CHAPTER 1
Problems with Traditional Management

Peter Drucker

Introduction

In this chapter, we take a closer look at the many problems with traditional management, which I have only been hinting at so far. This is where we have to start. If there are no problems, why should we bother changing? Why fix something that is not broken? There has to be a case for change. Some of the problems we will discuss are directly linked to budgets and budgeting. Others are more indirectly linked, but often rooted in the budgeting mindset of command and control.

Let us start with the budget. It is not the only problem, but still a major one. Over the last 20 years, I have asked thousands of managers across the world (and many employees, too) what they think of the budgeting process. It is just like pushing a button. Everybody has a view. The vast majority is very critical, and many are extremely negative. These are the problems they typically bring up:

1. Weak links to strategy
   The strategy and the budget are developed in isolated processes, facilitated by different functions without much mutual respect and contact.
2. A very time-consuming process
   Budgeting consumes a scary amount of time and energy, both when made and when followed up.
3. Stimulates unethical behaviors
   The gaming, lowballing, and hidden agendas that normally would not be accepted are seen as normal and unavoidable in a budget regime.
4. Assumptions quickly outdated
   Many, and sometimes most, of the budget assumptions turn out to be wrong.
5. Provides illusions of control
   Most of the controls the budget offers are nothing but illusions of control.
6. Decisions are made too early
   Decisions about activities, projects, and spending are typically made too early, without fresh enough information to make the right decision.
7. Decisions are made too high up
   Lack of autonomy forces decisions upstairs, often making them worse, not better.
8. Often prevents the rights things from getting done
   "I can't do the blindingly obvious, because it's not in my budget!"
9. Often leads to the wrong things being done
   The flipside is people doing what they shouldn't, because it is in the budget: "Spend it or lose it!"
10. The world ends December 31
    The budget year creates shortsightedness and a start/stop rhythm, which is often artificial from a business perspective.
11. A language ill-suited for performance evaluation
    "Hitting the budget number" is a narrow and often meaningless way of defining performance.

That is a pretty long list of problems, representing a massive level of frustration. What I find just as problematic, however, is that while so many complain, the vast majority of organizations continue budgeting, year after year. When so many are so critical, why haven't more done something about it? Where is the revolution, when there is so much dissatisfaction boiling among people?

I have thought long and hard about why. I see only two possible reasons. Maybe managers see no alternative: "What shall we then do instead?" They haven't heard of Beyond Budgeting. Fortunately, this group is getting smaller as Beyond Budgeting finally has entered the global management vocabulary.

Those who have heard of Beyond Budgeting may not regard these problems as big enough to justify the long and hard change journey required. They are seen more as irritating itches than as symptoms of any serious disease.

They are dead wrong. These problems are much more than irritating itches. They are symptoms of something much bigger and deeper. The management technology "budgeting" was invented a hundred years ago, with the best of intentions, to help organizations perform better. It probably worked well back then and maybe even 50 years ago. Today, however, we are in very different times. Not only have our business environments become much more dynamic and unpredictable, but they are just as much about people: the birth of the knowledge worker and the demise of organizations as obedient machines. In this environment, budgeting has become more of a barrier than a support for great performance, something that instead prevents organizations from performing to their full potential.

This serious problem is not fixed by addressing budgeting only. The purpose of Beyond Budgeting is therefore not just, or not necessarily, to get rid of budgets. The purpose is to create organizations that are more agile and more human, because this is both good and necessary for great performance today. This requires radical change in traditional management. At the core of this kind of management we find the budgeting process and the budgeting mindset, which seldom can be left untouched and unchanged.

You might hesitate to buy into this massive attack on traditional management and budgets without supporting evidence. If you are skeptical, I hope we at least can agree that any process should from time to time be reviewed and pressure-tested. There is always a better way. So if your guard is up right now, the only thing I ask for is to let it down during the next pages, where we examine more in depth whether we have a problem. I promise to provide hard evidence. Maybe you won't be convinced. Fair enough. But please give me a chance!

Which Way in a New Business Environment?

What is it that really drives great performance in organizations? What is it that makes people get up in the morning, go to work, wanting to do their best? How do we release creativity and innovation? How do we sense and respond faster than the competition? Why should people work for us and not for someone else?

These kinds of questions have probably been asked from the very early days of organizations and leadership. The questions are the same. It is the answers that have changed. The old answers were quite simple and included strong doses of hierarchical command and control. Much of it probably did work well in the past. Today, there is so much more VUCA out there: Volatility, Uncertainty, Complexity, and Ambiguity. In addition, the expectations from employees, customers, shareholders, and society have also increased dramatically. So has the transparency of business. There are few places to hide anymore.

It is almost as if we have been through a "global warming" of the entire business climate. The "climate changes" are faster, more unpredictable, and more violent than in those reliable summers and winters we might recall from our childhood. Just look at the volatility of oil prices. Many businesses, not just oil companies, have the oil price as a key variable in their business performance. They try to make short- and long-term projections, and keep failing miserably, as the 2014 price crash once again demonstrated. Look at the pace of technology innovation. Making a five-year business plan for a record company today must be a nightmare compared to the days before digital formats, downloading, and streaming. And why should it stop here?

The real global warming still has its skeptics, but no one seems to dispute this one. The evidence of change is everywhere. We are almost overwhelmed with uncertainty. The only thing that has become more certain is that our predictions about what lies ahead most likely are wrong. "The future ain't what it used to be," as the American baseball player Yogi Berra once put it.

At the same time, life inside organizations has also changed dramatically. The massive difference between market and book value in most companies is tangible proof that something has happened. The value of human capital: innovation, creativity, passion, and people's desire to contribute and make a difference is often the only value that exists, and it can walk out the door any day. Actually it does, every afternoon, often becoming even more valuable as many then mobilize and reveal additional talents. Employees do not see themselves as "workers" in such organizations, and they cannot be managed as "workers." They have different and higher expectations than earlier generations. Traditional management struggles when people regard leadership as something that must be earned and not assigned through stars and stripes. I learned that lesson the hard way during my short military career.

Companies are not deaf and blind. Most do respond, but in very different ways. Some believe the answer lies in "even more of what we already do." Their response is to pull harder and tougher on existing management levers. They go for longer budget processes, more analysis, more number-crunching, tougher targets, tighter follow-up, and higher bonuses. The strategy is simple: more of the old answers in order to get back into the "control" they had or believed they had in the past.

This is a tempting strategy. It also represents a major paradox. The more VUCA out there and the more urgent need there is to break with the past and go for radical management innovation, the stronger the fear of letting go and leaving what is perceived as a safe and calm harbor in stormy weather, namely, those familiar and well-tested management practices, including the good old budget.

Some realize that there are problems with the old way, but they lack the insight or the courage...