Evolution of the Epistemology of Beyond Budgeting Through Time - Essay Example

Evolution of the Epistemology of Beyond Budgeting Through Time Introduction This paper provides a critical examination of the evolution of the epistemology of beyond budgeting through time, from the perspectives of knowledge and of the adopted research methodology. The former includes discussions on contrary arguments, while the latter includes discussions of relevant quantitative models, if there are any. The basic thinking in beyond budgeting is that traditional systems for management control that focus on budgets are too inflexible for companies that live in dynamic environments that require constant change and innovation, and that beyond budgeting implies moving past static budgets and old management controls in favor of models of management that lend themselves to being used for better adaptation and empowerment of employees by firms. In the alternative paradigm that beyond budgeting represents, innovation is the fulcrum of all action and strategy, and the focus is on the empowerment of employees through greater sharing of information and knowledge, to enable individual employees to contribute more to organizational success through creativity, innovation, and the achievement of demanding targets rather than following rote and prescribed paths for behavior and performance. There is an emphasis on decentralization, greater leeway for decision-making at the employee level, and on culling best practices from various organizations and contexts and adapting those best practices to work for individual firms. There is a focus on budgets that are rolled and adjusted within a calendar year, usually on a quarter by quarter basis, and on the continuous refocusing and the tweaking of plans to make sure that there is a dynamism in the way the company sets targets and adjusts resources allocations to respond adequately to external developments. The focus shifts away too from the management of numerical targets that is the case in traditional budget -based management control paradigms to the creation of value in beyond budgeting paradigms (Kaplan Financial Limited 2012; Michael and Technical Information Service 2007; Daum 2002; Beyond Budgeting Institute n.d.; Hope and Fraser 2003, pp. 3-17). II. Evolution of the Epistemology of Beyond Budgeting Through Time A. Knowledge Literature from as far back as 1995 have been pointing out the limitations and shortcomings of traditional budgets to include their inflexible nature and the lack of adaptive mechanisms in traditional budgeting exercises as management control system protocols and tools in order to effect management at the very heart. Budgets were used to be the main lever of management control, in other words, and the literature has attacked the budget on grounds that include an overemphasis on the internal aspects of the organization versus the external environment and the challenges posed by that external reality, including competition, changes in external environment factors, and dynamic improvements in technology, among others. Even when an organization tries to form more adaptive organizational systems that on the surface seek results and innovation over internal centralized control, the reality is that with the budgets in place the organization is forced back into static and rigid forms of organizational controls when budgeting is at the heart of the management process. The attack on budgeting and the acknowledgment of its limitations meanwhile have resulted in the emergent notion, first explored in the 1970's, of management control systems that move beyond budgeting and towards more dynamic, empowering management paradigms. Beyond budgeting then became a kind of marker for the changes in controls that were instituted to better manage an innovation-based and dynamic management process that has the characteristics of decentralized control, a focus on the creation of new value, and of dynamic tweaking of budgets and goals, as well as employee empowerment to take the place of power being held by a hierarchical model, where all power resides within a select group at the top. Beyond budgeting too can be construed as embodying a shift away from pure academic theorizing on management accounting that was divorced from practice on the field towards a management accounting scholarship that was more relevant and adaptable to actual market and external environment realities (Bourmistrov and Kaarboe 2013; Scapens 2006; Hope and Fraser 2003). From an academic point of view too, the evolution of thinking and knowledge relating to management accounting in general and in budgeting and control systems for management in particular is evident in the way there was a shift away from the use of theoretical and mathematical models that were divorced from market realities towards a science of management that put case studies of actual business organizations as the starting point of academic inquiry and theorizing. This was a complete flip from previous paradigms in the 1970's of academic theorizing and mathematical and statistical models being employed to come up with systems of management control, regardless of context and of the external environment dynamics. In Scapens (2006) this shift towards cases-based academic inquiry and model-making occurred in the decade leading up to the turn of the millennium, from the 1990's onwards, Moving beyond this, from 2000 onwards, the shift was made in management accounting and in general thinking relating to control systems from narrow economic theory-based models of control towards newer paradigms that took inspiration and input from a broad range of disciplines, including sociology and newer forms of what is called institutional economics, to emphasize practice and a greater focus on the external environments, technological progress, the nature of consumer markets, and organizational empowerment and adaptation to market realities (Bourmistrov and Kaarboe 2013; Scapens 2006; Hope and Fraser 2003). By 2006, Scapens (2006) was summarizing the results of a personal journey that also mimics the evolution on thinking relating to management accounting and controls, towards an end result where a framework that is dynamic, evolutionary and also at times revolutionary in nature, supplants older static paradigms that did not take input from external market and environmental realities, that focused on static budgets and used an internal focus on resources and capabilities as a starting point. In the newer paradigms and the model prescribed by this time, there is a greater focus on new ways of viewing economics and sociology, among other disciplines, and on actual organizational experiences and best practices, to help craft new models for management control. The emphasis in the new paradigm is on moving beyond old static models of control and towards new models that impute dynamism and greater engagement with organizational members in the control process. This in essence also mirrors the evolution of thinking from budgeting to paradigms associated with beyond budgeting (Scapens 2006; Hope and Fraser 2003; Bourmistrov and Kaarboe 2013). Moving forward to the present, one finds that the literature on beyond literature has come to reflect a crystallization of the knowledge tied to beyond budgeting and how it contrasts with traditional budgets, with the points of emphasis falling in such key areas as styles of management, power and authority dynamics, and methods of measuring performance. The hallmarks of beyond budgeting have come to be in the areas of empowerment and stark decentralization of power from the old paradigms, movement towards targets that are relative as opposed to being fixed and absolute, and adaptation and innovation as opposed to rigidity and organizational decay (Michael and Technical Information Service 2007; Rothberg 2011; Hope and Fraser 2003b). The literature has also come to recognize, in field studies and related academic literature, peripheral gains made from moving beyond budgeting, such as increased levels of cooperative behavior among different functions in an organization (Ostergen and Stensaker 2008). Beyond budgeting has come to be associated with modernity and progress and a way of doing things associated with greater information dissemination and employee empowerment, as has been discussed elsewhere (Rickards 2006). There is a consensus too that the thinking on beyond budgeting has come to encompass not just budgeting but the entire process of management control. Present epistemology of beyond budgeting therefore is an evolution towards seeing beyond budgeting as a holistic set of practices, theory and insights that take off from a movement away from budgets and towards a complete rethinking of how management control is to be undertaken, mindful of the dynamic nature of present-day organizational contexts and demands (Horngren 2004; Hope and Fraser 2003; Daum 2002). B. Adopted Research Methodology As can be gleaned from the literature, the evolution of the thinking on beyond budgeting, the management control process,and management accounting is mirrored by a shift in the research methodologies employed to power that evolution in the knowledge aspect of the epistemology discussion here. In particular, whereas in the older contexts of management accounting the movement of research was from dry theorizing from technical disciplines and applying mathematical economic models to solve real-life organizational problems, the newer contexts are characterized by a contrary movement starting from organizational practice and the realities of the external environment and culling insights from those to form new models and theories. In particular, there was a movement away from the use of dry models from old forms of economics, towards new and more dynamic field research-based and case studies-based, ground-up research methods to craft better management control processes that focus on innovation and empowerment from below. Put another way, the evolution of the epistemology of beyond budgeting has been shaped by this inversion in research methods, away from a theory-first and practice-second approach that resulted in static budgets and top-down, hierarchical controls to ground-up, empirical research methods that took the data from below and came up with management control models based on actual realities on the ground. This has led to the evolution of what has become in the present context radically different conceptions of management control that emphasize decentralization, empowerment, dynamic recalibration of targets and strategies, and a focus on value creation rather than on static numerical targets that have failed many companies in the past. The literature also notes, in particular, a shift away from research methods that consider inputs from a narrow set of fields, towards research methodologies that impute insights from a broad set of disciplines, including sociology, in order to come up with more inclusive and comprehensive models of management control as reflected in current-day thinking and knowledge creation tied to beyond budgeting. This evolution in research methods is evident in Scapens (2006), and also in a slew of academic writings past the year 2000 emphasizing the insights from field studies and case studies when discussing the impact of beyond budgeting on different organizations. These studies in turn continue to inform theorizing and knowledge formation on beyond budgeting. This shift in research methods can therefore be characterized by a greater emphasis on actual experience, and a greater emphasis on the use of inputs and insights from a wider range of disciplines (Horngren 2004; Ostergen and Stensaker 2008; Hope and Fraser 2003b; Daum 2002; Bourmistrov and Kaarboe 2013). References Beyond Budgeting Institute (n.d.). What is Beyond Budgeting? Beyond Budgeting Round Table. [Online] Available from: http://www.bbrt.org/beyond-budgeting/bbwhat.html# [Accessed 19 March 2014] Bourmistrov, A. and Kaarboe, K. (2013). From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas.. Management Accounting Research 24 (2013). Daum, J. (2002). Beyond Budgeting: A Model for Financial Performance Management and Controlling in the 21st Century? Controlling & Finance [Online] Available from: http://www.juergendaum.de/articles/beyond_budgeting.en.pdf [Accessed 19 March 2014] Hope, J. and Fraser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business Press [Online] Available from: http://books.google.com [Accessed 19 March 2014] Hope, J. and Fraser, R. (2003b). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap- The Summary. Soundview Executive Book Summaries. [Online] Available from: http://www.businesstraining.com.mx/egaii/docs/Beyond%20Budgeting.pdf [Accessed 19 March 2014] Horngren, C. (2004). Management Accounting: Some Comments. Journal of Management Accounting Research 16. [Online] Available from: http://www.ccsa.ufrn.br/ccsa/areas/cont/ppgcc/ftp_disciplinas_Cust/Horngren.pdf [Accessed 19 March 2014] Michael, A. and Technical Information Service (2007). Beyond Budgeting. Chartered Institute of Management Accountants Topic Gateway Series No. 35. [Online] Available from: http://books.google.com [Accessed 19 March 2014] Ostergren, K. and Stensaker, I. (2008). Management control without budgets: A field study of “beyond budgeting” in practice. NHH Norwegian School of Economics and Business Administration. [Online] Available from: http://www.nhh.no/Files/Filer/institutter/rrr/Papers/working%20papers/mappe2008/0108.pdf [Accessed 19 March 2014] Rickards, R. (2006). Beyond Budgeting: Boon or boodoggle? Investment Management and Financial Innovations 3 (2). [Online] Available from: http://businessperspectives.org/journals_free/imfi/2006/imfi_en_2006_02_Rickards.pdf [Accessed 19 March 2014] Rothberg, A. (2011). Traditional Budgeting vs. Beyond Budgeting: Three Core Differences. CFO Edge. [Online] Available from: http://www.cfoedge.com/resources/articles/CFO-Edge-Traditional-Budgeting-vs-Beyond-Budgeting.pdf [Accessed 19 March 2014] Scapens, R. (2006). Understanding management accounting practices: A personal journey. The British Accounting Review 38. Read More