Planning and budgeting: whence and whither

AFAANZ Conference 2018

Martin Messner
University of Innsbruck
Austria

Images: pixabay.com

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An ambivalent practice

“… without planning events are left to chance”

(Koontz & O’Donnell, 1972)

“Managers keep forgetting that it is what they do,

not what they plan, that explains their success”
(Weick, 1995)

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Why do firms plan?

Plans fulfil different purposes

Motivation, target setting, control

Coordination and resource allocation

External information

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Budgeting

Annual budgeting is the most frequent form of short-term financial

planning

• Budget defines profit, revenue, or cost

targets for the various organizational units
• Resources (FTEs, investments) are
allocated on the basis of these budget
targets
• Coordination between units happens on
the basis of budget numbers
• Budget becomes the reference point for
performance evaluation
• Progress in achieving the budget is
monitored during the year

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Research on budgeting

Seminal studies in budgeting

• Human problems with budgets

• The game of budget control
• Different leadership styles when using budgets
• Achievability of budget targets

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Research on budgeting

Human problems with budgets

• Argyris (1952, 1953) identifies different problems that the use of budgets
brings about
 Top management uses the budget as a pressure device
 Budget pressure unites employees against management
 Finance staff obtain feelings of “success” only by finding fault with faculty people
 Factory supervisors focus on their own department only
 Supervisors experience strong tension and sometimes frustration

 One recommendation from this study: front-line supervisors should

participate in setting or changing budgets

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Research on budgeting

The game of budget control

• Hofstede (1968)
 Participation as key for motivation, but also other factors that may limit the
positive effect of participation: personality, culture, leadership practices, etc.
 A game-playing attitude, where budget fulfilment is seen as a sport, increases
motivation
 “It is a game. We tighten up the proposed standards beforehand and then we
drop some of it and so does the line manager. It’s quite passionate
bargaining, but in a friendly way”.

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Research on budgeting

Different leadership styles of using budgets

• Hopwood (1972) observes different “styles” of using budgets for

performance evaluation: budget-constrained, profit conscious, non-
accounting

• Managers who feel that they are evaluated on the basis of a budget
constrained style
 report higher levels of job-
related tension
 report more problematic
relations with their
supervisor and peers
 are more likely to engage
in manipulative
behaviour

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Research on budgeting

Achievability of budget targets

• Merchant and Manzoni (1989) examine budgets in 54

profit centers of 12 corporations
– How achievable are budget targets?
– Budget targets appear to be set at highly achievable
levels (74% of profit centers achieved their targets)
– Managers speak proudly of their ability to achieve targets
consistently
– Highly achievable budget targets have benefits for both
PC managers and top management

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Research on budgeting

Selected streams of literature following from these seminal studies

• Participatory budgeting and misreporting

• Target setting and RPI
• “Innovative” planning practices
• Budgeting as a ritual

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Misreporting

Misreporting and budgetary targets

Please provide me
with the sales forecast
for your region for next
year

“The higher the forecast

that I provide, the higher
will be the target that I
get…”

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Misreporting

Frequent gaming behaviors

Types of gaming behavior reported Occasionally Frequently

Negotiating easier targets (“budgetary slack”) 60% 26%
Spending money at year end to avoid losing it 57% 23%
Deferring necessary expenditures 52% 39%

Accelerating sales near year end to make the budget 41% 20%

Source: Libby and Lindsay (2010)

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Misreporting

What determines subordinates’ behaviour in a participatory budgeting

setting?

• Agency theory predicts that subordinates create maximum amount of slack if they
can (i.e. in a slack-inducing pay scheme).
• Early experiments (e.g. Young, 1985; Waller, 1988; Chow et al., 1988) find that
subordinates create less slack than agency theory predicts (around 20% of the
maximum possible slack, Brown et al. 2009). Reasons:
– “Social pressure” (Young, 1985)
– Desire to appear honest (Hannan et al. 2006)
– General ethical norms (Stevens, 2002)
• Subordinates may frame a budget situation in different ways: as an ethical dilemma
or as a matter of fairness (Ranking, Schwartz, Young 2008)
• Level of honesty is also driven by the financial/non-financial nature of the budget
report and direct/indirect nature of benefits (Church et al., in press)

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Misreporting

Truth-inducing indicators in practice

Jordan & Messner (WP) examine the use of sales forecast accuracy as a
performance measure within a manufacturing firm
• FA used as part of a tournament for distributors. But rather low motivational
effects
– Positive effects on e.g. lead time not visible to distributors
– FA perceived as not very controllable.
– Difficult to specify a good target level

• Over time, move from pure results control to input control.

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Research on budgeting

Selected streams of literature following from these seminal studies

• Participatory budgeting and misreporting

• Target setting and RPI
• “Innovative” planning practices
• Budgeting as a ritual

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Target setting and RPI

How do firms set targets?

• Managers’ targets are based mostly on future planning information or past

performance information, and less frequently on internal or external
benchmarking information (Murphy, 2001; Dekker, Groot & Shoute, 2012).
• Evidence for target ratcheting (Leone & Rock, 2002; Bouwens & Kroos,
2011)
• Evidence for a “ratchet effect” (e.g. Bouwens & Kroos, 2011)
• But also evidence that firms commit to not use current performance versus
target when setting future targets (Indjejikian et al., 2014): High-profitability
managers versus low-profitability managers.

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Target setting and RPI

Relative Performance Information – three perspectives

Economic theory posits that RPI filters out common uncertainty from performance,
thus improving its information value (Frederickson, 1992; Holmstrom, 1982).

• Example of a National Employment Agency that evaluates its Jobcenters

(Goretzki et al., 2017):
• Statistical analysis of what drives integration quota: economic, labor market,
demographic variables
• Clustering of Jobcenters with similar characteristics
• Relative Performance Evaluation within the cluster

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Target setting and RPI

Relative Performance Information – three perspectives

Social psychology theory suggests that RPI encourages social comparisons

among employees, which can have motivational and learning effects (Festinger,
1954; Frederickson, 1992; Hannan, Krishnan, & Newman, 2008; Hannan, McPhee,
Newman, & Tafkov, 2013; Tafkov, 2013).

• Several studies find that providing information about performance ranks has a
positive effect on employee effort and performance (e.g. Charness et al., 2014;
Hannan et al., 2013; Tafkov, 2013).

• In repeated tournaments, top performers tend to become complacent while weak

performers give up (e.g. Berger et al., 2013). These effects are stronger the
stronger the performance differences are (Casas-Arce & Martínez-Jerez, 2009).

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Target setting and RPI

Relative Performance Information – three perspectives

Sociological theory highlights structural effects of rankings (e.g. Espeland &

Sauder)

• Rankings induce a self-fulfilling prophecy (Espeland and Sauder, 2007)

• Prospective students react to small, “artificial” differences, making these

differences bigger.

• Survey-nature of ranking leads to correlation over time (prior ranking shapes

current evaluation)

• Resources within universities are allocated on the basis of rankings 

position in ranking decreases with less resources

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Research on budgeting

Selected streams of literature following from these seminal studies

• Participatory budgeting and misreporting

• Target setting and RPI
• “Innovative” planning practices
• Budgeting as a ritual

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“Innovative” planning practices

(How) do firms move away from traditional budgeting?

• Beyond Budgeting movement (Hope

and Fraser, 2003)
• More dynamic forms of planning (use
of rolling forecasts and relative
performance evaluation)

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“Innovative” planning practices

Firms’ experiences with Beyond Budgeting ideas

• Becker (2014) compares budget abandonment in 4 firms in German-speaking

countries. He finds that a move towards Beyond Budgeting ideas
• typically goes along with a change in organization culture and is driven by key
change actors (CEO, CFO)
• may be undone when the organization faces financial distress and a new
management comes in

• Henttu-Aho and Järvinen (2013) study changes to budgeting in 5 Finnish firms.

They observe that:
• budgets often first lose legitimacy as a planning instrument and are replaced
by rolling forecasts, but still serve a target-setting function

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“Innovative” planning practices

How have Beyond Budgeting ideas developed over time?

• Becker, Messner, & Schäffer (WP)

– Trace the development of Beyond Budgeting from the 1990s till today
– Identify two different approaches to BB: idealistic and pragmatic

“Beyond Budgeting cannot be a ‘pick- “And I think Steve Player … is not throwing
and-mix’ approach to change. It is an the budget away. He is taking account of
alternative coherent model or it is the budget and relaxing some of the
nothing.” constraints of the budget to make it more
(Hope and Fraser) flexible, more adaptable.”
(Michel Lebas)

• 4 phases in the evolution of Beyond Budgeting: Development of

the idea through ongoing “boundary work” (Gieryn, 1983)

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“Innovative” planning practices

Increasing dominance of “pragmatic” approach over time

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Pragmatic Comprehensive

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“Innovative” planning practices

Do some budgeting practices re-emerge?

Messner, Coyte, & Zhou (WP): examine the recent “revival” of zero-based
budgeting

The number of earnings conference calls mentioning ZBB from the Factiva database till 2017

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Earnings conference calls

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0
2002 2004 2006 2008 2010 2012 2014 2016 2018
Year

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Research on budgeting

Selected streams of literature following from these seminal studies

• Participatory budgeting and misreporting

• Target setting and ratcheting
• “Innovative” planning practices
• Budgeting as a ritual

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Budgeting as a ritual

Several studies have looked at the “ceremonial” nature of budgeting

• Budgeting as a taken-for-granted process that legitimizes subjective decision-

making (Pfeffer, 1981; Covaleski & Dirsmith, 1988).
• Covaleski and Dirsmith (1988) highlight how changing such a ritualistic process
becomes a “power game“ between a university and the state
• Mazmanian & Beckman (2018) describe budgeting as a ritual of quantification
that relies upon three types of control:
– Output control: Budget target as legitimate performance benchmark
– Process control: Going through set stages with particular activities
– Normative control: Engaging in the budget process creates personal
commitment and emotional investment

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Budgeting as a ritual

Ritual also has a pronounced temporal dimension

Kunzl & Messner (WP): how the temporal structure of a budgeting process shapes
accountants‘ experiences and how accountants contribute to this temporal structuring
• Three dimensions of temporal structure (Zerubavel, 1976): (1) sequence/timing, (2)
duration, and (3) pace
• Part of the temporal structure is pre-defined for accountants; other parts are subject
to active structuring
• Accountants are involved in two kinds of active temporal structuring:
– planned temporal structuring (predictable aspects, routinized behavior)
– ad hoc temporal structuring (non-predictable aspects that entail immediate
action; triggered by unexpected events)

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Whither planning/budgeting research?

Some reflections

Interaction between plans

• Financial plan (budget) and
sales and operations planning
• Strategic plan and budget

Possible theoretical concerns:

• Loose/tight coupling
• Boundary spanners and
objects
• Professional logics

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Whither planning/budgeting research?

Some reflections

Automated planning
• Big data and machine learning

Consequences for:
• Target settting?
• Gaming behavior?
• Ritual of planning?
• Role of accountants?

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Whither planning/budgeting research?

Some reflections

Rolling forecasting/planning

Little systematic evidence on the

effects of a rolling process on:
• Work load
• Accuracy
• Target-setting
• Gaming

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Thank you for your attention

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