Execuitve Summary

Chapter 1: An Agenda for Change

An outline of the urgent need to change the budgeting process. Why many believe that the conventional budget is an annual performance contract that is no longer fit for purpose in an era characterised by rapid market/sector changes that provide both strategic threats and opportunities to organizations. 

The overview looks at the purpose of the traditional budget in terms of:

• Goal setting
• Resource allocation
• Planning
• Performance evaluation and reward.

How adaptive organizations set out to achieve these outcomes in different, more effective and efficient ways.

Chapter 2: Creating the new Adaptive Vision

Although aware of the shortcomings of the traditional budget, most senior managers lack either an alternative performance vision for the organization or a clear understanding of the next steps to take.

Based on practitioner experience and expert advisor input, this chapter describes the importance for senior management of developing an ‘adaptive’ performance vision for the organization.  This typically involves devolved responsibility for decision-making.

This chapter stresses the value of senior management championing an adaptive approach, especially given the cultural and process challenges ahead. The CEO should drive the vision, and the CFO must champion the realization of that vision.

An adaptive organization is defined as possessing a number of external and internal performance characteristics:

• It continually reconfigures itself to remain aligned to external customer, market, economic and societal requirements.
• Internal responsibility for delivering to those requirements is devolved to the appropriate organizational level.

Chapter 3: Alternatives to the Conventional Budget

With a new vision in place, this chapter describes the most frequently used options to the conventional annual budget. These include:

• Setting non-negotiable top-down targets that are supported by bottom-up planning
• Assessing performance based on relative performance and not performance to a budget
• Quarterly rolling financial forecasts
• A more dynamic approach to resource allocation that is not based on entitlement.

Chapter 4:  Reinventing the Budget to Support Strategy Management

With the goal of being an adaptive organization, improving the annual budgeting cycle is one aspect of a wider performance management transformation to support better strategy management.

This chapter shows how the budgeting process can be better aligned to the strategy planning/implementation process. This includes the role of quarterly strategic reviews to direct resource allocation and inform rolling forecasts and the use of the balanced scorecard to align the budget with strategic efforts.

It also includes the role of shareholder value analysis such as EVA. These can be used to replace the budget or as a better mechanism for measuring performance and prioritising resource allocation.

Chapter 5: Moving to an Adaptive Model: the Cultural Challenges

The greatest barriers to abandoning, or re-engineering, the budgeting process to create and Adaptive Organization are typically not structural, but cultural. 

It is crucial that senior management defines the behaviour it wants to encourage to support the new performance model.  This means paying close attention to cultural questions and communicating the new behaviour organization-wide.

This chapter describes the major cultural challenges faced when re-engineering the budget, and how they have been tackled by leading organizations. Topics covered include:

• Selling the message to senior management
• Selling the message to the finance function
• Selling the message to line managers
• Overcoming resistance from managers who are ‘good’ at working the budgeting process.

Chapter 6: Decoupling the Bonus from Fixed Annual Targets

Possibly the greatest obstacle to transforming the budget is its link to the annual incentive compensation process.  As this chapter shows, a number of leading organizations have recast their bonus systems so that they are no longer linked to annually negotiated performance targets.

We look at how bonuses can be linked to other frameworks such as the Balanced Scorecard or EVA, but also how some companies have fully decoupled individual (as opposed to team or group) incentives from targeted outcomes.

Chapter 7: Looking ahead and A Model for Change

This concluding chapter includes a model for managing the migration to an adaptive organisation and the adoption of re-engineered planning and budgeting processes and practices.

Tweny action-oriented questions help  use to navigate their journey toward being an Adaptive Organization.

Chapter 8: Best Practice Case Studies

This chapter includes seven best-practice case studies of organizations exemplifying the new approaches described in this report.

• Boston Scientific
• Henkel
• Herman Miller
• Nordea
• Scottish Enterprise
• Tomkins
• UBS Wealth Management and Business Banking

APPENDIX 1
Using software to support better planning and budgeting

APPENDIX 2
Useful sources of information and help