Traditional management processes have dominated the business world since the 1920s, but my experience as Financial Controller at PRISMA has helped convince me that they’re no longer fit for purpose.
The reality is that the level of volatility, uncertainty and complexity in today’s business environment is simply incomparable with the era for which these methods were originally created. Pressured by fixed targets and performance incentives, I noticed that managers too often become slaves to KPI's and cost diktats, caught in a cycle of making the numbers instead of making a difference.
What’s more, due to its inherent inflexibility, I’ve come to believe that traditional budgeting is ill-equipped to cope with the turbulent environment faced by businesses and the aspirations of their workforce, who increasingly demand autonomy, responsibility and trust from their employers.
In short, the traditional annual budgeting process is a time-consuming, overcentralised, and outdated anachronism.
But change is afoot. Organisations across the globe who until now have focussed obsessively on managers meeting their targets have, like me, begun questioning these entrenched beliefs.
So, with more and more companies tearing up their old management models, what exactly is replacing them? And how have PRISMA embraced this Brave New World of financial management? Let me introduce you to Beyond Budgeting…
A radical model that’s both agile and human
When I first joined PRISMA in 2016, although Beyond Budgeting was already a well-established business philosophy having first emerged in the late 1990s, we were still relying on a more traditional approach. For example, every June we’d provide our shareholders with an overview of all of our planned projects, which meant that at the start of every year we’d have to prepare our Business Plan for the next 5 years – a process that would often take well into October.
It was, in many ways, a classic example of the kind of mistake for which Beyond Budgeting is meant to be antidote: businesses being dogmatic and overdetailed in the way they plan their costs.
It became apparent to me that we should shift our focus and offer more transparency to our shareholders by explaining how we planned to use their money. This way, we could build a relationship of trust with them.
Giving our Shareholders a renewed sense of control seemed to work pretty well – perhaps too well, as they would often request approval on even the most trivial of budgetary decisions, such as travel expenses.
But as PRISMA grew, and we demonstrated that we weren’t spending beyond our approved budgets, our Shareholders started to become more at ease. Step by step, we gained their trust and as a consequence their demands became fewer and fewer.
Even if we didn’t know it yet, this was one of our first steps towards a Beyond Budgeting approach.
Bridging the gap
As PRISMA moved towards agile methods in our other business practices, we had a sense that we were caught between two incompatible worlds – wanting to be innovative, flexible and fast, but held back by our approach to budgeting. While on the platform side we were reaping the benefits of agile working, this was not reflected on the financial side.
But finding a solution was complicated. After all, the methods for managing costs have remained pretty rigid over the last 50 years, and there was no off-the-shelf solution to turn to. So, we realised that we had to find our own way by creating a bespoke solution for ourselves, but based on the principles of Beyond Budgeting.
There was – at least - one aspect of PRISMA that was already well set for this journey: our culture.
The greatest challenge for any company that wants to implement Beyond Budgeting is creating the right culture. At PRISMA, we’ve always believed that people come to work to do good, and are motivated by a sense of freedom, purpose and trust – and this has been reflected in some of our long-standing policies and processes such as leadership programs and trust-based work hours.
We tried to build on this by giving more responsibility to our team managers, such as by allocating a budget per team rather than per project. This gave our managers the autonomy to make their own decisions, as long as they stayed within their budgets.
What Beyond Budgeting has achieved is to give greater structure to an approach we were already fostering.
In other ways, however, we’ve had to begin with a blank canvass, setting about building entirely new methodologies around five core principles, each one central to the original tenets of the Beyond Budgeting movement.
One thing we noticed was that a gap existed in the translation of data into financial indicators. For example, we’d be budgeting for the year ahead in June and within three months the data we’d put into our business plan was already obsolete. Moreover, our increasing use of agile methods across the company, which naturally lend themselves to rapid change, brought this problem into sharper focus.
As a consequence, we’d often be in situations where departments were denied money for things they needed, simply because of the inflexibility of the system that meant whatever was decided at the start of a year became set in stone. In response, we decided to make certain processes more open and transparent. Whereas previously, data and figures were only discussed in board meetings, now everyone has the opportunity to view the information they needed at any time using new data tools.
A major effect of our decision to decentralise power has been to free up managers to make decisions based on an overall picture of the company, rather than comparing their budget against that of other departments. No longer is money automatically allocated to a specific team or specific project, but instead the entire company budget is made available to be used as people see fit. This has helped foster a more collaborative approach, encouraging managers to work as a team so that all areas of the business are moving in the same direction.
Managers are also now urged to empower their teams with more decision making responsibility, breaking down the fixed hierarchy of yesteryear and instilling in staff the understanding that an intricate ecosystem of interdepartmental decisions can impact an entire company.
Lean and efficient processes
One way that we’ve streamlined things is by giving people more autonomy when it comes to how they apply for expenses. Previously, people would input into the system what they wanted to spend, but since there were no clearly defined rules it became like the Wild West. For example, for travel expenses such as train tickets, what were people allowed to spend? Should tickets be first-class or second class? No-one knew, so we came to the decision to scrap the process entirely.
Instead, we now put our trust in people to make their own responsible decisions on how much they should spend on things like travel, eating out, corporate entertaining, and so on. And we’ve also reduced the number of internal policies for the approval of items such as new computers or new phones. Our philosophy is that if you empower people, you get the best out of them.
Fast and adaptive methods
Our old systems were somewhat laborious to navigate, making it tough for people to access data and therefore slowing down their ability to make well-informed data-driven decisions. So we introduced a number of new financial tools that can produce up-to-date overviews of the current picture and can be accessed by anyone at the press of a button. For example, we moved from Excel-based planning to more user-friendly software that enabled each manager to input data, see at a glance how costs within the company are evolving, and assess whether they’re still on track with commitments to shareholders. It was hoped that by letting them focus on easy-to-understand KPS rather than abstract figures, our managers would feel less overwhelmed.
Naturally, such a system relies on it being updated as soon as new information is available, and this has been a key challenge, ensuring that people implement new data swiftly. We’ve made big efforts in encouraging people to be proactive in how they use these new tools, to ensure that everyone has the optimum chance of making the best decisions for their department and the company.
Decision-making based on real information
Vital to the efficiency of our new financial tools has been our use of a ‘rolling forecast’ approach, which enables decisions to made based on data received instantly, rather than on information from months ago, or even longer. This approach helped avoid situations whereby people would realise a couple of weeks or months later that they hadn’t made an informed decision because, for example, a colleague had spent more money or something than they’d originally recorded.
Beyond Budgeting is a methodology that has to be tailored to each company’s own culture and needs. While its principles can help a business create a favourable environment, there are no step-by-step instructions or guidelines. What would work for one company would not necessarily work for another.
There’s little doubt that the task of implementing Beyond Budgeting at PRISMA has been made easier by the fact that we’re still a relatively young company. Unlike other organisations whose people have worked with the same methodology for decades before suddenly being asked to change approach, the transition for us has been relatively smooth, with our people already in tune with many of the movement’s cultural principles.
Certainly, our qualitative assessment of how it’s gone has been largely positive. The KPIs that we now use to monitor the company can be more easily visualised by managers. Gone is the time when targets, forecasts and resource allocation were all lumped into the same box, with results sent out once a year. Today our people are more engaged in our processes and feel they can affect meaningful change with speed and efficiency.
There’s also been a palpable sense of relief that if you say something in June, you’ll no longer have to stick to it until December. Now decisions can be adapted, or even reversed, if new data emerges.
Or to quote the great British economist John Maynard Keynes, “when the facts change, I change my mind”.
Ultimately, Beyond Budgeting has achieved its fundamental purpose of providing all of the traditional functions necessary for effective company management, but with a decision-making process based upon the specific needs of an organisation and the environment in which it operates.
At PRISMA we look forward to reaping its benefits for many years to come.