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Column 2003 number 3
Control without budgets

by Matthew Leitch

(This article first appeared under the title "The Matthew Leitch Column: the dawning of a new age: control without budgets" in Emerald Insight's publication "Balance Sheet", volume 11 number 3, 2003.)

Some leading companies are getting rid of budgets and similar control mechanisms that use fixed targets. Why are they doing this and what are the implications for internal control?

The short answer to why they are doing it is that they want to spend less time on management systems, and more time on management.

Budgeting takes a huge effort from the Finance team and from management. The negotiations usually drag on for months. As the year goes on more effort is sucked into calculating, explaining, and arguing about the ever-growing variances between the budget and actual results. The process is time consuming and stressful.

And the payback for this effort? Budgets are a means to communicate goals, provide flexibility within limits, and allocate resources. However, they do so using targets that are fixed for a year even though conditions change. For this and other reasons budgeting performs poorly.

Budgeting also leads to bizarre and dysfunctional behaviour. People do not give honest forecasts. When negotiating their targets managers aim as low as they think they can get away with, while the top team picks higher numbers in opposition. Once the year begins people plan for hitting the target. If they meet their target early they relax. If they are falling short but not far short they will do short-term, even dishonest, things to close the gap - especially if there's a bonus riding on it. If they are falling too far short they may feel it is best to ease up, especially if a good effort might lead to a higher target the following year.

Budgeting also tends to block good management of risk and uncertainty. People prefer not to discuss outcomes other than the target. If they think the outcome might be much better than the target they keep quiet in case their boss raises the target. If they think the outcome might be much worse they still keep quiet, hoping to recover the situation by the year end. The precise targets, set so far in advance, suggest a certainty about future events that is unrealistic, encouraging people to continue ignoring uncertainties.

If people do not talk about risks and future opportunities, they tend not to think about them or manage them. The single minded focus on precise, fixed goals tends to lead to poor performance. It's not just budgets that do this. Any management system that creates a fixed performance contract with managers has the same effect.

Alternatives that work better

Companies that have dispensed with fixed targets have been studied intensively over a period of about five years by the Beyond Budgeting Round Table (BBRT). The BBRT is a collaborative organisation currently sponsored by around twenty leading organisations including Unilever Bestfoods, Deutsche Bank, Diageo, and BT Group. Naturally, some current sponsors have not yet thrown out budgets, but they are considering it and learning from the cases of companies that already have.

A recent book, "Beyond Budgeting: How managers can break free from the annual performance trap" by Jeremy Hope and Robin Fraser, explains what has been learned from these case studies and summarises the principles that seem to be common. More information can be obtained at

The benefits enjoyed by companies like Svenska Handelsbanken, Rhodia, Borealis, Leyland Trucks, Ikea, Bulmers, Ahlsell, Groupe Bull, Carnaud Metal Box, and Fokus Bank include:

One key principle (of 12) is to judge performance in hindsight by comparison with competitors, both internal and external. If business conditions improve unexpectedly during the year this helps everyone, so the "benchmark" automatically adjusts. This is simple and natural. It also means that managers are encouraged to think about how their plans will work out in a variety of future scenarios. Risk and uncertainty management improves. Shocks and crises are less frequent.

What about internal control?

Budgeting and similar target setting control systems have for decades been seen as a key element of internal control and, when companies describe their internal control system in their annual reports, annual fixed target setting is almost always prominent.

When this form of control is removed, what takes its place and what can you say in the annual report? What takes the place of budgetary control is:

Best of all, instead of reviewing the company's direction only annually, companies with adaptive planning instead of fixed targets review it frequently through the year in response to events. The shareholder's investment is being looked after with more care and attention.

No company studied by the BBRT that has ditched budgetary control has experienced a failure of internal control. On the contrary the dysfunctional and sometimes dishonest behaviour generated by fixed performance contracts is largely removed, strengthening the control environment. Managers have a clearer picture of what is really happening in their company.

Companies that have thrown away budgets have also tended to decentralise customer facing units while centralising support functions, and have devolved decision making authority. This calls for a style of internal control that makes people feel trusted and able to decide things for themselves - something that traditional accounting controls tend not to do.

In the Beyond Budgeting model, superior analysis of actuals, rapid availability of information to all, and clear principles and values tend to replace high level authorisation and requests for explanations.

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If you found any of these points relevant to you or your organisation please feel free to contact me to talk about them, pass links or extracts on to colleagues, or just let me know what you think. I can sometimes respond immediately, but usually respond within a few days. Contact details

Matthew Leitch - Author

About the author: Matthew Leitch is a tutor, researcher, author, and independent consultant who helps people to a better understanding and use of integral management of risk within core management activities, such as planning and design. He is also the author of the new website,, and has written two breakthrough books. Intelligent internal control and risk management is a powerful and original approach including 60 controls that most organizations should use more. A pocket guide to risk mathematics: Key concepts every auditor should know is the first to provide a strong conceptual understanding of mathematics to auditors who are not mathematicians, without the need to wade through mathematical symbols. Matthew is a Chartered Accountant with a degree in psychology whose past career includes software development, marketing, auditing, accounting, and consulting. He spent 7 years as a controls specialist with PricewaterhouseCoopers, where he pioneered new methods for designing internal control systems for large scale business and financial processes, through projects for internationally known clients. Today he is well known as an expert in uncertainty and how to deal with it, and an increasingly sought after tutor (i.e. one-to-one teacher). more

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