Beyond budgeting
Penelope Blackwell demonstrates a move away from a narrow financial reporting regime to a balanced scorecard approach grounded in its charitable aims
How many organisations have ended up being so inward-looking when it comes to the cycle of budgeting and revised forecasts that they lose sight of what they are there to do in the first place?With huge potential for the charity sector, beyond budgeting is a positive, practical approach to organisational thinking and operations. In combination with the balanced scorecard1 it returns people and strategy to centre stage and – instead of number crunching – allows energy to be devoted to measuring and delivering key charitable aims of social change.
“We’re in control and we don’t have budgets.”2 This bold statement comes from Petra Ingram, the former finance director of Sightsavers International (SSI), a charity which operates in 22 countries across the world and has an annual turnover of £100m as she and I sat down to discuss their experience of implementing beyond budgeting over the last ten years.
Ingram is currently the chief executive of the Brooke3 and had arrived at SSI in 2003 from the private sector and was somewhat sceptical of the system introduced by her predecessor, Adrian Poffley.4
“However,” she continued, “as I began to learn about beyond budgeting, I realised how powerful it was and became a supporter of it myself. I do think that some of the principles are just so important, so perfect for the not-for-profit world.”What then are these principles and what is beyond budgeting?
Budgets and strategy
Despite being the cornerstone of the management control process in virtually all organisations, budgeting is generally acknowledged to be a time consuming and imperfect process. Who didn’t wonder why we tried to second-guess what will be happening in the world in April 2011 (let alone March 2012) as we settled down to draft our budgets in November 2010? And what about that ‘use it or lose it’ mentality; budget gaming to achieve target, and the waste of time and cost of mid-year budget revisions?
For all of us, there are three clear control processes:
1) Strategic planning, both planned and emergent: how are we going to achieve our mission and change society, and how do we do that in an uncertain world?
2) Operational planning through which we deliver strategy.
3) Making it happen – ensuring our plans are completed on time and within cost through management control.
Unfortunately, because measuring financials is fairly straightforward to do – in that they are visible and tangible, budgeting has become synonymous with management control systems. For organisations whose bottom line should be a measure of their impact – not a surplus or deficit – this is even more of a concern, making charities concentrate their energies in the wrong place rather than on what they are delivering to their beneficiaries.
Going back to budgets: if we accept that the budget is no more than a one-year detailed financial expression of our planned operations – and that it was set way before the start of the year, without the benefits of hindsight – why do we allow it to dominate our control systems? It’s akin to setting off on a journey with no map, just travel directions printed months before, and then wondering how to reach our destination when roadworks force us off the motorway.
According to Adrian Poffley (see note 4): “the degree of uncertainty facing a charity is such that it must be organised to react and adapt. Detailed, overly prescriptive planning and control tools, including annual budgeting, must be replaced by much more nimble, informative systems.” Rather than the budget being the framework for our journey, we need a sat-nav system.
Beyond budgeting
Despite seeming revolutionary, beyond budgeting – which abandons the budget in favour of alternative ‘adaptive’ control and performance measurement systems (see Figure 1) – is absolutely not about abandoning control.
Its real purpose is in making us rethink our control systems to release time, energy and motivation. And it returns people and strategy to centre-stage by ensuring everyone's KPIs are directly linked to the organisation’s mission and key objectives. Most importantly, beyond budgeting is about a management culture in which a decentralised leadership abandons hierarchical ‘command and control’ thinking, and empowers staff, trusting them to make decisions and react quickly in a fast changing world, to keep strategy on track.
According to its authors,5 beyond budgeting provides a simple, low-cost, and more relevant alternative to budgeting. It should be in tune with the competitive environment. And it should promote good governance and more ethical behaviour – the very concepts which lie at the heart of our sector.
Reasons for introducing beyond budgeting at Sightsavers International
Beyond budgeting was introduced to Sightsavers in 1999 to counteract the increasingly competitive and unpredictable environment of its secondary business model – fundraising.
Additionally, the environment for their core business model – service delivery – was subject to turbulence, including political upheavals, natural disasters and the instability of relations with key third parties. Most crucial were the constant fluctuations in exchange rates.6
For Adrian Poffley,7 the major issues with the traditional budget during his tenure at SSI were the time taken in writing and agreeing it – often after the start of the year and with no contingencies in place – and the changes in key assumptions, such as exchange rates, which made it out of date even before the ink was dry. In addition, senior staff had a dysfunctional ‘use it or lose it’ attitude towards using up budgets at the financial year end.
The issue with the associated three-year strategic plan was that strategic planning and budgeting had become an annual event, creating a brick-wall mindset. In such a turbulent environment, Poffley needed to adapt and implement strategy through continuous planning.
And he found SSI was focusing on monthly finance reports rather than the effectiveness of their charitable activity – thinking which has become evident in the title of his new book: Income to Impact.
Initial implementation of Beyond budgeting at SSI
Adrian Poffley’s solutions to the problems he encountered at SSI reflected the three aspects of control outlined above (strategy, operations and management control):
1) Planning and forecasting became a continuous, participatory activity, enabling emergent strategy to develop.
2) Employees were given a high degree of autonomy within certain guidelines – principles, values, rules and policies – which were all outlined in a slim handbook.
3) Carefully thought-through KPIs acted as targets and controls. However, performance management was disentangled from financial planning to ensure honesty, and inspirational stretch performance targets were evaluated relative to the previous year and actual current circumstances.
His system was based on a continuous cycle of monitor, aim, plan – and then act.Quick top-line reporting of financial results against KPIs monitored available resources, whilst rolling forecasts – broad brush and intuitive – were used for fundraising and service delivery. Guiding parameters for decisions on resource allocation, in line with strategic objectives, allowed staff to aim in the right direction.In terms of planning, resource allocation was divided into four areas:
1) reserves;
2) income generation (fundraising);
3) governance; and
4) service delivery
in that particular order to ensure the long-term viability of SSI.
Problems and solutions
Inevitably, there were various problems, one of which was the issue of combining rolling systems with year-end reporting cut-offs. This is addressed through the narrative in the Annual Report and Financial Statements.8 Petra Ingram, who had responsibility for the 2008 documentation believes that the opportunity to explain a formal surplus or deficit can be an advantage.
Although the theory of beyond budgeting and the control system worked at SSI, insufficient attention to the details of implementation, particularly training around the use of rolling forecasts, meant staff initially used the forecasts as budgets, with all of their associated use it or lose it behaviours that Poffley had encountered.
To resolve this, Ingram has introduced a new operational planning process at SSI, supported by income and expenditure projections. These rolling forecasts and funding plans both involve continuous monitoring and revision, but, crucially, neither is linked to the other.
The rolling forecasts and funding plans are created by mixing two-year operational planning with (in Ingram’s words) ‘a financial interpretation’. This is a matter for managerial judgment by the finance team, who are held accountable for their departmental KPIs – to use resources strategically and efficiently.
Because the finance team now works closely with all operational staff (services and fundraising), they have delivered training in using the new processes across SSI and the previous mentality of using up budgets in case they did not get reinstated the following year is no longer an issue. Moreover, Ingram believes that the SSI finance team’s increased understanding of what goes on within that charity is a far stronger control than any reliance on variance.Trustees at SSI bought in to beyond budgeting at an early stage; such was the conviction of both Adrian Poffley and the former CEO Richard Porter that it was the right move for SSI.
Petra Ingram, however, suggests that trustees can be the stumbling block for many charities in seeking to introduce this alternative approach.This is partly because trustees generally have traditional backgrounds and expect to use variance as their major control tool. More importantly, she believes that as volunteers they are unlikely to have the time to understand the different ways of control involved in beyond budgeting.
Balanced Scorecard to SIM
Hand-in-hand with the ongoing implementation of beyond budgeting has been the development of a new strategic framework under current CEO Caroline Harper’s leadership, and its implementation through the introduction of the Balanced Scorecard.
Following beyond budgeting principles, everyone has their own Balanced Scorecard and associated KPIs, giving them clear direction regarding their role in driving forward SSI’s strategy. And everyone, including trustees, ancillary, office and field staff, was involved in setting the strategic direction.
SSI calls the Balanced Scorecard the SIM or Strategy Implementation and Monitoring card. It focuses less on financial KPIs (which sit at the bottom, supporting but not dictating the work of the charity) and more on measures of impact.9
While SSI recognises that impact measures are a long shot (as other agencies may be involved over the impact area), they do understand their importance, both as measures of organisational strategic success and as a key driver in successful income generation.
Reasons for supporting beyond budgeting
Ingram believes there are several major reasons why beyond budgeting and its principles are: “so important, so perfect for the not-for-profit world.”
She cites the (now) smooth management of funds across the arbitrary year-end cut-off; the fast and transparent systems which allow everyone to make decisions based on up-to-date financial information; and the ending of dysfunctional behaviours. She talks of the huge improvement in understanding across SSI – and not just in the finance department.
Fundraisers now act as ‘country champions’, explaining SSI’s work in specific areas to donors and enabling them to understand how their donations impact the lives of those they wish to help.
And field staff are genuinely aware and appreciative of the work that raises the funds they spend, and understand the need for case studies and impact measures.
Ingram is passionate about the introduction of SIM cards, which has aligned everyone’s aims with those of SSI through their KPIs, and which has achieved buy-in across the organisation.
But what particularly engaged her as a finance professional was being able to develop away from output to outcomes, by moving away from measuring numbers towards identifying and recording the impact SSI makes in the lives of its beneficiaries. For example, the woman she met on a site visit to India, whose sight has been restored, who can now work and feed her family, whose children can now attend school and whose opportunities in life are now so very different.
Delivering social change
This, surely, is what we are all about. We are not ‘not-for-profit’, we are ‘for impact’, for social change.
While the bottom line is important, it is only a means to an end. The numbers say nothing useful about the contribution we are making in the world. There is nothing to say that a big spend is necessarily an effective spend, nor that a small spend is not necessarily highly effective.
Beyond budgeting, together with the Balanced Scorecard – which can only operate effectively in a management culture where the financials are just one strand in measuring strategic success – frees us to concentrate on social change.
It moves us away from decades of number crunching and enables us to focus our energies on measuring and defining our impact. Tangible proof that we can and do make the world a better place.
1. Immortalised by Kaplan and Norton: www.balancedscorecard.org
2. Blackwell, P. (2009) ‘An Investigation into the Potential Benefits of using ‘Beyond Budgeting’ in the charity Sector’, dissertation presented for the degree of Master of Business Administration, University of Edinburgh.
3. See her First Person interview in Caritas, issue 23, October 2009, page 37
4. Poffley is the author of Financial Stewardship of Charities: maximising impact in times of uncertainty’ DSC 2000; revised and reissued as Income to Impact: Financial Stewardship of Public Sector and Not-for-profit Organisations, DSC September 2010
5. Hope, J. and Fraser, R. (2001) Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap Harvard Business School Press, Boston, Mass
6. Further detail on how exchange rates affect INGOs can be found in Andrew Derry’s article ‘Currency speculation or risk management?’ in Caritas, issue 26, January 2010, page 13
7. Lindsay, R.M. & Mark, K. (2005) ‘Sight Savers International Teaching paper’: Richard Ivey School of Business, University of Western Ontario, Ivey Publishing, London, Ontario
8. www.sightsavers.org/about_us/annual_review/default.html
9. SSI’s SIM can be found on their website: www.sightsavers.org/in_depth/quality_and_learning/13093_SIM%20Card.pdf
Author: Penelope Blackwell
Penelope Blackwell has been director of fundraising at Chest Heart & Stroke Scotland since May 2007.
Her fundraising career started at Jersey Hospice Care in 2002, after a variety of roles in the private sector.
She has recently gained an MBA from the University of Edinburgh, as well as holding the Institute of Fundraising’s Certificate in Fundraising Management.
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