Ambition to action

The most stubborn myth in traditional management is probably that the only way to manage costs is through detailed cost budgets, with a tight follow-up to ensure that no more is spent than is handed out, writes Bjarte Bogsnes in ‘ Implementing Beyond Budgeting: Unlocking the performance potential ' (www.landmarkonthenet.com). He explains how a cost budget is a kind of ceiling we put on cost. “In most companies, this ceiling seems to work quite well. It is simple to communicate and easy to track.”

But the problem, as the author highlights, is that the focus is not on an efficient and value-creating use of resources, even if that should cost somewhat more or less than decided last year. He reminds that cost budgets tend to be spent, even when the initial budget assumptions change. “Managers do not necessarily behave like this to cheat; they do it because the system encourages them to do so. Managers see budgets as entitlements, as bags of money handed out at the beginning of the year.”

Interestingly, nobody gets fired for spending their budget, but spending too much or too little could mean problem, raising the question in the latter case, ‘Why did you ask for more money than you really needed?' It is not very smart either, Bogsnes points out, if you want to protect next year's budget.

Money bags

How many of these bags of budget money get handed out? Thousands, even in smaller companies with a few hundred cost centres and around 30 to 40 budgeted cost accounts, the author notes. “In bigger companies, the number probably is hundreds of thousands. Fortunately, no physical packaging is required; otherwise the environmental impact would be a disaster.”

Delving into the word ‘cost,' Bogsnes describes it as an accounting term for how a financial transaction should be classified and treated. “Cost is something negative; it is something we must deduct from our revenues. It reduces our results.” A major weakness of traditional cost budgeting, in his view, is that the focus is typically on what put in, not on what we get back.

The book proposes the replacement of the budget system with ‘Ambition to action,' where the main questions are: “Where are we going, and what does success look like? (Ambition and strategic objectives) How do we get there? (Actions) How do we measure progress? (KPIs).” The start is with a finance perspective and the results we want to achieve, explains Bogsnes. “Then we work our way backward through a cause-and-effect relation between the different drivers that lay the foundation for good financial results.”

The author recommends the use of the ‘Ambition to action' method as something you do more for yourself than for others. He assures that if used well in the front line, there will always be enough data and information available from the method for those above to tap into. “The best indication of doing it for others is when Ambition to action is updated only before review meetings with the level above.”

A daring break from the well-trodden budgeting path.

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