Behavioral Problems with Budgeting and Beyond Budgeting Model

All organizational Managers have to do certain management functions such as planning, control, coordination, staffing, motivation, leading, communication and organizing.

These functions differ from organization to organization due to different organizational cultures, nature of activities and its complexity, size, staff profile in terms of values and skills, internal political activity its intensity and is level external environment in which they exist in terms of social, political, legal and environmental issues they face and its nature in terms of stable or dynamic and the Management philosophy of the senior and executive level of management.

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The traditional Budgeting is a tool for planning and control activities such that it enable the organization direction as well to coordinate activities and compare actual performance with Budgets so that to identify variance and investigate the causes and determine whether they are controllable or uncontrollable and revise plans if the organization cannot achieve the panned performance because of uncontrollable factors. The traditional budgetary process has many advantages.

The advantages are that it forces managers to formulate detailed plans for achieving the targets for each department and operation, promotes coordination and communication, clearly defines the areas of responsibility for the achievement of the budgets, enables remedial action to be taken as variance emerge, motivates employees by participating in the budgetary process of setting or formulating the budgets, improves allocation of scarce resources. Economizes management time by using the principle of management by exception. However they have serious drawbacks, They are mostly of a behavioral type. Page: 2

The drawbacks of the traditional Budgets are that budgets may be perceived by the lower level managers and employees as it is imposed by the senior management and thus affects labor relations as well it may also tend to have inaccurate record keeping, In addition budgets may increase conflict over the resource allocation or they may blame others if they don’t meet the targets as well in practice it is difficult to reconcile individual goals with corporate goals and the plans cannot be accurate in a dynamic environment and detailed planning consume considerable time and resources of managers and they may

Perceive it as a futile activity. The budgeting also may induce mangers to spend all what they get even though they can spend less because of the attitude “ we better spend it or we will lose it”. In the traditional Budget as a plan and control tool managers can also over estimate expenditure because of the fear they will be blamed if expenditures are not within the budgets and sales budgets will be under estimated for the reason that the sales people may fear if they don’t meet the sales target and for the fear of losing performance pay if such a rewarding system exists.

In a global economy in the current 20th an 21st century the changes in technological economic social and political climate have become more rapid and dynamic as well unpredictable than ever before and the competition has increased mostly in all industries at least in advanced industrialized countries and in some parts of Asia, Latin America, Eastern Europe and in Middle East. In this context if organizations are not adaptive and responsive in a timely manner to meet customer needs compared to its competitors and Page: 3

have products tailored to satisfy these needs organizations must react quickly and its planning and decision making mechanisms must be flexible and managers must be able to make decisions and must have the authority and responsibility to react quickly and organizations must devolve power to managers of profit centers and decentralize organizations and performance measured in general terms relatively measured comparing different profit centers and be customer focus culture at all levels in general terms and allow managers to make decisions to make returns on equity more than its competitors by satisfying customer needs profitably and have an information system to assist such process rather than plan in detail which is traditionally done which may stifle innovation and flexibility of the organization in a dynamic environment. The Beyond Budgeting Model is a model to address the limitations and behavioral disadvantages of the traditional budgeting in organizations. As well it is not a new planning tool but it is a new management idea. That is to change the organizational structure and organizational culture from a hierarchical organization to a network organization and decentralize decision -making and to devise a management information system, which enables mangers to share knowledge and instill new ideas and empower managers to make decisions to respond to unexpected events and to create an entrepreneur culture.

That is to make the organization to become more flexible and adaptable and create systems processes and products, which satisfy customer needs profitable, compared to its competitors and monitor emerging needs and respond quickly Page: 4 to satisfy the emerging needs more effectively than its competitors and benchmarking its processes and products on a continuous basis. There fore the success or failure of Beyond budgeting depends on how the model is introduced in the organization and the phase of its introduction and how management has overcome resistance to change and how mangers are trained and the phase of overcoming competitive culture and become a more co-operative and team culture and the possibility of this happening in the organization.

So in effect the success or failure of Beyond Budget Model itself depends on how it is implemented and whether the managers perceive this as another method imposed by the senior management and how senior management can overcome such behavioral constrain. If this can be done given the managers profiles in terms of their entrenched management practices and the senior managements effectiveness and their leadership qualities to change behavior Beyond Budget may become a more adaptive process and may overcome some grave disadvantages of the traditional budgeting system. That is in other words to be a workable model the Beyond Budget Model must have the appropriate culture and structure introduced effectively. In practice it is not an easy task and there is no silver bullet. However in practice it has been implemented in some organizations particularly in large, small and medium organizations.

But the number of organizations adopting this model is very small even in large organizations. As well this model is mostly applicable to knowledge industries mostly than other organizations and the traditional model with good budgeting practices may work effectively than the Beyond Budget Model. For example Sevenska Handelsbanken a Swedish retail bank with Page: 5 branches all over Northern Europe and in Great Britain have had no Budget since 1970. (http://www. juergendaum. com/news/02_24_2003. htm). As well other examples of Beyond Budget model implemented successfully are Toyota an Automobile manufacturer, Aldi a German Retailer, South West Airlines, the American Airlines. (http://www. 12manage.

com/methods_fraser_beyond_budgeting. html). In addition there are also other less well-known examples adopting Beyond Budget Model. They are Ahlshell, the Swedish materials wholesaler, ISS, the International Danish facilities service group, World Bank and small non-profit Sight savers International, a UK charity. (http://www. 12manage. com/methods_fraser_beyond_budgeting. html). As mentioned above in page 4 these examples demonstrates the Beyond Budget Model can be successful in any size however it is mostly applied by Knowledge Industries and the examples are very few this may be due to the fact this model is a recent model and it may increase in the future.

However there are many organizations using the traditional budgeting model indicates the traditional model at least to be perceived by these organization to have some value to them as well it may be effective for many organizations or they adopt good budgeting processes. In summary it can be argued that the Beyond Budget Model certainly can overcome some behavioral problems in budgeting. However it has its own behavioral issues to be resolved to be more effective and in some circumstances it may not be effective and traditional budgeting process may work more effectively than Beyond Budget model as discussed Page: 6 Above. Its effectiveness is dependent on many factors as well as discussed above. Applying these behavioral issues as discussed above to the scenario one must assume about the organizational culture and organizational structure.

If suppose one assumes the organization is a centralized organization and the top management believes in the beyond budgeting process and value the usefulness of budgeting and managers want to compete with other managers with resources and there exist considerable political activity then it can be argued it is very difficult to implement by top management the beyond budgeting model due to excessive conflict and empire building processes which may inhibit the successful implementation of the new Beyond Budget model. Any new model will have resistance due to changes in the status quo and managers may resist changes to protect their power and turf in the organization.

There fore if the senior management does not have the leadership to influence and overcome resistance and change behavior and introduce the model in a phase which, is perceived by the managers and staff as imposition it may affect their performance and effective implementation, That is the top management must consider behavioral issues involved in introducing Beyond Budget model because it is a radical change from the traditional model and the culture may resist such change and it may be counter productive and may not reap benefits theoretically expected by introducing this model. As well even if managers in this scenario do not like detailed budgets they may not have the skills and motivation and hindsight to plan and if the organization is a centralized organization not a decentralized organization the beyond budget model may not work in such circumstances. In effect management must consider Page: 7 the behavioral implications and behavioral issues of this model before considering this model and not considering good budgeting processes and use of technology and tools for budgeting as the traditional budgets have several advantages to organizations as well to its own behavioral limitations.

As discussed above the Beyond Budget Model do not overcome all issues in Budgeting and even it addresses some issues it has its own behavioral issues to be resolved to be effective in all organizational circumstances and the behavioral issues may vary from one organization to another. It is also necessary to recognize to change a culture takes time and any culture cannot be changes in short time. This is a very important to consider because the Beyond Budget model is a radical change in culture and insists and based on considerable behavioral modification and change. This is a very important limitation of this model in practice and management must be aware of this before planning to introduce this in to organization without giving prior considerations of the complexity and the radical nature of its model in terms of behavioral implications, which is very difficult to predict.

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