For those of you who are my regular readers, you may know that the number of my obituaries that honor special people are very few. I believe this my fourth one in the four years that I have been blogging.
Jeremy Hope (1948 – 2011) was a special type of management consultant. He started a revolutionary movement when he co-authored with Robin Fraser the book, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Boston: Harvard Business School Publishing, 2003). Their basic message was that the annual budgeting process is so broken and dysfunctional that the best solution is not to reform it but rather to abandon the process altogether. Their solution was to understand the underlying purposes of a budget and apply methods, like driver-based rolling financial forecasts, that fulfill the purposes of a budget.
I personally knew Jeremy, however, to read a much better memorial tribute and description about Jeremy and his like than I could write I encourage you to read a piece written by my friend and fellow enterprise performance management (EPM) visionary, Steve Player.
At a recent conference I attended, during a group discussion, a CFO remarked that the best part of the annual budget is when it is over. The laughter was thunderous. But there is truth in humor. Many are questioning if its value is worth the effort. The annual budget process can take six months or more to develop and finalize (following multiple executive tweaks and revisions), and it can be obsolete in just a few months after it is published.
Jeremy Hope and Robin Fraser had a better way. They co-founded with Peter Bunce an organization called the Beyond Budgeting Round Table (BBRT). These BBRT founders explain that the annual budget is a fiscal exercise done by accountants that is disconnected from the executive team's strategy and is usually insensitive to forecasted volume and product / customer mix. Typically the budget simply increments or decrement's each department's line-item expense (e.g., 3 percent for inflation) without considering the interdependencies of cross-departmental process flows.
The BBRT solution acknowledges that budgeting line-item expense limits are more like shackling handcuffs for managers who may need to justifiably spend more than was planned and approved many months ago in the past in order to capture benefits from newly emerged opportunities. BBRT replaces budget controls by giving managers the freedom of decision rights. BBRT does invoke controls, but it does so by monitoring non-financial key performance indicators (KPIs) against targets. Managers do not escape the need to be held accountable.
BBRT does not leave the accountants empty-handed. Treasury cash flow management, periodic interval rolling financial forecasts, and probabilistic what-if marginal/incremental expense scenarios (e.g., make versus buy decisions) are enabled with activity-based costing and its powerful calibrated cost consumption rates.
Risks From Being Blunt and Radical
Jeremy Hope was radical in his thinking. To accounting and finance traditionalists, the thought of operating without an annual budget may be beyond their comprehension. They should reflect that the electric light bulb replaced oil lamps that replaced wax candles for producing light.
I like radical thinkers like Jeremy. He will be missed. So many organizations are wed to tradition and insulated where employees are like in an echo chamber reinforcing the same ways of conducting business. Jeremy's observation was that externally the closer one is to a customer, the faster that things speed up and are dynamic. Therefore a static budget, like a fixed contract with accountable managers to meet or exceed the fiscal year-end results, is locked in too far into the planning time horizon where agility and flexibility are continuously needed for adjusting.
Management movements for progressive methodologies need more activists like Jeremy Hope.