Contents:

Chapter 1: An Agenda For Change Research Findings The Strengths Of The Annual Budgeting Process Accountability Weaknesses Of The Annual Budgeting Process Structural Shortcomings Goal Setting Forecasting Resource Allocation Process Shortcomings Balanced Scorecard Behavioural Problems Incentive Compensation Devolved Responsibility Self-Assessment Checklist: The Current Status Of The Budget Chapter 2: Creating An Adaptive Organization Defining An Adaptive Organization Appropriate Devolution A Dynamic Tension Continuous Learning An Adaptive Vision Senior Management Commitment A Compelling Case Chapter 3: Alternatives To The Conventional Budget Case Overview Disentangling The Budgeting Process An Interlocking System Managing With Adaptive Processes: Six Principles Self-Assessment Checklist Chapter 4: Reinventing The Budget To Support Strategy Aligning Strategy With The Budget The Balanced Scorecard Strategic And Operational Budgets The Balanced Scorecard And Beyond Budgeting Shareholder Value Analysis EVA Explained Chapter 5: Moving To An Adaptive Model – Challenges Culture: The Most Difficult Challenge Research Findings Myriad Cultural Barriers The Role Of Senior Management Senior Management Resistance Middle Management Buy-In Devolved Decision-Making The Importance Of Trust Teamworking The Support Of The Finance Function Turf Protection More Enlightened Professionals Chapter 6: Decoupling The Bonus From Annual Targets The Downside Of The Budget/Bonus Linkage A Ceiling And A Floor The Problem Of Negotiation Relative Targets Shareholder Value Techniques Economic Value Added Nine Priciples Of EVA-Based Incentive Compensation Aligning Compensation To The Balanced Scorecard Difficulties In Scorecard/Compensation Link Weighting Perspectives Scorecard-Based Plans Quarterly Bonuses Chapter 7: Conclusion And Agenda For Change Future Developments No Change Expected Some Change Expected Significant Change Expected Key Questions For Becoming An Adaptive Organization Chapter 8: Eight Case Studies Boston Scientific Henkel Herman Miller Nordea Scottish Enterprise Statoil Tomkins UBS – Global Wealth Management And Business Banking

Summary:

Chapter 1: An Agenda for Change An outline of the urgent need to change the budgeting process. Why many believe that the conventional budget is an annual performance contract that is no longer fit for purpose in an era characterised by rapid market/sector changes that provide both strategic threats and opportunities to organizations. The overview looks at the purpose of the traditional budget in terms of: - Goal setting - Resource allocation - Planning - Performance evaluation and reward. How adaptive organizations set out to achieve these outcomes in different, more effective and efficient ways. Chapter 2: Creating the new Adaptive Vision Although aware of the shortcomings of the traditional budget, most senior managers lack either an alternative performance vision for the organization or a clear understanding of the next steps to take. Based on practitioner experience and expert advisor input, this chapter describes the importance for senior management of developing an ‘adaptive’ performance vision for the organization. This typically involves devolved responsibility for decision-making. This chapter stresses the value of senior management championing an adaptive approach, especially given the cultural and process challenges ahead. The CEO should drive the vision, and the CFO must champion the realization of that vision. An adaptive organization is defined as possessing a number of external and internal performance characteristics: - It continually reconfigures itself to remain aligned to external customer, market, economic and societal requirements. - Internal responsibility for delivering to those requirements is devolved to the appropriate organizational level. Chapter 3: Alternatives to the Conventional Budget With a new vision in place, this chapter describes the most frequently used options to the conventional annual budget. These include: - Setting non-negotiable top-down targets that are supported by bottom-up planning - Assessing performance based on relative performance and not performance to a budget - Quarterly rolling financial forecasts - A more dynamic approach to resource allocation that is not based on entitlement. Chapter 4: Reinventing the Budget to Support Strategy Management With the goal of being an adaptive organization, improving the annual budgeting cycle is one aspect of a wider performance management transformation to support better strategy management. This chapter shows how the budgeting process can be better aligned to the strategy planning/implementation process. This includes the role of quarterly strategic reviews to direct resource allocation and inform rolling forecasts and the use of the balanced scorecard to align the budget with strategic efforts. It also includes the role of shareholder value analysis such as EVA. These can be used to replace the budget or as a better mechanism for measuring performance and prioritising resource allocation. Chapter 5: Moving to an Adaptive Model: the Cultural Challenges The greatest barriers to abandoning, or re-engineering, the budgeting process to create and Adaptive Organization are typically not structural, but cultural. It is crucial that senior management defines the behaviour it wants to encourage to support the new performance model. This means paying close attention to cultural questions and communicating the new behaviour organization-wide. This chapter describes the major cultural challenges faced when re-engineering the budget, and how they have been tackled by leading organizations. Topics covered include: - Selling the message to senior management - Selling the message to the finance function - Selling the message to line managers - Overcoming resistance from managers who are ‘good’ at working the budgeting process. Chapter 6: Decoupling the Bonus from Fixed Annual Targets Possibly the greatest obstacle to transforming the budget is its link to the annual incentive compensation process. As this chapter shows, a number of leading organizations have recast their bonus systems so that they are no longer linked to annually negotiated performance targets. We look at how bonuses can be linked to other frameworks such as the Balanced Scorecard or EVA, but also how some companies have fully decoupled individual (as opposed to team or group) incentives from targeted outcomes. Chapter 7: Looking ahead and A Model for Change This concluding chapter includes a model for managing the migration to an adaptive organisation and the adoption of re-engineered planning and budgeting processes and practices. Tweny action-oriented questions help use to navigate their journey toward being an Adaptive Organization. Chapter 8: Best Practice Case Studies This chapter includes seven best-practice case studies of organizations exemplifying the new approaches described in this report. - Boston Scientific - Henkel - Herman Miller - Nordea - Scottish Enterprise - Tomkins - UBS Wealth Management and Business Banking APPENDIX 1 Using software to support better planning and budgeting APPENDIX 2 Useful sources of information and help

Companies Mentioned

- Boston Scientific - Henkel - Herman Miller - Nordea - Scottish Enterprise - Statoil - Tomkins - UBS – Global Wealth Management And Business Banking