Alternative measures of Performance

1. Alternative measures of Performance Management Level – Paper P2 Advanced Management Accounting Lecture - 18 Vidya Rajawasam ACMA CGMA MBA

2. Alternative measures of Performance In the previous lectures we have discussed • Benchmarking

3. Alternative measures of Performance In this lecture we will discuss • Beyond Budgeting • Beyond Budgeting Round Table • Six principles of Beyond budgeting • Benefits of Beyond Budgeting

4. Alternative measures of Performance Beyond Budgeting There is a differentviewpoint has emerged during recent years which challenges the traditionalapproach to the budgeting process that has operated in both private and public sector organisations since time immemorial.

5. Alternative measures of Performance Beyond Budgeting What is proposed may be more relevant to the current business environment and the challenges that must be overcome by organisations facing increasing competitivepressures.

6. Alternative measures of Performance Beyond Budgeting The traditional budgeting processes tends to fix a company's thinking and response to events in an ever-changing world. This limits flexibility in responding to these events. There is an argument that the budget, in effect, reflects the previous year's reality.

7. Alternative measures of Performance Beyond Budgeting This is why organisations and their managers place an unduefocus on past events rather than thinking about current and future issues within the organisation. Furthermore, the traditional budgeting processes require finance personnel to spend far toomuch time on activities that are relatively lowvalue. Given that finance staff time is a finiteresource.

8. Alternative measures of Performance Beyond Budgeting The traditional budget is seen as the fixed plan in accordance with which all management processes are based and aligned. This determines how managers behave and the activities and objectives on which they focus.

9. Alternative measures of Performance Beyond Budgeting Therefore, Annual budgeting is seen as absorbing considerable management time and the monthly comparisons of actual and budgeted performance are primarily concerned with control issues.

10. Alternative measures of Performance Beyond Budgeting Managers will not exceed their budgets by perhaps spending necessary resources outside the planned budget cycle to react to events because their bonuses or even their jobs may be put in jeopardy.

11. Alternative measures of Performance Beyond Budgeting During recent years the business environment has become far more complex, dynamic, turbulent and uncertain. Shorter product lifecycles coupled with technological advancement has focused greater attention on innovation as a determinant of corporate success.

12. Alternative measures of Performance Beyond Budgeting Although organisations need to be as adaptive to change as possible, the rigidity of the budget serves only to stifle innovation and responsiveness to change. The need to comply with a fixed plan, and to manage with resources which may have been allocated more than one year earlier, act as impediments that prevent managers from responding quickly to changes in today's business environment.

13. Alternative measures of Performance Weaknesses of Budgeting The weaknesses of traditional budgeting processes have been the subject of much attention and many commentators. Hope and Fraser consider that such weaknesses include the following: • Budgets prepared under traditional processes add little value and require far too much valuable management time which would be better spent elsewhere.

14. Alternative measures of Performance Weaknesses of Budgeting • Too heavy a reliance on the 'agreed' budget has an adverse impact on management behaviour, which can become dysfunctional with regard to the objectives of the organisation as a whole. • Most budgets are not based on a rational, causal model of resource consumption, but are often the result of protracted internal bargaining processes.

15. Alternative measures of Performance Weaknesses of Budgeting • The use of budgeting as a base for communicating corporate goals - setting objectives, continuous improvement etc - is seen as contrary to the original purpose of budgeting as a financial control mechanism.

16. Alternative measures of Performance Weaknesses of Budgeting • Conformance to budget is not seen as compatible with a drive towards continuous improvement. • Traditional budgeting processes have insufficient external focus.

17. Alternative measures of Performance Beyond Budgeting Round Table Beyond Budgeting Round Table (BBRT) an independent industry led research consortium. The BBRT was established in the UK in 1998, but now has members in mainland Europe, the US and Australia. The BBRT solution is radical and believes that the shortcomings of the budgeting process can only be overcome by abandoning budgeting altogether.

18. Alternative measures of Performance Beyond Budgeting Round Table The BBRT combines the new concept of beyond budgeting with the status of a community round table. It shares its knowledge worldwide through conferences and workshops. The BBRT argument is that traditional budgetary or control practices are not sufficient to cope with these changing market trends.

19. Alternative measures of Performance Beyond Budgeting Round Table The BBRT includes a diverse range of companies in Europe and the US. They include banks, chemical and petrochemical companies, a wholesaler, a brewer, car and truck manufacturers, a food producer, an eye care company, a computer company and ball bearing manufacturer.

20. Alternative measures of Performance Beyond Budgeting Round Table The case studies used by the BBRT to demonstrate their approach include the Swedish bank SvenskaHandelsbanken, which ceased budgeting in 1972. It allows managers discretion to act within prescribed boundaries. It uses branch league tables to promote competition among staff.

21. Alternative measures of Performance Beyond Budgeting Round Table • Another case is the Swedish wholesaler Ahlsell which has over 200 decentralized profit centres. Further cases can be found in the BBRT book.

22. Alternative measures of Performance Review MCQs The Beyond Budgeting process ? • Challenges the traditional budgeting process. • Provides in depth understanding of direct labour costs. • Provides Continues performance improvement • Non of the above

23. Alternative measures of Performance Review MCQs The Beyond Budgeting process ? • Challenges the traditional budgeting process. • Provides in depth understanding of direct labour costs. • Provides Continues performance improvement • Non of the above

24. Alternative measures of Performance Review MCQs What is true related to the Beyond Budgeting Round Table ? • It is Quality assurance program • Improvement in understanding customer needs and requirements. • It is an industry led research consortium focusing on improvement in budgeting processes. • Non of the above.

25. Alternative measures of Performance Review MCQs What is true related to the Beyond Budgeting Round Table ? • It is Quality assurance program • Improvement in understanding customer needs and requirements. • It is an industry led research consortium focusing on improvement in budgeting processes. • Non of the above.

26. Alternative measures of Performance Principles of Beyond Budgeting Beyond Budgeting, Hope and Fraser describe the six shared common principles used by all the companies which have chosen BB as an alternative to traditional budgeting.

27. Alternative measures of Performance Principles of Beyond Budgeting 1.) A governance framework based on clearpriorities and boundaries. This enables front line teams to take decisions. A coach and support style of management promotes community spirit and a seamless service for customers.

28. Alternative measures of Performance Principles of Beyond Budgeting 1.) A governance framework based on clearpriorities and boundaries. Furthermore, the manager responsible should have no doubts over what he is responsible for and what authority levels he should be having. The concept of internal market for business units may be relevant here.

29. Alternative measures of Performance Principles of Beyond Budgeting 2.) A high performance climate based on visible and relativesuccess at all levels The managers should be given goals and targets which is based on relative success and also should link to shareholder value. This promotes peer based performance reviews, internal competition and a sense of customer ownership.

30. Alternative measures of Performance Principles of Beyond Budgeting 3.) Front line teams with the freedom to takedecisions in line with the company’s governance principles and strategic goals. This advocates the abandonment of a safety first approach to open up the strategy process to all contributors. High standards, higher expectations and benchmarks are promoted.

31. Alternative measures of Performance Principles of Beyond Budgeting 4.) Teams given responsibility for valuecreating systems. This creates and empowers many small units within the company, who have the freedom to manage their own resources while remaining accountable. This is consistent with BPR and TQM concepts.

32. Alternative measures of Performance Principles of Beyond Budgeting 5.) Teams focused on customeroutcomes. This leads to greater accountability, as well as more satisfied and profitable customers. The front line teams should be responsible for relationships with customers, associate businesses and suppliers etc…

33. Alternative measures of Performance Principles of Beyond Budgeting 5.) Teams focused on customeroutcomes. The direct communication between all parties involved should be facilitated. This is consistent with the SCM concept.

34. Alternative measures of Performance Principles of Beyond Budgeting 6.) Open and ethical information systems. The information support system should be more transparent and ethical. An Activity Based accounting system which reports on activities for which managers and teams are responsible is likely to be used in this process. This generates more reliable information, greater transparency and more ethical reporting.

35. Alternative measures of Performance The Benefits of Beyond Budgeting The following benefits van be highlighted with regard to Beyond Budgeting systems. • Faster Response time, Since Beyond budgeting system operates within a flexible organizational operating environment and with strategy as an adaptive process, allows the managers to quickly respond to customer requests.

36. Alternative measures of Performance The Benefits of Beyond Budgeting • Better innovation, Managers are working within an environment where the performance is judged on the basis of team and business results. This concept encourages the adoption of new innovations. The relationships with customers & suppliers through SCM systems facilitate the adoption of new working methods and technologies.

37. Alternative measures of Performance The Benefits of Beyond Budgeting • Lower costs, With regard to Beyond Budgeting, the managers are more likely to perceive costs as scarce resources which have to be used effectively than as a budget entitlement that has to be used within a specific period.

38. Alternative measures of Performance The Benefits of Beyond Budgeting • Lower costs, Beyond budgeting is also likely to promote an awareness of the purposes for which costs are being incurred and thereby the potential for reductions.

39. Alternative measures of Performance The Benefits of Beyond Budgeting • Improved customer and supplier loyalty, The leading role of front line teams in dealing with customers and suppliers is likely to deepen the relevant relationships.

40. Alternative measures of Performance Review MCQs The principles of beyond budgeting are? • A high performance climate based on visible and relative success at all levels • Identifies the activities and revenues related to distribution channels. • Discourages improvements related to Internal processors • Improves External supplier relationships

41. Alternative measures of Performance Review MCQs The principles of beyond budgeting are? • A high performance climate based on visible and relative success at all levels • Identifies the activities and revenues related to distribution channels. • Discourages improvements related to Internal processors • Improves External supplier relationships

42. Alternative measures of Performance Review MCQs The benefits of Beyond Budgeting are? • Focus on cost reduction • Very difficult to implement • Supports innovation • Cheaper than benchmarking activities.

43. Alternative measures of Performance Review MCQs The benefits of Beyond Budgeting are? • Focus on cost reduction • Very difficult to implement • Supports innovation • Cheaper than benchmarking activities.

44. Alternative measures of Performance Lecture Summary We have discussed the • Beyond Budgeting • Beyond Budgeting Round Table • Six principles of Beyond budgeting • Benefits of Beyond Budgeting

45. Alternative measures of Performance Management Level – Paper P2 Advanced Management Accounting Lecture - 18 Vidya Rajawasam ACMA CGMA MBA