Accenture/Cranfield School of Management Study Shows Companies Creating and using Innovative Budget Models to Reduce Earnings Surprises
New York, N.Y. (October 23, 2001) – The annual budget may be going the way of the dinosaur as companies introduce new and more accurate financial models capable of linking budgeting to overall corporate strategy, according to results of a global Accenture/Cranfield School of Management study released today. The research also points to a correlation between companies modifying their budget processes and stock price performance.
“Companies are able to reduce their budget cycle time 30-to-40% by adopting approaches to the budget process that are more in concert with their overall strategic planning,” said Herman Heyns, partner of Accenture’s Finance & Performance Management practice and an author of the study. Among these new approaches are rolling budgets, and in some instances, elimination of budgets entirely concludes the study “Driving Value Through Strategic Planning and Budgeting.”
“Our study indicates that the budget process is obsolete given today’s economy, resulting in documents that are time-consuming to produce, of little predictive value, subject to gamesmanship and, quite frankly, out of date by the time they’re implemented,” Heyns adds. “We found that companies are beginning to radically modify their budget processes and are thinking actively about approaches beyond budgeting.”
Based on the results of the study, corporations are moving away from annual budgets to reduce costs, improve forecasting and better manage investor expectations to reduce the risk of missed earnings targets and analyst downgrades. Emerging technology is providing corporations with the tools to modify their budget processes. And as the significant benefits accruing to early adapters become apparent, the move is gaining momentum. A large Swedish car manufacturer, for instance, estimates that 20% of all management time was tied up in the group’s budgeting and planning processes, which led to its decision to abolish budgets.
Driving Value through Strategic Planning and Budgeting finds that the move away from traditional annual budgets seems to help companies outperform their peers. Early movers’ five-year share price growth has been 221% on average compared to 167% for others in their sectors. Over ten years, early adapters outperform peers even more dramatically, recording average share price growth of 373% vs. 280% for the sector. There are other rewards as well. Ford, through its F@ST (financials at the speed of thought) program, has significantly improved its budgeting and forecasting efficiency. In the past, revenue forecasts in Ford’s 19 European markets were done in the different local systems using five different methods, each requiring between two and seven man-days. Since switching over, Ford employs one method and system throughout Europe, requiring only one man-hour per market. Quality, as measured in forecast accuracy, has increased dramatically.
“Three themes clearly emerged in the study,” said Professor Andy Neely, Director of the Centre for Business Performance at Cranfield School of Management. “First, companies can no longer justify the time and effort they invest in the budgeting process; second, budgets have to be much more responsive, enabling nearly real-time tracking; and third, management must understand that budgets cannot serve as both control and motivational devices. Companies that understand this and act on it, are poised to enhance their credibility and performance.”
About the Study
The Accenture/Cranfield research team interviewed representatives of more than 20 companies, drawn from diverse industries and markets, including ABB, BP, Cisco, Credit Lyonnais, Electrolux, Ford, Shell, Skandia, and Volvo. These interviews were supplemented by discussions from over 30 senior analysts from major investment firms – Deutsche Bank, Morgan Stanley Dean Witter, Merrill Lynch, Prudential Securities, and William de Broë, as well as Standard & Poor’s.
Accenture (NYSE: ACN) is the world’s leading provider of management and technology consulting services and solutions, with more than 75,000 people in 46 countries delivering a wide range of specialized capabilities and solutions to clients across all industries. Accenture operates globally with one common brand and business model designed to enable the company to serve its clients on a consistent basis around the world. Under its strategy, Accenture is building a network of businesses to meet the full range of any organization’s needs – consulting, technology, outsourcing, alliances and venture capital. Its home page is http://www.accenture.com.
About Accenture’s Finance & Performance Management Practice
The Finance & Performance Management practice (F&PM) at Accenture works with clients to address issues of importance to the chief financial officer (CFO) in creating value for the corporation and delivering world-class finance capabilities. The practice is global and operates on a cross-industry basis. F&PM’s scope of practice encompasses strategy, operating model design and transformation initiatives, which deliver new capabilities to clients across a range of business processes.
About Cranfield School of Management
Cranfield School of Management is a world-class university business school, based in the UK. Renowned for its strong links with industry and business it is committed to providing practical management solutions through a range of activities, including: postgraduate degree programs, management development, research and consultancy. http://www.cranfield.ac.uk/som
The Centre for Business Performance is a research centre dedicated to performance measurement and management. The work of the centre revolves around the design, implementation, operation and evolution of performance measurement and management systems. The centre’s home page is http://www.cranfield.ac.uk/som/cbp.