This blog is about replacing obsolete guiding principles in business. Budgeting is a prime example of such a principle. Budgets are a relic of the past, yet still heavily relied on in most companies.
But times they are a-changing. Last week I attended Nordic Business Forum 2013 where Henkka Hyppönen interviewed Jack Welch, the former CEO of General Electrics. During Welch’s 20 years as CEO the company’s value rose 4000% and revenues went up from $26.8 billion to $130 billion. Welch was named “Manager of the Century” by Fortune magazine and “The World’s Greatest Leader” by Fast Company magazine. In the interview Welch said “Budget is the worst invention ever”. Ah, music to my ears.
Budgets are used to set targets, forecast the future and allocate resources. There is a perceived sense of control in budgeting. We think we can predict the future if we only have enough details in our plans and forecasts. Yet especially in today’s business this is simply not true. The world can change in a day. If you’re busy updating your budgets instead of actually responding to the change, you are going to be left out. We should respond to the growing complexity in business with guiding principles, not detailed plans.
“Simple, clear purpose and principles give rise to complex, intelligent behavior. Complex rules and regulations give rise to simple, stupid behavior.” -Dee Hock, founder and former CEO of Visa
Beyond Budgeting is a method developed by Statoil, another billion dollar company, to get rid of the budgeting madness. Here are a few examples of its principles (source).
- Govern through a few clear values, goals and boundaries, not detailed rules and budgets.
- Create high performance climate based on relative success, not on meeting fixed targets.
- Promote open information for self management, don’t restrict it hierarchically.
The amount of time companies waste honing their budgets is ridiculous, especially when it’s all in vain. Successful, billion dollar companies are abandoning budgeting because of its destructive effect. And it’s about time. And your company should too.
If you want to read more about Beyond Budgeting there are plenty of books available on Amazon.