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
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
- Continuously provide innovative solutions and generate new business
- Operate with lower costs and greater efficiency to achieve operational
- Increase your knowledge of customer needs and focus on improving
profitability of all your customers
- Deliver sustainable, competitive
corporate performance to your
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
||Replace rules and procedures with clear values and boundaries to
provide front-line managers with the freedom they need to make fast,
|2. Performance responsibility
||Recruit and develop the right people - those with the mindset to
serve customers and take responsibility for achieving results.
||Delegate authority and responsibility to your managers at the front
line. Give decision-making power to managers who are close to your
||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.
||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.
||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
|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.
||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
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.
||SAP SEM Measure Catalog
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
||Cause-Effect Chain from SAP SEM
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
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.
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.
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.
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
- Fast response: Fixed annual strategies and budgeting
cycles and reliance
on rules, procedures, and budgetary controls can constrain your
- 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
- 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
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