In his book Winning, General Electric’s Jack Welch famously griped: “It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.”
“It” is the corporate budgeting process. This much-hated annual exercise in setting targets, doling out resources, and providing incentives for employees is the way nearly all companies run their shops. Even organizations that have adopted monthly or quarterly rolling forecasts as a more agile way of reacting to events still produce a budget, for the most part.
Now, a few companies are doing what others fantasize about: getting rid of the budget altogether, stomping out the century-old process for good. Their guru is Steve Player, program director at the Beyond Budgeting Round Table, a learning network with more than 50 corporate members. For years, Player has railed against budgeting, which he excoriates as an expensive waste of time. A charismatic consultant and speaker, Player has his converts. Among them is Statoil, the giant Norwegian oil-and-gas company, with $90 billion in 2011 revenue and operations in 36 countries.
Statoil did away with traditional budgeting in 2005, and decided in 2010 to abolish the calendar year in its management processes whenever possible. “Not only does a budget take too much time, it is a bad yardstick for evaluating performance,” contends Bjarte Bogsnes, Statoil vice president of performance management development.
He explains that a budget creates the opportunity for “gaming” the system. “Managers are instructed to deliver on an easy-to-achieve target, told what resources they have to get there, and then are incentivized for hitting that number,” Bogsnes says. “It prevents managers from seizing opportunities to create value.”
Statoil’s radical approach is shared by three other companies profiled below: Elkay Manufacturing, Holt CAT, and Group Health Cooperative. Kenneth Merchant, a professor of accounting at the University of Southern California’s Marshall School of Business, has closely followed the Beyond Budgeting phenomenon, and estimates that at least 100 companies across the globe are on the same path. “A lot fall by the wayside or don’t reach the end destination of no budget at all,” says Merchant, who is also the school’s Deloitte & Touche LLP Chair of Accountancy. “Nevertheless, there is definite value in doing away with the budget,” he adds. “Getting to this point is the problem.”
Sensible but Unreliable
Player doesn’t mince words about his disdain for the “B” word. Budgets, he asserts, can foster unethical behavior and conflicts of interest. “When companies tie incentive compensation to reaching budget goals, they create a huge conflict of interest,” he says. “Managers are incented to submit proposed budgets with low goals. Instead of reaching for outstanding performance, the budget process becomes a game of negotiating the lowest acceptable target, which is often based on assumptions outside the managers’ control.” The process also leads managers to hoard information, says Player, “since no one wants to share information that can be used against them.”