneously, with the goal of getting them to market as early as possible. If Kling had been managing the company with a traditional budget, the testing might have been spread over a number of months. The department would have remained within budget, but the products would have taken longer to get to market--which is unacceptable, says Kling, who was able to shift costs elsewhere to cover the overrun. "It would have been nice to keep costs within range," he admits. "But not if it means micromanaging our business" and delaying the rollout of new products.

The trickiest part, Kling says, has been crafting a compensation system, especially in the sales department. At most companies, it's simple: Bonuses are tied to the ability to meet sales call quotas and targets spelled out in the budget. Kling takes a more subjective, qualitative approach. The biggest rewards go to those who are best at explaining Swiss-American's often complex products to the company's medical-industry clientele. For Kling, selling is about the ongoing relationship between the salesperson and his or her customers. The stronger that relationship, the more robust sales will be over the long haul. "The person who makes the most calls is not always closing the most deals," Kling says.

Kling's intuitive approach is riskier than traditional budgeting, but there are potential payoffs, says Al Osborne, director of the Price Center for Entrepreneurial Studies at UCLA's Anderson School of Management. Osborne is a big believer in budgeting. "If nothing else, budgets force individuals to think about the resource requirements of different activities, and the assumed or potential returns of those activities," he says. Budgets also have a way of focusing managers on the financial consequences of the decisions they make.

But problems arise when companies cling too tightly to their budgets. After all, no manager considers a company's business plan as being set in stone for a calendar year. There's no reason for a budget to be set in stone either. "Part of my job working with entrepreneurs is trying to make them understand that budgets shouldn't be thought of as inflexible or constraining," Osborne says.

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.

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