Should we go beyond budgeting?
A research into optimizing the budgetary process
Ralph Holtkamp
March 2016
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Erasmus Universiteit Rotterdam
Faculteit der Economische Wetenschappen
Sectie Accounting & Finance
Should we go beyond budgeting?
A research into optimizing the budgetary process
Master Thesis
In order to obtain the title Master of Science
from the Erasmus University in Rotterdam
By
Ralph Holtkamp
March 2016
under the supervision of
Drs. Hendrik Geerkens
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Acknowledgements
I would like to thank Wilco de Haan, Focko Doorhout Mees, Fred Willemze, Anton Cornel
and Gerrit Geers for their continuous support. I couldn’t have made this thesis without
their valuable input.
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Table of Contents
1 INTRODUCTION
1.1 INTRODUCTION
1.2 RESEARCH RELEVANCE
1.3 RESEARCH PURPOSE AND METHOD
1.4 RESEARCH STRATEGY AND DESIGN
1.5 OVERVIEW AND STRUCTURE OF THESIS
2 THE COMPANY: MARSH & MCLENNAN
2.1 INTRODUCTION
2.2 MARSH AND MCLENNAN COMPANIES
2.3 MARSH NETHERLANDS
2.4 CONCLUSION
3 BUDGETING
3.1 INTRODUCTION
3.2 MANAGEMENT CONTROL SYSTEMS
3.3 STRATEGIC PLANNING
3.4 BUDGETING
3.4.1 The history of budgeting
3.4.2 Budget functionality
3.4.3 Perspectives on budgeting and evaluative style
3.4.4 Target setting and incentives
3.4.5 The impediments of the budgeting process
3.5 BETTER BUDGETING
3.6 BEYOND BUDGETING
3.7 CONCLUSION
4 ANALYSIS: THE CONSTRUCT OF THE ORGANIZATION
4.1 INTRODUCTION
4.2 ORGANIZATIONAL PROCESS AND PROBLEMS
4.3 ANALYSIS OF BEST PRACTICE
4.3.1 Activity Based Budgeting
4.3.2 Zero Based Budgeting
4.3.3 Rolling Budgets
4.3.4 Profit Planning
4.3.5 Beyond Budgeting
4.3.6 Overview of the alternatives
4.4 OVERVIEW OF ACTIONS AND CONTROLS
4.5 CONCLUSION
5 CONCLUSION AND RECOMMENDATIONS
5.1 INTRODUCTION
5.2 SUMMARY OF MAIN FINDINGS
5.3 DISCUSSION
5.4 LIMITATIONS
5.5 POSSIBILITIES FOR FURTHER RESEARCH
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REFERENCES
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APPENDICES
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APPENDIX A: CRITERIA FOR QUALITY OF RESEARCH DESIGN
APPENDIX B: SIMONS’ FOUR LEVERS OF CONTROL
APPENDIX C: BEYOND BUDGETING PRINCIPLES
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APPENDIX D: STATISTICAL OVERVIEW OF SURVEY
APPENDIX E: BEYOND BUDGETING SURVEY (IN DUTCH)
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Table of Figures
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1.1 Relevant situations for different research strategies
1.2 Structure of thesis
2.1 MMC’s organizational structure
2.2 Marsh’s organizational structure
2.3 2010 contribution to growth and NOI
2.4 The trend of the budget and forecast
3.1 The development and functionality of the budget
3.2 The shift of the approach in management and control
3.3 The multidivisional structure (M-form)
3.4 The Principal-Agent Theory
4.1 Statement on the strategic focus
4.2 Statement on the responsiveness and flexibility of the budget
4.3 Statement on the budget’s time frame
4.4 Statement on the budgetary time frame
4.5 Statement on the foundation of the budget
4.6 Statement on dysfunctional behaviour
4.7 Statement on top-down structure
4.8 Statement on departmental barriers
4.9 Weighted index of the problems
4.10 Overview of the alternatives
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1 Introduction
1.1 Introduction
Budgeting is not from the past decades. On the contrary, it can be traced back to the
late 1800’s to the government of the United States (US). In the US, budgets were
introduced at municipal level to control the state’s tax earnings and expenses. By 1919
more than forty states had adopted a form of a state budget. The first national budget
was provided in 1921 to the National Congress. This was the start of the role of
budgeting in the public sector.
The word on the effectiveness of budgeting spread quickly in the private sector. In
1930, most of the larger industrial companies had implemented some kind of budgetary
control, although not many used budgeting throughout the organization. A study was
conducted in 1941 and showed that almost 50% of the established companies in the US
used a form of budgeting.1 Budgeting was practically fully integrated by 1958 in the US.
European companies followed the example the US a bit later in time.
Nowadays almost every organization has implemented a management control systems
(MCS). The budgeting process is a vital component of the MCS and has been a very
useful system by which the management successfully plan, coordinate and control. The
budgeting process involves the creation and implementation of the organization’s
objectives as well as the short and long term planning. A budget allows the organization
to better utilize the available financial resources.
The budget can be distinguished into a normative and behavioural approach. The former
elaborates on the preparation and the use of a budget. The latter explains the
behavioural aspects of budgeting and people (Grønhaug and Ims, 1988). Argyris (1952)
found that behavioural factors were important for understanding the effectiveness of
budgeting. DeCoster and Fertakis (1968) investigated how budget pressure was related
to leadership style of departmental supervisors.
More distinctive research has been conducted on the budgetary participation by
subordinates and to which they were able to influence budget targets. Hopwood (1972)
and later Otley (1978) respectively showed how the budgets are used to evaluate
managerial and subordinates performance. This is now commonly known as Reliance on
Accounting Performance Measures (RAPM).
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National Industry Conference Board (USA), Budgetary Control in Manufacturing Industry, 1931.
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Other studies show the relationship between job related issues and managerial style
(Otley, 1978; Merchant, 1981; Brownell and McInnes, 1986; Chenhall, 1986; Harrison,
1992; Ross, 1995; Lau and Tan, 1998; Emsley, 2001), and between budgetary
participation and job satisfaction and rewards (Merchant and Manzoni, 1989; Frucot and
Shearon, 1991).
The normative and behavioural approaches show the distinct relationship between
organizational, individual and environmental variables. Both approaches have factors
that negatively influence the budgeting process. Neely et al. (2001) determined the
twelve most cited criticisms which relate to a) non-added value of the budgeting process,
b) the impeding results of budgetary controls and c) organizational and people related
issues.
The weaknesses of the traditional budgeting have been studied and therefore alternative
budgeting techniques such as Zero Based Budgeting, Activity Based Budgeting, Rolling
Budgets and Beyond Budgeting have been developed over the past decades to overcome
these weaknesses.2
Although, the approach of each technique can be very different, the fundamental
purpose of each alternative serves the same cause; to plan and control.
Most alternatives are in line with the traditional budgeting, but Beyond Budgeting
advocates abandoning the traditional budgeting as the budget does not aid the
organization as intended. Beyond Budgeting argues that the disadvantages cause more
damage to the organization than the advantages yield. The organization should more to
a more devolved environment and use adaptive processes that are based on relative
performance. There are several examples of companies (e.g., Svenska Handelsbanken,
Tetra Pak, Borealis) who have successfully implemented Beyond Budgeting and have
outperformed their competition.
1.2 Research Relevance
An organization’s structure and (performance) culture always is susceptible to change.
These changes can lead to several shortfalls in the management control systems. The
shortfalls are most notably noted in the short-term related goals. Negative effects, such
as impeding of allocation of organizational resources to their best use and myopic
decision planning and other dysfunctional behaviour (e.g., slack or budget gaming), play
a major role in the annual budget planning and performance evaluation (Hansen et al.,
2003). The numerous shortfalls of the traditional budgeting process have extensively
been discussed in the past decades (e.g., Schmidt, 1992; Bunce et al., 1995; Hope and
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There are other budgeting techniques available e.g., Beyond Beyond Budgeting or Scenario Budgeting. These
techniques are insufficiently supported by the literature on budgeting and are therefore not taken into account.
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Fraser, 1997, 2003a, 2003b; Wallander, 1999; Ekholm and Wallin, 2000; Marcino, 2000;
Jensen, 2001).
The shortfalls have lead to the discussion whether the traditional budgeting is the best
solution for an organization to go forward or that the organization should decide to
change to an alternative budgeting technique.
In this view, Hansen et al. (2003, p. 96) share the same vision:
“The conflicting developments illustrate that firms face a critical decision
regarding budgeting: maintain it, improve it or abandon it?”
Problem definition
For several years, Marsh is not able to comply with the annual budget. The problems
that Marsh face is a snowball effect of the past five years. Firstly, the budgetary process
is not punctual and the budget works counterproductive due to the unrealistic targets.
Secondly, the performance culture is unsatisfactory. Marsh does not work as a team, but
as mere individuals who strive for their own goals. Insufficient subordinates dare to take
responsibility for their actions related to the budget. And thirdly, the complexity of the
system cannot create one version of the facts. Therefore, synergies from running
efficient processes and accountability are fully missed, and the budget misses its
purpose as a control mechanism for the organization.
Therefore, it is necessary to better understand the traditional budgetary problems and
the actions that can be taken to mitigate the risk of these problems. Further analysis
should show whether the traditional budgeting process is indeed the right way forward
or instead choose for an alternative budgeting technique.
1.3 Research Purpose and Method
An organization is continuously under the influence of internal and external factors. This
also affects the budgeting process. In order to mitigate these effects in the scope of
budgeting, alternatives have been developed to suit the organizational and/or industrial
needs.
This thesis addresses the functionality of the traditional budgeting process within an
organization and compares budgeting to the alternative budgeting techniques that have
been developed.
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The thesis will contribute to a better understanding of the traditional budgeting process
in a holistic way and to explain the weaknesses of budgetary control that have been
found in the literature. The twelve most cited weaknesses from a report by Neely et al.
(2001) will be used as it is primarily drawn from the practitioner literature and widely
used in the literature on budgeting.
A good understanding of the budgeting process is a necessity for elaborating on the
alternative budgeting techniques that have been developed to overcome those
weaknesses.
The main goal is to conclude whether Marsh’s organization should improve the current
budgetary process or decide to move to an alternative budgeting technique. This is
written down as the main question and also serves as the title of my thesis:
“Should we go beyond budgeting?”
In order to answer the main question, the following sub-questions have been
formulated:
1. What impediments occur in the current budgetary process? And what is the effect of
the impediments?
2. Which alternative budgeting techniques are known and how can these techniques be
implemented in the current process?
3. Which budgetary controls should be implemented to successfully manage the
budget?
And to conclude in the final chapter:
4. Which recommendations can be made based on these findings?
1.4 Research Strategy and Design
Robert K. Yin is a renowned scientist in the field of research design and strategies and
author of case study research books. His comprehensive work has been widely used and
is therefore used to create the scope of the research strategy and design.
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Yin (2003) shows several research methods and how every strategy has its distinctive
characteristics.
There are three conditions to decide on the correct strategy, namely a) the type of
research question posed, b) the extent of control an investigator has over actual
behavioural events and c) the degree of focus on contemporary as opposed to historical
events. Figure 1.2 displays the three conditions and shows how this is related to the five
major research strategies (Yin, 2003, p. 5).
Strategy
Form of Research Question
Requires Control of
Behavioural Events?
Focuses on
Contemporary Events?
Experiment
How, why?
Yes
Yes
Survey
Who, what, where, how many,
how much?
No
Yes
Archival
Analysis
Who, what, where, how many,
how much?
No
Yes/No
History
How, why?
No
No
Case Study
How, why?
No
Yes
Figure 1.1 Relevant situations for different research strategies
The main question of the thesis is: “Should we go beyond budgeting?”. Even though the
main question is noted as a closed question, we can still determine the correct strategy.
To answer this question, we need to know why the organization should alter to a
different budgeting technique and how to improve or to incorporate the budgeting
technique. The “how” and “why” are the base for a more explanatory field of research as
the main and research questions deals with operational links to be traced over time
rather than mere frequencies and incidence (Yin, 2003, p. 6). Also, budgeting is a
contemporary event which is often used by the organization, but relevant behaviours in
this event cannot be manipulated as the investigator has little or no control over. Hence,
the case study is preferred.3
A case study consists of two forms of design: the single-case or multiple-case design. Yin
(2003, pp. 40-42) gives five rationales to choose for the single-case design. One of the
rationales is: “when it represents the critical case in testing a well-formulated theory”.4
This thesis addresses the organizational theory, and as Yin describes:
“The theory has a specified clear set of propositions as well as the
circumstances within which the propositions are believed to be true.”
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Yin (2003, p. 12) states that the definition of a case study often incorporates the words “organization” or
“process” to which this thesis entails.
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Other rationales are when the case represents an extreme/unique, representative/typical, revelatory or
longitudinal case.
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This thesis uses the twelve weaknesses in the report by Neely et al. (2001) which has
extensively been used in the literature. The twelve weaknesses fits Yin’s description as
there is a clear set of propositions. The extensive use of the report acknowledges the
circumstances in which the propositions are believed to be true. The theory is the base
to conduct a single-case study. The empirical research will corroborate the outcome.
A single case study has two types of design; a holistic or an embedded case study
design. Yin (2003, p. 43) cites: “a holistic case design will be used when it examines the
global nature of an organization or of a program”. This thesis entails an organization (a
unitary unit) and does not focus on several sub-units. The thesis also uses a theory that
is of a holistic nature. Therefore the case study will be based on a holistic single-case
design.
Data collection
The literature on management control and budgeting has been used to create the scope
and define the lay-out of this thesis. The literature will be the base for chapter 3, the
theoretical part of the thesis.
Chapter 4 will describe the empirical part of the thesis.
The collected data for the empirical part consists of four sources of evidence:
documentation (including literature), archival records, interviews and participantobservation. Although every source has its strengths and weaknesses, the thesis will
benefit from the use of multiple sources. This is called ‘methodological triangulation’. It
will help to establish construct validity and reliability (Yin, 2003, p. 97).5
Next to the mentioned sources above, two surveys will be conducted in order to create a
weighted index of the weaknesses in the budgeting process according to Marsh’s
employees and determine the alternative budgeting technique. The weighted index is
corroborated by the other sources and it will expose the weaknesses in the process and
will assist in comparing the several budgeting techniques. The choice of the budgeting
technique will be based on the weighted index.
The second survey is the Beyond Budgeting test. The survey will expose whether Marsh
is ready to move to Beyond Budgeting and supplies information on whether it is possible
that the alternative budgeting techniques are implementable.
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Please see appendix A for an overview on the criteria for the design.
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The functionality of the sources of evidence
The four sources will aid in answering the main and research questions (Yin, 2003, pp.
85-96). An elaboration on the strengths and weaknesses of the sources of evidence is
given below.
The use of documentation (e.g., internal or progress reports) will support the evidence
found in other sources. The documentation has been studied as it is/has:

Stable. It can be reviewed repeatedly;
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Unobtrusive. It is not created as a result of a case study;
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Exact. It contains exact names, references, and details of an event;
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A broad coverage. It has a long span of time, many events, and many settings.
Although using documentation also has its weaknesses as a) the retrievability can be
low, b) a biased selectivity can occur due to an incomplete collection, c) a bias can be
reported as it reflects the bias from the author and d) the access to documentation
might be deliberately blocked. These weaknesses are the reason for the corroboration
and augmentation of other sources.
Archival records are, amongst the advantages mentioned above, also precise and
quantitative. E.g., organizational charts and budgets can graphically show the
weaknesses of budgeting. Therefore, documentation and archival records are used for
their overall value, but in the end will not answer the main question.
Essential sources for the case study are interviews and observations. These sources are
needed when a contemporary event has to be examined and the relevant behaviours can
not be manipulated.
Interviews are targeted and insightful. It focuses directly on the case study topic and
provides perceived causal inferences.
The type of interview will be a focused interview. Focused interviews will elaborate on
the survey and will entail structured questions, but remain open-ended. To overcome
bias in answers, the interviews will be taken separately and from two layers of Marsh’s
organization; top-management (CEO, group controller and management directors) and
sub-segment leaders. The selection between the two layers will help to check the
outcome of the surveys with persons who hold different perspectives. This way the
interviews will remain focused and unbiased.
Participant-observation are done in reality and contextual. It also is insightful into
interpersonal behaviour and motives. During the participant-observation, I was working
as Financial Controller at Marsh. One of my main tasks was controlling the budget
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process. The budgeting process was based on the process rolled out in 2008. This
indicates that I was not able to manipulate parts of the budgeting process. Although
enhancements in the process have been carried out, it will not bias the outcome. Hence,
an objective view will be given.
Data analysis
The best method to conduct a case study is to have a general analytic strategy. There
are three analytic strategies and these strategies are based on a) theoretical
propositions, b) setting up a framework based on rival explanations, and c) developing a
case description (Yin, 2003, p. 109).
Yin (2003, p. 112) describes the following: “The original objective and design of the case
study presumably is based on propositions, which in turn reflects a set of the research
questions and reviews of the literature. Theoretical propositions about causal relations,
answers to “how” and “why” questions, can be extremely useful in guiding caste study
analysis.” Yin’s description perfectly fits when the choice for the general research
strategy was explained. This concludes that the thesis will be based on the strategy of
‘theoretical propositions’.6
Budgeting touches every base in the organization; from strategy to performance
evaluation and from departments to employees. Every part of the organization can be
influenced by the weaknesses in the budgeting process and can cause effects throughout
the entire organization. Therefore, the sequential stages in the budgeting process, i.e.
the dynamic events that take place in the organization, need to be investigated by using
an organizational-level logic model. The use of this logic model will consist of matching
empirically observed events to theoretically predicted events (Yin, 2003, pp. 127-133).
Analysis of the research questions
The sources of evidence are mainly collected to answer the first research question: What
impediments occur in the current budgetary process? And what is the effect of the
impediments?
Chapter 4.2 will, based on the first survey, explore and expose the impediments in the
budgeting process. The interviews and the participant-observation will endorse the
survey. Documentation and archival records will show a priori why budgeting is not
working properly.
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The strategy for ‘rival explanations’ is used when several hypotheses are included or when a theoretical
proposition is lacking. Case description is used when having difficulties making either of the approaches work.
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The second research question: Which alternative budgeting techniques are known and
how can these techniques be implemented in the current process?
Chapter 4.3 will use the literature and the second survey as the basis for the
alternatives. The improvements for the budgetary process and the alternative budgeting
techniques will be discussed during the interviews. This will indicate whether adoption of
a different budgeting technique will actually help the organization.
The third research question: Which budgetary controls should be implemented to
successfully manage the budget?
Chapter 4.4 will use the literature, the interviews and the participant-observation (i.e.,
behavioural aspects) to identify controls. The interviews should indicate whether the
methods of control are feasible and flexible within the scope of the management. E.g., a
method such as rules and procedures are quite rigid, but need to be maintained on a
yearly basis by the management. However, accountability needs to be managed
continuously as behaviour plays a role within the budgeting process.
The survey and the implication of statistical inference
The surveys are the starting point of the empirical research. The survey is the empirical
test of the theoretical part of the thesis based on the twelve weaknesses in the report by
Neely et al. (2001) complemented by the opportunities the alternative budgeting
techniques give. The survey will disclose the weaknesses in the process and possible
solution to these weaknesses. It will also be used as a benchmark for the other sources
of evidence.
The survey will be taken amongst the employees who have participated in the budgetary
process. This selection will increase the reliability and validity of the data. Although, this
means that the sample size will be small, and thus will have a higher margin of error.
This will affect the inference to provide statistical evidence for the relationship of the
weaknesses in the process and/or organization. However, the latter is not the aim. The
aim is to provide a base for the weighted index. It is therefore important that the quality
of the survey is retained by keeping respondent mistakes and biases to a minimum.
1.5 Overview and structure of thesis
This thesis aims to 1) create a better understanding of the traditional budgeting process
and the alternative budgeting techniques, 2) discuss the problems and provide a solution
for the budgetary process, and 3) provide control measures to ensure the budget can be
managed (i.e., the trade-off between the performance and the budget). Therefore, the
structure of this thesis is as follows.
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Chapter 2 comprises the description of the Marsh and McLennan (MMC) organization. I
will describe the parent company and its subsidiaries, and the core values of the
organization. I will in particular look at the history and goals, the industry and products.
The description of the organization will be elaborated to Marsh Netherlands. The Dutch
insurance industry will be described and the financial results of Marsh over the past year.
The latter will attribute to understanding the main goal of this thesis.
Chapter 3 will discuss the theoretical part of this thesis. Chapter 3.2 will firstly address
the scope of management control and the view of the management control systems
(MCS) in the organization.
MCS consists of several phases; strategic planning, budgeting, performance
measurement and reporting, and evaluation. Strategic planning and budgeting will
separately be discussed in respectively chapter 3.3 and 3.4. It will also describe the link
with strategic planning and budgeting.
The discussion on budgeting in chapter 3.4 will encompass several objectives.
The first objective is a review of the adaptation and development of budgeting and the
evolution of academic research perspectives into the causes and effects of budgeting.
This will be the introduction to target setting and incentives. Secondly, it will discuss the
twelve most cited weaknesses from the report by Neely et al. (2001). Chapter 3.5 will
enunciate on the alternative budgeting techniques with extra notice for Beyond
Budgeting in chapter 3.6.
Chapter 4 will discuss the empirical part of this thesis. The chapter will explain the
current problems found in the Marsh’s budgetary process based on the twelve most cited
weaknesses. The traditional budgeting process will be benchmarked against the
alternative budgeting techniques that have been evolved in the past decades to
overcome those weaknesses. Based on the outcome, an overview of the actions and
controls will be given to ensure the best viable budgeting solution for Marsh.
Chapter 5 will summarize the main findings from this thesis. It will also discuss the
limitations and shortcomings of the thesis. Finally, several opportunities are mentioned
for further research.
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Chapter 1: Introduction
Problem definition, research relevance and
overview of thesis
Chapter 2: Description of organization
Overview of MMC and Marsh
Overview and evaluation of literature
Chapter 3: Budgeting
Chapter 3: Budgeting
Budgeting: the purpose,
causes and the
weaknesses
Alternatives to
traditional budgeting
Findings from empirical research
Chapter 4: Analysis
Budgetary process and
problems
Chapter 4: Analysis
Best practice and
overview of control
Chapter 5:
Conclusion and recommendations
Figure 1.2 Structure of thesis
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2 The Company: Marsh & McLennan
2.1 Introduction
This chapter will provide background and financial information about the parent
company, Marsh & McLennan Companies (MMC), and its subsidiaries with the focus on
Marsh. The information will help to elucidate on the activities and performance of the
company.
Chapter 2.2 will inform about MMC on a) the history and subsidiaries b) the mission,
vision, values and goals and c) the competitive conditions.
Chapter 2.3 will explain how Marsh Netherlands’ organization acts and performs and will
zoom in on financials as a benchmark to the performance in EMEA and the industry.
Chapter 2.4 will review the organization with regard to Marsh’s organization.
2.2 Marsh and McLennan Companies
MMC is the leading global service company who provides advice and solutions in risk,
strategy and human capital. The leading brands help clients to identify, plan and respond
to critical business issues and risks. Marsh and Guy Carpenter are specialised in risk and
insurance services. Mercer and Oliver Wyman are specialised in consulting.
Nowadays, more than 75% of the companies in the Fortune 1000 are among MMC’s
clients. From small and mid-sized companies to the world's largest multinationals.
MMC is listed on the NYSE since 13th January 1978 (ticker: MMC).
MMC’s history dates back to 1871. Marsh, the risk and insurance services subsidiary, has
a long and distinguished history as the world's leading insurance broker and risk
management advisor. In 1923 MMC made the first major business extension, in
reinsurance broking, with the acquisition of the newly formed Guy Carpenter &
Company.
In 1959 MMC expanded their presence in human resource consulting with the acquisition
of Canadian benefits consultant William M. Mercer Limited. That company is known today
as Mercer, and is a global leader for HR and related financial advice, products, and
services.
In the 1980s, they began to expand into specialty consulting. Today, the Oliver Wyman
Group delivers advisory services to clients via three operating units: management
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consulting through Oliver Wyman, corporate branding and identity consulting through
Lippincott, and economic analysis and advice through NERA Economic Consulting.
In 2004 MMC broadened the risk consulting services significantly with the acquisition of
Kroll, which provides a broad range of investigative, intelligence, financial, security, and
technology services. Although, last year Kroll was divested in order to focus more on the
strategic cells MMC has formulated for the coming years.
Figure 2.1 MMC’s organizational structure
Subsidiaries
Marsh is the world leader in delivering risk and insurance services and solutions. It
provides global risk management, risk consulting, insurance broking, alternative risk
financing, and insurance program management services for businesses, public entities,
associations, professional services organizations, and private clients. Marsh is organized
by client, industry, and risk categories to facilitate the global delivery of highly
specialized products and services covering a wide spectrum of risks.
Insurance Broking and Risk Consulting
In its main insurance broking and risk consulting business, Marsh employs a team
approach to address clients' risk management and insurance needs. Each client
relationship is coordinated by a client executive who draws from the many industry and
risk specialties within Marsh to assemble the resources needed to analyze, measure and
assist a client in managing its various risks.
Product and service offerings include program design and placement, post-placement
program support and administration, claims advocacy, and a wide array of risk analysis
and risk management consulting services. These include Multinational Client Service,
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Marsh Risk Consulting, Risk, Specialty and Industry Practices, Bowring Marsh, Consumer
Operations and Marsh & McLennan Agency.
Multinational Client Service
Multinational Client Service (MCSe) is solely focused on delivering service excellence and
insurance solutions to multinational clients, irrespective of their size. Executing in a clear
and consistent manner around the globe, MCSe provides risk management programs
with a service platform that comprises a combination of proprietary tools and technology
and specialized resources. MCSe provides global expertise and an intimate knowledge of
local markets, helping clients navigate local regulatory and legal environments and
address the worldwide risk issues that confront them.
Marsh Risk Consulting
Marsh Risk Consulting (MRC) is a global organization comprised of consulting specialists
dedicated to providing clients with advice and solutions across a comprehensive range of
insurable and non-insurable risk issues, such as restructuring, product safety, patient
safety, business interruption, supply chain, governance, workforce, and reputation. MRC
helps clients identify exposures, assess critical business functions and evaluate existing
risk treatment practices and strategies. MRC provides client services in five main areas
of exposure:
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Business/Enterprise Risk: provides risk modelling and assessments, enterprise
risk management, risk management optimization and reputational risk and crisis
management.

Claims and Litigation Support: provides support and solutions to clients to assist
in managing claim portfolios and resolving insured and uninsured losses and
disputes of all kinds, as well as calculating losses and asset valuations.

Operational Risk Management: provides an integrated approach to managing and
optimizing the impact of operational risks such as those associated with property
(including natural hazards), supply chain, business continuity, and products
(including recalls).

Human Capital: assists in protecting the quality of clients' operational processes
and the health and safety of their employees, focusing on issues such as
absenteeism, safety and ergonomic programs and employment practices.

Risk Technologies: provides services to help clients manage, collect, analyze and
report on the data and workflow associated with risk, insurance, claims and legal
matters within their organizations.
14
Risk, Specialty and Industry Practices
In further support of its clients' strategic, operational and risk management objectives,
Marsh provides consultative advice, brokerage and claims advocacy services through
dedicated global Risk, Specialty (areas such as Casualty, Claims, Property, FINPRO) and
Industry Practices (areas such as construction, financial institutions, healthcare,
manufacturing). For both large and mid-size organizations, Marsh’s experience and
working knowledge of clients' industry sectors, and of the unique environments in which
they operate, to facilitate the requisite breadth of coverage and to reduce cost of risk.
Guy Carpenter is the world's leading risk and reinsurance specialist, creating and
executing reinsurance and risk management solutions for clients worldwide. It provides
risk assessment analytics, actuarial services, highly specialized product knowledge, and
trading relationships with reinsurance markets throughout the world. Client services also
include contract and claims management and fiduciary accounting. Run-off services and
other reinsurance and insurance administration solutions are offered through Guy
Carpenter subsidiaries on a fee basis.
Mercer is a leading global provider of consulting, outsourcing and investment services.
Mercer consultants help clients design and manage health, retirement and other
benefits, and optimize human capital. The firm also provides customized administration,
technology and total benefit outsourcing solutions. Mercer’s investment services include
global leadership in investment consulting and multi-manager investment management.
Mercer’s global network ensures integrated, worldwide solutions for clients who wish to
establish global policies and procedures while allowing for the flexibility to accommodate
local cultural, legal and regulatory requirements. The firm's locally based professionals
are also available to serve midsize companies and to address country-specific issues and
opportunities.
The Oliver Wyman Group delivers advisory services to clients through three operating
units, each of which is a leader in its field. Oliver Wyman is a top-tier global
management consulting firm that combines deep industry knowledge with specialized
expertise in strategy, operations, risk management, organizational transformation, and
leadership development. Lippincott helps clients create, develop, and manage their
corporate branding, identity, and image. NERA Economic Consulting advises
corporations, law firms, and government entities on the economics of competition,
regulation, public policy, finance, and litigation.
15
Mission
MMC is to be the professional services firm who is committed to assist all clients in the
protection and enhancement of value through advice and solutions in risk, strategy, and
human capital.
Vision

To be the premier global professional services firm in risk, strategy, and human
capital, with each of the companies a clear industry leader.

To be the place that individual professionals, groups of professionals, and
professional services firms see as the clear employer/owner of choice.

To create an environment in the firm where professionals have the freedom and
support to flourish and grow, and where all colleagues are both motivated and
enabled to provide world-class client service.
Values
MMC share and aspire to act consistent with a common set of values. While the
operating companies work in distinct markets using different technologies and ideas,
face different competitors, operate in different countries, and draw from different labour
markets, MMC are aligned around a way of doing business. As part of MMC, all operating
companies and functions strive to operate each day consistent with a set of values that
apply to all of our activities, specifically the following:
Clients: To deliver exceptional value to clients on a global basis by meeting or
exceeding the clients' requirements and by innovating to meet emerging client needs in
a manner that promotes shareholder value over time.
Integrity: To conduct business consistent with the highest ethical and professional
standards and not tolerate behaviour that deviates from those standards. MMC will act
with integrity, honesty, courage, and mutual respect.
Colleagues: To make MMC a great place to work for outstanding people by treating all
colleagues as valued partners, in the spirit of collaboration, engagement, and inclusion.
MMC will empower people, hold them accountable for results, and reward them based on
their performance as individuals, as teams, and as part of MMC.
Execution: To focus on efforts and consistently deliver on the commitments to clients,
shareholders, and colleagues. MMC will ensure alignment around goals, cost discipline,
and P&L accountability.
16
Goals
In 2010, MMC has listed four targeted objectives for the year.
Grow the firm
For the past two years, the focus has been to stabilize the company and improve
financial performance, while effectively managing the overall business through the
downturn. MMC have been successful at both, MMC return to the growth objective.
Specifically, MMC want to achieve significant, profitable growth across all operating
companies. Each of the businesses is well-positioned to achieve its key strategic and
financial goals.
Make significant progress in weaving the company together
MMC’s second key priority is to unlock the potential value by working together across
individual businesses.
MMC will create additional value by: 1) taking advantage of MMC’s scale to drive down
the cost of doing business, 2) capitalizing on adjacencies between the operating
companies and global functions to create incremental revenue opportunities, and 3)
creating a greater sense of coherence across the enterprise and cultivating a strong
company culture around quality and risk management that supports the most important
asset – MMC’s people.
Ensure effective enterprise-wide risk management
MMC will continue their work to further reduce the risk profile of the company. MMC will
integrate a common risk management philosophy and protocol into their core business
processes – both at the enterprise level as well as within each of the operating
companies. This will include establishing a firm-wide risk framework, improving certain
of the processes, and facilitating a strong company culture around risk management.
Engage people
The successful execution of these goals also depends on the hard work, talent, and
commitment of all colleagues around the world. Strengthening the corporate culture and
improving levels of engagement for the colleagues across the firm are two areas of
opportunity. MMC will also continue the great work that has begun in the areas of
diversity and inclusion as well as corporate social responsibility.7
7
Diversity and sustainability are important to MMC’s culture. Please see www.mmc.com/diversity/ and
www.mmc.com/sustainability/index.php.
17
Competitive Conditions
MMC faces strong competition in all of its businesses from providers of similar products
and services. MMC also encounters strong competition throughout its businesses from
both public corporations and private firms in attracting and retaining qualified
employees.
Risk and Insurance Services
MMC’s combined insurance and reinsurance services businesses are global in scope. The
principal bases upon which the (re-)insurance businesses compete include the range,
quality and cost of the services and products provided to clients. MMC encounters strong
competition from other insurance and reinsurance brokerage firms that operate on a
nationwide or worldwide basis, from a large number of regional and local firms in the
United States, the European Union and elsewhere, from insurance and reinsurance
companies that market, distribute and service their insurance and reinsurance products
without the assistance of brokers or agents and from other businesses, including
commercial and investment banks, accounting firms and consultants, that provide riskrelated services and products.
Certain insurers and groups of insurers have established programs of self insurance
(including captive insurance companies) as a supplement or alternative to third-party
insurance, thereby reducing in some cases their need for insurance placements. There
are also many other providers of affinity group and private client services, including
specialized firms, insurance companies and other institutions. The continuing impact of
legal and regulatory proceedings concerning the insurance brokerage operations also
could affect Marsh’s competitive position.
Consulting
MMC’s consulting and HR outsourcing businesses face strong competition from other
privately and publicly held worldwide and national companies, as well as regional and
local firms. These businesses compete generally on the basis of the range, quality and
cost of the services and products provided to clients. Competitors include independent
consulting and outsourcing firms, as well as consulting and outsourcing operations
affiliated with accounting, information systems, technology and financial services firms.
2.3 Marsh Netherlands
Marsh Netherlands (hereafter called Marsh) is part of the EMEA, which consists of
Continental Europe and UK, Middle Eastern and Africa.
18
The Anglo-American model which MMC introduced is also indoctrinated into the Dutch
organization. It is a money-driven business and in a technology and market driven
environment. MMC also cares for the stakeholder which is part of the “Rijnland model”.
The latter is important, because MMC positioned its values around many stakeholders
(e.g., employees, clients).
In the previous years, Marsh drove its business via fourteen product and services lines.
These lines of business were controlled by four segments of the organization and acted
as separate profit centres. The segments executed Marsh’s strategy.8
Though, this organizational structure failed. Inefficient processes, lack of teamwork,
ineffective segregation of duties have lead to deterioration of the organization. In 2011,
the executive committee has decided to reorganize the structure by act through the lines
of business instead of the segments. It is a necessary step to bring Marsh back to a
healthy organization. The result should lead to better financial results, efficient processes
and being able to steer towards the organizational goals as appointed in the strategies
(e.g., customer satisfaction, growth and profitability).
Front Office
Customer segment: All
Focus: New and Expanded Business
Lines of Business and MRC
Procuration
Customer segment: premium ≥
USD 30 mln
Customer segment: premium <
USD 30mln
Focus: Renewal
Focus: Renewal
Finance
HR
IT
Legal
Figure 2.2 Marsh’s organizational structure
The Dutch insurance industry
In 2005, MMC developed a new business model in order to be more competitive and
more efficient with the resources. The latter required Marsh to alter the organizational
structure and therefore changes have been carried forward on product-, service- and
client level. By 2006, this restructuring made a hundred (25%) jobs redundant.
Even after the restructuring, Marsh failed to manage their performance in the years
after. The business model works with great difficulty due to the many organizational
changes and the market is also saturated.
8
Each segment is divided into several sub-segments to reflect a part of the business.
19
Major players such as Aon and Willis remain stronger than Marsh, but also the smaller
local brokers are stealing market share from Marsh. Overall, Marsh faces a lot of
challenges.
2009 was for Marsh, Aon and Willis a difficult year. Aon saw their revenue decline by 5
million euro to 213 million Euros (growth of -2,3%). This was mainly due to volume
decrease. There were less insurances for investments, employees and revenue.
However, the attrition was minimal and gained more customers.
Willis saw a decline of revenue of 8% to 17 million Euros. Additional services,
such as risk consultancy, were the main driver for this decline. An existent risk is the
non-profit sector, and particularly the municipalities. Their budgets shrunk due to
savings and therefore municipalities join forces or wrote out a tender to gain information
on the best prices. This affected the margins.
Marsh saw their revenue decline by 10% to 55 million Euros. They are losing revenue
mainly due to a low retention rate, less additional risk consulting and to pressure on
volumes and commissions.
Marsh’s negative growth is higher than the market average. This indicates that Marsh is
losing against their competitors. This also worries MMC, because Marsh is the 9th largest
country in EMEA and therefore should contribute to the top-line and bottom-line results.
The 2010 outlook is still not promising. MMC planned for EMEA that The
Netherlands is the largest negative contributor to the growth and Net Operating Income
(NOI). Though, there were more regions that planned a negative growth, but were able
to report positive growth. This makes The Netherlands the worst performer out of
eighteen countries in EMEA.
The pressure to perform on top-line (revenue) and bottom-line (NOI) continuously
exists. Due to the consistent underperformance, MMC tracks the progress of The
Netherlands closely.
20
Contribution to growth
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Contribution to NOI
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
vs Plan
vs Prior Year
vs Plan
vs Prior Year
Figure 2.3 2010 contribution to growth and NOI
The Netherlands have been struggling over the years. In order to keep up with the
financial targets, The Netherlands have made numerous attempts to create a healthy
and viable business environment.9
The strategic plan remains the focus for the business environment and the budget is
prepared according the plan. Marsh fine-tunes the yearly budget to an acceptable level
in order to attain the MMC financial requirements on revenue and NOI.
Three main sources of revenue form the top-line base and are referred as client service
revenue. The distinction of the client service revenue (CSR) is as follows:

Renewal, yearly contractual renewal of the product or service;

Expanded business, new / extended product or service rendered for an existing
client;

New business, new product or service for a new client.
Extra revenue can be achieved through e.g., received bank interest and policy costs.10
This is referred as other revenue. Client revenue and other revenue form the total
revenue.
Figure 2.7 shows the quarterly 3-year trend of the budget and the forecasted full year
(FY FC) performance by Marsh. This graph has several evident key messages:
1) The budgeted revenue declines every year;
9
Initiatives have been instigated to grow revenues and to cut costs (e.g., organizational restructurings).
10
Policy payments are made to Marsh which then pays the insurer. The time constraints allow Marsh to
receive interest payments on the credit balance.
21
2) The forecasted revenue declines every quarter;
3) High volatility on NOI in 2010.
Revenue in EUR mln
60
NO I Margin
15.0%
55
10.0%
50
5.0%
Other Revenue
45
0.0%
Client Service Revenue
40
-5.0%
FY FC NOI Margin
35
-10.0%
Budgeted NOI Margin
Budgeted Revenue
30
-15.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
08 08 08 08 09 09 09 09 10 10 10 10
Figure 2.4 The trend of the budget and forecast
It is apparent that the revenue line is of a major concern. Questions rise on the health of
the performance culture and the reflection of the truth in the budget.
As in many organizations, Marsh creates targets for the business on the client service
revenue. The budget is not supported by many employees in the organization.
2.4 Conclusion
MMC is the leading service company which has the biggest network around the globe and
executed via MMC’s subsidiaries. Subsidiaries often collaborate to benefit from the
network.
The American culture is a money-driven business. It is indoctrinated in MMC’s mission,
values and goals throughout the company. MMC strive for a healthy organization and a
great place to work. Therefore, the values and goals are communicated to all levels.
In the last years, Marsh has failed to follow the values and goals of the organization. The
organization is not financially healthy and is losing their place in the industry. Therefore,
MMC closely tracks Marsh’s performance.
The problems are found in the budgetary process and the performance culture. The
organization insufficiently manages to create a realistic budget and is not able to steer
the organizational participants to work towards the organizational goals.
22
3 Budgeting
3.1 Introduction
It is a common saying, but tells the truth: “what gets measured gets managed”.
Measurement is crucial to management control. Organizational participants focus on the
variables that get measured. The variables are derived from the mission and strategic
goals into a plan and quantified for the budget. This method helps to execute the
strategy on a short-term, often yearly, basis.
Controls are the corrective actions in order to ‘keep on track’. It is an evaluation of the
realized performance versus the standard. Therefore, the management control process is
divided into several phases (de Waal, 2004):
Mission
Strategic Plan
Yearly Budget
Performance
Evaluation
Control
(versus
Budget)
Reward
(versus
Budget)
Figure 3.1 The development and functionality of the budget
Strategic planning is the implementation of the organizational mission, objectives and
the achievability of the strategy. The implementation gives a better understanding of 1)
the market position, 2) the strengths and weaknesses (internal environment) as well as
the opportunities and threats (external environment) and 3) how the company should
act in the industry.
The strategy provides a way to exploit the strengths and opportunities, and
translates the vision for managers into a subset of tactics which are executed throughout
the organization. The subset of tactics have many behavioural aspects such as the
discussing the future and the commitment of attaining the performance targets.
Therefore, the strategy can be used to assess the organizational success and/or
progress.
The budget is necessary; it is the implementation of the strategic plan and it functions as
a predetermined ‘contract’ in order to evaluate the realized performance. Thus, the
budget plans as corporate resources are allocated throughout the organization and the
budget controls, because the realized performance is evaluated against the budget and
decisions are made to follow the budget. At year end, the achievements are rewarded if
the organizational participants have performed better than the ‘contract’ (i.e., targets).
23
Though, the industry evolves continuously. Fierce competition, governmental or third
party11 pressure on regulations, corporate governance (e.g., SOX), and specialisation
and differentiation of customer needs induces change. Strategic choices need to be
adapted and which has a great effect on the organization. Managers can undertake
actions that are not in line with the budget due to these differentiating circumstances.
The budget can become unusable and is therefore not sacred.
This chapter will look at the phases and predominantly focus on budgeting. It will
elaborate on the effects of budgeting and which solutions are available mitigate the
effects.
3.2 Management Control Systems
“If all employees could always be relied on to do what is best for the organization, there will be no
need for a management control systems. But employees are sometimes unable or unwilling to act
in the organization’s best interest, so managers must take steps to guard against the occurrence,
and particularly the persistence of undesirable behaviours and to encourage desirable behaviours.”
Merchant and van der Stede, 2007
The organization and the industry have developed rapidly to become a more competitive
and customized environment and to which creativity and subordinate initiative are key
success factors for the organization. Former techniques (e.g., command-and-control) do
not suffice to control the organization.
The managerial influence can lead to actions and decisions that are not in line
with the organization’s goals and consequently, managers use control mechanisms to
keep on track. It is an ongoing process to guide the organization by providing control for
the tensions that arise in the dynamics of creating value, strategy making and human
behaviour.
Management control is defined by Robert Anthony12 (1965) as: “the process by which
managers assure that resources are obtained and used effectively and efficiently in the
accomplishment of the organizational goals” and later emphasized that control systems
are impacted by behavioural aspects due to managerial influence on other organizational
11
Third parties in The Netherlands that act in the interest of e.g. stockholders are Autoriteit Financiële Markten
(AFM) and Verening van Effecten Bezitters (VEB).
12
Anthony, R. (1965); Planning and control systems: A framework for Analysis, p. 17.
24
participants in order to implement the organization’s strategies (Otley, 1999, 2003;
Noeverman, 2007).
Simons (1995, p. 4) argued that the approach of management and control have shifted
due to the change in the industry and organization. It requires a new approach for
managers to control the tensions that are inherent to the organization.
Old
New
Top-down organization
Customer/Market-driven strategy
Standardization
Customization
According to plan
Continuous innovation
Keeping things on track
Meeting customer needs
No surprises
Empowerment
Figure 3.2 The shift of the approach in management and control
Tensions exist between freedom and constraint, empowerment and accountability, topdown direction and bottom-up creativity, and experimentation and efficiency. It is
necessary to find the balance between these tensions and how managers control the
strategy by using the four levers of control.13 Simons’ (1995) four levers of control are:
1. Beliefs systems, used to inspire and direct the search for new opportunities;
2. Boundary systems, used to set limits on opportunity-seeking behaviour;
3. Diagnostic control systems, used to motivate, monitor, and reward achievement
of specific goals; and
4. Interactive control systems, used to stimulate organizational learning and the
emergence of new ideas and strategies.
Beliefs systems and diagnostic control systems create the inspiration to act in the
interest of the organization and the boundary and diagnostic control systems are used to
create constraints and compliance. These four levers of control will be the basis for the
management control systems and will help to align the organization in achieving the
goals.
Diagnostic control systems are the backbone of management control to predict the goal
achievement (Simons, 1995). The budget is a form of a diagnostic control system.
Diagnostic control systems
13
Simons (1995) four levers of control are presented graphically in appendix B.
25
In today’s business fast and adequate decision-making is compulsory, but managers
cannot make all decisions. Hence, activities and decision-making is cascaded to a lower
level in the organization (the empowerment). Managers will monitor and control the
outcome and take corrective actions if deviations arise versus the performance standard
(most common are budgets and profit plans).
Managers select critical success factors that influence the achievability of the mandated
goals (effectiveness) or to provide a longer term benefit (efficiency). Thus, effectiveness
and efficiency are the main criteria for selecting measures in the diagnostic control
systems. It is paramount that the selected diagnostic control measures are objective,
complete and responsive; that is when a measure is respectively “independently
verifiable, captures all relevant actions or behaviours and when it reflects the efforts and
actions of the individual” (Simons, 1995, p. 76).
Objective measures administer to a clear and unambiguous description of the
goals.14 Completeness is imperative to include all actions and efforts, because
incompleteness can lead to dysfunctional behaviour which is not in the interest of the
organization (Otley, 1978; Merchant, 1985; Simons, 1995; Dunk and Nouri, 1998;
Jensen, 2003).
Diagnostic control systems are designed to assure that the standards are met without
constant management oversight. This is the base of management control. Therefore,
diagnostic control systems have the ability to:
1. Measure the process’ outcome;
2. Compare the actual performance against the performance standard;
3. Correct deviations from the performance standard.
Diagnostic control systems give feedback on the progress (‘keeping on track’). It is the
curtailment between opportunity seeking and innovation to establish goal achievement.
Managers will only consider the significant deviations and can therefore better
allocate their attention for a number of organizational activities (i.e., management by
exception) and to generate a better balance between unlimited opportunities and limited
attention.
Hence, management control controls the tension between creativeness and innovation,
and the expected goal achievement. Management control systems will stimulate and
14
Nevertheless, subjectivity can be present due to the circumstances in which managerial assessment can
take place. This can have an effect on the subordinates’ motivation.
26
delineate innovation and opportunity seeking and are based on how subordinates can be
influenced that they will handle in the best interest of the company and the
stakeholders.
3.3 Strategic Planning
Companies often use three formal, distinguishable, sequenced planning cycles called
strategic planning, capital budgeting and operational budgeting (Merchant and van der
Stede, 2007).15
Strategic planning is the organizational process for defining the strategy and to decide
on the allocation of resources in order to pursue the strategy.
It is commonly agreed that a coherent and implementable plan is beneficial to a firm and
it should involve a process (Harris and Ogbonna, 2006), but it can be based on a
misunderstood process (Mintzberg, 1994).
A firm’s mission and vision are made tangible as strategic goals and objectives and
executed via multiple strategies for competing in the market and aligning internal
activities (Neely et al., 2001; Blumentritt, 2006). This makes strategic planning a
process to identify and integrate internal and external environmental factors. Hence,
planning is the decision-making in advance.
Purpose
Planning and budgeting serves four main purposes which are planning and control,
coordination, top management oversight and motivation.
Planning and Control
Managers are often focussed on the short-term horizon, because most of the time is
spend on “fighting fires” or in other words, realizing and reacting to problems. Though,
the focus on short-term activities is not often in the best interest of the company. The
managers should be motivated to engage in long-term, strategic thinking.
Strategic planning serves as a control for managers to think about and adapt to the
future on strategic and operational level. The process of adaptive thinking will
accommodate the comprehension of the organizational strengths, weaknesses,
opportunities and threats and the possible effect of decision-making in advance.
15
This topic of the thesis does not touch the subject of capital budgeting and therefore will only discuss
strategic planning and operational budgeting.
27
The strategic planning will help managers to integrate and control miscellaneous
parts of the organization. It will hold the managers accountable for their actions and for
any incongruity with a plan. Integration and control are a necessity in larger
organizations due to their complexity. Careful planning will ensure that the pieces will fit
the puzzle.
The plans of the strategically and operational decision-making can be amended based on
the results of the outcome between higher and lower level management. This will
increase the effectiveness of planning to make an organization more proactive in
challenging circumstances and it will promote the adaptive thinking for achieving or
maintaining the internal environment alignment (Miller and Cardinal, 1994; Mintzberg,
1994). It will also yield superior returns for an organization if the process is implemented
successfully (Harris and Ogbonna, 2006).
The value of adaptive thinking will not contribute to dysfunctional inertia. However,
bureaucracy can promote dysfunctional inertia by inhibiting underlying organizational
capacity for adaptation (Miller and Cardinal, 1994).
Coordination and communication
Coordination is the communication of information between the several layers of the
organization. Though, this is neither a top-down nor a bottom-up approach. It is a
complex activity which requires top management to communicate the strategic goals and
targets, but equally the participation from business and functional levels. This will
indicate actions, resources and risks, and also providing pragmatic alternatives for
achieving the objectives.
The latter gives managers to express their ideas on creating added value for the
organization, but it also is a valuable shared experience and provides an educational
opportunity. This will generate individual commitment and personal participation (Hax
and Maluf, 1984).
The budget is a tool for the communication of the planned activities in the coming year
and gives quantitative information concerning the plans and limitations. The plans will
not be carried out in full if the organization does not understand the usefulness (De With
and Dijkman, 2008).
Motivation
The amended plans will facilitate top management oversight in order to evaluate and
allocate the resources and finally, to set challenging, manageable targets. The targets
28
are the (short-term) plans and budgets that affect the manager’s motivation as it is used
as a performance evaluator and as a benchmark for their reward.
Hence, strategic planning is important as it supports adaptive thinking, induces
integration and control, creates a common sentiment to achieve the mandated targets
and reduces myopia. The strategic planning process should enable agility to adapt to
changing conditions and refine the strategy. Therefore, strategic planning will positively
affect the firm’s performance. 16
3.4 Budgeting
Almost every firm uses some form of budgeting. It is integrated in the structure of the
organization. The research by Neely et al. (2001) showed that 80% of the firms agree
that the planning and budgeting process does not function properly for several reasons
and it does not add value to the organization. Hope and Fraser (2003a, 2003b) argued
that budgeting is “an annual performance trap” and “as long budgeting dominates
business planning, a self-motivated workforce is a fantasy, however many cutting-edge
tools and techniques a company embraces.”
Even though the compelling words by Hope and Fraser, budgeting is still in use at most
companies. They do not want to radically change their budgetary process as they cannot
afford to lose central strategic control. Alternative budgeting techniques have been
developed to overcome these criticts.
This has lead to the question: do we choose to improve the current budgeting process to
overcome the weaknesses or should we go to a radical different approach which exclaims
the abandonment of the traditional budgeting process? Hence, will it be Better Budgeting
or Beyond Budgeting?
3.4.1 The history of budgeting
Budgeting started in the US in the late 1800’s as a management tool to control the
municipal income and expenses. In 1921, the first national budget was created and
transmitted to the Congress. This was the start of budgeting the public sector.
16
Please note that a variety of endogenous (e.g., size, culture, capital intensity) and exogenous variables
(e.g., industrial turbulence, competitive intensity) can significantly influence the relationship between strategic
planning and performance (Miller and Cardinal, 1994; Blumentritt, 2006).
29
The industrial growth had a big impact on the economy. Economies of scale could
be achieved by standardising the use of raw materials and labour and calculating the
standard cost price. Therefore, the efficacy of budgeting was quickly adopted by the
private sector. Large firms, such as DuPont, General Motors and Siemens developed
budgeting as a method to plan and control their costs and cash flow.
Later, DuPont used budgeting as a tool to plan, control and motivate managers. DuPont
linked rewards to the budget which also indicated the relationship between the budget
and the managerial performance.
Twenty years after the first governmental budget, nearly half of all well established firms
in the US introduced budgetary control. The use of budgeting was adopted quickly.
Camillus and Grant (1980, p.370) argued: “from the 1950s onward any large-sized
corporation without any formal annual budget would, without hesitation, be classified as
poorly managed.”
The course of budgeting was set into a manner of planning and control. In the early
stage of budgeting, control was more important than planning.
Planning and allocation of the resources were only conducted by the senior management
that had a great understanding of the business and was only set out for the budgetary
period. The planning was afterwards cascaded to the middle-managers who acted as the
controllers of the plans and finally, the plans were implemented by the divisional
managers.
This was typical for the industrial age (1920s-1970s). Capital was the primary strategic
resource and the accounting systems were driven by productivity and volume. The
market and competitors were known and the organization was aligned to this process.
Accordingly, the organization had a multidivisional structure, the M-form (Hope and
Fraser, 1997).
30
Senior
Management
Middle
Managers
Division
Managers
Division
Managers
Middle
Managers
Division
Managers
Division
Managers
Middle
Managers
Division
Managers
Figure 3.3 The multidivisional structure (M-form)
The M-form helped to shift assets and accountability to the divisions and the top-down
approach was used to allocate and control the resources. The M-form was established to
support the rapid growth in new products and markets and reduce the complexity of
holding multiple strategies (Hope and Fraser, 1997; Frow et al., 2010).
It is obvious that the culture during the industrial age did not allow decentralization and
empowerment. It is a culture with a rigid form of vertical integration, divisionalization
and command-and-control orientation (Simons, 1995; Hope and Fraser, 1997; Otley,
2003).
The importance of planning has increased rapidly over the past years. This can be
attributed to the rapid change in the business environment. The industries have become
more competitive and less predictable, the consumer and employees’ needs have
increased in demands. It instigated firms to consider the long term instead of short term.
The emphasis is now on speed, service, quality and innovation. Capital is no
longer the main strategic resource, but is substituted by a combination of information,
knowledge and intellectual capital.17 This made the industrial age not lenient enough for
these changes due to its bureaucracy and unresponsiveness to organizational needs.
And thus, the industrial age changed to the information age (Hope and Fraser, 1997).
3.4.2 Budget functionality
The long term thinking is the strategy that is implemented in the year-on-year plans and
quantified in the annual budgets. The literature gives many descriptions to capture the
scope of budgeting. Horngren et al (2000, p. 883) define the budget as: “A quantitative
17
Intellectual capital includes competent managers, skilled knowledge workers, effective systems, loyal
customer and strong brands.
31
expression of a proposed plan of action by management for a future time period and is
an aid to the coordination and implementation of the plan”. Zimmerman (2000, p. 238)
added: “Budgets are an integral part of the organization’s performance evaluation and
decision rights partitioning system”. The most comprehensive definition is given by Shim
(2009, p.1):
“A budget is defined as the formal expression of plans, goals, and objectives
of management that covers all aspects of operations for a designated time
period. The budget is a tool providing targets and direction. Budgets provide
control over the immediate environment, help to master the financial aspects
of the job and department, and solve problems before they occur. Budgets
focus on the importance of evaluating alternative actions before decisions
actually are implemented.
A budget is a financial plan to control future operations and results. It is
needed to operate effectively and efficiently. Budgeting, when used
effectively, is a technique resulting in systematic, productive management.
Budgeting facilitates control and communication and also provides motivation
to employees.”
This makes a budget a powerful management control tool which has become a fixed part
of the organization. The budget is also referred to as ‘a fixed performance contract’. The
continuous development made budgeting to become a functional instrument. Van Horn
(2003, p. 25) argued that budgeting is:

A system of authorization;

A means of forecasting and planning;

A channel of communication and coordination;

A motivational device;

A means of performance evaluation, as well as providing basis for decision
making;

Task setting;

An integration instrument;18

An instrument for risk control.
The budgetary functionalities can be summarized into the three goals. The budget is to
provide:
18
Van Horn (2003) elaborated that budgeting is an integration instrument for management control as it forces
all processes and departments to be geared to one another, e.g. production department is linked with the
procurement, HR and sales department and is also linked to the cash budget.
32

Strategic control: To assure that the organizational activities are being
developed as proposed by the senior management;

Financial control: To assure that the activities meet the demands of the
shareholder;

Risk control: To assure that the development of the organizational activities are
within the boundaries of the possibilities and risk.
Control refers to the continuous cycle of monitoring the progress and taking appropriate,
corrective, actions to achieve the budgeted performance.
Strategic control has a primarily external focus; managers examine the industry and the
firm’s position. The primary action is to compete with the competition using the
information on the strengths, weaknesses, opportunities and threats.
Financial and risk control have internal focus and can be integrated in the scope
of management control. These are mainly managerial decisions on how to align the
organization to the organizational goals, i.e., how can we influence employees’ behaviour
to create goal congruence. The quantification of goal congruence (i.e., achieving targets)
works as a motivation when the manager is rewarded based on the achievements.
Although, the effectiveness can only be guaranteed when the budget is (de Waal, 2004):

Impartial: only organizational goals should have priority (not third party);

Formed in collaboration: all available knowledge and experience should be used
to formulate the budget;

Carried across the entire organization: everyone should understand and support
the budget;

Reasonable: the budgets should be challenging, but attainable.
3.4.3 Perspectives on budgeting and evaluative style
The increasing importance of budgeting has now become one of the most extensively
researched topics in management accounting. Budgeting has mostly been researched in
the theoretical accounting fields of economics, psychology and sociology and relates to
cost accounting, responsibility accounting, performance measurement and
compensation. Hence, budgeting gives the opportunity to research the choice between
the theories of different perspectives or the compatibility of the theories of different
perspectives. This validates the comprehensiveness of the explanations into the causes
and effects of budgeting (Covaleski et al., 2003).
33
Economical perspective
The economical perspective views budgeting as a part of the management control
systems, because budgets coordinate and plan activities and provide incentives. The
economical perspective focuses on “equilibrium budgeting arrangements that maximize
the combined interest of organization owners and managers” (Covaleski et al., 2003, p.
10). It provides to find the balance between decision-making and available information
in order to maximize the organizational objectives. The research investigates the use of
budgets in relation to employee demands, uncertainties and information asymmetry.
The main scope relates the owner-employee relation. The owner and employee
are presumed to display perfect rational behaviour whose decisions are to maximize the
organizational objectives.
Though, the equilibrium state is hardly ever achieved. The organizational position is a
strategic interaction between owner and employee. Individuals have different
preferences due to uncertainties and do not share the available information with the
owner (information asymmetry) and therefore primarily base decisions in response to
self-interest (i.e., the agency theory).
Managers should create goal congruence by motivating employees to work in the
interest of the organization and to communicate all information. This method will aid to
control the business and attain the strategic objectives. Simons (1995) describes the
communication and interaction (debate and dialogue) between owner and employee (in
order to control) of interactive control systems.
Psychological perspective
The psychological perspective researches the influence of budgeting on the individuals’
mental state, behaviour (e.g., communication, effort, gaming) and performance
(Covaleski et al., 2003).
The psychological research has made two assumptions. The first assumption describes
that behaviour is limitedly rational and satisficing. That is, individuals do not necessarily
maximize their value due to insufficient cognitive resources (bounded rationality) and
therefore try to satisfy their means to what is sufficient.19 The other assumption
describes that individual want to create a mental consistency, but individuals are often in
an imbalanced position due to the bounded rationality and satisficing.
19
Simons (1956) coined the word “satisfice” by combining the verbs “to satisfy” and “to suffice”. For more
information, please review: Simon, H. A. (1956); "Rational choice and the structure of the environment";
Psychological Review, Vol. 63, No. 2; pp. 129-138.
34
The available information for budgetary decision-making can exceed the individuals’
limited cognitive capacity. The individual will not assess all information about all
alternatives in order to optimize the decision, but as a result of the bounded rationality
and satisficing will instead often choose the first choice when it provides benefits above
the satisficing standard. Therefore, the selected alternative does not represent the
optimal solution for the organization, but it is a satisfying solution for the individual.
Though, the aspired standard tends to adjust to the circumstances. Mental tension (i.e.,
cognitive inconsistency) is avoided when individuals adjust their preferences to feel
better about their belief of the achievability of the outcomes.
The individual strives for a mental balance, but can become imbalanced (inconsistency)
due to mental tension (e.g., stress) which in effect leads to dysfunctional behaviour.
Sociological perspective
According to Covaleski et al. (2003, p. 29), the sociological perspective on budgeting
“explicitly addresses the tension in aligning individuals’ goals and behaviours with the
organizational goals and objectives, as well as the role of individuals in shaping the
organizational goals and objectives, through the budgeting process.” It focuses on how
goal congruence between e.g., employee and employer or subunits can be achieved.
The contingency and institutional theory are major research streams in the field of
sociology. Both theories relate to the organizational level.
The contingency theory assumes that it is complicated to align the organizational
goals with the individual behaviour, as the latter is boundedly rational and satisficing.
Incongruity can arise when errors occur in the organizational structure and process and
in response, individual behaviour can, unintentionally, change.
The institutional theory argues that individuals act for their self-interest, because
the individual is boundedly rational. The tension is throughout the whole budgeting
process (planning, control and bargaining).
The perspectives emphasize the individual behaviour and how tension arises with
conflicting interests. It shows that the organization influences the behaviour and
therefore also the managerial style of evaluation.
Evaluative style
The strategy determines in an indirect way the manager’s evaluative style as the
attainment of the goals are based on the strategic plan.
35
Budgets are a derivative of the strategic plan. Budgets facilitate decision-making by
improving a) coordination for the planned activities across the organization and b) the
share of knowledge on local condition (via participative budgeting). Secondly, budgets
influence decision-making because the play a major role in performance evaluation and
rewards (Covaleski et al., 2003). Therefore, budgets affect the managerial (dys-)
functional behaviour (Otley, 1978).
The measurement of the management performance can be distinguished into three
budget styles (de Waal, 2006; de With and Dijkman, 2008):

Budget constrained style;

Profit conscious style;

Non-accounting style.
The budget constrained style is aimed at tight budgetary control in pursuance of the
realization of the short term related goals. It is primarily focused on accounting
measures. The most notable weaknesses of budgeting are often encountered in the
budget constrained style.
The profit conscious style focuses primarily on the general effectiveness of the business
unit’s result regarding the longer term. The evaluation is based budgetary information,
but the budget functions more as a business guideline. Any overspending is evaluated
with regard to the long term objectives.20
The non-accounting style does not focus a great deal on the budget; in fact it plays a
minor role in the managerial evaluation. The evaluation is primarily focused on nonfinancial information.
3.4.4 Target setting and incentives
In an empowered organization, the organizational participants are asked to bear more
accountability. Incentives are a must when the organizational participants take risks and
should be rewarded for over-performance.
Incentives are monetary incentives as well as non-monetary incentives, e.g. praise,
recognition and autonomy (Merchant and van der Stede, 2007, p. xiii). Incentives
stimulate the individual efforts for initiative and opportunity seeking. The definition of
20
De With and Dijkman’s research showed that 90,9% of the respondents did performance measurement in
The Netherlands and is evaluated against the long term goals. This refers to the profit conscious style.
36
the organizational goals provides focus to the area in which the opportunity seeking
should be done.
The diagnostic control systems incentives are linked to the output measures
defined by the management. The output measures thrive on the subordinate’s
motivation, because the subordinate will be rewarded when attaining their own target.
Though, the target setting will only work when the measures are objective. Objectivity
provides direction and fairness which consequently motivate subordinates for the
attainment of the targets.
Fairness is obtained when managers let subordinates participate in and influence on the
process of target setting. The decision is, however, the manager’s responsibility.
The trade-off has several reasons. Firstly, subordinates are more likely to understand the
level of the target and are therefore more likely to accept the target. This will create
commitment to attain the target.
Secondly, it is an information-sharing dialogue. On one hand, the subordinate will
discuss the opportunities and on the other hand, the manager will discuss the corporate
resources and preferences. The dialogue can provide valuable information on corporate
prioritization and limitations for senior managers.
Thirdly, it clarifies expectations and encourages the organizational participants to think
about the most efficient and effective way of achieving the target.
Dysfunctional behaviour
Incentives can make organizational participants self-interested and try to attain easily
achievable targets to secure their rewards. This is known as dysfunctional behaviour.
Typical comments associated with dysfunctional behaviour are e.g., “Always negotiate
the lowest targets and the highest rewards”, “Always make the bonus, whatever it takes”
or “Always meet the numbers, never beat them” (Hope and Fraser, 2003b, pp. 12-13).
They will try to create slack in the targets or game the system.
The former firstly induces less negative variances when the actual performance
benchmarked against the lower standard and therefore decreases the risk of scrutiny.
Secondly, future expectations are tempered. The latter means that actions are taken to
either make their current year’s performance look more favorable whilst the actions have
no positive effect on the real performance or to move actual results into the subsequent
measuring period when it is clear that this year’s targets will not be met.
Game playing can be exercised by several means (Simons, 1995, Hansen et al., 2003;
Merchant and van der Stede, 2007):
37

Smoothing: changing time and flow of data without changing the transactions
being measured. Example: changing accounting methods such as accounting
accruals or postponing preventative costs such as maintenance costs.

Biasing: only reflect favorable information. Example: only show achieved targets.

Illegal acts: violation of rules and/or laws. Example: violation of codes of
conduct.
Dysfunctional behaviour is an example of the principal-agent theory.
The principal-agent theory is known as the inability to motivate one party to act on
behalf of the other party. The principal-agent theory arises when the employer, the
principal (P), remunerates the employee, the agent (A), and in return the agent
performs acts in the interest of the principal.
Figure 3.4 The Principal-Agent Theory
The agent’s self-interest can cause dysfunctional behaviour in order to achieve the
incentives. The agent has (more) relevant information about their performance which is
not shared with the principal and thus creates an imbalance. This is known as
information asymmetry.
Achievability
Bonus incentives are predominantly tied to short-term related goals (e.g. budgets). The
targets should be “tight but achievable” or in other words, to set a challenging
performance target to perform at a higher level which leads to “innovation rather than
incrementalism” (Merchant and Manzoni, 1989; Merchant and van der Stede, 2007).
If targets are easily achieved, subordinates will be less motivated to work hard as
the targets can be attained with a minimum of effort, creativity and perseverance. On
38
the other hand, unrealistic targets will lead to discouragement and conclusively the
subordinate will lose commitment and exert no effort to attain the targets.
Challenging, but attainable will lead to a higher motivated workforce with an increased
commitment (winner’s mentality) which provides realistic forecasted financial projections
and reduce dysfunctional behaviour. Objective measures and participation will assure
that the risk of dysfunctional behaviour is minimized.
3.4.5 The impediments of the budgeting process
Budgets survive, because they are deeply imbedded throughout the organization
(Hansen et al., 2003) and the budgeting process encompasses all organizational
activities (Otley, 1999) which is centrally coordinated (Neely et al., 2001).
Many researches have argued that budgeting does not satisfy the organizational need for
planning and control (Hope and Fraser, 1997, 2003a, 2003b; Ekholm and Wallin, 2000;
Marcino, 2000; Jensen 2001).
Neely et al. (2001) summarized the twelve most frequently cited criticisms. These
criticisms can be placed into the following categories (Neely et al., 2003):
Competitive strategy:
1. Budgets are rarely strategically focused and often contradictory.
Budgets make managers try to achieve the short-term related goals without looking at
how to beat the competitors and generate value for the organization and to increase
customer satisfaction. The myopia makes strategic goals to become less relevant, even
when it is an indicator on the long term business health.
2. Budgets concentrate on cost reduction and not on value creation.
A study by Lazere (1998)21 showed that only 27% of companies integrate strategies and
only 22% have forecasts including corrective action plans. Budgets fail to measure and
suppress growth of future cash flows’ key drivers and shareholder value.
The budget’s aim for cost reduction may become deadlocked as the budgets create an
upper and a lower bound for the expenses. The aim becomes to fully spend the budget in
order to get the same budget for next year (de Waal, 2004).
21
Lazere, C. (1998); All together now – why you must link budgeting and forecasting to planning and
performance; CFO Magazine; pp. 28-36.
39
3. Budgets constrain responsiveness and flexibility and are often a barrier to
change.
The budget is a fixed performance contract and all attention is aimed at the achievement
of the budget. There is hardly any possibility to amend the budget to reflect the
changing conditions. The fixed performance contract makes incentives to out-perform
the budget fully miss their purpose.
The budget becomes a barrier for continuous improvement and success, because the
organization is focused on how to beat the budget instead of how to maximize the
potential.
4. Budgets add little value, especially the time required to prepare them.
A study by Trapp (1999) found that the financial department spends more than 50% of
the time on the budgeting process and only 27% on analysing the budget.
The budget becomes an annual bureaucratic procedure rather than a method to
stimulate creative thinking on how the organization will generate value.
Business process:
5. Budgets are time-consuming and costly to put together.
The budgetary process is too rigid and the management focuses less on strategic
queries. In many organizations the budgeting process consumes around 20-30% of the
management’s time.
6. Budgets are developed and updated too infrequently, usually annually.
Budgets are a yearly one-off exercise and are often not changed during that year. The
changing circumstances can make a budget irrelevant after one month.
7. Budgets are based on unsupported assumptions and guess-work.
Budgets are often determined by senior managers where they will in- (i.e., last-year
plus) or decrease next year’s budget by a fixed percentage (i.e., across-the-board cuts).
It is not a well-considered process of assumptions which can be validated by the in- or
external factors. This will limit the possibility to perform a variance analysis and
eventually becomes disruptive for controlling the organization.
8. Budgets encourage ‘gaming’ and perverse behaviours.
The primary focus on the annual performance creates a mismatch between the
operational and strategic decisions that highlight non-financial variables (Hansen et al.,
2003). Accordingly, participants do not commit to the organizational goals, do not feel
accountable and as a result are only self-interested during the budgeting process. The
40
incentives encourage participants to create budgetary slack or other games in order to
attain the incentives. This will deter the participants for creating added value for the
organization.
Organization capacity:
9. Budgets strengthen vertical command and control.
A budget is often the mandate by senior managers in order to plan and control all
resources and activities in the organization. The budgetary process becomes a tool to
exercise the mandate and consequently discourages employees in innovative thinking
rather than to stimulate them.
10. Budgets do not reflect the emerging network structures that organizations
are adopting.
Budgets often remain a top-down approach which restrains empowerment and thus,
opportunity seeking promotes centralized control in the current organization’s ability.
11. Budgets reinforce departmental barriers rather than encourage knowledge
sharing.
The participants will try to achieve their own budgets and targets and will keep useful
information to themselves as it may harm the pursuit of their own targets. There is
hardly any incentive for knowledge-sharing in order to achieve synergies.
12. Budgets make people feel undervalued.
Budgeting is a top-down approach and prevents decentralization. Budgets see employees
as means of production rather than intellectual capital. Therefore, budgets restrict the
opportunity seeking in contribution for the organization.
It has been suggested that abandoning budgets can attract qualitatively good managers
who value empowerment and challenging targets.
3.5 Better Budgeting
Nowadays, budgets still exist. They are integrated in the organization and work as a
management planning and control tool in many stable industries. It helps to remotely
control the corporate business and organization. And for some, budgets are an aid in
cost price calculations. Therefore, budgets are still of importance.
Due to the rapid changing environment, it is obvious that budgets do not function
efficient- and effectively as expected under different circumstances. This commands
change in the way of planning and control. Hence, the organization will need to apply
appropriate strategic planning, improve the performance management process, and
41
identify and manage key drivers of shareholder value (Neely et al, 2003; de Waal,
2004). Better budgeting will aid in:

Create more efficiency in control processes;

Accelerate current plan- and budgeting processes;

Reduce the amount of detail in planning activities;

Formulate moving average forecast instead of yearly planning;

More non-financial KPI’s in operational planning;

Goal setting against relative external standards;

Clear top-down standards with decentralized operational planning;

Use of integrated planning- and performance software systems.
There are several alternatives developed and the following alternatives will be discussed:
1) Activity Based Budgeting, 2) Zero-based Budgeting, 3) Rolling Budgets, 4) Profit
Planning and 5) Beyond Budgeting.
1. Activity based budgeting
Activity based budgeting has been elaborated on the concept of Activity Based Costing.
The methodology of activity based budgeting looks at all activities (instead of products)
to determine the capacity where afterwards the corporate resources, activities and costs
are allocated to an activity centre and cost driver. The costs depend on an appropriate
cost driver within each activity.22
Activity based budgeting consists of two elements: one element focuses on the market
strategy (external) and the other element focuses on the operational strategy (internal).
The former determines the expected volumes and price of the product- or services. The
organization will allocate resources based on the expectations. The latter determines the
available capacity for providing the goods or services. It assigns available activities
based on available means at a normal capacity. The core of the operational strategy is
products and activities. Activity based budgeting is an effective means to align supply
and demand.
Activity based budgeting has been developed, because it gives information on production
plans which are in need of new capacity in order to cover the indirect activities, provides
information on expected costs and tries to hold managers accountable for costs incurred
in their activity centre. The organization would get more control on their cost structure
than the traditional budgeting process.
22
Example: a machine is a cost driver for the production department.
42
In practice, activity based budgeting is not widely used. Most organizations use the
yearly budgeting process which is mainly driven by interdependencies, exceptions, and
negotiations and therefore cannot adopt any other form of budgeting. There are also
other causes that have lead to the rare use of activity based budgeting.
Activity based budgeting requires cultural and organizational change, because it is based
decisions related to indicator and activities, and not on hierarchical achievements. The
process requires a revision on responsibility and incentives as it is now based on activity
centres.
Activity based budgeting often requires a repetitive process for determining the correct
KPI’s. KPI’s are necessary as it let organizations better control their processes and
activities, but the KPI’s blur the link with the strategic plan (although activity based
budgeting will help to create more focus on strategy).
A necessity for activity based budgeting to work is sufficient information on processes
and activities which is time and money-consuming.
The nature of the organization and the product/service determines whether the
organization is ready for activity based budgeting. It becomes difficult to implement
when an activity cannot be allocated to a product or service or when the implementation
of the process is difficult (Van Ekelen and Baerts, 2006).
2. Zero-based budgeting
In common practice, budgets contain last year’s figures plus incremental increase, but
this leads to inflated budgets with higher costs. Zero-based budgeting is a technique that
budgets from the start again, i.e., it takes no information on previous year(s) into
account.
The necessity of all expenses is discussed, but past decisions on corporate resources and
human capital are not part of the discussion. Zero-based budgeting determines the
justification of the spending in contrast of (in-) direct value. This prevents that any
inaccuracies and inefficiencies are part of the new budget.
Each department should indicate the purpose and output of the departmental activities
and the costs incurred. This state is known as the zero base (Fransen and Schepers,
2004; Groot, 2007).
Zero-based budgeting has proved its effectiveness in cutting unnecessary costs, but it is
time-consuming and is in no contrast to the return on investment.23 At most, it can be
23
Zero-based budgeting is not very effective in The Netherlands, because labor is only moderate variable due
to legislation and Collective Labour Agreements (CAO’s).
43
used as support the reorientation of the organization every three to five years. Zerobased budgeting is therefore hardly used for cost control (Groot, 2007).
3. Rolling Budgets (or rolling forecasts)
The traditional budget covers a specific period of time, often a year. A rolling budget is
the budget (or plan), but it is updated continuously and frequently – often every month
or quarter – that it still reflects the same time horizon as the original budget. Due to the
frequent updates, the changing circumstances are reflected in the rolling budgets.
The use of rolling budgets can be beneficial for several reasons. Rolling budgets will aid
when future activities or costs cannot be accurately determined and it can integrate
strategic perspectives.24 It provides for a more accurate forecast.
Secondly, the frequent updates make rolling budgets a less time-consuming activity as
the budgeting activities are spread over the year. It becomes part of the routine and it
only requires time for the update of the new budgeted period.
Thirdly, managers can be more in control as they can spend their access time on
decision-making rather than creating, analysing and deciding in a short term as it is the
case when the traditional budgeting is made. This can result in a positive attitude
towards budgeting and could lead to a better effort and result.
Finally, rolling budgets can help to mitigate myopia. The manager is not focused on the
short term results and consequently immobilizes the decision-making ability, but keeps
looking forward.
Rolling budgets perform as an information tool, used for resource allocation,
communication, planning and control and not as an incentive tool. The incentive role
either remains with the budget or is done by other mechanisms (e.g., Balanced
Scorecard, relative internal performance benchmark such as ‘league tables’).
A combination with the incentive tools can procreate into short-term profit maximization
and long-term value creation that is homogenous to the strategy. Disconnecting rolling
budgets to incentives will also lead to a decrease in dysfunctional behaviour.
4. Profit Planning
Profit planning is much alike budgeting only profit planning is determined for profit
centres within an organization for short and long term prognoses. The profit plan will
give an estimate on expected revenues and expenses. It concludes if the organization
24
Please note that rolling budgets does not force managers to think strategically, but is more consistent with
the strategic perspective than the traditional budget.
44
creates enough cash flow, economic value added and financial means for investments
(de Waal, 2004).
Profit planning is hardly used in practice, because there is little evidence that it actually
simplifies the traditional process.
These alternatives have a distinct relationship with the traditional budget, but Beyond
Budgeting advocates a different approach. Budgets should be abandoned.
3.6 Beyond Budgeting
“Not to beat around the bush, but the budgeting process at most companies has
to be the most ineffective practice in management. It sucks the energy, time, fun
and big dreams out of an organization. It hides opportunity and stunts growth. It
brings out the most unproductive behaviours in an organization, from sandbagging to settling mediocrity. In fact, when companies win, in most cases it is despite their budgets, not because of them. And yet, as with strategy formulation,
companies sink countless hours into writing budgets. What a waste!”
Jack Welch,
Former CEO General Electric
In 1998, thirty-three, mainly European firms joined the Beyond Budgeting
Round Table (BBRT) to work on alternatives for the traditional budgeting
process.
According to the BBRT, budgeting is costly, time-consuming and encourages
dysfunctional behaviour when ‘managed by the numbers’. Budgets are turned
into fixed performance contracts without reference to an external source that
force all managers to attain their targets, even when variables are out of their
control (manager’s desire versus subordinate’s feasibility). This is detrimental
and therefore leads to unethical behaviour. Budgets also provide poor value.
They do not address any competitive variables. Conclusively, Hope and Fraser
(2003a, 2003b) argued that budgets are a ‘barrier to change’. Hope and Fraser
also argued that Activity Based Budgeting and Zero-based Budgeting are not
beneficial if management structure and style are not coherent (Neely et al.,
2001).
Based on the literature and practical research, BBRT concluded that budgeting
can be abandoned and management should change their focus in order to have
a good functioning organization. The change in focus meant that managers
45
should vision that subordinates are intellectual capital and not means of
production.
The BBRT called the alternative Beyond Budgeting. Hope and Fraser
(2003b) argued that Beyond Budgeting is “not just another tool”. It provides an
alternative general management model based on the managerial decisionmaking needs.
Beyond Budgeting proposes to eliminate the fixed performance contracts and to
replace these contracts with performance evaluations based on relative
performance contracts with hindsight (Hansen et al., 2003).
The relative performance element uses budget targets with financial and nonfinancial measures which are benchmarked internally, i.e., versus other
departments or externally, i.e., versus competitors. The non-financial measures
will ensure alignment with strategic goals. The benchmarked targets are likely
to augment fairness and accuracy of the performance evaluation and reduce
dysfunctional behaviour and motivational problems. The target becomes
challenging, but achievable when competing against an appropriate standard.
The hindsight element defines that targets will be adjusted looking in
retrospect and should incorporate the differentiating circumstances that
occurred during that period. Rewards should be based subjective performance
evaluations and focus on group performance rather than individual
performance. The aim is to promote teamwork and encourage strategic
initiatives. The latter can capture opportunities that are not comprehended in
the benchmarked target. This will be, on longer term, favourable for the
organization (Neely et al., 2001; Hansen et al., 2003).
Beyond Budgeting model is set for a ‘behaviour based’ instead of often used
‘managed-by-numbers’. It requires a flexible organizational structure which can
be achieved by the devolution of decision-making and empowerment, and an
adaptive performance management process.
In the past twelve years, BBRT have studied organizations that abandoned
command-and-control structure and have adopted similar principles. These
principles redefine the Beyond Budgeting model.25
The first six principles provide a framework for leadership by creating the
decentralization of accountability to front-line teams. This enables them to
25
http://www.bbrt.org/beyond-budgeting/bb-principles.html
46
quickly respond to opportunities and therefore make them accountable for
continuous internal and external improvements and relative performance.
The second six principles provide a process framework for adaptive
performance management process that enables front-line teams to become
more responsive to business environment and customer demands. 26
Governance and transparency
1.
Values: Bind people to a common cause; not a central plan.
2.
Governance: Govern through shared values and sound judgement; not
detailed rules and regulations.
3.
Transparency: Make information open and transparent; don't restrict and
control it.
Accountable teams
4.
Teams: Organize around a seamless network of accountable teams; not
centralized functions.
5.
Trust: Trust teams to regulate their performance; don't micro-manage
them.
6.
Accountability: Base accountability on holistic criteria and peer reviews; not
on hierarchical relationships.
Goals and Rewards
7.
Goals: Encourage teams to set ambitious goals; don't turn goals into fixed contracts.
8.
Rewards: Base rewards on relative performance; not on fixed targets.
Planning and controls
9.
Planning: Make planning a continuous and inclusive process; not a top-down annual
event.
10. Coordination: Coordinate interactions dynamically; not through annual budgets.
11. Resources: Make resources available just-in-time; not just-in-case.
12. Controls: Base controls on fast, frequent feedback; not budget variances.
3.7 Conclusion
A business is healthy when it is under control. Good management control is essential for
an organization to perform. It should be aimed at the future and directed towards the
organizational goals.
26
Please see appendix C for an overview of principles of the new performance contract and the devolved
organization.
47
The control is managed via a management control systems. It evaluates the organization
for its long-term objectives via the strategic plan and incorporates the short-term
objectives in the budget. This makes the budget inextricably bound up with the strategic
plan. Hence, the budget evaluates the performance and signals whether adjustments are
needed. It creates a constant monitoring of the organization.
The budget has several other functionalities than planning and control, e.g. it is a
communication and coordination tool, a motivational device and task setting. The fact
that the budget touches the field of behaviour has lead to research in economical,
psychological and sociological fields.
The researched fields showed that all can be intertwined. The information can be kept for
personal gains (information asymmetry) or how behaviour and tension in the budgetary
process can conflict. This is often regarded as dysfunctional behaviour.
Dysfunctional behaviour can be the effect of evaluative style and target setting.
Evaluation can be fully aimed at the budget (budget constrained style), regards the long
term health of the organization in which the budget plays a moderate role (profit
conscious style) or it can be inferior where the evaluation is based on non-financial
measure and therefore the budget plays a minor role.
Behaviour is rewarded when certain achievements are made. The budget becomes the
target. Incentives are rewarded when the budget is attained. The matter on how the
target is achievement can have several implications. It gives the possibility for
dysfunctional behaviour which most commonly appears as creating slack and budget
gaming. Slack is creating better attainable targets and budget gaming is creatively
influencing the results (smoothing, biasing or by illegal act).
The budget also has its weaknesses and relates to the 1) competitive strategy as it is
contradictory and not strategically focused, it is a barrier to change and constrain
responsiveness and flexibility, concentrates on cost reduction rather than value creating
and adds little value due the lack of analysis, 2) business process, it is time-consuming,
quickly out-of-date, it is based on unsupported assumptions and encourage dysfunctional
behaviour, and 3) organizational capacity as it strengthens vertical command-andcontrol, do not reflect emerging network structures, reinforce departmental barriers and
make people feel undervalued.
There have been several alternative budgeting techniques developed to overcome these
weaknesses. The most reflected alternatives are: activity based budgeting, zero-based
budgeting, rolling budget, profit planning and beyond budgeting.
48
Most alternatives serve the common purpose as the traditional budgeting process,
namely to plan and control. Beyond budgeting, however, advocates for the abandonment
of the budget. According to Beyond Budgeting, the budget is a fixed performance
contract whilst it should be a benchmark for relative performance and restrains a
devolved organization. Every organizational participant should be empowered and
become more responsible for their actions instead of the central control that the budget
executes.
49
4 Analysis: The construct of the organization
4.1 Introduction
This chapter will look at the Marsh’s budgetary process and what improvements can be
made in order to increase the reliance of the budget in the organization.
Chapter 4.2 will discuss the weaknesses found in the budgetary process according to the
report by Neely at el. (2001) and the effects of these weaknesses on the organization. It
will follow the outcome from the first survey. The survey has been conducted amongst
the participants (n = 29) in the budgetary process to analyse the weaknesses. Chapter
4.3 will elaborate on these impediments by measuring them against the alternative
budgeting techniques. The response on the first survey will rank the weaknesses. The
second survey (n = 3) and interviews have been conducted amongst the Executive
Committee to analyse whether it is possible to go to Beyond Budgeting. The outcome is
important as it also gives a base on how other alternatives can be successfully managed.
Chapter 4.4 will accommodate a set of controls in the budgetary process.
Chapter 4.5 will conclude this chapter by looking at the weaknesses in the budgetary
process and added value of the alternatives and the controls.
4.2 Organizational process and problems
Marsh has become an incoherent organization with self-interested organizational
participants who are insufficiently steered to work towards the organizational goals.
Their inability to comply with the budget has far reaching effects on the organization.
The unrealistic targets make it more difficult to create a motivated workforce. Marsh’s
performance culture is lagging and this is noted throughout the organization itself.
A survey was conducted containing 25 questions about the twelve most cited
weaknesses by Neely et al. (2001) to expose the weaknesses that are currently in
Marsh’s budgetary process.27
1. Budgets are rarely strategically focused and often contradictory.
Marsh’s budget has been agreed for 2011-2013. Though, 2012 and 2013 are set as
estimates for profitability. There is no detailed plan on how to achieve the profitability
(i.e., via revenue growth and/or cost control). Hence, the scope is mainly focused on the
coming year.
27
Please note that the percentages contain rounding errors. Therefore, the sum of the choices might show a
slight deviation from 100%.
50
This is mainly due to the importance of the current year revenue and profits. The myopic
view creates an imbalance towards the longer term business health. The corrective
actions to enhance the short term goals are very time-consuming which leaves
insufficient time for the organization to create longer term opportunities.
The statement that the budget is rarely strategically focused and contradicts to the long
term perspective corroborates the outcome of the survey below.28
The achievement of the fixed short-term related goals is a priority without contemplating
what would create added value for the organization and accomplish a higher customer
satisfaction.
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
Strongly
agree
The budget lets me to aim on customer
service.
20,7%
41,4%
13,8%
13,8%
0,0%
The budget allows me to create added value
for Marsh (e.g., obtain higher revenue than
budgeted).
13,8%
27,6%
37,9%
10,3%
3,4%
The budget allows me to act on a longer term
(i.e., longer than one year).
20,7%
37,9%
17,2%
17,2%
0,0%
n = 29
Figure 4.1 Statement on the strategic focus
2. Budgets concentrate on cost reduction and not on value creation.
Marsh uses forecasts to reflect current (market) conditions and to steer towards their
targets. Though, the forecast model does not follow the strategic plan and it does not
take all corrective actions into account due to the uncertainty of the achievement of
those actions.
The myopia leads to cost control in order to attain the targeted NOI. It becomes more
fixated when the targeted revenue is insufficiently achieved. Budget cuts make
managers are incommensurately rewarded for spending less than expected. Therefore,
the aim for cost reduction misses its target.
3. Budgets constrain responsiveness and flexibility and are often a barrier to
change.
The budget is a fixed performance contract for the full year. There are no possibilities to
amend the budget to reflect the market conditions, because firstly the budget is linked to
the incentives. The inability to change effectively mitigates the incentive to outperform
the budget. Secondly, EMEA looks at the performance based on the given budget and
28
Please note that respectively 10,3%, 6,9% and 6,9% of the respondents have chosen “not applicable” at
question 1,2 and 3 due to the nature of their responsibilities.
51
does not allow for any changes in the budget (unless they are substantiated and fall in
the first quarter). Therefore, the aim becomes to beat the budget instead of
outperforming the market and competitors. This restrains the possibility to improve.
The majority of the respondents disagree that budget is a method to exploit continuous
improvement and success which is mainly driven by the response of sales / account
managers and brokers. It is interesting that the view of Finance (e.g., Executive
Committee, Finance department) differs as 13,8% (strongly) agrees.
n = 29
The budget allows me to carry out changes
when these occur.
Strongly
disagree
Disagree
6,9%
37,9%
Not agree,
not
disagree
17,2%
Agree
Strongly
agree
34,5%
3,4%
Figure 4.2 Statement on the responsiveness and flexibility of the budget
4. Budgets add little value, especially the time required to prepare them.
Marsh’s budgetary process starts in April when the Finance department decides on how
to budget will be implemented. In the previous years, several methods were handled; it
was either based on policy level or account level. The analytics is impacted as it requires
detailed analyses per (sub-) segment. In order to budget on lower (or lowest) level
demands more time to prepare for each segment and thus less time for the Finance
department to analyze the budget. Secondly, the time constraint makes the relevance of
the budget to become more saturated within the organization and the goal to stimulate
creative thinking to generate value is undermined.
The respondents agree that the budgetary process takes too much time and it affects
their other responsibilities during the budgetary process.
n = 29
The budgetary process gives me enough time to
evaluate the budget.
Strongly
disagree
Disagree
6,9%
55,2%
Not agree, Agree
not
disagree
20,7%
17,2%
Strongly
agree
0,0%
Figure 4.3 Statement on the budget’s time frame
5. Budgets are time-consuming and costly to put together.
The budgetary process is time-consuming for the management in which from August to
October evolves around the preparation of the budget. The management agree that they
do not have sufficient time to focus on strategic queries that are eminently important or
being able to quickly anticipate to recurring customer issues.
52
n = 29
The budgetary process is time-consuming and
therefore I have insufficient time for other
business related activities.
Strongly
disagree
Disagree
0,0%
24,1%
Not agree, Agree
not
disagree
27,6%
34,5%
Strongly
agree
13,8%
Figure 4.4 Statement on the budgetary time frame
6. Budgets are developed and updated too infrequently, usually annually.
The budget is a static mechanism that is not updated during the year. It is a one-off
exercise to determine next year’s performance which reflects current market conditions.
The changes that occur after the budget has been set and can potentially impact the
budget are not taken up in the budget. It is acknowledged by the management that
failing to address these changes can make a budget irrelevant before the year has even
started.
7. Budgets are based on unsupported assumptions and guess-work.
The CSR budget is based on last year’s CSR plus an addition for New and Expanded
Business and is insufficiently taking the strategic plan into consideration.
Each (sub-) segment-leader will discuss with every account / sales manager their
account and next year’s attainment of revenue. It is an open process in which the
renewal based revenue is determined via dialogue. New and expanded business targets
are assigned by the manager, but often are not agreed in dialogue. The target
attainability depends on the achievement of the segment. Unfortunately, this can lead to
unrealistic targets.29
The spread in the first question matches the fact that renewal is part of the discussion
and new/expanded business is mostly appointed top-down. Therefore, the account /
sales managers are often drifted to agree that the budget is determined by their
manager. New and Expanded Business targets are according to the sales / account
managers not pertinent attainable (respectively 41,4% and 31% disagrees). The
majority of the respondents overall agree that the budget is in accordance with the
agreements between the senior management and business level.
29
Example 1: A sub-segment leader received a target from the segment leader for New and Expanded
business. A part of the target was allocated in dialogue with his account / sales managers. Therefore, the latter
group got tight, but attainable target. The rest was given as a target to the sub-segment leader. This was
twenty times higher than the average target and was completely unable to achieve that target.
Example 2: Other sub-segment leaders proportionally gave targets to their account / sales managers and fully
miss the purpose of having “tight, but attainable” targets.
53
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
n = 29
Strongly
agree
The budget is determined by my manager. 30
0,0%
31,0%
27,6%
13,8%
24,1%
I can fully substantiate my budget.
0,0%
13,8%
27,6%
44,8%
13,8%
Figure 4.5 Statement on the foundation of the budget
8. Budgets encourage ‘gaming’ and perverse behaviours.
The budget is based for the year and does not account for any long-term actions which
are presented in non-financial KPI’s. It misses the link with the organizational goals.
The focus is on next year’s financial achievement and instigates to act towards selfinterest as it aims to beat the budget. The respondents agree that they will try to get a
better attainable target, i.e. they will try to create budget slack.
n = 29
During the budget negotiations, I will try to
realize a better attainable target.31
I will try to achieve my bonus, even if it is not
in the interest of Marsh.32
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
Strongly
agree
3,4%
6,9%
24,1%
41,4%
13,8%
72,4%
24,1%
0,0%
0,0%
0,0%
Figure 4.6 Statement on dysfunctional behaviour
It is not a surprise that the respondents believe that they act ethically towards the
attainment of their targets. Unfortunately, this is not always the case. There are several
examples of game playing.
Smoothing
A manager iniquitously records an accrual at year end to reflect the current year’s
performance. Due to the accrual, the performance is sufficient to attain the target. The
adverse consequence can be that next year’s target is too high due to the inclusion of
the accrual. Hence, a gap in the budget arises when the accrual is reversed.
A manager can also decide not to book any sales at year end when it is certain
that the target will not be achieved. Sales are accounted in the next year and are not
budgeted for. Hence, the manager starts with a “plus” in the following year.
Biasing
Initiatives can be budgeted too opportunistically. It is sometimes known that a budgeted
target of a certain initiative will not be met. The decision to keep this result in the P&L
30
One respondent (3,4%) choose not applicable due to the nature of respondents responsibilities.
31
Three respondents (10.3%) choose not applicable due to the nature of respondents’ responsibilities.
32
One respondent (3,4%) choose not applicable due to the nature of respondents responsibilities.
54
account biases the outcome, but in the end is only procrastination.33 The manager
suffers a loss of face and it is also a signal towards EMEA that Marsh is not in control of
the budget and is therefore very likely to underperform. EMEA is very strict towards
attaining the financial targets as it treasures MMC’s values (the P&L accountability is part
of MMC’s value “execution”).
9. Budgets strengthen vertical command and control.
The budgetary process is a bottom-up and top-down approach to which senior
management uses the budget to evaluate the organization. Initiatives by subordinates to
add value to the organization still are performed.
The respondents mostly agree that they can act to their personal best in order to add
value to the organization. Senior management let the subordinates run their part of the
business. The preset conditions are not fixed, but are discussed in dialogue. Therefore,
subordinates are motivated to achieve their budget.
n = 29
The budget allows me to give a personal
interpretation to the activities in order to
achieve the budget.34
I am motivated to achieve the budget.
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
Strongly
agree
10,3%
20,7%
10,3%
44,8%
6,9%
0,0%
6,9%
10,3%
51,7%
31,0%
Figure 4.7 Statement on top-down structure
10. Budgets do not reflect the emerging network structures that organizations
are adopting.
Senior management empowers the subordinates. Subordinates can better influence the
customer satisfaction and increase the value for the organization. The process is
controlled by the senior management, but keeps the dialogue.
11. Budgets reinforce departmental barriers rather than encourage knowledge
sharing.
The cooperation between segments and lines of business is ample according to the
respondents. Though, time and service and thus revenue are lost due to the internal
bickering between segments on the appointment of the more profitable accounts. As a
result, insufficient synergies between segments have been created.
33
This is also reflected in the 2010 results (please see figure 2.7) in which in the last quarter a major initiative
was taken out of the P&L account. This has lead to a drop in revenue and NOI.
34
Two respondents (6,9%) choose not applicable due to the nature of respondents’ responsibilities.
55
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
Strongly
agree
I share my knowledge with one or more
segments to achieve the budget.35
3,4%
13,8%
3,4%
48,3%
20,7%
I share my knowledge with one or more lines
of business to achieve the budget.36
3,4%
3,4%
3,4%
58,6%
24,1%
n = 29
Figure 4.8 Statement on departmental barriers
12. Budgets make people feel undervalued.
The respondents are divided on the recognition of their efforts. Marsh arranges the
process not only as a top-down approach. The opportunity seeking and personal
interpretation of adding value is encouraged throughout the organization.
The reason of the division is mainly due to the managers lack good people-management
skills.
n = 29
I receive sufficient recognition for my efforts
to achieve the budget.
I can sufficiently act to my own interpretation
to exploit my ideas that support the
organization.
Strongly
disagree
Disagree
Not agree,
not
disagree
Agree
Strongly
agree
10,3%
24,1%
31,0%
24,1%
10,3%
0,0%
6,9%
34,5%
41,4%
13,8%
Figure 4.8 Statement on freedom of act and praise.
4.3 Analysis of best practice
There have been several budgeting techniques developed to mitigate the weaknesses
the traditional budgetary process. Each alternative will be benchmarked against the
current budgetary process in order to see which of the alternatives will be the best
solution to Marsh’s current budgetary process.
The first survey requested the respondents to indicate which of the following subjects
were most important to them. They were allowed to choose more than one subject.37
Other important aspects (e.g., organizational structure, allocation of resources,
possibility to decentralize) that are driven by the Executive Committee will be
substantiated by the outcome of the second survey.
The relevant subjects will be discussed separately within the scope of each alternative,
but this can deviate. Any remaining subjects that relate to the design (determination of
35
Three respondents (10,3%) choose not applicable due to the nature of respondents’ responsibilities.
36
Two respondents (6,9%) choose not applicable due to the nature of respondents’ responsibilities.
None of the respondents used the possibility to indicate a different subject than the listed subjects.
37
56
budget) or behavioural aspects (e.g., freedom to act, share of knowledge or recognition)
of the budgetary process and are not specifically designed for the alternative will be
discussed as a whole. This way, each alternative will be assessed on the possibility to
accelerate efficient and effective processes for planning and control and decide how the
organization can move to a more decentralized environment in which the organization
can steer towards the organizational goals without radically changing the organizational
structure.
Subject
1. Time frame budgetary process
2. Focus of the budget on the (e.g., revenue, customer-) strategy
Response
18,9%
16,2%
#
21
18
15,3%
17
13,5%
15
5. Freedom to act
6. Dialogue for the determination of the budget / target
9,0%
8,1%
10
9
7. Share of knowledge
8. Ethical behaviour
9. Recognition
7,2%
7,2%
4,5%
8
8
5
3. Relevance of the budget during the year (possibility to amend the budget to
market conditions)
4. The link between the budget and incentives
Figure 4.9 Weighted index of the problems
4.3.1 Activity Based Budgeting
Activity based budgeting (ABB) is distinguished by the focus on two elements; market
strategy (external) and the operational strategy (internal). ABB balances the capacity
(supply versus demand) and operational requirements which in effect highlight
inefficiencies and other bottle necks. The activity-based model constitutes a horizontal
process view instead of the vertical orientation of the organization. Though, the activitybased model requires a cultural and organizational change in order to fully benefit from
its advantages.
The activity-based model is the opposite of the traditional product-to-market and
departmental focus as Marsh currently manages. Marsh cannot drive the organization
with separate activities as most are interdependent (e.g., a client can have multiple
insurances which require different lines of business) and require specific knowledge on
the processes and activities. Also, the insurance industry in which Marsh operates, does
not innovate much.38 A reiterating process on defining KPI’s is therefore not necessary.
To keep all information on activities and processes up-to-date is a money- and timeconsuming exercise.
ABB is focused on the strategy which is preferred to the Marsh’s current budgetary
process. It is not indisputable that ABB is a better solution for following the strategy that
38
Insurance products (e.g., casualty or liability) do not deviate much as it is a (often yearly) risk assessment.
57
Marsh currently handles. The latter is mainly due to the fact that Marsh performed an
organizational change and nowadays does not focus on the different segments, but on
the need of a customer and to achieve efficient processes. This will aid in achieving the
budgeted revenue and/or profitability and customer satisfaction.
According to ABB, the budget is based on the expected demand. It still is an estimate
what next year’s P&L account will look like. This process is the same as the current
process to which estimates are made. These estimates will not be amended during the
year. Therefore, the relevance of the budget during the year is not neutralized by the
alternative.
ABB can be integrated with other performance measurement systems such as the
balanced scorecard due to the use of KPI’s. The balanced scorecard is a method to link
the incentives to the performance of the organization.
However, Marsh already uses the balanced scorecard. Marsh introduced the balanced
scorecard in which mostly financial KPI’s regarding the current budgetary process are
recorded. 39
ABB is a solution for a better allocation of resources. It reflects more on capacity and
where any inefficiencies or bottleneck emerge which can lead to enhanced decisionmaking. The allocation will also lead to less game playing as better information is at
hand.
Though, the new organizational structure let Marsh to become more internally and
externally focused. Another change in the structure to reflect the activities is not
supported by the executive committee. ABB is a time and money-consuming alternative
which does not provide the solution to Marsh’s problems.
4.3.2 Zero Based Budgeting
Zero based budgeting (ZBB) does not look at the budget in retrospect. Instead, it starts
from scratch. All costs are assessed on its added value to the organization. This will
avoid that any inefficiencies will become part of the budget.
The strong focus on the allocation of costs can lead to improved targets and decisionmaking, but unfortunately it does not take the budgeted revenue into account. The latter
is a major part of the Marsh’s budgeting process.
It is beyond dispute that ZBB becomes very money and time-consuming if Marsh has to
budget costs from scratch every year which is the opposite of the survey’s outcome. ZBB
39
E.g., each part of the client service revenue will have a target for the account manager and broker.
58
does not look at the strategy and how the budget can be turned into a derivative of the
strategy as it does not look back and assess if Marsh is ‘on track’. Nor does it tell
anything about decentralizing the organization or how dysfunctional behaviour can be
managed.
Groot (2007) argued that ZBB can be used as a support for the organization in every 3-5
years to assess the contribution of the costs to the organization. Therefore, ZBB can be
(at most) an addition to the current budgetary process on costs.
4.3.3 Rolling Budgets
Marsh currently uses the budget and forecast to predict the year end outcome. Every
quarter the forecast is updated with the latest information to reflect the current year’s
performance. Most insurance products have a contractual period of a year and therefore
Marsh has not looked at the possibility rolling budgets can give.
The advantages of using rolling budgets are that the activities for creating next year’s
budget are spread over the year. The quarterly updates on the budget can be performed
for a rolling year instead of the current year only. Budgeted revenue can be budgeted
(forecasted) and would take less time as only one quarter is done at a time. The
consequence is that the budgetary participants will have more time to evaluate the
budget on accuracy and completeness, but also will be able to focus on other activities
during the month in which the budget is determined.
Secondly, rolling budgets can integrate Marsh’s strategic perspectives and reflect
financial and environmental changes. The information can be updated during each
revision of the rolling budget. This decreases information asymmetry and therefore game
playing. The increase of the reliability will enhance decision-making and it can therefore
better allocate resources during a specific period. This reduces the short-term orientation
and becomes a better tool for planning and control.
The role of rolling budgets is not fit for performance measurement. Rolling budgets are
used as an information tool to communicate, plan and control. Marsh can keep the
Balanced Scorecard as the performance measurement systems with the KPI’s that have
been agreed during the budgetary period.
4.3.4 Profit Planning
Profit planning are the short and longer term prognoses on revenue and expenses. It
indicates whether sufficient profit, cash flow and other means of economic value added is
attained.
59
Profit planning is already in use at Marsh. Marsh has budgeted for 2011-2013. 2012 and
2013 are the plans for profitability, but there is no formal plan on how to achieve the
profitability, because of high volatility in the industry (e.g., average premium or
commission) and consumer behaviour (risk appetite of the client). Profit planning is used
as an indication for the targeted growth in top and bottom-line. It does not add value to
the budgetary process as it lacks the opportunity for enhanced decision-making on the
available information. Too many factors are missing to contribute as an alternative.
4.3.5 Beyond Budgeting
Beyond budgeting advocates the abandonment of budgeting as the advantages do not
outweigh the disadvantages in order to have a good functioning organization. According
to Beyond Budgeting, a good functioning organization is achieved by decentralizing the
organization and to create an adaptive performance management process. The former
proposes to eliminate fixed performance contracts and replace them with relative
performance contracts and the latter proposes to create more responsibility on lower
levels in the organization.
Beyond Budgeting formed twelve points to which they argue that Beyond Budgeting is a
better solution than the traditional budgetary process. Points 1-6 relate to go from fixed
budgets that are fixed performance contracts to adaptive processes which are relative
performance contracts. Points 7-12 relate to central control that should be self managed
teams.
1. Fixed targets should become relative targets: relative targets are often
benchmarked against competitors (external) or between departments (internal) to
stretch changes. Marsh hardly uses relative targets and, according to the second survey;
introducing relative targets can mildly aid the organization.
The focus is mainly internally driven in order to make the organization financially healthy
again and create a great place to work by running efficient processes and to stimulate
teamwork. At this moment, relative targets can impede this process.
2. Fixed incentives should become relative rewards: rewards would be based on
subjectivity and should incorporate the differentiating circumstances that have occurred.
It should also base the incentives on group performance rather than individual
performance.
60
Marsh is not able and willing to adjust the targets according to the circumstances.
Though, the organization is in need of a steady method of evaluation. A revision is
necessary, but it cannot be based on subjectivity as this can lead to a distorted
performance evaluation.
Marsh should base their rewards based on individual and group performance. There are
ample examples of companies who have successfully introduced a performance
evaluation based on group and individual performance (e.g., Unilever). The group
performance is necessary to stimulate synergies.
3. Fixed planning should become continuous planning: continuous planning would
lead to an increased focus on value creation. It regards a longer period than one year.
This is an improvement to the current situation where the aim is to meet the budget.
4. Allocation of resources should become resources on demand: The new
organizational structure has lead to a different allocation of resources. Costs are yearly
allocated to where it is necessary. There are no indications where Marsh is under- or
overspending in order to retain the same budget. Marsh looks at the profitability to
determine whether the revenue and costs are in line. The latter is assessed by the
executive committee.
5. Central coordination should become a dynamic coordination: Marsh’s value
“colleagues” is to empower employees. According to the second survey, the
decentralization is sufficient (no further decentralization is needed). The responsibility
lies with each organizational participant. The survey indicated that the budgetary process
is partially top-down and bottom-up and the budgetary participants can influence the
setting of the budget and feel that they are allowed to work to what they think is best.
Hence, the organization is flexible enough for lower level employees to be valuable for
the organization.
6. Variance controls should become relative KPI controls: To put relative targets
and controls does not currently work for the organization and therefore relative KPI’s
would also not add value yet. It should be Marsh’s goal to work towards relative targets
in the future as it would increase the internal and external competitiveness.
7. Mission statements should become principles and values: The mission
statement is not a primary target that is communicated throughout the organization.
Marsh acts more to the principles and values of the MMC organization.
61
8. Focus on internal targets should become focus on competition: Responsibility
and trust are not up to standard to create internal and external benchmarks. It can
imbalance the new organization due to the focus on product- and service levels.
Once the organization is internally aligned, Marsh should be able to focus more on
competitors.
9. Top down controls should become freedom to decide: The response on the
surveys conclude that the budgetary participants feel that they have enough freedom to
decide on how to add value to the organization. The budget may remain a fixed plan, but
initiatives to improve e.g., the customer strategy can still be arranged.
10. Budgets and ‘red tape’ should become capability to act: Decisions are made to
the information available in the budget (e.g., what is the targeted revenue per client).
Relevant information is used at that time to make the best decision possible. Excluding
this from the budget would not improve Marsh’s situation.
11. Focus on ‘please the boss’ should become focus on ‘please the customer’:
The new organization focuses more on customer needs. This will be supported now by
efficient processes. Customer satisfaction is main priority, because low customer
satisfaction would mean low retention. This cannot be balanced by new and expanded
business. Therefore, the new organization will lead to improved customer outcomes.
12. Manipulated information should become ethical information: manipulated
information exists due to dysfunctional and opportunistic behaviour. Communication and
empowerment would lead to the share of information and therefore mitigates the risk of
information asymmetry.
It is compulsory for Marsh to get one version of the facts from the system and
communicate this to each team. Senior management in accordance should let each team
regulate their performance.
4.3.6 Overview of the alternatives
Marsh does not want to renew the organizational structure again due to the recent
change. The focus is firstly to internally align the organization by getting all processes
and organizational participants to work more efficiently and effectively.
We can conclude that due to the nature of the industry and Marsh (as part of EMEA)
needs budgets to evaluate the performance. Marsh expects that abandoning budget
would lead to the loss of strategic control.
62
The weaknesses that have been spotted in the budgetary process can be addressed. We
can conclude graphically which alternative provides the best solution for the weaknesses
in Marsh’s budgetary process.
It is no surprise that Beyond Budgeting scores best. The relative performance and
empowering the organization make Marsh more agile to respond to the market signals
and customer needs.
#
Weakness
ABB
ZBB
RB
BB
-
-
+
-/+
1
Time consuming
2
Incorrect allocation of resources
-/+
+
-/+
-/+
3
Insufficient control mechanism
-/+
-/+
-/+
+
4
Creates a strong focus on target achievement
-
-/+
-
+
5
Creates insufficient space for decentralization
-/+
-
-/+
+
6
Encourages dysfunctional behaviour
-/+
-
-/+
-/+
7
Focuses on own activities
-/+
-
-/+
-/+
8
Looks at internal activities only
-/+
-
-/+
+
- : Alternative is not a solution to the weakness.
-/+ : Alternative might be a solution to the weakness, but depends on
implementation.
+ : Alternative provides the solution to the weakness.
Figure 4.10 Overview of the alternatives
4.4 Overview of actions and controls
The budget is a control mechanism. Management control is necessary to estimate the
likelihood of the expected outcomes. Lack of good management control is considered
when there is a poor performance. Good management control is characterized when it is
future oriented and objectives-driven, and it creates alignment for the organizational
participants to work in the best interest for the organization.
There are several budgetary controls to achieving the budget. The decision on the
certainty of achieving the budget also depends on the tightness of the budgetary
controls (van der Stede, 2001; Merchant and van der Stede, 2007).
Marsh already uses tight budgetary control, because it distinguished by low tolerance for
budgetary variances, detailed budget reviews (i.e., policy level) and high importance on
achieving the budgeted targets on a short-term horizon (van der Stede, 2001).
Though, the budgetary controls are insufficiently anticipated in the organization.
Results control
Results control involves motivating the budgetary participants to generate the outcome
that is in the interest of the organization. The following steps need to be taken:
63
1. Define which results are desired and can be measured. E.g., growth, profitability,
customer satisfaction, number of client visits.
It is important the results are based on financial and non-financial KPI’s. The
latter will help to translate strategic goals into operational goals which affect the
(long term) business health and mitigate the risk of being managed-by-numbers.
2. Measure the outcome.
3. Set performance targets. The targets can be based on the KPI’s and should be
tight, but achievable. This will affect behaviour as it motivates and allows for selfreflection regarding their performance.
It is important that the targets can be significantly influenced within the scope of
the organizational participant’s responsibility. This method will keep the
organizational participants accountable for their actions.
4. Provide monetary and non-monetary incentives that lead to the desired results.
Tight results control can only be achieved when the budgetary participants understand
the objectives and when the KPI’s are SMART; Specific, Measurable, Attainable, Relevant
and Timeliness. Communication and congruence are important as it will ensure that
behavioural problems are not likely to occur.
Action control
Action control is to ensure that the budgetary participant operates in the organization’s
best interest by making the participant’s actions the focus of control.
1. Budget reviews: the scrutiny is necessary regarding the planned actions to
achieve the budget. This is a form control Marsh currently handles.
2. Action accountability: To make the budgetary participant accountable for their
actions. This requires the communication and observation of what is (un-)
acceptable and rewarding good actions or punishing actions that are not
acceptable..
Tight action control can be achieved by regularly detailed budget reviews by the
manager with whom the budget has been agreed with. Tight control on accountability
depends on the level of acceptance. Marsh should have a more tight action accountability
control to focus more on what is adding value to the organization and steer the
budgetary participants towards the optimal level of behaviour. Therefore, close action
tracking is compulsory, but it should not interfere with the ownership. I.e., empower the
budgetary participant, but observe closely and communicate often.
64
Cultural control
Cultural control involves the stimulation of reciprocal monitoring. It is a form of group
pressure on participants which actions differ from the organizational norms and values.
Group rewards will encourage cultural control as it instigates teamwork, communication
and share of knowledge to work towards the attainment of the budget.
4.5 Conclusion
The budget and the construct of the organization in the past years have lead to
insufficient planning and control in the organization. This resulted in negative financial
results, inefficient processes and self-interested organizational participants.
Marsh uses the budget as its main control mechanism. This chapter has looked at the
weaknesses in the current budgetary process and which improvements can be made. An
overview of the weaknesses in Marsh’s budgetary process has been presented.
The most notable weaknesses are the time frame of the budgetary process, focus
of the budget on the strategy (ability for long term thinking), the relevance of the
budget during the year and the link of the budget to incentives. Other weaknesses relate
to the behavioural aspect of budgeting. The budgetary participants find that freedom to
act, share of knowledge, budgetary participation and recognition are important factors as
well.
Even though, some weaknesses are addressed in lesser terms, they are still intertwined.
E.g., the budgetary participants find incentives important when it is linked to the budget.
Incentives comprise of monetary incentives and non-monetary incentives. The budgetary
participants find monetary incentives more important than non-monetary incentives.
Still, non-monetary aspects such as praise and recognition are appreciated.
Alternative budgeting techniques
Alternative budgeting techniques have been developed to overcome these weaknesses.
Five alternatives have been benchmarked against the traditional budgeting process;
activity based budgeting, zero-based budgeting, rolling budgets, profit planning and
beyond budgeting.
Activity based budgeting creates a focus on market and operational strategy. It
determines the expected volume and price of the product and services. The
determination of the demand would improve the allocation of the resources to activities.
In order to function properly, ABB requires an organizational change that would lead to a
focus on activities rather than products and departments. Marsh’s handles product-tomarket scenario which means that allocation to activities would unnecessarily complicate
65
the organization due to the interdependencies of the lines of business. Besides, the new
organization has been set and Marsh will not alter the organization again in order to
comply with the new form of budgeting.
The weaknesses on the time constraint of the budgetary process and focus on target
achievement show that ABB does not aid the current budgetary process.40
Zero-based budgeting is cost-based. ZBB is a technique that starts for the beginning,
i.e., it does not look to the budget in retrospect. All costs are discussed on its purpose
and value to the organization. It is effective in cutting unnecessary costs, but it is too
time-consuming and does not look at the other effects (e.g., behaviour related issues,
incentives) that budgets have.
ZBB can only help Marsh every three to five years when the orientation of the
organization is discussed. Therefore, ZBB is hardly used for cost control. This technique
does not aid Marsh’s budgetary process on the short term.
Rolling Budgets do not require a fundamental change regarding its budgetary process.
The process is nearly the same, but it will no longer be a one-off exercise. The one year
time horizon will be kept in order to retain the scope on the longer term objectives.
Rolling Budgets will be updated every quarter to include all available information. This
will provide a better forecast for the year end and for the allocation of resources during
the time horizon. This will decrease myopia and information asymmetry and increase the
effectiveness of decision-making in advance.
Rolling budgets cannot be maintained for performance evaluation as it too difficult to
create targets. Marsh can keep the Balanced Scorecard as the performance management
systems. Therefore, rolling budgets can add value to the organization without major
adjustments to the organization. It will still be in line with Marsh’s current strategy.
Profit planning is already in use. The strategy predefines long-term financial
objectives. Therefore, Marsh budgets three years in advance for the long term
profitability. Marsh does not have a predefined plan on how to achieve the profitability; it
looks into a crystal ball. The missing plan is difficult to compose due to the
unpredictability of the industry and the risk appetite of the consumer. It gives no added
40
ABB argues that a new ABB system has to be built, but another possibility is to amend the current process
by better link to the capacity planning systems (Hansen et al., 2003, p. 105). Marsh does not have a fully
integrated planning system. Therefore, this part has not been elaborated.
66
value to the current budgetary process, because insufficiently focuses on the outcome of
long-term thinking.
Profit planning can help in support of rolling budgets. It will give direction whether the
appointed targets are to be achieved in the forthcoming year.
Beyond Budgeting would be a good alternative for Marsh’s budgetary process. The
signals indicate that Marsh is able to become a more devolved organization and able to
create adaptive processes, but not at this moment.
The new organization has to be set up and all organizational participants should
understand the role of the new organization and his or her place in the new organization.
The new way of working should lead to a more agile company with the financially healthy
base. In order to achieve this situation, Marsh firstly needs to create synergies by
making the performance culture up to standard which needs efficient processes and
teamwork. Relative performance contracts do not aid directly to increase teamwork and
the focus customer satisfaction.
The budget can aid to this situation. Hence, Marsh should amend the budgetary process
and not abandon the budget.
Tight budgetary control
The budgetary process is in need of enhanced tight budgetary controls. This is to be
achieved by the implementation of results, action and cultural controls.
These controls will aid in the clarification and communication of the organizational goals
into the targets for the budgetary participants and will be able to perform controls on the
individual actions which would lead to behaviour that is in the interest of the
organization.
67
5 Conclusion and Recommendations
5.1 Introduction
When the business is not going well, people will quickly shout that the strategy is not
working and that communication is lacking. It is a quick assessment of the problems.
Marsh’s problems relate to the ineffectiveness of the budget and the lack of a good
performance culture. Marsh uses the budget as the main control mechanism and as the
performance evaluator. A number of problems have been identified that have lead to
unattainable budget and an ineffective performance culture:

The realistic estimation of renewal revenue was insufficient according to the
senior management and was therefore compensated in new and expanded
business to show growth;

Insufficient budgetary participation of the Executive Committee;

Insufficient communication between sales / account managers and brokers
resulted that available information was missed that could help determine
budgeted revenue. This has lead to too much opportunistic behaviour in the
budgeted revenue;

Undisciplined behaviour had lead to the fact that hardly anyone want to feel
accountable for the achieved results. Still, everybody think that they performed
well and therefore contributed to the organization;

The complexity of the system has lead to unreliable data;

Cuts in back-office personnel have lead to loss of knowledge and inefficient
processes.
The scope of these problems does not only entail the budgetary process. It does give an
overview of impediments in the organization which has influenced behaviour in the
budgetary process.
Two surveys have been held. The first survey contained questions regarding the
weaknesses found in the budgetary process according to a report by Neely et al. (2001).
The second survey contained questions whether Marsh was able to implement Beyond
Budgeting. The survey revealed information that has been used to determine the
possibility of the other budgeting techniques. The latter has been discussed in chapter 4
and will therefore not be summarized. The surveys did contribute to the main findings.
68
5.2 Summary of main findings
The first survey spotted the following weaknesses in Marsh’s budgetary process:

The budgetary process is too time-consuming. The budgetary participant does not
have enough time to evaluate the budget and cannot sufficiently focus on their
own tasks;

The budget is not strategically focused. E.g., the link to the customer strategy is
not fully represented;

The budget does not allow any changes to market conditions during the year;

The budget encourages dysfunctional behaviour. The unrealistic targets
encourage gaming and to create budgetary slack in order to attain the incentives;

There is insufficient congruence on the budget and communication;

Insufficient non-monetary incentices, i.e. the soft controls.
The following steps are required in order to mitigate the addressed weaknesses in the
budgetary process
1. Incorporate rolling budgets
Rolling budgets will help spread the budget over several quarters instead of a one-off
exercise whilst the time horizon remains one year. This means that every quarter an
update for the budget’s next quarter is required. The advantages are as follows:
Less time-consuming
The amount of work is spread over the quarters. The budgetary participants will have
sufficient time to evaluate the budgeted quarter and will be able to work on their other
duties. Also, the budget can still be arranged on policy level. This will help the financial
team to track any mishaps in the process and/or results.
Incorporate information on market conditions
The revision of the budget will lead to an up-to-date budget with the latest information.
Any adjustments can quickly be made on the previous quarter. This way the rolling
budget always is up-to-date.
Create longer term focus
The rolling budgets focus on a full year and not only on the fiscal year. Information can
be gathered whether Marsh is still in line with the achievement of current year’s results
and assist them in planning for next year.
69
Mitigate dysfunctional behaviour
The continuous update of the budget can lead to the share of information between the
manager and subordinate. This might decrease the information asymmetry and therefore
budgeting gaming and/or slack.
2. Change budgeting style
Marsh is a typical example for using the budget constrained style. The subordinates are
assessed by their managers based on their result versus the budget. The tight budgetary
control leads to myopia, because the aim is to achieve the yearly budget. This misses
the goal on what is adding value to the organization. The managerial budget emphasis
on the accounting measures (e.g., revenue growth, profitability) and budget participation
can lead to budget slack.
Marsh should move to a more profit conscious style instead of the budget constrained
style. The profit conscious style focuses primarily on the longer term general
effectiveness of the business.
The evaluation is based on the budgetary information, but the budget functions more as
a guideline. Overspending is evaluated with regard to the longer term objectives. Lower
revenue obtainment (new and expanded business) should relate to customer satisfaction
and a higher retention level.
Positive communication between managers and subordinates can lead to a reduction in
dysfunctional behaviour. The subordinate feels more confident in sharing information and
less pressure to create budgetary slack (Dunk, 1993).
Conclusively, Marsh should assess the organizational participants on financial and nonfinancial KPI’s. The KPI’s will form the targets in order to achieve their incentives. The
targets should be tight, but attainable. The motivation and commitment will be high to
attain the target and the organizational participant would go that extra mile to achieve
their target.
It is mandatory that incentives are linked to individual performance and group
performance. This method will help to further develop synergies such as teamwork and
efficient processes.
3. Coordinate and communicate
Communicate regarding the relevance of the budgetary process. The organizational
participants need to be informed on the added value of the budget in relation to the
organizational goals and how the company benefit if the budget is met.
70
An accurate budget affects the participants as it influence the financial health of the
company and thus, their compensation.
The dialogue will help managers to share ideas and initiatives which are in the interest of
the organization and it will create commitment. Therefore, budgetary participation is
extremely important.
4. Create “One Stop Shop”.
The Finance department is in charge of the financial planning and analysis. They should
be the single point of contact for delivering the budget and financial results. This will
keep one version of the facts which can be communicated throughout the company.
5.3 Discussion
The tightness of the budgetary controls depends on the executive committee idea on
how the organization should participate, but also on what the side effects may be and
what the incurred costs are. Therefore, personnel controls have not been discussed.
The basis of the tight controls is beneficial to the range which determines the
organizational success.
5.4 Limitations
This thesis entails the budgetary process and its effects on the organization. There are
factors that relate to the performance culture of the organization which does not touch
the topic of this thesis. Though, the effects have an indirect relationship to the budget.
The budget is offset against the organizational performance. If the performance is
better, motivation will generally higher.
The manager’s evaluative style is also important, because factors such as environmental
or task uncertainty, strategy and education affect other organizational participants. The
relationship between the evaluative style and budgeting has not been fully addressed.
5.5 Possibilities for further research
Budgetary control is part of the overall management control. It would be an interesting
topic for Marsh to see how the current management control systems can be updated that
reflects the current organizational structure and performance.
Secondly. the performance management can be topic as it would help Marsh to create a
good (or better) functioning performance management systems (e.g., Balanced
71
Scorecard, EVA) or how performance relates to the management control systems (e.g.,
Simons’ levers of control).
Thirdly, budgets relate to behaviour. This has been extensively discussed in the Reliance
of Accounting Performance Measures (RAPM). It would be of interest how the
economical, psychological and sociological factors relate to Marsh’s budgetary process. It
would aid in defining an optimal approach in the behavioural aspects regarding the
budgetary process in relation to the performance evaluation (Hartmann, 1998;
Noeverman, 2007).
72
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Internet
http://www.referenceforbusiness.com
http://www.whatisasurvey.info
http://www.mmc.com
http://www.marsh.com
http://www.google.co.uk/finance?q=NYSE:MMC
http://www.bbrt.org
http://en.wikipedia.org/wiki/Principal-agent_problem
77
Appendices
Appendix A: Criteria for quality of research design
Test
Construct
Validity
Internal
Validity
External
Validity
Reliability
Description of test
Establishing correct operational
measures for the concept being
studied
Establishing a causal
relationship, whereby the certain
conditions are shown to lead to
other conditions, as
distinguished from spurious
relationships
Establishing the domain to which
a study's findings can be
generalized
Demonstrating that the
operations of a study can be
repeated with the same results
Case Study Tactic
- Use multiple
sources of evidence
- Have key
informants review
draft case study
report
Use logic models
Use theory
Use case study
protocol
Phase of
research in
which tactics
occur
Data collection
Data analysis
Research
design
Data collection
78
Appendix B: Simons’ four levers of control
Belief systems
Beliefs systems are the core values of the organization which are a set of organizational
definitions (e.g., mission, vision and goal of the firm) that managers use to provide
purpose and direction to their subordinates.
The purpose is to provide inspiration and guidance for opportunity seeking. Beliefs
systems will inspire subordinates to motivate them to pursue new ways of creating
added value for the organization and provide guidance when strategic problems arise
and help to determine the solution to this problem.
In the current competitive environment, the complexity of an organization has increased
significantly. The (financial) information is better at hand and requires quick
reassessment of the position. This makes the internal processes of extreme importance,
because it should be managed efficiently and effectively and clear to all organizational
participants. The continuous organizational change creates a commitment to strong
values in order to create stability.
Managers work towards the organizational goals and empower subordinates for their
opportunity to innovate for the organization. It is eminent that managers should
transform subordinates from individuals with own expectations and desire for challenges
to a coherent workforce. A coherent and motivated workforce will provide stability and
increase the performance of and commitment for organizational goals. Therefore,
subordinates should understand the values and purpose of the organization and how
they can contribute to the organization.
Boundary systems
The continuous search for opportunity seeking by organizational participants is
motivated by the beliefs systems although the organization cannot handle all initiatives.
Therefore, a limit is imposed by the boundary systems.
79
The limit creates an acceptable domain inferred from the business risks in which
organizational participants can perform opportunity seeking activities and also provide
accountability due to this limited scope.41
Managers empower subordinates to exploit and decide on new initiatives and in effect
stimulate creativeness and maximize organizational flexibility. Due to the large amount
of opportunities, limitations of the possibilities are necessary and therefore managers
create an underlying barrier on what not to do. This enforces a method of decision
making on what should be done. This process is stimulus for effective decision-making.
Interactive control systems
Interactive systems are not a unique type of a control system, because it can be used
interactively. It becomes interactive when managers involve on all kinds of activities for
goal achievement.
It is the managerial vision on how to cope with strategic uncertainties when
implementing the business strategies and by personal decisions and control in order to
perform, will lead to an interactive control system. The signals will instigate for an
interactive debate and dialogue, and through learning contained from the interactive
control system, effective measurement of the business strategy can be performed.
Control systems can only be used as an interactive control system if the following five
conditions are applied (Simons, 1995, pp. 108-9):
1. The control system must require the re-forecasting of future states based on
revised current information. A better understanding of changes in the business
will allow organizational participants to better estimate the effects of the current
plans and induces debate;
2. The information contained in a control system must be simple to understand.
Debate must focus on the cause and effects which should be supported by
unequivocal information;
3. A control system must be used not only by senior managers, but also by
managers at multiple levels of the organization. Organizational integration and
usage is necessary to be fully effective (e.g., budget);
4. A control system must trigger revised action plans. Revision will lead to the
testing new ideas and strategies to adapt quickly in the industry;
5. A control system must collect and generate information that relates to the effects
of strategic uncertainties on the business strategy. A control system, e.g., profit
planning system must be in place to follow and coordinate (inter)action.
It is important that the technical design of these systems is in place, but more
importantly, how managers effectively use these systems. Simons (1995, p. 5) refers to
management control systems as “the formal, information-based routines and procedures
managers use to maintain and alter patterns in organizational activities”.
Simons (1995) firstly refers to the formal routines and procedures as the plans
and/or budgets used by the management. Secondly, the information-based systems are
used for multiple purposes; 1) to define the domain for the opportunity searching, 2) a
communication tool for plans and goals, 3) to monitor achievements of the plans and
goals, and 4) to keep and to be informed on emerging developments. The informationbased systems become control mechanisms when managers use these steps to provide
guidance, i.e., to maintain or alter patterns in organizational activities.
Simons (1995) argued that managers use control systems to stabilize tensions between
unlimited opportunity and limited attention, intended and emergent strategy, and selfinterest and the desire to contribute. These tensions exist due to the desire to do what is
right for the organization. Management control systems are used in this process for
unlocking the potential by:
41
The limit is accomplished by e.g., codes of conduct, strategic planning systems or operational guidelines.
80




Specifying and enforcing the organization’s rules of the game. This is necessary
to mitigate the risk of temptation or pressure;
Formulating and supporting clear target setting in order to bring focus and
resources to the organizational participants who seek achievement;
Inspiring and motivating organizational participants to innovate;
Triggering the share of knowledge.
81
Appendix C: Beyond Budgeting Principles
82
Appendix D: Statistical overview of survey
Function
Account / Sales Manager
Broker
ExCo / Finance / Sub-segmentleader / Controller
Response
rate
Sample
Response
Weight
20
14
70,0%
48,3%
3
1
33,3%
3,4%
12
8
66,7%
27,6%
Practice Leader
4
4
100,0%
13,8%
Other (HR, budget administrator)
2
2
100,0%
6,9%
41
29
Total
70,7%
Survey
Question
The budgetary
process is timeconsuming and
therefore I have
insufficient time for
other business
related activities.
The budgetary
process gives me
enough time to
evaluate the
budget.
The budget allows
me to carry out
changes when
these occur.
The budget lets me
to aim on customer
service.
Disagree
Not
agree,
not
disagre
e
0,0%
6,9%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
Function
Strongl
y
disagre
e
Agree
Strongl
y agree
Not
appicabl
e
17,2%
17,2%
6,9%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
6,9%
3,4%
10,3%
6,9%
0,0%
Other
0,0%
3,4%
3,4%
0,0%
0,0%
0,0%
Practice Leader
0,0%
3,4%
0,0%
0,0%
27,6%
6,9%
34,5
%
0,0%
Total
Account / Sales
Manager
3,4%
24,1
%
13,8%
0,0%
3,4%
27,6%
10,3%
6,9%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
3,4%
13,8%
3,4%
6,9%
0,0%
0,0%
Other
0,0%
0,0%
3,4%
3,4%
0,0%
0,0%
Practice Leader
0,0%
3,4%
0,0%
6,9%
20,7%
0,0%
17,2
%
0,0%
Total
Account / Sales
Manager
10,3%
55,2
%
0,0%
0,0%
6,9%
24,1%
0,0%
17,2%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
3,4%
10,3%
10,3%
3,4%
0,0%
Other
0,0%
3,4%
0,0%
3,4%
0,0%
0,0%
Practice Leader
0,0%
6,9%
0,0%
6,9%
17,2%
3,4%
34,5
%
0,0%
Total
Account / Sales
Manager
3,4%
37,9
%
3,4%
0,0%
13,8%
13,8%
6,9%
10,3%
0,0%
3,4%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
6,9%
10,3%
3,4%
0,0%
0,0%
6,9%
Other
0,0%
3,4%
0,0%
3,4%
0,0%
0,0%
Practice Leader
0,0%
10,3%
41,4
%
3,4%
0,0%
13,8
%
0,0%
0,0%
0,0%
10,3%
Account / Sales
Manager
Total
20,7%
13,8%
83
Account / Sales
Manager
The budget allows
me to create added
value for Marsh
(e.g., obtain higher
revenue than
budgeted).
The budget allows
me to act on a
longer term (i.e.,
longer than one
year).
The budget allows
me to think
creatively about
actions that I want
to exploit.
I always want to
attain my target.
The budget is
determined by my
manager.
I can influence the
setting of the
budget.
6,9%
13,8%
20,7%
3,4%
3,4%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
6,9%
6,9%
6,9%
0,0%
0,0%
6,9%
Other
0,0%
3,4%
0,0%
3,4%
0,0%
0,0%
Practice Leader
0,0%
10,3%
0,0%
13,8%
37,9%
3,4%
10,3
%
0,0%
Total
Account / Sales
Manager
0,0%
27,6
%
3,4%
6,9%
6,9%
20,7%
6,9%
10,3%
0,0%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
13,8%
3,4%
3,4%
3,4%
0,0%
3,4%
Other
0,0%
6,9%
0,0%
0,0%
0,0%
0,0%
Practice Leader
0,0%
6,9%
0,0%
20,7%
17,2%
0,0%
17,2
%
0,0%
Total
Account / Sales
Manager
6,9%
37,9
%
0,0%
6,9%
3,4%
20,7%
13,8%
10,3%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
3,4%
10,3%
0,0%
10,3%
0,0%
3,4%
Other
0,0%
6,9%
0,0%
0,0%
0,0%
0,0%
Practice Leader
0,0%
6,9%
0,0%
6,9%
20,7%
0,0%
20,7
%
0,0%
Total
Account / Sales
Manager
6,9%
48,3
%
0,0%
3,4%
0,0%
0,0%
3,4%
24,1%
20,7%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
10,3%
13,8%
3,4%
Other
0,0%
0,0%
0,0%
6,9%
0,0%
0,0%
Practice Leader
0,0%
0,0%
0,0%
0,0%
0,0%
Total
Account / Sales
Manager
0,0%
0,0%
3,4%
13,8%
55,2
%
37,9%
3,4%
0,0%
13,8%
6,9%
10,3%
17,2%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
10,3%
6,9%
0,0%
6,9%
3,4%
Other
0,0%
0,0%
6,9%
0,0%
0,0%
0,0%
Practice Leader
0,0%
6,9%
0,0%
0,0%
27,6%
3,4%
13,8
%
0,0%
Total
Account / Sales
Manager
3,4%
31,0
%
24,1%
3,4%
10,3%
13,8%
10,3%
13,8%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
20,7%
0,0%
3,4%
Other
0,0%
0,0%
3,4%
0,0%
3,4%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
84
My manger
evaluates my
progress (at least
once a quarter) for
achieving the
budget.
The budget allows
me to give a
personal
interpretation to
the activities in
order to achieve the
budget.
I can fully
substantiate the
budget.
I am committed to
the budget.
Practice Leader
0,0%
10,3%
3,4%
20,7
%
Total
Account / Sales
Manager
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
17,2%
6,9%
44,8
%
3,4%
3,4%
17,2%
10,3%
17,2%
3,4%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
3,4%
13,8%
3,4%
6,9%
Other
3,4%
0,0%
0,0%
3,4%
0,0%
0,0%
Practice Leader
3,4%
0,0%
0,0%
6,9%
13,8%
6,9%
41,4
%
0,0%
Total
Account / Sales
Manager
3,4%
24,1
%
6,9%
6,9%
10,3%
10,3%
6,9%
20,7%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
3,4%
3,4%
10,3%
3,4%
6,9%
Other
0,0%
0,0%
0,0%
3,4%
3,4%
0,0%
Practice Leader
0,0%
0,0%
0,0%
10,3%
10,3%
10,3%
44,8
%
0,0%
Total
Account / Sales
Manager
3,4%
20,7
%
6,9%
6,9%
0,0%
6,9%
17,2%
24,1%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
3,4%
10,3%
13,8%
0,0%
Other
0,0%
0,0%
0,0%
6,9%
0,0%
0,0%
Practice Leader
0,0%
6,9%
0,0%
0,0%
27,6%
3,4%
44,8
%
0,0%
Total
Account / Sales
Manager
3,4%
13,8
%
13,8%
0,0%
3,4%
3,4%
13,8%
27,6%
0,0%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
3,4%
0,0%
0,0%
13,8%
10,3%
0,0%
Other
0,0%
0,0%
0,0%
3,4%
3,4%
0,0%
Practice Leader
0,0%
3,4%
3,4%
3,4%
0,0%
Total
Account / Sales
Manager
6,9%
6,9%
17,2%
3,4%
51,7
%
17,2%
0,0%
0,0%
3,4%
6,9%
24,1%
13,8%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
13,8%
13,8%
0,0%
Other
0,0%
0,0%
0,0%
3,4%
3,4%
0,0%
Practice Leader
0,0%
0,0%
3,4%
0,0%
0,0%
Total
Account / Sales
Manager
0,0%
6,9%
10,3%
10,3%
51,7
%
31,0%
0,0%
0,0%
10,3%
6,9%
27,6%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
13,8%
6,9%
6,9%
Broker
ExCo / Finance / SubI am motivated to
achieve the budget. segmentleader /
Controller
My yearly target for
Renewal attainable. Broker
ExCo / Finance / Subsegmentleader /
3,4%
85
Controller
Other
0,0%
0,0%
0,0%
0,0%
3,4%
3,4%
Practice Leader
0,0%
3,4%
0,0%
0,0%
13,8%
6,9%
48,3
%
0,0%
Total
Account / Sales
Manager
3,4%
13,8
%
13,8%
10,3%
0,0%
20,7%
6,9%
20,7%
0,0%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
17,2%
0,0%
6,9%
Other
0,0%
0,0%
3,4%
0,0%
0,0%
3,4%
Practice Leader
0,0%
3,4%
0,0%
3,4%
17,2%
3,4%
41,4
%
0,0%
Total
Account / Sales
Manager
6,9%
27,6
%
0,0%
10,3%
10,3%
13,8%
13,8%
6,9%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
6,9%
3,4%
0,0%
10,3%
0,0%
6,9%
Other
0,0%
0,0%
3,4%
0,0%
0,0%
3,4%
Practice Leader
3,4%
3,4%
3,4%
20,7%
24,1%
0,0%
17,2
%
0,0%
Total
Account / Sales
Manager
3,4%
20,7
%
3,4%
13,8%
0,0%
6,9%
10,3%
24,1%
6,9%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
3,4%
10,3%
6,9%
6,9%
Other
0,0%
0,0%
0,0%
3,4%
0,0%
3,4%
Practice Leader
3,4%
0,0%
10,3%
0,0%
0,0%
Total
Account / Sales
Manager
3,4%
6,9%
24,1%
0,0%
41,4
%
13,8%
10,3%
37,9%
10,3%
0,0%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
17,2%
6,9%
0,0%
0,0%
0,0%
3,4%
Other
6,9%
0,0%
0,0%
0,0%
0,0%
0,0%
Practice Leader
6,9%
0,0%
0,0%
0,0%
0,0%
Total
Account / Sales
Manager
72,4%
6,9%
24,1
%
0,0%
0,0%
0,0%
3,4%
3,4%
10,3%
3,4%
17,2%
10,3%
3,4%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
13,8%
10,3%
3,4%
Other
0,0%
0,0%
0,0%
3,4%
0,0%
3,4%
Practice Leader
0,0%
0,0%
0,0%
3,4%
3,4%
10,3%
48,3
%
0,0%
Total
I share my
Account / Sales
knowledge with one Manager
3,4%
13,8
%
20,7%
10,3%
0,0%
3,4%
3,4%
27,6%
13,8%
0,0%
Broker
My yearly target for ExCo / Finance / SubExpanded Business segmentleader /
attainable.
Controller
Broker
My yearly target for ExCo / Finance / SubNew Business
segmentleader /
attainable.
Controller
During the budget
negotiations, I will
try to realize a
better attainable
target.
Broker
I will try to achieve
my bonus, even if it ExCo / Finance / Subsegmentleader /
is not in the
Controller
interest of Marsh.
I share my
knowledge with one
or more segments
to achieve the
budget.
86
or more lines of
business to achieve
the budget.
I can sufficiently act
to my own
interpretation in
order to attain the
budget
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
13,8%
10,3%
3,4%
Other
0,0%
0,0%
0,0%
3,4%
0,0%
3,4%
Practice Leader
3,4%
0,0%
0,0%
0,0%
0,0%
Total
Account / Sales
Manager
3,4%
3,4%
3,4%
10,3%
58,6
%
24,1%
6,9%
0,0%
13,8%
3,4%
24,1%
6,9%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
3,4%
10,3%
6,9%
6,9%
Other
0,0%
0,0%
3,4%
0,0%
3,4%
0,0%
Practice Leader
0,0%
10,3%
0,0%
0,0%
20,7%
3,4%
41,4
%
0,0%
Total
Account / Sales
Manager
0,0%
13,8
%
17,2%
6,9%
0,0%
6,9%
20,7%
17,2%
3,4%
0,0%
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
0,0%
0,0%
0,0%
17,2%
6,9%
3,4%
0,0%
0,0%
3,4%
0,0%
3,4%
0,0%
Practice Leader
0,0%
0,0%
6,9%
0,0%
0,0%
Total
Account / Sales
Manager
0,0%
6,9%
34,5%
6,9%
41,4
%
13,8%
3,4%
6,9%
10,3%
10,3%
17,2%
3,4%
0,0%
Broker
ExCo / Finance / Subsegmentleader /
Controller
0,0%
0,0%
3,4%
0,0%
0,0%
0,0%
3,4%
3,4%
10,3%
6,9%
3,4%
0,0%
Other
0,0%
3,4%
0,0%
0,0%
3,4%
0,0%
Practice Leader
0,0%
6,9%
24,1
%
6,9%
0,0%
24,1
%
0,0%
0,0%
10,3%
0,0%
I can sufficiently act
Broker
to my own
ExCo / Finance / Subinterpretation to
segmentleader /
exploit my ideas
Controller
that support the
organization.
Other
I receive sufficient
recognition for my
efforts to achieve
the budget.
Total
10,3%
31,0%
Appendix E: Beyond Budgeting survey (in dutch)
Behoeftebepaling
A. In welke mate is de organisatie momenteel tevreden met het budget?
B. In welke mate bestaat er binnen de organisatie de bereidheid om het budgetteringsproces aan
te passen?
Status van de organisatie
1a In welke mate is de organisatie momenteel gedecentraliseerd?
1b Is naar uw mening de decentralisatie in organisatie voldoende?
1c Is het mogelijk om (verdere) decentralisatie door te voeren?
1d Zou u bereid zijn hieraan mee te werken?
2a In welke mate hebben managers op lagere niveaus in de organisatie (bijv. sub-segment
leaders, account managers) de vrijheid om zelf beslissingen te nemen?
2b Is het mogelijk om de handelingsvrijheid te vergroten?
87
2c Is de organisatie bereidt dit te doen?
3a In hoeverre zijn de budget normen in de organisatie dynamisch, d.w.z. dat deze gedurende het
jaar (naar boven of beneden) bijgesteld worden, al naargelang de omstandigheden?
3b Is het mogelijk om de normen dynamisch te maken?
3c Is de organisatie bereidt dit te doen?
4a In welke mate is de organisatie momenteel gericht op de klant?
4b Is het mogelijk om een sterkere klantgerichte service structuur door te voeren?
4c Is de organisatie bereidt dit te doen?
Behoeftebepaling
5a In welke mate is de leiderschapstijl van managers binnen de organisatie te beschrijven als
coachend?
5b Is het mogelijk om een coachende leiderschapstijl te ontwikkelen?
5c Is de organisatie bereidt dit te doen?
5d Heeft dat naar uw mening een toegevoegde waarde?
6a In hoeverre worden de normen in de organisatie relatief ten opzichte van concurrenten
gesteld?
6b Is het mogelijk om de normen relatief ten opzichte van de concurrentie te stellen?
6c Is de organisatie bereidt dit te doen?
6d Heeft dat naar uw mening een toegevoegde waarde?
7a Hoe ziet het strategieproces er in de organisatie uit?
7b Is het mogelijk om het strategieproces flexibel en bottom-up te maken?
7c Is de organisatie bereid dit te doen?
7d Heeft dat naar uw mening een toegevoegde waarde?
8a In hoeverre worden in de organisatie voortschrijdende prognoses gebruikt?
8b Is het mogelijk om voortschrijdende prognoses (rolling forecasts) in de gehele organisatie in te
voeren?
8c Is de organisatie bereidt dit te doen?
8d Heeft dat naar uw mening een toegevoegde waarde?
9a Op welke manier worden middelen in de organisatie toegewezen?
9b Is het mogelijk om middelen flexibel toe te wijzen (daar waar nodig op het moment dat ze
nodig zijn)?
9c Is de organisatie bereidt dit te doen?
9d Geeft dat naar uw mening een extra ondersteuning?
10a In welke mate is in de organisatie sprake van een snelle en goede informatievoorziening die
gebaseerd is op een brede set financiële en niet-financiële prestatie-indicatoren?
10b Is het mogelijk de informatievoorziening te verbeteren?
10c Is de organisatie bereidt dit te doen?
11a In welke mate is in de organisatie sprake van een beloningsstructuur die gebaseerd is op een
gebalanceerde combinatie van individuele beloning en groepsbeloning?
11b Is het mogelijk om de beloningsstructuur te baseren op de combinatie van individuele
beloning en groepsbeloning?
11c Is de organisatie bereidt dit te doen?
Randvoorwaarde
I. In hoeverre heeft de organisatie de vrijheid om het budgetteringsproces aan te passen?
88