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IMA members express their views.
Most organizations recognize budgets as a key element in their management control systems, but the usefulness of budgets has generated much recent discussion and debate. Though budgets are useful for coordination, communication, and performance evaluation, many people consider them die cause of gaming and earnings manipulation by managers, time-consuming and cosdy to develop, and a barrier to change. Indeed, even Charles Horngren, whose popular textbooks have promoted traditional budgeting for more than 40 years, admits that "numerous managers are extremely unhappy about budgeting." In dieir book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, Jeremy Hope and Robin Fraser argue that traditional budgeting is counterproduc- tive in today's fast-paced and highly competitive environment. Instead of tinkering with current budgeting systems, managers would be better off abandoning budgeting altogether-that is, companies should move beyond budgeting.
Hope and Fraser propose a new management model to take the place of budgeting for control purposes. This new model is based on employee empowerment and alternative methods of performance management. In their view, traditional budgeting with its emphasis on the fixed performance contract-where targets are set at the beginning of the period and results are evaluated relative to this static plan-won't support the types of extreme decentralization and employee empowerment initiatives that are required for firms to be competitive today. The clarity and cogency of Hope and Fraser's argument suggest that it deserves serious consideration. Moreover, the authors have marshaled some impressive case studies from which they have derived their new model of control.
But even casual empiricism suggests that the budget remains an important part of many organizations' control systems, particularly in North America. While budgeting practices may require improvement, for many firms budgets are deeply ingrained in the "way we do things around here" and may be the only means of communication, coordination, and control across the organization. That's why it may be difficult for managers to give up budgets. There are also several well-known examples of extremely successful U.S. companies whose budgets lie at the heart of their management control system. For example, Johnson & Johnson relies extensively on budgeting systems and is perennially ranked as one of the best-managed firms in Fortune's annual survey. Emerson Electric...