The calendar or fiscal year might be an appropriate period for reporting results to investors but is it an appropriate period for managing business? Strategic initiatives usually extend beyond the annual budget period and managers scrambling to meet arbitrary targets by the end of each period actually disrupts flow, drives further dysfunctional behavior, and likely damages long-term capability building.
Instead of negotiating numbers once a year and following a predetermined plan, why can’t financial planning be a continuous and inclusive investment process informed by open information systems that make truth visible and deploy relevant data to the right people at the right times? When decisions are made closer to the action, the information hasn’t decayed (or been tampered with by people in the middle to make it look better). According to Beyond Budgeting case studies, a significant benefit of managing without a predetermined plan or budget for the year ahead is that managers become more aware of the changing business environment, are better prepared to face different situations and are able to focus attention on responding to events in order to realize the most value. As a consequence, I can imagine more businesses being able to build the capability to respond to customers more quickly and produce better outcomes.
More entrepreneurial business capability
Does everyone in a company typically feel like they’re accountable for customer experiences and business outcomes? Are they committed to satisfying customers profitably? Is the responsibility for value-creating decisions distributed throughout the organization?
Responding to customer demand with high speed and low costs requires devolved and adaptive working so that expertise can quickly come together to cause delight. A person must feel free to respond to customer demand. Innovation and responsiveness doesn’t come from people when they’re confined to functional departments and restricted to predetermined plans. Imagine what would be possible in a culture where people are safe to challenge assumptions and risks, where they have time and space to think deeply about constraints and economics, and are free to make small bets across a set of options to prove the best course of action or investment to make.
“Purpose and principles, clearly understood and articulated, and commonly shared, are the genetic code of any healthy organization. To the degree that you hold purpose and principles in common among you, you can dispense with command and control. People will know how to behave in accordance with them, and they’ll do it in thousands of unimaginable, creative ways. The organization will become a vital, living set of beliefs.”
– Dee Hock, founder and former CEO of Visa
Why not devolve business strategy and responsibility for business performance to teams closer to customers and benefit from richer participation of people and more entrepreneurial business capabilities that are able to coordinate actions according to customer demand? There can be explicit principles and boundaries so people know what they can and cannot do.
More effective governance
Every implementation of governance I’ve seen has been a major source of impediments. Everyone subjected to it complains about it. Conventional governance is obsessed with productivity, resource utilization, and cost. When value isn’t clearly defined, isn’t well understood and isn’t quantified and measured, communication is reduced to time, scope, and cost: “Go faster. Deliver more. Cut costs.” I wonder if quality has almost become an ‘undiscussable’. People in business think they’re buying it and assume they’re getting it but have no way to test for it. A lot of people don’t hang around long enough to feel the pain of poor quality and appreciate economic consequences. Just because things were late last time, or came in over budget, or didn’t deliver on critical business objectives doesn’t mean the answer is more (of the same) governance!
Governance has to focus on continuous value creation for customers and stakeholders, including shareholders. It has to monitor portfolio performance through relative business performance indicators. Only when governance lives at the gemba can it truly know what’s going on and support local decision making. Such a governance framework provides strategic direction and guidelines to front-line people making decisions to create customer value consistent with company goals and challenges their key assumptions and risks prior to investing. It need interfere only when absolutely necessary. Largely people ought to be left to get on with things. Governance ought to be inquiry-by-exception “based on outliers from the patterns and trends that possibly reflect changes in customer behaviors.”
Open information systems that make truth visible
People on the front line making decisions about business strategy, customer needs and customer profitability need access to real-time, unadulterated financial and operational information. Their insights come from asking important questions, challenging strategic assumptions, and calling out the risks as and when they see them. A prerequisite is being safe. Everyone has to be trusted to live up to the principles and values expected of them. Beyond Budgeting talks about values such as integrity, openness, and fairness adding to the effectiveness of risk management.
While the finance department often feels like a dark overlord perpetuating misconceptions about software development (it’s nothing like manufacturing) it does sit on some very relevant measurements. An objective is continuous monitoring of existing initiatives by looking at their impact on business performance characteristics such as profitability and cash flow, among other things. Another objective is continuous re-evaluation, prioritization and investing. No more annual round of estimating and agreeing budgets, RAG reports and variance analysis. Instead? ‘Fast actuals’ deployed to the front line in real-time through a simple accounting system that’s always up-to-date. Rolling reviews of outcomes in line with trends connecting ‘fast actuals’ with ‘flash forecasts’ made quickly and only looking immediately ahead. More informed small and reversible strategic decisions. Cost is no longer driving everything but there is now a rolling system of cost management. Bring on fair finances and ethical reporting.
Business agility requires financial agility
Managing to a predicted future provides only the illusion of control. A discovery-driven approach that makes small bets builds competence in sketching future options that traditional budget-driven processes fail to see until it’s too late.
More control very rarely delivers success. Success requires responsiveness – the anticipation of possibilities, seeing options and responding effectively to events. Responsiveness requires liquidity. Business agility requires financial agility and operational flexibility.