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The transformation of Nors management system from traditional budgeting to rolling forecasts and adaptive management. Business managers now focus on critical business factors, setting relative targets, and interpreting reports, while spending 80% of their time helping managers build forecasts and learning from them. The document also touches upon the challenges of decentralization and the importance of trust in management actions. Manuel Ferreira's perspective on the benefits of rolling forecasts, such as improved skills, trust, and strategy formulation, is highlighted.
Typology: Exercises
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Masters Final assignment in the modality of dissertation presented to Católica Porto Business School to obtain the Master's degree in Management with specialization in Management Control
by
under the orientation and co-orientation of Prof. Luís Manuel Dionísio Marques Prof. Miguel Alberto Reis Soares
Católica Porto Business School March 2017
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Abstract
Beyond Budgeting is presented by the BBRT (2016) as an adaptive management model that will enable organizations to compete in today’s dynamic and volatile environment. Hope and Fraser (2003a) and the BBRT (2016) argue that by abandoning the traditional budget and implementing the 12 Beyond Budgeting principles, organizations will be able to achieve an adaptive and decentralized management process, which should improve their ability to compete in today’s turbulent environment. The purpose of this study is to explore if the Beyond Budgeting model is able to contribute to the adaptation to volatile environments, as suggested by Hope and Fraser (2003a) and the BBRT (2016), by conducting a case study on a company that recently implemented the beyond budgeting model and operates in volatile environments. This case study reveals that the company under study, Nors, through better planning and reporting routines set in motion by a customized approach to the Beyond Budgeting model, was able to deliver critical information to top- management about their business operations in volatile environments, namely Angola and Brazil, thus creating conditions for the company to adapt to significant market changes. As a result, the sharp market declines felt by Nors in both these geographies during the year of 2015 have been effectively answered by reducing both the structures and resources in these regions by around 60% and within only 9 months, which in turn allowed Nors to present in the year of 2016 the same positive results shown in 2014 but with a less significant volume of sales.
Keywords: Traditional Budget, Beyond Budgeting, Volatility.
Table of Contents Acknowledgments ........................................................................................................ iii Abstract ........................................................................................................................... v Table of Contents ......................................................................................................... vii Table of Figures ...........................................................................................................viii
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Table of Figures
Figure 1 – Nors Planning Process ........................................................................ 67
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Glossary
BBRT – Beyond Budget Round Table BSC – Balanced Scorecard EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization EVA – Economic Value Added GDP – Gross Domestic Product MCS – Management Control Systems KPI – Key Performance Indicators KVD – Key Value Drivers RF – Rolling Forecasts ROCE – Return on Capital Employed
“How did the Nors group react, through the use of Beyond Budgeting, to the market volatility felt in their international businesses, Angola and Brazil?” To answer this question, this case study takes both a descriptive and explanatory approach. First, the management control system implemented at Nors and the processes that support it are described, followed by a critical analysis of the system in order to explore if the processes currently implemented at Nors helped in the better management of their businesses within volatile markets, namely Angola and Brazil or if, contrary to what is defended by the BBRT (2016), the model created problems for the organization in managing their businesses within these geographies. Primary data collection was made through two interviews with Nors Director of the Department of Planning and Performance Management, Manuel Ferreira, who was in charge of the implementation process of Beyond Budgeting, and secondary data was collected through documentation and archival records analysis. Additionally, all the data gathering processes were guided by the literature review, which allowed a better interpretation and analysis of the collected information. This dissertation is structured in 6 main chapters. After this introduction, Chapter 2 presents a literature review about the Traditional Budgeting approach and the proposed alternative by the BBRT, the Beyond Budgeting approach. Chapter 3 gives a detailed description of the research methodology followed. Chapter 4 presents the organization under study, Nors, followed by a description of the current management control system implemented at Nors and how the group manages their businesses in Angola and Brazil. Chapter 5 discusses the presented findings having in mind the literature review conducted in chapter 2. In Chapter 6, the conclusions of this dissertation are presented and suggestions for future research are made.
feedback mechanisms, and incentives to guide and motivate employees to achieve organizational objectives. They identified four types of controls at the disposal of organizations: Results control, which dominates in importance in the vast majority of organizations, refers to motivating employees to produce the outcomes the organization wants, through the use of performance measures, evaluations and incentives; Action control, which is the most direct form of control, involves ensuring that employees perform certain actions known to be beneficial to the organization and do not perform actions known to be harmful; Personnel control intends to make it more likely that employees will perform the desired tasks satisfactorily on their own; Cultural control exists to shape organizational behavior norms and to encourage employees to monitor and influence each other’s behaviors. Simons (1995) on the other hand, interprets MCS as “the formal, information- based routines and procedures managers use to maintain or alter patterns in organizational activities”. In his adopted framework, four types of control systems, or as he calls them, levers of control, are identified. These are: Beliefs systems, which are used to inspire and direct the search for new opportunities and are based on an Organization’s core values; Boundary systems, used to set limits on opportunity-seeking behavior. Diagnostic control systems, used to motivate, monitor and reward achievement of specified goals; Interactive control systems, used to stimulate organizational learning and the emergence of new ideas and strategies.
The four levers presented above establish opposing forces of effective strategy implementation, where Belief systems and Interactive control systems create positive and inspirational forces, while Boundary systems and Diagnostic control systems create constraints and assure compliance with orders. Both these notions recognize that informal controls are an integral part of MCS, as opposed to Anthony and Govindarajan (2007), which exclude informal controls from MCS (Siska, 2015). Malmi and Brown (2008) have a slight different view of MCS, interpreting these as a package, a collection or set of controls and controls systems. There are five types of controls in this typology: planning, cybernetic, reward and compensation, administrative and cultural controls. The concept of a MCS working as a package refers to the fact that different systems are often introduced by different interest groups, which may compromise the integration between different types of controls. As such, they argue that controls in their entirety should not be defined holistically as a single system, but instead as a package of systems. In summary, while at its early steps MCS were regarded as a means to provide information for decision-making purposes, this scope gradually widened to include behavioral-influencing aspects as well. As a result, informal controls became an integral part of MCS definitions and research (Strauß & Zecher, 2012).
Several academics have pointed out that traditional MCS use the budget as the central plank of most organizations control mechanisms, as it is one of the few techniques that can integrate the whole range of organizational activity into
Wallander (1999) describes the budget as a forecast and a plan for the company for the next year. It is built on forecast and concerning the general development of demand, prices, exchange rates, costs and so on. As such it is heavily reliant on the ability to forecast market variables, which is heavily criticized by Wallander (1999), as he believes it is impossible to foresee something of which we have no previous experience. He concludes that the budget might even be dangerous, because if you believe in your budget it might stop you from adapting to new situations and if you don’t believe it, there is no point in making it. Thus, despite the strong acceptance of the budget and the widespread use of this tool in most organizations, several critics have emerged to the practice of budgets in organizations (Østergren & Stensaker, 2011). Budgets have been called an unnecessary evil, a relic from the past or a fixed performance contract (Wallander, 1999; Hope & Fraser, 2003b; Player, 2009). Hope, Fraser and Woodcock (1999), used a workshop conducted by Professor Michael Bromwich to show the objectives of traditional budgeting and how it fails to achieve them. The objectives identified are strategic coherence, resource rationality, continuous improvement, congruent behavior and added value. They point out that: Strategic coherence is not possible as there is discontinuity between budgets and strategy, which they point out as one of the principal weakness of traditional budgeting. Resource rationality is dysfunctional as long as the last year plus approach to setting resource levels is applied and the cycle time remains the same. Continuous improvement is frozen as inefficiencies are masked, and targets are internally driven (cost oriented).
Congruent behavior is about overcoming the functional barriers and dysfunctional behavior which are reinforced by the alignment of traditional budgeting with the organizational structure and its strong focus on financial performance. Added value is about reducing the bureaucracy of traditional budgeting and ensuring that the planning and budgeting process really adds value in relation to the time spent by managers on it. They conclude that traditional budgeting is dysfunctional, as the budget is based too heavily on the organizational hierarchy to achieve its objectives in today’s environment where ever higher standards of performance are demanded in response to customer demand and competitive pressures. In extreme cases, it can even lead to a breakdown in corporate ethics as employees might deviate from acceptable patterns of behavior to achieve their targets, fearing the consequences of failing to achieve them, no matter how unrealistic and out of context they might be (Hope & Fraser, 2003b). Player (2009) describes the annual budget as having all the elements of a fixed contract, such as fixed targets and pre-determined allocated resources, which he considers to be an obstacle in an organization’s ability to be responsive in today’s ever-changing environment. According to the author, the seven most common problems with traditional budgeting are the following: High costs Out-of-date when published Does not add value in managing the business Requires a crystal ball to predict the future Slows response time Leads to gaming where managers try to negotiate low targets to reach maximum bonuses Sub-optimizes results, as people will chase the “targeted number”.
