Borealis, a European plastic producer, used a traditional, time-consuming procedure in its budgeting. Such use led the company's budget to become outdated in a constantly changing and competitive environment with the unsteady input and output prices and market conditions. This case study analysis discusses the process which led Borealis to use four targeted management tools in budgeting. These tools are the rolling financial forecasts, Balanced Scorecard, activity-based costing, and investment management. This study also delves into the implementation of the new measurement and control systems.
Robert S. Kaplan; Bjorn N. Jorgensen
Harvard Business Review (102048-PDF-ENG)
December 03, 2001
Case questions answered:
- What were the reasons for Borealis to abandon budgets?
- What are the advantages of the new approach?
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Borealis Case Answers
Question 1: What were the reasons for Borealis to abandon budgets?
Borealis was first concerned because of the impossibility of budgets to distinguish between forecasts (realistic) and targets (challenging). Budgets were also seen as a tool hindering decentralized decision-making and responsibility-taking.
Moreover, the budget process forced the organization to look into financial data only once a year, thus causing many drawbacks in a volatile industry such as the petrochemical industry.
In fact, the cost of raw materials is not predictable, and switching costs for the customers are law. The long bureaucratic process of building budgets, caused by the hurdles for data collection and internal negotiations, made the company slow in reacting to the changes in the external environment.
Despite the hard work behind it, people rarely used it as it was soon considered obsolete from a market point of view.
Eventually, using budgets as the only financial tool impeded the employees from gaining a clear idea of what the strategy of the company was, hampered a more relevant cost accounting and cost management system, and hindered quick evaluation of investments’ proposals.
Question 2: What are the advantages of the new approach?
By comparison with budgets, the new approach required less bureaucratic work and ensured more decentralized action.
Rolling financial forecasts ensured a simpler approach that cut off most parts of the long process needed for budgets.
Moreover, they were not correlated to managers’ performances; hence, the trade-off between accuracy and achievability was eliminated.
Eventually, even if simpler, rolling financial forecasts provided more reliability since they were easier to update and not influenced by managers’ gaming. This could ensure a faster reaction of the company to changes in the market.
Balanced scorecards achieved the objective of making the company strategy a shared and understood goal, thus empowering individual action. Short-term (good relative performance) and long-term KPIs (value creation KPIs) were implemented and used to build a long-term incentive plan for key managers.
The employment of activity-based costing management helped in creating a common language for describing costs and benchmarking with other companies.
Moreover, it made cost information more intuitive and understandable, aligning discussions about costs and cost reporting systems. It also made it possible to pinpoint the cost of expected and unexpected unused capacity.
Since managers were not constrained by budgets anymore, a decentralized investment management policy was also implemented. Ensuring complete autonomy on the small size investment enhanced individual responsibility, but also company responsiveness to investment opportunities.