Introduction: Toward a New General Management Model

The budget is a tool of repression rather than innovation. ¹
Bob Lutz, ex - Chief Operating Officer, Chrysler

Budgeting is an unnecessary evil.
Dr. Jan Wallander, Honorary President, Svenska Handelsbanken

The budget is the bane of corporate America. ²
Jack Welch, ex-CEO, General Electric

Every business leader wants competitive success, the best management team, continuous innovation, low costs, loyal customers, and high standards of corporate governance and control. But for most, these goals remain pipe dreams. And despite spending huge sums on enterprisewide information systems and a range of tools such as the Balanced Scorecard, they appear to be just as far away as ever. Some might point to the pursuit of ineffective strategies. Though there have been many strategic mistakes (especially in the high-tech and telecom markets), there have also been plenty of excellent examples of imaginative and well-crafted strategies. The failure is, by and large, not one of strategy. It is a failure of execution.

The problem is that the management model used by most organizations today is not up to the job. It was designed to enable leaders to plan and control their organizations from the center. Enabling business units and subunits throughout the organization to focus on creating value for customers and shareholders was never part of its design. But that is what it is being asked to do. The Balanced Scorecard has provided a strategic framework to help overcome some of these problems, but most scorecards still play second fiddle to a core management process driven by the annual budgeting cycle.

The budgeting process has much to answer for. That it is too long, too expensive, and adds little value is not in doubt. Nor do most managers need much convincing that it is out of kilter with the competitive environment. But it has even more insidious effects that are perhaps less obvious.

Budgets (or any planning and measurement frameworks, for that matter) don't exist in a vacuum. They determine how people behave in any given situation. Focusing leaders' minds on the stewardship of shareholders' funds and ensuring that managers worried about controlling costs were its original functions, and leaders and managers, by and large, behaved accordingly. But budgets have since been hijacked by a generation of financial engineers that have used them as remote control devices to "manage by the numbers." They have turned budgets into fixed performance contracts that force managers at all levels to commit to delivering specified financial outcomes, even though many of the variables underpinning those outcomes are beyond their control. This leads to undesirable and, in many cases, unethical behavior.

One large survey of U.S. companies concluded that managers either did not accept the budgetary targets and opted to beat the system or felt pressured to achieve the targets at any cost.³ This pressure is squeezing the life and spirit out of many organizations and their people. It's the mentality that says, "Do what I say or your future is at risk." It is driven by greed and a need for instant gratification and immediate results. These problems also occur at the highest level. The torrent of media criticism about how firms have been "managing their earnings" (especially following the Enron and WorldCom scandals) has highlighted the behavioral consequences of these links.

Budgets provide poor value. They fail to address current competitive imperatives. And they lead to dysfunctional behavior. It is perhaps little wonder that an increasing number of large organizations are attracted by the idea of breaking free from this budget-induced annual performance trap. They want to learn from organizations that have already escaped to find out what alternatives are available.

They will find plenty of exemplars. We have visited and reported upon many of them over recent years. They range across industries, countries, and cultures. In some cases the initiatives have come from new leaders with a mandate for visionary change. In others, they have come from enthusiastic senior managers (typically finance professionals) who have to persuade their colleagues of the case for change. In most cases they learned by their mistakes. Though these were, by and large, unconnected cases, we were able to piece together a common set of processes and principles to guide prospective followers (though their application varied considerably).

Beyond budgeting is not a toolset designed to fix a specific problem with budgets or anything else. Nor is it a set of processes that can be cherry-picked to suit the requirements of senior managers who claim to have identified particular weaknesses in their information systems. Plastering over the cracks of the existing management model based on central control is not its purpose. Rather, it offers an alternative management model based on the decision-making needs of front-line managers. It is a coherent set of alternative processes that support relative targets and rewards, continuous planning, resources on demand, dynamic cross-company coordination, and a rich array of multilevel controls. None of this means loosening performance standards. The effects are just the opposite. Performance responsibility is transferred from the center to business units and, in more mature cases, to the front line. The heightened sense of ownership and commitment that comes from involving local people in setting goals and actions provides the driving force for continuous improvement.


1. Price Waterhouse Financial and Cost Management Team, CFO: Architect of the Corporation's Future (New York: Wiley 1997), 84.

2. Marshall Loeb, "Jack Welch Lets fly On Budgets, Bonuses, and Buddy Boards," Fortune, 29 May 1995, 73.

3. Robert Simons, Levers of Control (Boston: Harvard Business School Press, 1995), 83.

Reprinted by permission of Harvard Business School Press. Excerpted from Beyond Budgeting by Jeremy Hope and Robin Fraser. Copyright (c) 2003 by Harvard Business School Publishing Corp; All Rights Reserved.