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Go "Beyond Budgeting" with mySAP Financials to Become a More Adaptable and Responsive Organization

by Ulrich Hauke | SAPinsider

October 1, 2001

by Ulrich Hauke, SAP AG SAPinsider - 2001 (Volume 2), October (Issue 4)
 

One of the effects of the new high-speed global economy is that rigid, command-and-control style budgeting processes are quickly falling by the wayside. But what replaces the old models? The Beyond Budgeting Model is an effective alternative to traditional budgeting.

     The Beyond Budgeting Model was developed by the CAM-I Beyond Budgeting Round Table and is a major international program of CAM-I. More than 50 companies and organizations, including SAP, have sponsored the work of the Beyond Budgeting Round Table since 1998.

     This article introduces you to the Beyond Budgeting Model, and describes how your SAP system, including the mySAP Financials solution, supports this highly responsive approach to overcoming the barriers of traditional budgeting to create a more flexible, adaptable, and innovative organization.

The traditional organizational budgeting model was developed in the 1920s to help financial managers control costs in large corporations, with a producer-led approach to business. Large organizations coped with increasing complexity by placing the activities of each distinct product line, region, or technology into a separately managed compartment, such as a business unit or division, and subjecting all these compartments to the financial discipline of a strong corporate staff.

     The underlying thread of the traditional budgeting model was control: the mission statement agreed upon by senior executives was translated into the strategic plan by planners and handed down the hierarchy to operational managers, who prepared their yearly budgets. Once the plan and budgets were set, all that was demanded of managers was adherence to the plan. Control reports were constantly fed back up the line, and if the reports showed that performance was veering off-track, the head office issued new directives.

     For many years, this traditional model did the job reasonably well - as long as market conditions were stable, decisions were made at corporate headquarters, prices reflected internal costs, strategy and product life cycles were fairly lengthy, customers had limited choice, competitors were known and their actions were predictable, and the priority of shareholders was good stewardship. But, as you are keenly aware, these conditions no longer apply. Now, new models are needed to help you:

  • Respond more quickly to competitive threats and opportunities and to changing customer needs
  • Attract and retain the best people capable of taking responsibility for decisions and accepting accountability for results within their domains
  • Continuously provide innovative solutions and generate new business
  • Operate with lower costs and greater efficiency to achieve operational excellence
  • Increase your knowledge of customer needs and focus on improving the profitability of all your customers
  • Deliver sustainable, competitive corporate performance to your shareholders

The Beyond Budgeting Model

The Beyond Budgeting Model is designed to overcome the barriers often created by traditional, rigid management processes (see "Budgeting Barriers" below), and create a flexible, adaptable organization that gives managers the self-confidence and freedom to think differently, make decisions rapidly, and collaborate on innovative projects with colleagues in multifunctional teams - both within your company and across its borders.

     The 12 principles detailed in Table 1 provide a robust framework for implementing the Beyond Budgeting Model. The first set of principles address a company's performance management climate: both the design of the organization and the delegation of power and responsibility to the people who are closest to your customers. Principles 7 through 12 address the processes of performance management. A key element is that goals, measures, and rewards are decoupled - not tied together in a performance contract.

Performance Management Climate
1. Self-governance Replace rules and procedures with clear values and boundaries to provide front-line managers with the freedom they need to make fast, effective decisions.
2. Performance responsibility Recruit and develop the right people - those with the mindset to serve customers and take responsibility for achieving results.
3. Empowerment Delegate authority and responsibility to your managers at the front line. Give decision-making power to managers who are close to your customers.
4. Structure Base your new organization on a network of interdependent units with fast communication up, down, and across the business. Create as many small, entrepreneurial units as possible.
5. Coordination Design processes that work together naturally to deliver customer value. Use process- and project-based relationships to respond to customer demands in real time. When you make each unit responsible for its own results, market-like forces driven by supplier-customer agreements replace centralized control.
6. Leadership Challenge your managers to make significant increases in performance and to break free from thinking only of small increments. Change your leadership style to coach and support your managers, rather than command and control them.
Performance Management Process
7. Goal setting Adopt relative, rather than absolute, targets, and disconnect your targets from measures and rewards. This frees local managers to set their sights on ambitious goals. Base relative targets on a range of key performance indicators and external benchmarks that encourage managers to pursue strategic as well as financial goals.
8. Strategy process Free your managers to think differently and to produce new ways of delivering customer value, and even to create new businesses altogether. Build your new initiatives from strategic goals rather than from departmental concerns.
9. Anticipatory systems Give managers early warning of changes that impact their businesses, particularly if the changes spell trouble ahead. Use rolling forecasts to keep an eye on the future. Anticipatory systems can help you manage short-term capacity. If you integrate customer-order information with the supply chain, you need not fix capacity far in advance, which turns some of your fixed costs into variable ones.
10. Resource utilization Delegate investment and resource decisions to people who are close to the action. Disconnect such decisions from the annual budgeting cycle to ensure that they are made only when needed and thereby give your managers the freedom to take appropriate action at the right times. Maintain continuous downward pressure on costs by making efficient resource consumption highly visible within your company. Where appropriate, use an internal market model, whereby internal supplier units sell their services to customer units within your company.
11. Measurement and control Put into place multifaceted controls that provide actual results, leading indicators, and rolling forecasts, and support them with fast, open information systems. Disseminate measures to all management levels simultaneously, with more detail at a local level and less detail at a higher level.
12. Motivation and rewards Base performance evaluations on relative measures to drive performance improvement. Emphasize performance by teams, groups, or companies, rather than individuals. This approach encourages sharing and ensures that your whole enterprise pulls in the same direction.

Table 1</td> The 12 Principles of Beyond Budgeting Model

How SAP Solutions Support Innovative Performance Management

While your organization takes a look at its performance management climate in light of this model, SAP already has tools in place to support your performance management processes.

    mySAP Financials provides financial professionals, executives, and managers with a comprehensive set of solutions and tools to help your company operate profitably, generate long-term value for investors and stakeholders, and leverage new financial models and collaborative business scenarios. Two of the key functional areas of mySAP Financials that go "beyond budgeting" are Strategic Enterprise Management (SEM) and Business Analytics:

  • Strategic Enterprise Management (SEM) supports value-based management through integrated strategic planning, performance management, business consolidation, and effective investor and stakeholder communication.1
  • Business Analytics provides managers and knowledge workers with an integrated framework to identify and exploit value-adding opportunities within daily business - enabling you to optimize operational performance, create accurate forecasts, and perform better business planning.

    Here are just some examples of how mySAP Financials supports each of the six principles for performance management processes in the Beyond Budgeting Model:

   Goal Setting: The Measure Catalog, SAP SEM's measure builder and measure analysis tool, shown in Figure 1, allows the user to define KPIs, set relative targets, and upload internal and peer-based benchmark information.

Figure 1 SAP SEM Measure Catalog

    Strategy Process: With SEM, you can describe your strategic goals and easily communicate these across the entire business network to all involved employees (see Figure 2). Strategy Management allows you to define initiatives assigned to specific goals and, with the help of Business Planning and Simulation (BPS), to create detailed business cases for various possible scenarios.2

Figure 2 Cause-Effect Chain from SAP SEM

    Anticipatory Systems: The SEM Management Cockpit includes a number of early warning indicators, as well as leading indicators, in a well-sorted and systematic format and supports a drill-down to customer-order and supply-chain information. Business Analytics allows you to improve your day-to-day operational business performance.

    Resource Utilization: Use Business Analytics to increase transparency in resource utilization. For example, with Activity Based Management features you can identify, communicate, and optimize resource consumption between internal suppliers and customer units.

    Measurement and Control: SEM provides a range of features for Performance Measurement and Rolling Forecasts. Automatically extracting actual data from the transaction system, the system supplies all management levels with up-to-date single scorecard analysis on different levels of detail. Business Planning and Simulation helps you to create exit routes for faltering strategies and to integrate updated action into your continuous planning process.

    Motivation and Rewards: SEM provides several capabilities to fill this role. Its scoring mechanism allows you to automate the calculation and ranking of performance based on relative measures. It can be linked with SAP Human Resource compensation management, which rewards groups and teams of managers based on relative performance.

Budgeting Barriers

In the changing economy, enterprises need to be more adaptable to change and seek faster response, innovation, process improvement, customer focus, and shareholder value. But management processes - plans, targets, measures, and rewards - can all too easily remain stuck in a command-and-control model that can actually become a barrier to:

  • Fast response: Fixed annual strategies and budgeting cycles and reliance on rules, procedures, and budgetary controls can constrain your freedom to act locally.


  • Finding and keeping talented people: Hierarchical structures that are governed by rigid plans and inflexible financial budgets offer ambitious managers limited opportunities for challenge, risk and reward, and personal development. Rigid plans tend to discourage innovation, entrepreneurial leadership, and risk taking.


  • Innovation: Bloated bureaucracies and rigid budgetary controls often obstruct insight, innovation, and creativity. When fixed budgets are the only target against which performance is measured, managers are unprepared to aim high. Easy-to-achieve targets and overly cautious strategies are the result.


  • Operational excellence: One opportunity for cost reduction is to adopt a flat management structure, like a networking model, to promote high-speed business processes that support fast responses to customers. But in the traditional budgeting model, resources and costs are hard-wired into the fabric of the business structure, which can discourage managers from challenging fixed costs and seeking continuous cost reductions.


  • Close relationships with customers: When salespeople focus solely on achieving fixed targets for revenue, product volume, or gross margin, they have little incentive to care about whether the company is delivering high customer satisfaction or meeting customer needs.


  • Achieving sustainable, competitive corporate results: One of the aims of the budgeting process is to produce earnings forecasts and set shareholders' expectations. Blind allegiance to financial targets can cause long-term problems. Managers who set aggressive targets may be required to take drastic actions (downsizing, restructuring, or cutting essential long-term investments in R&D) to meet shareholder's high expectations.

For More Information

For more details on the Beyond Budgeting Model, and the work of CAM-I and the Beyond Budgeting Round Table, visit www.bbrt.org and order the SAP white paper "Beyond Budgeting" (material number 50048005). For more information on the mySAP Financials Solution, and how it can help your organization overcome budgeting barriers, visit www.sap.com/financials.


This article is based on the SAP white paper "Beyond Budgeting," written by CAM-I BBRT together with SAP SEM Product Management. To obtain a copy of the full white paper, visit www.bbrt.org. For further information, contact SAP SEM product manager Ulrich Hauke at ulrich.hauke@sap.com.


1 For more information on SAP SEM, see "SAP Strategic Enterprise Management: Implementing SEM to Meet New Challenges in Business Planning and Development" in this issue of SAP Insider, and online at www.SAPinsider.com.

2 For more on modeling and simulating business strategy, see "Powersim's Powerful Business Modeling and Simulation Tools AreBuilt Right In to mySAP Financials and Powersim" in this issue of SAP Insider, and at the online archives at www.SAPinsider.com.

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