The Case Evidence 

It is difficult to say categorically whether any one program of change (even with the benefit of hindsight) leads to a direct and measurable improvement in shareholders' wealth within a given period of time. It is easier to say what hasn't worked. For example, it is doubtful that many of the aggressive expansion projects of the 1990s involving significant mergers and acquisitions have improved the wealth of shareholders (except in the companies they acquired). But in a number of organizations that have migrated to the adaptive and decentralized model, their leaders have been adamant that it was this switch that underpinned their performance transformation. Here are six examples of how performance improved in the years following the change to the beyond budgeting model:  

• Carnaud Metal Box. Under the leadership of Jean-Marie Descarpentries, this an Anglo-French packaging company was transformed from a debt-laden company worth only $19m in 1982 to a market value of $3bn in 1989. By abandoning the fixed performance contract and encouraging business unit teams to set stretch targets (disconnected from a rewards system based on relative performance) he achieved what Fortune Magazine described as one of the best European corporate performances of the 1980s.

• Groupe Bull. Descarpentries was recruited from Carnaud Metal Box (CMB) to transform this French government owned mainframe computer company in the early 1990s. By deploying the same management principles that he used so successfully at CMB, the company turned around from losing FF5.5BN in 1993 to making a profit of FF600m in 1997, paving the way for a successful privatization.

• Fokus Bank. After abandoning the budgeting model in 1997, this small bank transformed itself from the worst performing bank in Norway with the highest costs to the best performing bank with the lowest costs and the highest return-on-capital-employed. Fokus Bank was acquired by Danish bank, Den Danske Bank, in 1999 at almost three times its flotation value four years earlier.

• Ahlsell. This Swedish wholesaler of heating, plumbing, refrigeration, and electrical products abandoned budgeting in 1995. A fast, open information system with a strong emphasis on relative performance now provides the necessary controls for self-governance by local units. Ahlsell is now the sector's most profitable company in Sweden in both of its main lines of business (heating and plumbing, and electrical products) - a major turnaround from its position in the early 1990s. 

• Leyland Trucks. This UK truck manufacturer had tried every improvement initiative from total quality to process reengineering but none of them led to improved performance. The difference came when CEO John Oliver abandoned piece work and the fixation with volume on the assembly line. In the first two and a half years after making these changes (from 1989 to 1991), the company reduced its operating costs by 24 percent (halving its breakeven level), and improved its return on sales to over ten percent (beating most of its European rivals). It was later sold to the US company, PACCAR, to gain access to greater sources of development capital.

• Svenska Handelsbanken. Since abandoning the budgeting model in the 1970s Handelsbanken has produced outstanding returns for shareholders, consistently beating all its rivals in Europe on the key ratios of cost-to-income and costs-to-total-assets. It is interesting how it communicates with investors. The CEO's annual message in the shareholder's report focuses on competitive performance. It shows a league table of cost-to-income and share price performance against its main competitors. It also spells out how its radically decentralized management model is a major source of competitive advantage  

Faster response - Beyond budgeting companies operate with speed and simplicity, and simplicity comes from reducing complexity in the management process. This can best be achieved by giving managers the scope to act immediately and decisively within clear principles, values and strategic boundaries. Operating within a flexible network is also important as it enables managers to respond quickly to customized requests by reconfiguring processes. But making strategy an open, continuous and adaptive process is perhaps the key element in a fast response organization. It enables the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan. To this extent regular rolling forecasts can be helpful and access to resources when they are needed can be critical. Underlying all these approaches is the shredding of the bureaucracy that still plagues most large organizations

Innovative strategies - In Beyond Budgeting companies, people work within an open and self-questioning environment. Clear governance principles set the right climate and builds the mutual trust needed to share knowledge and best practices. This is also encouraged by the move away from rewards based on budget 'cells' (a formidable barrier to a sharing culture) and toward rewards based on the results of a business unit or group. The knowledge sharing imperative is often driven by the need to achieve ambitious goals that can even lead companies to exchanging knowledge with suppliers and contractors that, in earlier times, were seen as adversaries.

Lower costs - Only by seeing operating processes as supplier-customer relationships will managers respond to demands for improvement in quality and cost. And only by eradicating the budgeting mentality will managers be encouraged to challenge fixed costs and seek sustainable cost reductions. Beyond budgeting companies have lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects, and structures with their strategy. Operating managers also challenge resources used rather than seeing them as 'entitlements'. Just asking the question, "Does it add value to the customer?" is often sufficient to ensure that unnecessary work is eliminated.

More loyal customers - Beyond budgeting companies place customer value needs at the centre of their strategy and adapt their processes to satisfying them. Fast response to customer requests is also important. Thus people at the front line must have the authority to make quick decisions. The 'right' customers must also be profitable. Thus measuring order line profitability (after charging all costs are serving customers) is crucial.