On 29 November 2016, Vanguard Consulting – our partner in the UK and Ireland – held a great event which demonstrated how the Vanguard Method call help organisations avoid the significant problems that come with budget management.
John Seddon – Vanguard’s founder – opened the event: “One hundred years ago James McKinsey of the eponymous consulting firm invented budget management. It solved a problem for Alfred Sloan in that it created a form of order in the amorphous mass that was General Motors but at the same time, it introduced an insidious disease. The disease has spread. This day is designed to expose the nature of the disease and chart a route to its eradication.”
Hereafter, Anders Olesen – from Beyond Budgeting Institute – reviewed the typical problems associated with budget management. Not only are organisations spending a lot of time on something with limited value. Even worse: the typical annual budget process leads to undesired behaviour, poor service, wrong decisions, and higher costs. Anders concluded that budgeting is more than just an irritating itch; it is a symptom of a much bigger problem (ref. John Seddon’s comments above).
During the day, Vanguard presented four cases from private and public sector service organisations: Service Centres, Insurance Claims, People-centred-services, and Housing Repairs. In all cases, Vanguard had taken managers on a journey of discovery in their own organisations. This opened their eyes to the problems caused by conventional management thinking, including budget management and other system conditions. By addressing these issues and introducing new measures, they all achieved massive performance improvement. All of the cases showed:
- how budget management and traditional financial controls are at the heart of sub-optimal performance, and how better control is achieved with new measures.
- how to re-design services to become more effective: much better service at much lower cost.
- how new measures lead to improved performance, and how they can be used to predict performance and resources needed.
In all cases, the problems had been invisible to management and therefore not addressed. One of the main reasons is that measures derived from budgeting are largely disconnected from what matters to customers, and from what is relevant for operational performance. Since conventional management reporting systems are preoccupied with functional activity measures, top management does not see the systemic impact on service, efficiency, costs and morale.
One of the solutions presented by Vanguard was ‘Knowledge-Based Budgeting’. In short, this is very much about:
- replacing the traditional budget with processes that – based on knowledge – leads to better decision making – both on group and operational level
- abandoning the cascading of targets and measures from top to bottom
- allowing each part of the organisation to apply those measures that make sense for them. For those directly serving customers, this means measures derived from what matters to customers
- moving from a static to dynamic use of measures
- understanding that using appropriate leading measures gives us knowledge of a) what is happening in an organisation now and b) gives us the ability to predict performance going forward. As a consequence, there is better control over lagging measures such as cost/revenue.
- resource planning based on knowledge of capacity
This event demonstrated that by combining the Vanguard Method with the Beyond Budgeting management model, it is possible to achieve massive and lasting performance improvements.
If this sounds interesting and if you would like to get started in your organisation, please feel free to contact Anders Olesen