Amsterdam Business School
Leaving the budget behind
Name: Mouaad Ammar Student number: 10282149 Date: 03-05-2015
Word count: 11,009
MSc Accountancy & Control, specialization [Control]
Statement of Originality
This document is written by Student Mouaad Ammar who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Acknowledgements
After an intensive five months the moment has finally come. With writing this acknowledgment I am putting the last touch on my thesis. It was a period where I have worked very hard and learned a lot. I would like to thank the people who supported me and encouraged me during this thesis-process.
I would like to thank my colleagues from ING for their cooperation. You have supported me and were always willing to help me. In particular I would like to thank my mentor Dirk Swagerman and my teacher Sander van Triest. Mr. Dirk Swagerman thank you very much for your support and your guidance during this process. You were always willing to help me and available when I needed you. Mr. Sander van Triest I would like to thank you for the classes regarding the thesis and your guidance by writing the research proposal.
Dear all, thank you very much! Mouaad Ammar,
Abstract
The Mid-Term-Planning (MTP) process within ING Commercial Banking (ING CB) has been a time consuming process for many years. Now the Rolling Forecast has been fully implemented, the question which can be asked is why does ING CB still has a MTP-process. This dissertation examines the role of the MTP and the monthly Rolling Forecast (RFC) within ING CB, and the reason why ING CB is using both processes. By using the Institutional framework and further theory on management accounting change, the researcher clarifies why both processes are being used.
Contents Acknowledgements ... 3 Introduction ... 6 1 Theory literature ... 7 1.1 Traditional budgeting ... 7 1.2 Rolling forecast ... 9
1.3 Rolling forecast and Budget ... 10
1.4 Institutional theoretical framework ... 11
1.4.1 Institutional Framework ... 11
1.4.2 Change and resistance ... 14
2 The Research Method ... 16
3 Finance processes within ING Commercial Banking ... 18
3.1 Mid Term Planning 2014 ... 18
3.2 Rolling Forecast 2014 ... 19
4 Findings ... 21
4.1 MTP-findings ... 21
4.2 Rolling Forecast findings ... 26
4.3 Summary of the findings and analysis based on theory ... 29
4.3.1 Summary of findings ... 29
4.3.2 Findings explained by theory ... 30
5 Conclusion ... 33
Introduction
The research is a case study research and the object of the study is de case ING. The researcher has adopt a research within ING Finance Commercial Banking (ING FCB), focusing on the relationship between the Rolling Forecast (RFC) and the yearly Mid-Term-Planning (MTP) process also known as the traditional budget. Within Finance the MTP-process has been a time/energy consuming event for several years and normally takes about a view moths. For several years the ambition was to lighten the MTP-process.
As of 2012 ING CB has introduced the RFC on a monthly basis. One of the main purposes of introducing the RFC was to create more up-to date data, to lighten the yearly MTP process or even to replace it by the RFC. However now the RFC is implemented the MTP process still exist. Therefore the researcher would like to examine why the RFC did not replace the MTP. The main research question is: ‘why is the MTP-process not replaced by the monthly RFC-process’. The examination has been done by using the Institutional Framework which can be used to examine management accounting change (Burns and Scapens, 2000). The outcome of the report is an explanation why ING CB still uses both the MTP and the RFC.
As research method the researcher has conducted interviews (see chapter five) with ING FCB employees (see appendix 1) from different departments and analyzed available documents (see chapter four). The interviews were semi-structured, because this gave the researcher the opportunity to give the interviewees a direction but at the same time give them the opportunity to tell their story in an open way. Both methodologies are suitable for a case study research. The research paper will contribute to prior literature because it will provide original data.
1 Theory literature
The first part of this section consist of a literature review concerning the research area which is linked to the traditional budgeting and rolling forecast. The second part will be the theory which will be used to explain the findings later in the dissertation.
1.1 Traditional budgeting
Management control traditionally has been viewed as facilitating the process by which resources are acquired and consumed in accomplishing organizational objectives. One form of a management control device, ‘budgets’, has been defined as being financial plans which provide a basis for directing and evaluating the performance of individuals and subunits within organizations to better coordinate and control various activities (Covaleski and Dirsmith 1983). Hansen and van der Stede describe four reasons to budget: operational planning, performance evaluation, communication of goals, and strategy formation.
Organizations often create budgets in order to inform departments and other organizational units about their funding constraints, prior to period commencement. Departments request a budget, and a budget committee comprising senior managers negotiates an amount with departments. The resulting budget must be adhered to by departments (Brownell and Dunk, 1991). Therefore, coordination of resources is the process of requesting and negotiating budget funds. Budgets are also often used as a monitoring device by the board of directors of an organization through formal approval of what is expected in a future period and then regular review of performance against budget (Baysinger and Butler, 1985).
The budget is one of the few formal financial controls provided to directors and represents a financial expectation communicated from senior management to directors. From an operational perspective, directors may use the budget to monitor an organization’s progress intraperiod, noting significant deviations and questioning senior management regarding progress (P. Sivabalan et al., 2009). Budget numbers are often created for the provision of information to external parties (Merchant and Van der Stede, 2003).Most publicly listed medium and large organizations create annual budgets and shorter period forecasts to satisfy market information requirements. Budgets may also be provided to creditors, informing them of an organization’s expected future financial position (P. Sivabalan et al., 2009).
Budgets are often strongly criticized by practitioners and academics (Wallander, 1999; Hope and Fraser, 2003; Jensen, 2003).Despite this, studies have shown that the vast majority of organizations still use budgets (Umapathy, 1987; Ekholm and Wallin, 2000).When companies use
budgets to evaluate staff, staff may engage in game-playing (Jensen, 2003) during the pre-period planning stage. This directly thwarts the planning and control processes relating to budgeting, as the budget numbers developed are not sufficiently accurate and, therefore, not regarded as important by staff (often the same individuals gaming the budget).Therefore, planning and control difficulties result from the use of budgets for evaluation. Hope and Fraser (2003) similarly argued that as a result of the evaluation-related problems in budgeting, organizations should abandon budgeting and adopt a more activity-focused approach to forecasting that is cross-departmental and less likely to engender managerial gaming.Wildavsky (1978) argues that budget is incremental rather than comprehensive; it does fragment decisions, usually making them piecemeal; it is heavily historical looking backward more than forward; it is indifferent about objectives. View other downsides of the traditional budget are that it is expensive, it does not add much value and that the budget quickly becomes outdated (Waal 2002, p. 3).
But budgeting is not only an economic instrument but also a political instrument (Wildavsky, 1978). Despite the drawbacks of the traditional budget, many companies are not prepared to do without it, even as they adopt rolling forecasts. The budget is "outdated the minute it's done, but it still keeps people focused on the end game," explains Andy Gutman, CFO and treasurer. "Like the old adage says, you can achieve 80% of your goals if you write them down." (Branham 2011).
The power of Traditional budgeting is that it makes calculations easy precisely because it is not comprehensive. History provides a strong base on which to rest a case. The present is appropriated to the past which may be known, instead of the future, which cannot be comprehended (Wildavsky, 1978). Libby and Lindsay (2010) argue that budgeting systems continue to play a key role in firms’ control systems and that most companies have no plans to abandon this practice, although many are planning to take steps to improve their budgeting systems to overcome some of the common criticisms. Budgeting is an important control system in almost all organizations (Ekholm and Wallin, 2000; Merchant and Van der Stede, 2003).
1.2 Rolling forecast
Organizations are increasingly using alternative budget forms such as rolling forecasts for management control (Barrett, 2003; Bogiages, 2004; Lynn and Madison, 2004; Haka and Krishnan, 2005). A rolling forecast is usually produced monthly or quarterly, and enables organizations to periodically adjust its expected numbers within an annual period to reflect the current market realities faced by companies (Haka and Krishnan, 2005). Existing studies argue that by using rolling forecasts to forecast more frequently than once per annum (annual budget), companies are able to reduce the detrimental effects of uncertainty on budgeting (Bogiages, 2004).
Rolling forecasts differ from budgets in several ways. They don’t envision a fixed “finish line” at the end of the fiscal year when income, costs, and other elements are measured against the budget’s sale targets. Rolling forecast are more accurate for two reasons. First, they are constantly refreshed by the latest estimates of economic trends and customer demand and by emerging data from the most recent quarter. Second, no one has a reason to manipulate or spin the numbers, because there are no fixed profit targets – or penalties for missing them (Hope and Fraser, 2003). By forecasting over short periods, the rolling forecast reduces the time interval between planning and business reality. This should make organizations more competitive and responsive to change (Gurton, 1999; Neely et al., 2001), especially when economic conditions rapidly change. The annual budget, by contrast, has been argued to be out of date too soon after it is created (Myers, 2001). This problem is minimized when budgeting more frequently. Also, and as a result of more accurate and frequent predictions, rolling forecasts facilitate organizational learning and provide managers with more confidence in the budget numbers that are used for short-term operational planning (Hansen et al., 2003; Haka and Krishnan, 2005).
Rolling forecasts reduce the ‘free ride’ period and, hence, provide more relevant accounting numbers for performance evaluation. However, Gurton (1999) argues that rolling forecasts can negatively affect performance evaluation, because evaluating individuals over shorter periods provides much higher administrative workloads for management, and the performance evaluation process becomes more cumbersome. Also, because budgets are prone to change, it is difficult to provide staff with a performance evaluation target using rolling forecasts. The target will continually change as budgets change. Haka and Krishnan (2005) similarly argued that rolling forecasts reduce goal congruence, as they frequently shift budget targets for staff, when used for evaluation. This makes it increasingly difficult for employees to know what performance targets to aim for, and the use of rolling forecasts for performance evaluation can be difficult. Annual budgets are also more suited to staff evaluation than rolling forecasts, as formal performance evaluation is most often conducted on an annual basis (P. Sivabalan et al., 2009). However
Østergren and Stensaker (2011) argue that in absence of budgets the targets will become more strategic and based on high ambitions, there will be a greater focus on the big picture and an increase focus on possibilities and flexibility.
The majority of practitioner studies have argued for the use of rolling forecasts as a substitute for annual budgets (Bittlestone, 2000; Bogiages, 2004; Lynn and Madison, 2004). However, this argument appears contrary to the reality of high annual budget use in organizations (Umapathy, 1987; Ekholm and Wallin, 2000).
1.3 Rolling forecast and Budget
Rolling forecasts seem to be used as complements to (not substitutes for) the annual budget. In addition, annual budgets and rolling forecasts are used for nearly identical reasons. Annual budgets and rolling forecasts are used in parallel for essentially similar operational reasons. This suggests a collaborative use of annual budgets and rolling forecasts rather than the current arguments that rolling forecasts are substitutes for annual budgets (P. Sivabalan et al., 2009).
1.4 Institutional theoretical framework
This section will describe the institutional theory and explain the Institutional Framework as set out by Burns and Scapens (2000)
Scapens (1994) argued that in many organizations, management accounting systems and practices constitute stable rules and routines. Management accounting is conceived as a routine, and potentially institutionalized, organizational practice. Management accounting can become institutionalized when, over time, it becomes the ‘taken-for-granted’ way of thinking and doing in an organization (Mouritsen, 1994). In the process of routinization, rules may become modified as a group finds mutually acceptable ways of implementing those rules. For example as described by Burns and Scapens (2000): “a new budgeting procedure could be defined in a set of rules laid down in the
‘budgeting manual’. These rules might be established, for instance, when one organization is acquired by another, and the acquirer’s standard procedures are imposed on the acquisition. However, as these new rules (i.e. budgeting procedures) are implemented modifications may be introduced, either deliberately or unconsciously. Deliberate changes could occur due to resistance within the acquired organization, or because of the specific circumstances of that organization. Changes may occur unconsciously when, for example, the rules are misunderstood, or are inappropriate to the circumstances.” Nelson and Winter (1982) argue that in the enactment of the budgeting
procedures routines will emerge and in time will be reproduced and so they will be passed on to new members of the organization.
1.4.1 Institutional Framework
This section will provide an explanation of the framework of Burns and Scapens (2000) for conceptualizing management accounting change by using the institutional theory. This theoretical framework will help to interpret the case study.
An important characteristic of institutions is their seemingly normative and objective character. They define the behavioral patterns which are expected in the particular social group. So the members of a group will behave in the same way of the defined patterns and just assume that this is the way things are. However Tolbert and Zucker (1996) argue that not all behavioral patterns as set by the institutions are instutionlized to the same extent. Institutions can differ from each other in terms of length in time an institution have been in place and to what extent the institution are accepted by a collectivity. The institutions which are more likely to be vulnerable to challenge and less likely to influence action are the ones that did not manage to gain widespread acceptance and are relatively short-lived (Barley and Tolbert, 1997).
Figure 1 (source: Burns and Scapens, 2000)
The framework as shown above as figure 1 has to be seen as three connected parts: the top (Institutional Realm), the middle (Routines & Rules) and the bottom (Realm of Action). Furthermore the framework is an combination of both synchronic and diachronic elements. The synchronic processes are illustrated by the arrows a and b whereas the diachronic processes are illustrated by the arrows c and d. An institution constrains and shapes actions at a certain point in time and is therefore the synchronic element. Whereas action produces and reproduces institutions in a cumulative way and is therefore the diachronic element. The realms are both ongoing through time in a cumulative process of change. The change processes within the institutional realm go over longer periods of time compared to the realm action. The middle of the figure consist of rules and routines which are the elements which link the institutional realm and the realm of action. Both rules and routines are part of a cumulative process of change. But over time it is possible that new rules and routines are being introduced or arise in a more discrete way, which is being illustrated in the form of two separate boxes in the middle.
The first process within the framework starts with the encoding of institutional principles into rules and routines, which is illustrated by arrow a.
The second process which is illustrated by arrow b, is the moment when the actors are enacting the routines and rules which encode the institutional principles. If the new rules and routines challenge existing meanings and values in combination with the presence of actors who possess sufficient resources of power to intervene in the process, the enactment of rules and routines could possibly be subject to resistance.
The third process (arrow c) illustrates the reproduction of the routines due to repeated behavior. The reproduction can be in the form of a conscious change or an unconscious change. If actors have the power to collectively question existing rules and routines conscious change may occur. If the rules and routines are misunderstood or not accepted by the actors, unconscious change may occur.
The final process illustrated by arrow d includes the institutionalization of rules and routines which have been reproduced through the behavior of individual actors. In this way the rules and routines will become simply the way things are (the taken-for-granted way of behaving), and then become the institutions. The more the institutions are widely and deeply accepted, the more they can influence action and resist change.
So to summarize, rules may be introduced and become implemented through the establishment of routines, or rules can emerge out of the established routines. Important to notice is that the whole process will be shaped by the prevailing institutions. Institutions will always exist prior to any attempt by the actors to introduce change, and will therefore shape the processes of change (Bhaskar, 1989).
1.4.2 Change and resistance
In order to further evaluate organizational change, Burns and Scapens (2000) describe three dichotomies; (1) formal versus informal change; (2) revolutionary versus evolutionary change; and (3) regressive versus progressive change.
Formal and informal management accounting change
According to Burns and Scapens (2000) formal change is a result of conscious design, so usually the introduction of new rules can be seen as formal change. On the other side informal change will happen in an unconscious way for instance when operational change creates new routines. The essence of informal change is changing the way of thinking which can be essential for the implementation of formal change. Resistance and anxiety which possibly can lead to an unsuccessful implementation of a new management accounting system for instance can occur if the informal change lags behind the formal change processes. A top-down management accounting change will initially have a direct impact on the formal rules but only an indirect impact on the informal processes which influences the routines.
Revolutionary and evolutionary management accounting change
As described by Burns and Scapens (2000), revolutionary change can be explained as major changes which include fundamental changes to existing routines and institutions. Evolutionary change on the other side includes moderate changes to existing routines and institutions. But that does not mean that by definition significant changes have more impact on existing routines and institutions than little changes.
Regressive and progressive management accounting change
Regressive changes includes behavior which reinforces ceremonial dominance, which limits institutional change. Whereas progressive change tends to change the ceremonial behavior into instrumental behavior and therefore creates institutional change.
As argued by Burns and Scpanes (2000) management accounting change which does not causes a lot of deviations to existing routines and institutions will probably be easier to achieve than change which leads to major differences to the existing routines and institutions. From the moment that new routines become widely accepted in the organization they can be labelled as institutionalized. Which means that they represent the expected way of behavior and will define the relationships between different groups within an organizations.
So when planning a management accounting change it is important to have a good understanding of the underlying context of an organization. Which goes further than only knowing the formal systems, it means understanding the habits of members of an organizations and their taken-for-granted assumptions in the day-to-day activities. When change conflicts with existing routines and institutions resistance against can occur. Burns and Scapens (2000) define three forms of resistance against change:
1. formal and overt resistance due to competing interests;
2. resistance due to a lack of capability (knowledge and experience) to cope with such change; and
3. resistance due to a 'mental allegiance' to established ways of thinking and doing, embodied in existing routines and institutions.
So to summarize, change can be introduced in different ways as described above, the success of an implementation of change depends on the acceptance of the actors. If the actors are powerful enough they can cause resistance which can lead to the failure of an implementations.
2 The Research Method
Type of research is a case study research on the case ING. The research has been done in the form of interviews and document analysis. The data from the documents is for the factuality and the interviews for the opinions. Reason for using interviews is because the researcher wanted to orient broadly and discover the opinions of the interviewees which the researcher thinks could not be done by questionnaires via email. But by choosing interviews as a research method you also bring in the risk of internal validity with it. This risk has been mitigated by using cross reference during the interviews. The interviews have been held with FCB employees from different departments. The interviews are semi-structured, because this created the opportunity to give the interviewees a direction but at the same time giving them the opportunity to tell their story in an open way. Nine employees have been interviewed, which are all in some way involved in the Budget process as well as the RFC process. After the interview data was collected, the data has been analyzed. The internal documents which are related to the MTP and RFC have been analyzed too. By using the analysis which are conducted from the interview data and the documents, the following research and sub questions could be answered:
Research question:
Why is the MTP-process not replaced by the Monthly-RFC? The sub-questions are deductive distracted from de research question:
For what is the Budget used? For what is the RFC used? What does the budget provides? What does the RFC provides?
What are the advantages and disadvantages of the Budget? What are the advantages and disadvantages of the RFC?
The documents have been used to get a basic understanding of both processes and the top-down guidance which is being given in relation to those processes. The interviews have provided in depth knowledge regarding the reasoning of different events which occurred during the MTP and RFC processes.
The number of interviews was related to the point of meeting theoretical saturation, which was in this case by the number of nine interviews.
By answering the abovementioned questions the researcher hopes to give a better understanding of why the MTP still exist now the RFC is fully implemented within ING FCB, and in addition the researcher hopes that the findings will contribute to the existing literature.
To secure the quality of the research design, this research is exposed to the criteria for judging the quality of research design according to Yin (2010) related to case studies. Yin describes the following criteria which are applicable to this research: construct validity, internal validity and generalization. Construct validity is ensured by using multiple sources of evidence (data analysis and interviews). The internal validity is ensured by using cross reference during the interviews. The recommendations can be generalized when implementing management information systems.
3 Finance processes within ING Commercial Banking
Below the researcher describes the case ING, this is based on the document analysis. For many years ING CB is structured as a so called ‘matrix’ organization, which consist of a regional view as well as a functional view. In this case the regional view consist of all the countries where ING provides their CB products and the functional view consists of all the products which ING offers in these countries1. Both views have different chiefs with different responsibilities and sometimes shared responsibilities. During the last few years a third view is playing a more and more important role, which is the Clients view. This view focuses on the clients which ING serves. So a third dimension is added to the so called ‘CB matrix’.
3.1 Mid Term Planning 2014
During the process all the three views have to agree as much as possible on the MTP-numbers which have to be delivered to the Management Board Banking (MBB) for approval.
In the beginning of this year the Board of Directors mentioned the ambition to lighten the MTP and shorten the timeframe of the MTP-process. The ambition as communicated was to shorten the MTP-process to twelve weeks. The actual process took longer (see figure 2).
MTP MTP MTP MTP MTP
Jan'14 Feb'14 Mrt'14 Apr'14 May'14 Jun'14 Jul'14 Aug'14 Sep'14 Oct'14 Nov'14 Dec'14 Figure 2: duration of MTP-process 2014
A working group of Group Finance Bank (GFB) started in 2014 around June/July to evaluate the process of previous year which could help by constructing the upcoming MTP-process. During this sessions the working group also started to construct the framework for the upcoming MTP-process. During August/September GFB sat together with different departments like Risk, Capital Management, Bank treasury, to come up with targets and constraints for the regions and functions. GFB proposed their ambitions to the MBB, after the MBB discussed the proposed ambtions and made adjustment to it, the targets and constraints where formalized. These approved targets and constraints were then translated into planning letters (guidance) which were being sent to the different regions and functions in September/October. This was basically the
starting point of the MTP-process. The regions and functions were asked to deliver their MTP in the beginning of November. So, after the regions and the functions did receive their planning letters they had to come up with their MTP-ambitions at the beginning of November at latest.
To deliver the MTP-ambitions in November the regions and the functions had to talk together about their thoughts for the coming years. These discussion are the so called ‘alignment meetings’. During these meetings, the regions and the functions were trying to align their thoughts and eventually agree about the MTP-ambitions. After these meetings the regions had to finalize their ambitions and deliver it to GFB. When GFB received all the regional input they analyzed it and compared it with the guidance they gave in the planning letter. After these analysis, the regional ambitions were presented to the MBB. After the MBB received the regional ambitions from GFB there was the planningweek. During the planningweek the regions had to present their ambitions which they had submitted to GFB and were presented to MBB. Based on these presentation the MBB took some decisions and these decisions were incorporated in the total MTP-ambition by GFB. After the adjusted MTP-ambitions were approved by the MBB, GFB informed the regions about their targets for the coming years. After the Supervisory Board approved the MTP-ambitions, these ambitions were sent to the De Nederlandse Bank (DNB) and European Central Bank (ECB).
3.2 Rolling Forecast 2014
As of 2012 ING CB introduced the monthly Rolling Forecast (RFC). The goal of the RFC was to lighten the yearly MTP process, and to provide up to date information about the performance of ING CB. With more up to date information, the top-management was enabled to adapt quicker to changing circumstances.
The RFC has been updated on a monthly basis. Basically there are two types of RFC within ING CB, one is the functional RFC and the other is the regional DB RFC. For the functional RFC the functions are asked to deliver a RFC on functional level on a monthly basis, consisting of a forecast for the current year and the next year. The DB-regions have to deliver the same input based on their knowledge.
The main difference within RFC process and the MTP-process is that there is no alignment between the functions and the DB-regions. So in order to have the same total forecast number the gap between the both forecasts is being plugged in a fictive region.
The monthly RFC process takes approximately one and a half week. This process begins with the functional preparation up to the delivery of the RFC and the consolidation of all the
functional RFC’s. The consolidated RFC is then reported in a monthly report. During the preparation of the RFC the functions are asking the business (the people in the front office) about their expectations for the coming periods. After the discussion with the business the function puts a RFC together which they will then submit as the current functional RFC. When the RFC’s are submitted and consolidated, GFB analyses it and then sends it to the MBB. The MBB is then updated with the latest available information.
4 Findings
This section describes the findings which were conducted from the interviews. The researcher has described the document analysis in the previous chapter. The following findings are divided into two parts, the first part is about the findings regarding the MTP-process and the second part is about the findings regarding the RFC-process. The citations testimonial include qualitative judgments. The findings will be analyzed by using the Theory regarding traditional budget and Rolling Forecast and the Institutional Framework (as outlined in chapter 1).
4.1 MTP-findings
The MTP findings which are going to be outlined in this subsection are categorized by the following criteria’s: goal, duration, actors, level of detail, communication, compensation policy, process, advantages and disadvantages/improvements.
The goal of having a MTP within ING CB is mainly to create a long term ambition based on the strategy of the bank. These ambitions have to be translated into goals for all the departments within the bank. Besides the translation of the ambition level, the MTP is used to evaluate the current position in relation to the strategy every year. Where necessary the strategy can be adjusted or plans can be created in order to achieve the strategy. The MTP is also a tool to get everyone on the same page regarding the things that have to be done in order to achieve the ambition plans. At the same time the regions and the functions are being heard about their plans for the coming years. Besides the strategic use of the MTP, the MTP is also being used as the basis for performance measurement by KPI’s which are based on the MTP. One of the interviewees stated the goal as follows:
“ To set a mid-long ambition for the company and get everyone on the same page about the direction the company needs to go. So everyone needs to be committed and heard. Ambition plans are being evaluated and the performance measurements are being derived from the MTP that is more on the short term.”.
This is in line with the overall view of the interviewees that the MTP is a strategic process/tool which translates the strategy of the company into business plans and numbers.
Despite the announcements of the topmanagement that the MTP-process would be shorter this year, this was not the case for most of the interviewees. For the top-management the MTP-process is shorter than previous year but for the layers below the process is still as long as last year. The guidance from the top-management for the regions and the function was indeed to
start later with the MTP-process than previous year. But both the regions as well as the functions have indicated that they have to prepare earlier in order to be able to deliver an MTP (as detailed as it is) before the deadline.
The duration of the MTP-process differs per department. GFB for instance who is responsible for guiding the MTP-process, starts already in June by evaluating the process of previous year and brainstorming about the process for the current year. The functions and the regions are starting in August and September and finish end of December/ begin of January. But for instance the teams which are on a consolidated CB level start in October until mid-January. For the top-management it is indeed shorter than previous year. But for most layers below them, the process is not shorter than previous year, simply because of the demand of details and the complexity of the governance which makes the MTP-process a time consuming event. As one of the interviewees stated:
“Officially the MTP-process takes twelve weeks, but in order to prepare a MTP correctly we start 1 or 1.5 month earlier”
Another interviewee said:
“ Mid September the RFC is being discussed with the Commercial Banking Executive Team (CB ET), the real MTP-process starts by determining the total ambition level of CB and that was begin of October and it ends end of January.”
The intention to make the process shorter is obviously and is also explicitly mentioned by the top-management. For the top-management the goal for shorten the MTP-process is also accomplished but for the layers below them the duration has not changed much.
The numbers of actors involved in the MTP-process is being perceived as many. Most of the interviewees have mentioned explicitly that there are a lot of people involved in the MTP-process, which makes the process tougher and longer. Because of the governance of ING CB all the different views (regional view, functional view and client view) are involved, and they have to cooperate to come together to one final number. This means that the different parties have to make compromises to meet each other at a number. Having said that, the interviewees did mentioned, that because of the governance this many actors have to be involved because the MTP affects all of them. As one interviewee stated:
‘MTP-process is heavy because there are so many actors, the organization is complex because of the different scopes. There are a lot of products with different managers and therefore you need a lot of details which makes the process heavier.’
Another interviewee stated:
‘Involve less people. In a small group you can make things happen quicker than when you have to involve the whole world. When things are clear you have to communicate it, but not in the process when you are trying to settle an ambition level, that have to be done in a small group’.
So the feeling among most of the interviewees regarding the number of actors that are involved in the MTP-process is that there are many actors which makes the process heavier and longer but they also understand that given the governance in which ING CB is suited it is necessary to have this many people involved. But you can argue when the appropriate time is to get all the actors involved, as mentioned by the interviewees.
The level of detail deliverables regarding the MTP which is being asked from the regions and the functions is also a topic which has been mentioned by the interviewees. The level of detail that the regions and functions have to deliver is assumed as one of the main factors which makes the MTP-process heavy. Because the regions and the functions have to come up with a detailed MTP-proposal they have to involve more people to come up with detailed numbers which takes more time. Another thing which has been said is that the goal of the top-management is to make the MTP-process lighter, but still the demand of detail is increasing every year. But yet, most of the interviewees acknowledge that the amount of detail is necessary because of the governance in which ING CB is suited. Because of the different scopes within ING CB you have different managers with different responsibilities and sometimes with shared responsibilities. So in order to be transparent and to be able to have good discussions between all the parties the details are necessary. Like one of the interviewees stated:
‘The details are necessary to defend your high level numbers. Details enables you to have in depth discussions. Some Domestic Banks find it difficult to come up with a lot details because they would like to have managerial freedom.’
Another interviewee stated:
‘The amount of details has increased but to come to a good total you need details’.
And another interviewee stated:
‘Because of the many stakeholders you need the details. The demand of details has already been filtered. In the coming future the details will only become more important.’
So the interviewees mentioned the demand of detail as a factor which makes the MTP-process heavier. And if you would decrease the demand of detail the MTP-process would be lighter. But at the same time most of the interviewees argued that the level of detail is necessary because of the
governance but maybe more importantly to be able to build a solid total number which then can be justified based on detail. Which results in a good basis for discussions between the different actors.
The factor ‘communication’ has been mentioned by several interviewees as a point for improvement. The communication throughout the process is not always clear for the regions and functions, which results in miscommunication, delays and frustration. For instance, for the actors it is not always clear what is being expected from them, in terms of who is going to do what and when. Another point is that when decisions or adjustments have been made centrally it is not always being communicated to the people which it affects. Which eventually results in confusion among the actors because the figures changed. And therefore the actors are not recognizing the figures. One of the interviewees stated:
‘Bad communication, no clear guidance, miscommunication. When processes are being adjusted this is not always communicated clearly.’
Another point which has been mentioned in the interviews is the communication around the alignment meetings. During the alignment meetings between the regions and the functions topics are being discusses which results in an action list which has to be done. The actions or decisions are not always recorded accurately and consistently in terms of who has to do what and when. The outcomes of these meetings are also not always communicated to the actors which it might affect. The link that exist between the MTP and the compensation policy has been mentioned as a cause for the political aspect of the MTP-process. Because the actors are partially being rewarded based on the MTP targets, the actors might behave differently during the MTP-process than when their rewards would not be linked to the MTP targets.
One of the interviewees stated:
‘MTP is so detailed because the bonuses are linked to the MTP.’
Another interviewee stated:
‘By rewarding people based on Actual vs Actual instead of a MTP you will lose a lot of discussions and complexity in the MTP-process. That would really help by improving the MTP-process.’
Because the compensation policy is linked to the MTP-targets, the MTP-process is being exposed to another complexity, besides the governance of ING CB which only makes the process harder.
There are several stakeholders involved in the MTP-process. All the different stakeholders have their own demands in terms of information. The GFB filters the demand and tries to construct a way to meet the demand as much as possible without making the process to heavy.
The MTP-process as a whole is being perceived as heavy and time consuming. Yet, most interviewees see the process as an essential and important process. The following quotes describe how the MTP-process is being perceived by some of the interviewees.
One of the interviewees stated:
‘One of the most important processes. Process which gives you in the beginning a lot of energy but when times passes by it turns into a laborious process because of the complexity of the governance.’
Another interviewee stated:
‘Frustrating process for many years, mainly because of the complex governance. Too many actors are involved which makes the process only longer and harder and due to the link between the budget and the KPI’s.’
Another stated:
‘The process is time consuming. Because of the KPI’s the MTP becomes politically driven. Finance processes are not working. Big things are being discusses in the alignment meetings, but what to do with the small things which causes the pain in the end.’
Another interviewee said:
‘Process has improved during the last ten years. The governance has also improved but there is still some improvement needed but the building blocks of the MTP-process are quite good.’
Another interviewee stated:
‘Process is a time consuming event, because the deadlines are shorter but the amount of work is still the same.’
The process has several advantages as mentioned by the interviewees. The MTP-process provides the opportunity to have strategic discussions regarding the direction the company needs to head and allocate the resources of the company. Once per year there is a good alignment between the regions and the functions. It provides transparency to the external world and the internal world and it is a tool to monitor and steer the expenses and FTE’s. The MTP-process is a moment to see the total picture and see how everything in the company is connected. New business plans are being revealed and evaluated. People are being heard.
Beside the advantages which the MTP-process provides, it also has some disadvantages and possibilities for improvements as mentioned by the interviewees. During the interviews the MTP-process was noted as a time consuming event. The timeframe for having alignment meetings was perceived as too short. There is some gaming involved in the MTP-process. When the figures supposed to be final because the deadline did pass, mutations are still being made in the system. This causes confusions among the different departments. The templates which the regions and functions are receiving are not always clear. People have to be held accountable if things are going wrong during the MTP-process and where necessary it has to be escalated.
4.2 Rolling Forecast findings
The RFC findings which are going to be outlined in this subsection are categorized by the following criteria’s: goal, duration, actors, level of detail, communication, process, advantages and disadvantages/improvements.
The goal of having a monthly RFC within ING CB is mainly to provide up-to-date information and therefore be able to quickly respond to changing circumstances. It provides the information to evaluate if the current course in line is with the ambition levels of the MTP. One of the interviewees stated the goal of the RFC as follows:
‘Provide up to date information about the performance of the company and project the outcome for the coming periods based on the new up to date information.’
Another interviewee said:
‘Forward looking instead of backward looking. Creates the opportunity to steer the company on a frequent basis.’
The RFC is being used as a tool to provide up-to-date information on a more frequent basis (monthly), this enables the management to quickly respond to changing circumstances.
The duration of the monthly RFC-process is quit short according to the interviewees. The duration of the RFC-process differs per department but on average it takes around three days. Sometimes it takes longer and sometimes it might be shorter. This is mainly related to changing circumstances and the amount of deltas on the previous RFC. You can imagine that in case of economic or political turmoil things can change quickly on a bigger scale which maybe results in bigger changes which need more time to be analyzed.
In terms of number of actors which are involved during the RFC-process it is quite different compared to the MTP-process. There are less actors involved during the RFC-process, because the RFC is not as detailed as the MTP-process and therefore less actors are asked for input. Some departments (like for instance Risk, Corporate Strategy, Legal etc.) are not involved as they are during the MTP. The RFC is mainly done by the finance departments of the regions (for the domestic banks) and the finance departments of the functions in collaboration with the business.
The level of detail which the regions and the functions have to deliver is less compared to the MTP-process. The RFC is more high level and is also being perceived as less detailed and therefore also as lighter by the interviewees. One of the interviewees stated:
‘Less detailed than MTP, but still detailed. But the level of detail is necessary because of the governance but having details can also be beneficial.’
The RFC is less detailed than MTP but it still offers details which can be used to understand what is happening and fulfill the different demands which are inherent to the complex governance.
The factor ‘communication’ has been mentioned by several interviewees as a point for improvement. The communication throughout the process is not always clear for the regions and functions, which results in miscommunication, delays and frustration. For instances, for the actors it is not always clear what is being expected from them, in terms of who is going to do what and when. Another point is that when decisions or adjustments have been made centrally it is not always being communicated to the people which it affects. Which eventually results in confusion among the actors because the figures did change. And therefore the actors are not always recognizing the figures. One of the interviewees stated:
‘Central adjustments have to be communicated better.’
Another interviewee stated:
‘Questions are not always being asked to the right people, involve the regions more.’
Another interviewee said:
‘Make people more aware of why some things are being asked to deliver.’
So based on the interviewees there is still some improvement possible regarding the communication during the RFC-process.
The RFC-process is being perceived as a light, smooth and efficient process by most of the interviewees. This is mainly because the RFC is less detailed and because there is no alignment between the regions and the functions. The fact that there is no alignment between the regions and functions makes the process light. In this way the regions can deliver a RFC based on their own input and the functions can deliver their RFC based on their own input without discussions and compromises between both of them. As one of the interviewees stated:
‘Smooth process because there is less complexity, there is no alignment between the regions and the functions. The responsibilities are clear’.
Another interviewee stated:
‘Institutionalized process, with hard deadlines where everyone aware of is. This makes the process smooth. But process is also vulnerable because it is spreadsheet driven’.
Another interviewee said:
‘It is too much a finance process now. During the process you lose the business people because finance makes in the end central adjustments.’
Another interviewee stated:
‘Nice process, enjoyable process, quick process. Only sometimes just too little time to do a double check on the figures.’
To have one total RFC-number the gap between the RFC of the regions and the functions is being plugged in a fictive regions this avoids a lot of discussions. The RFC-process has no direct link to the compensation policy which makes it less political driven. Overall, the process is being perceived quite positive.
The process has several advantages as mentioned by the interviewees. The RFC-process provides the opportunity to have up-to-date information which helps the management to adapt quickly to changing circumstance. The RFC increases the quality of the MTP because with the RFC the regions and the functions are forced to analyze their predictions for the coming periods earlier.
Beside the advantages which the RFC-process provides, it also has some disadvantages and possibilities for improvement as mentioned by the interviewees. The tooling can be better, it is now more a spreadsheet driven exercise. Analysis and comments on deltas can be improved. The communication regarding the RFC-process can be better. Because there is no alignment between the regions and the functions (which is both an advantage as well as a disadvantage), the
difference between both RFC has to be made more transparent and explained. In some cases the RFC number reflects an ambition level instead of a realistic forecast.
4.3 Summary of the findings and analysis based on theory
This section will provide a summary of the findings and an analysis of the findings by using the theory as described in chapter 1.
4.3.1 Summary of findings
The MTP process is a strategic process where the strategy is being translated into long term ambitions. With this long term ambitions the people within the company know which direction they have to head. But despite the ambition and announcement of the top-management to lighten and shorten the MTP-process, for the layers below the top-management the MTP has not changed much compared to previous year. The MTP is still a time consuming event, driven by the complexity of the organization, different responsibilities and shared responsibilities. The amount of detail involved in the MTP-process is another factor which makes the process longer and heavier. But the majority of the interviewees seems to understand that because of the complexity of the organization and the different stakeholders these details are necessary. The communication during the MTP-process needs improvement, miscommunication is now leading to frustration among the employees. The compensation policy is still linked to the MTP-targets, this makes the MTP-process political driven sometimes.
The RFC-process is a monitoring/steering process, which uses up-to-date information (monthy updated) to check if the results are in line with the long term ambitions (MTP) and to project the future results. The expectations of the result are being adjusted based on the latest information and changing circumstances. The process is a quick process which takes on average three days per month. The process is less complex compared to the MTP-process, this is mainly because there is no alignment between the regions and the functions. Both can deliver their own forecast without making compromises with each other. If there is a gap between the regional forecast and the functional forecast, this gap is closed by using a fictive region to close the gap. This avoids a lot of discussions and makes the process therefore light. The RFC is also less detailed compared to the MTP. This is mainly because the results are monitored on a higher level and if the regions and functions would be asked to deliver more details it would make the process heavier. The communication during the RFC-process can be improved. Miscommunication or even no communication leads to frustration among the employees. Central adjustment on the rolling
forecast of the functions for example are not always communicated properly, this results in confusion by the employees who are affected by the adjustments on the figures.
4.3.2 Findings explained by theory
The findings as described above related to the MTP are in line with the theoretical arguments as described by Covaleski, Dirsminth and van der Stede in chapter 1. The findings prove that the budget is being used as financial planning and provide the basis for directing and evaluating the performance of individuals within ING, furthermore it used for creating the strategy and communicating the goals. Brownell and Dunk (see chapter 1) argue that there is a negotiating element in the budget process, this is also being seen in the process within ING. When the MBB sets a budget for an particular department the departments has to response with a plan of what they think is achievable and try to convince the MBB. As explained by Merchant, Van der Stede and Sivabalan (see chapter 1) the budget numbers are a provision of information for external parties. This also the case within ING, who provides for instance the budget information to the Dutch Central Bank and to the European Central Bank. Within ING there is also strong criticism on the whole MTP which is in line with the arguments of Wallander, Hope, Fraser and Jensen (see chapter 1). As argued by Jensen (see chapter 1) there is indeed a factor of game-playing within ING in the MTP-process this is because the bonuses are related to the budget which can lead to game-playing. The budget is being experienced as quickly outdated within ING and is expensive because it takes a lot of time and effort of employees. These findings are in line with the findings of Waal (see chapter 1).
In line with the arguments of Haka and Krishnan (see chapter 1) the RFC within ING is provided on a monthly basis and enables ING to adjust the forecast every month based on the latest available information. Also the RFC does not creates incentives to manipulate the numbers because there are no target linked to the RFC-numbers and no penalties for missing them which is in line with what Hope and Fraser mentioned (see chapter 1). Currently ING is using the RFC next to the MTP which is line with the findings mentioned by Umapathy, Ekholm and Wallin (see chapter 1).
The intention to make the MTP process lighter or even replace it by the RFC seems to be a revolutionary change as described in chapter 1. Because fundamental changes to existing routines and institutions are needed to make the change happen. The change intended by the topmanagement of ING can be defined as formal change by introducing new rules, the informal change however seems to be hard to change because employees are used to their old routines. The
process to change can also be viewed as a battle between regressive change against progressive change as described in chapter 1.
The MTP-process has become institutionalized over the years, the new top management is trying to change the process by setting new rules. One of the new rules as described above is a shorter timeline for the MTP-process. But despite the announcement and guidance of the top management to have a shorter MTP-process the employees do start earlier. It is obvious that the employees hold on their routines despite the new rules. The resistance to start later with the MTP-process can be explained by using the theory regarding management accounting change as described in chapter 1, which also describes resistance against management accounting change. The resistance can be divided in three sorts of resistance: ‘1. formal and overt resistance due to competing interests; 2. resistance due to a lack of capability (knowledge and experience) to cope with such change and; 3 resistance due to a 'mental allegiance' to established ways of thinking and doing, embodied in existing routines and institutions.’ The findings as mentioned by the interviewees (regarding the duration of the MTP) seem to show that the majority wants the process to be shorter but still experiences the timeline as the same as in previous years. The willing to shorten the process exists among the employees but still the processes have not changed much which seems to be like resistance due to a lack of capability (resistance nr.2) because the shorter timeline is a new experience for the employees, after experiencing a long MTP-process for many years. Resistance due to mental allegiance (resistance nr.3) is also likely, because the MTP-process is an institutionalized process and employees tend to remain stuck in their habits an routines. Which can cause resistance against new ways of thinking an doing.
Another topic which has been described regarding the MTP-process is the level of detail and the friction (among the employees and stakeholders) which occurs because of the high demand of detail from the stakeholders. The findings as mentioned by the interviewees seem to show that the majority seem to understand why more detail is needed, that is why the sort of resistance which is likely to occur is number 3 instead of 1 or 2. The employees understand why details are necessary but at the same time everyone is trying to make the MTP-process lighter. Some of the employees are getting confused because on one side everyone is trying to make the process lighter but on the other side the demand for detail is increasing which means more work. The employees did become used to provide a level of detail during the years which have become routines and institutionalized, but now the stakeholders are asking more details, the routines have to be changed to provide this level of detail. This can cause the resistance against the demand for more detail.
Another crucial point within the MTP-process is its relation with the compensation policy. Because of the fact that employees are getting partly rewarded based on their budget targets, the MTP-process gets a political aspect. So to eliminate the compensation aspect out of the budget process is a big change for the employees. The rewards of the employees have been based on budget targets for many years which has become an institutionalized process now. Due to the political aspect of the MTP-process it has been impossible to replace the MTP by the RFC. The RFC has been perceived by the interviewees as very positive, helpful and nice to have. Because no rewards are based on the RFC numbers, the process is light and less political than the MTP. This difference is one of the main reasons for the resistance against the elimination of the MTP. And that is why the MTP has not been replaced by the RFC. Employees are used to get rewarded based on a budget, which has been the way it has been done for many years. So to implement a new rewarding system which will affect individual employees will have a big impact and is likely to receive resistance. The most likely sort of resistance which will occur is resistance nr.1, this is because the employees have personal interest (rewards) in the way of how things are going now. But it is possible that the resistance is an combination of nr.1 and nr.2. Because the employees have been rewarded for many years on the budget targets, it is likely that it is difficult to find a new way to measure and rewards the performance of the employees.
5 Conclusion
The research paper has used the institutional theory to interpret the findings regarding the probable change from the MTP-process to the RFC-process. Burns and Scapens (2000) provided the researcher with three dichotomies (formal vs informal change; revolutionary versus evolutionary change; and regressive versus progressive change), which allowed the researcher to interpret the role of management accounting change. Beside the institutional theory the researcher used previous theory regarding the traditional budget and RFC to help understand the findings.
The MTP and the RFC are two different processes with different purposes. The MTP is a strategic process which is being used to translate the strategy of the company into ambition levels and hard targets for the different departments. This enables the top-management to get the employees within ING CB on the same page about the direction ING CB needs to head in order to achieve the ambition plans. It is also a chance for the regions and functions to show their business plans to the MBB. The MTP-process is being perceived as a heavy, time consuming process, but at the same time also as a necessary process because of the complexity of the governance. Despite the ambition to shorten the MTP-process, in reality the process has not changed much in terms of duration. The communication during the MTP-process is one of the most crucial points which needs to be improved. With clear communication you lose a lot of frustration and gain a lot of efficiency. Besides the abovementioned factors which makes the MTP-process a though MTP-process, the main factor has to be the link with the bonuses. The MTP-targets are partly being used the measure performance of the employees and reward them based on that. It is difficult to eliminate this factor because it has become an institutionalized process over the years. As long the bonuses will be linked to the MTP, it is difficult to replace the MTP by the RFC. The RFC-process is being perceived quit positive. The RFC-process is a light process which takes on average 3 days a month. It provides up-to-date information which helps the top-management to make decisions and adapt quickly to changing circumstances. The process is less complex because the targets for the employees are not linked to the RFC, so there is less political aspect involved compared to the MTP. During the RFC there is little to no alignment between the regions and the functions, that is why the process stays so light and quick. This can be both an advantage and a disadvantage. It makes the process less complex and time consuming, but at the same time there are no discussions between the both sides which can help to provide a more realistic number.
The change which the top management is aiming for can be classified as a revolutionary change because the process which they want to change is widely institutionalized and will have to change a lot. Some changes have already taken place on a formal base but the informal change seems to stay behind on certain points, because employees stay stuck in their old routines.
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Appendix 1
Nr. Function Date Duration
1 Manager 10-12-2014 01:01:46 2 Manager 10-12-2014 00:57:21 3 Manager 11-12-2014 00:54:00 4 Process-mentor 11-12-2014 01:09:33 5 Manager 15-12-2014 00:41:05 6 Manager 17-12-2014 00:34:35 7 Manager 17-12-2014 00:41:29 8 Manager 18-12-2014 00:43:09 9 Managar/ (process-owner) 19-12-2014 01:23:32
Appendix 2
Interview-questions MTP-vragen
1. In hoeverre ben je betrokken bij het MTP-proces? 2. Waarom wordt er gebruik gemaakt van een MTP?
3. Wanneer begint voor jullie het MTP-proces en hoelang duurt het? 4. Hoe ervaar je het MTP-proces?
5. Wat zijn de voordelen van de MTP?
6. Wat zijn de nadelen/verbeterpunten van de MTP?
RFC-vragen
1. In hoeverre ben je betrokken bij de maandelijkse RFC-proces? 2. Waarom wordt er gebruik gemaakt van een maandelijkse RFC?
3. Wanneer begint voor jullie het maandelijkse RFC-proces en hoelang duurt het? 4. Hoe ervaar je het maandelijkse RFC-proces?
5. Wat zijn de voordelen van een maandelijkse RFC?
6. Wat zijn de nadelen/verbeterpunten de maandelijkse RFC?
MTP & RFC
