Penelope Blackwell is director of fundraising for Chest Heart and Stroke Scotland. Here she writes about beyond budgeting and its uses in the charity sector.

Charities are cause-motivated businesses. Often described as not-for-profits, they are better described as for-impact. Yet surprisingly, charities spend a lot of management and trustee time focusing on variance and the bottom line, rather than putting in place systems that focus on their all-important impact.

Impact – which could be described as how well you deliver against your strategy – is important not only to charities, but to every lean business. And returning strategy to centre place by releasing the time, energy and motivation of staff by abandoning command and control is one of the key themes of beyond budgeting.

How then does this link with lean?

As with lean, beyond budgeting is so much more than a set of tools. It is in fact a philosophy that shares with lean an antithesis to command and control through the decentralisation of decision making to front line staff. In Toyota, we see staff empowerment, staff-led design and visibility to the front line, themes that also run through beyond budgeting. It is no surprise Toyota practices both lean and beyond budgeting.

With much in common, they do, however, focus on different areas. Beyond budgeting’s first radical thesis is that budgets and the budgeting process are wasteful and unnecessary.

Not that there shouldn’t be controls. Just that these controls should be adaptive as well as diagnostic, and include wider controls around boundaries and belief systems. The budget is like the dials on a plane’s control panel. If budgeting is abandoned in favour of alternative controls, staff time, energy and motivation can be released to drive impact.

To illustrate this, there is one bank that emerged from the 2008 financial crisis unscathed- growing, in fact- having practiced beyond budgeting since the 1970s. Handelsbanken – whose late CEO, Jan Wallander, is regarded as the father of beyond budgeting – is Sweden’s largest and most profitable bank, and is now expanding, including into the UK. Also, Norway’s StatOil, under the leadership of Bjarte Bogsnes, who chairs the beyond budgeting roundtable, and the UK’s SightSavers charity practice beyond budgeting. SightSavers is so focused on impact, it spends 80p in every pound delivering its services across the world, despite the overheads one might expect of an international organisation.

So, if Handelsbanken, StatOil and Sightsavers can make it work, what do we mean by beyond budgeting? In any organisation, there are three main control functions, strategic planning (where are we going?), operations planning (how will we get there?), and management control (are we getting there, and to time and cost?). Due to financial measurement, in many organisations the budget has taken over as the key management control, and even supplants strategic decision making. The budget becomes bad master, not good servant.

Combined with being a bad master, the whole process of budgeting is complex, time-consuming and fraught with difficulties. Linear extrapolations from past events are frequently integrated into the new budget, with changed market circumstances not reflected; gaming happens as managers pad their budgets or make inappropriate business decisions to meet short-term targets not long-term needs; and office politics run rife. In Jan Wallender’s words “traditional budgeting is a cumbersome way of reaching conclusions which are either commonplace or wrong. In the latter case the budget might even be dangerous. It is dangerous because if you believe in your budget it might hinder you from adapting to new situations. If you do not believe in it, there is no point in making it.”

So, what would a beyond budgeting organisation do instead? Bjarte Bogsnes has identified the five functions of a budget as: high level financial and tax planning; target setting; controlling fixed costs; prioritising and allocating investment or project resources; and the delegation of authority. His solution was instead to: produce quarterly rolling financial forecasts; set targets and KPIs against a balanced scorecard; and use trend reporting and cost targets where and when needed. In making investment decisions he used trend reporting for small projects and varying hurdle rates for medium sized projects (major projects need a case by case decision and have never sat within the budget). Finally, he used existing mandates and authority schedules to ensure good governance.

The use of the balanced scorecard is a feature of beyond budgeting organisations. SightSavers has its own SIM (strategy implementation and monitoring) card, which identifies exactly where the organisation needs to focus to deliver its vision and mission. Targets and KPIs can then be set, for example, for the effectiveness of its partnerships, the quality of its programmes or the adequacy of its specialist and technical expertise.

But using rolling forecasts or balanced scorecards are only a part of how beyond budgeting puts strategy and agility centre-stage to drive impact. Central to the philosophy is its focus on radical decentralisation, not command and control. Staff are empowered to make local decisions that are consistent with governance principles and the organisation’s goals, and in line with their local knowledge – for example at Toyota, where production workers are able to halt the production process to prevent a failure from causing a major problem. Front-line customer-facing teams are given responsibility for the value creation which delivers impact – for example, at Handelsbanken, 50% of branch staff have decision making authority. Whilst performance is judged by benchmarking against other teams, internal or external, this competitive spirit is balanced by co-operation, the sharing of knowledge across the whole organisation and a focus on long-term goals, not short-term reward.

Everything we’ve learnt from the events of the last decade reinforce not only how stultifying but how dangerous the command and control budget model can be – think Fred Goodwin and RBS. Lean beyond budgeting organisations, where the controls are adaptive, staff time has been released by removing the frustrations and constraints of budgeting and their energy, and motivation increased by being empowered to make value adding decisions through local knowledge, are surely the way forward to achieving real impact in any sector.

Further reading

  • Jan Wallander, “Budgeting – an unnecessary evil”, Scandinavian Journal of Management, (1999).