1 Introduction
Recent budgeting research has become more extensively informed about the various functions
1 (e.g. planning, control and evaluation) that budgeting serves (Hansen and Van der Stede
2004; Sivabalan et al.
2009; Henttu-Aho and Järvinen
2013; Becker et al.
2016). Accordingly, the focus of research is shifting from assessing the effects of budgeting in an aggregate manner toward considering the importance of the individual functions of budgeting and the associated implications for control systems’ design in various organisational settings (Sponem and Lambert
2016). In particular, the planning function of budgeting has been found to grow more prominent in volatile business environments or a shaky economy, with organisations often addressing the uncertainty by turning to more frequent forecasts or to scenario work (Becker et al.
2016; Goretzki and Messner
2016; Palermo
2018). Notwithstanding this utility, it appears that the intentions behind more predictive accounting practices can sometimes be controversial from the standpoint of budgetary functions, leading to confusion and contradictions if there is failure to distinguish between the core purposes of planning and evaluation.
The role of rolling forecasting in planning involves its own intriguing contradictions: while practice-oriented literature often suggests it as an alternative to annual budgeting (Cosper
2012; Zeller and Metzger
2013), it seems to get incorporated into management control systems in various ways. In the accounting literature, some scholars find strong overlap between the role of forecasting in
planning and the
evaluation function of annual budgeting, hence referring to ‘re-budgeting’ (Becker et al.
2016) or ‘rolling budgeting’.
2 Researchers applying that framing tend to see more frequent (i.e., rolling) setting of budget goals as problematic, especially in a stable business climate (Haka and Krishnan
2005; Hansen and Van der Stede
2004; Hansen
2011). Others view rolling forecasting more as a complementary tool supporting the
planning and
control functions of annual budgeting and as having its place in a hybrid system composed of various accounting instruments (Ekholm and Wallin
2000; Sivabalan et al.
2009; Henttu-Aho and Järvinen
2013). Finally, some studies indicate that in an environment without annual budgeting the process of rolling forecasting becomes a key part of
planning. This position is visible in the organisational mix of controls called Beyond Budgeting, in which target-setting is separated from the flows of planning (Østergren and Stensaker
2011; Bourmistrov and Kaarbøe
2013). These contradictory conceptions imply that rolling forecasting might well play many of several roles in connection with the annual budgeting process or in connection to another mix of controls, and highlight a need for research to delve more deeply into the interrelations among practices serving various functions typical of budgeting (Hansen and Van der Stede
2004).
The variety of roles that rolling forecasting plays in management control systems may be explained in part by the degree of goal-orientation they embody or the existence of a motivational component in planning (see Malmi and Brown
2008; Goretzki and Messner
2016). Even though planning sometimes is seen as only supporting
ex ante decision-making and hence as separate from the management control per se, in budgetary control it plays a vital role in creating goal congruence in the organisation and thus is always linked in some way to the evaluation function of budgeting (Malmi and Brown
2008; Palermo
2018). Indeed, research has acknowledged that functions of budgeting do not exist in isolation from each other. The resulting constellations may differ greatly. For instance, the varying emphasis placed on planning and on evaluation may account for diverse outcomes in the design of systems of management control (see Hansen et al.
2003). We use the concept of
budgetary control systems to refer to implementations that may serve more than one of the functions of budgeting and that represent a wider design of practices around annual budgeting (Flamholtz
1983; Arwidi and Samuelson
1993; Ekholm and Wallin
2000; Otley
2001,
2006). More widely seen, systems that managers use to ensure that the organisational decisions made are in line with certain goals or strategies, can be termed
mix-
of-
controls or
management control systems (MCSs) (Merchant and Van der Stede
2007, p. 8; Østergren and Stensaker
2011). By investigating the role of rolling forecasting from the standpoint of various combinations of management control practices and the links between them, we can better understand the diversity in design and use of such control systems. In light of this, we address the following research question:
what is the role of rolling forecasting for the planning function of budgeting, and what implications do the way it is used have for management control system design?
To examine rolling forecasting’s role in planning and how it ties in with other practices in an MCS, we draw from the recent theoretical work of Tessier and Otley (
2012) on the Levers of Control (LoC) framework (Simons
1995), also considering research into the temporal orientation of management control practices (Becker and Messner
2013; Palermo
2018). The conceptualisation by Tessier and Otley, by viewing diagnostic and interactive controls as attention-related attributes of control, aids in drawing a comparison between controls in terms of how they are used. Attention is a key concept also with regard to the time dimension: various attention-directing mechanisms are argued to shape organisational actors’
temporal orientations within an MCS (Becker and Messner
2013). This paper examines the role of rolling forecasting in three industrial firms, all of which have recently sought to enhance their planning. While the focus is on short-term planning, evaluation roles are contemplated too, through their linkages to planning. We apply a multiple-case-study approach, which helps us to compare the companies in their MCS design and use. This study contributes to the literature in at least three ways: firstly, it adds new empirical insights to the discussion of the planning function of budgeting and of the role of rolling forecasting in an MCS setting (Hansen et al.
2003; Hansen and Van der Stede
2004; Becker
2014; Becker et al.
2016). Also, our results suggest that certain types of use of rolling forecasting may promote an MCS’s proactive functioning (Becker et al.
2016; Palermo
2018). Thirdly, the work increases understanding of how rolling forecasting may complement other practices in an MCS and thereby benefit some other functions typically served by budgeting (see Widener
2007; Grabner and Moers
2013).
We begin the presentation by providing conceptual and theoretical orientation, in Sect.
2. This clarifies the design and use aspects of the MCS and presents the theoretical background to our study. The research design and the three case companies are presented in Sect.
3. In Sect.
4, we can then elaborate on the role of forecasting and MCS design in each company, with the aid of concrete illustrations. Section
5 lays out our analysis of the study and details two approaches to how planning may be incorporated into an MCS. A concluding discussion is provided in the final section.
3 The research design
3.1 Methodology
The research question on the use of rolling forecasting in planning and its role in an MCS was approached through a multiple-case study examining three industrial organisations, all of which are situated in the Finnish paper industry, which has recently encountered several challenges in the industrial business environment and, especially, amid growing global competition. Industrial operations can be identified as an extreme setting (Hansen et al.
2003) in the sense that they represent a field in which increasing market volatility creates pressure for agile planning and structural changes in the players’ operations while the production systems demand a long-term perspective on strategic investments. Numerous contextual variables may cause tensions in the design of an MCS in such circumstances. For example, Van der Stede (
2000) argues that strategic responses to changing environments may sometimes be incompatible with organisations’ size and structure and that this can lead to tensions arising between formal accounting-based controls and more fluid arrangements.
Taking a multiple-case-study approach is seen as an appropriate method for comparing and contrasting the nature of phenomena across contexts (Lillis and Mundy
2005). Multiple-case studies are often situated very close to single-case studies from the perspective of method and methodology. The complexity of the phenomena investigated is typically not as great as with single-case studies, but the approach still enables considering a broad spectrum of research issues and pursuing various aims. According to Scapens (
2004), multiple-case-study methods can be used for two purposes: replication and theory refinement. For the first of these, the researcher may select cases that display key similarities, for evaluation of how well empiria supports particular theoretical explanations, while the cases chosen in the latter option (theoretical sampling of cases) might be mutually dissimilar so as to enable drawing conclusions as to the differences and thereby hone or even extend the theory. The initial aim in our research was to select similar cases, for replication: all the paper-industry companies had modified their MCS practices in some respects, and we expected to find a common pattern. However, we found over the course of the study project that the budgeting practice in one of the companies (denoted as company C) had moved back toward an annual budgeting process since implementing its changes. This steered our research more in the direction of investigating differences between the case companies and attempting to explain them. We examined the prevailing practices at each company in depth, creating a foundation for extension of the theory as outlined by Eisenhardt (
1989).
3.2 Collection of the data
Interviews constituted the primary source of data. All told, 22 interviews were carried out, with 24 persons being interviewed, between 2009 and 2014 (see “Appendix
1”). In the exploration of emerging issues, such as new MCS practices, the concepts are not so well established in the literature that they can be studied via survey-based questionnaires. In light of this, interviews were considered an appropriate method for highlighting the type of use and the relationships between purposes or functions typical of budgeting that had not yet been empirically revealed. Indeed, semi-structured and open interviews enabled obtaining a richer picture of the mechanisms operating in MCSs and their interrelation. With our semi-structured interviews in 2009, the aim was to gain information about the then-recent change in budgeting, the role of the technical systems involved, the part played by the controller, and any contacts with external consultants. The next interviews, in 2010 and 2011, were focused on providing a map of the linkages between MCS practices but also on the controller’s role. The final interviews, carried out in open-ended form in 2014, were designed for forming better understanding of the companies’ use and analyses of MCS-originated information.
Since the aim was to collect data on how organisations use the various MCS mechanisms, it was important to collect views from employees at various levels in the organisations. This diverges from the approach typically applied in connection with the LoC framework (Simons
1995), which has directed attention to activities of top managers and to their strategic endeavours (see Tessier and Otley
2012). Because the changes in the companies’ budgeting had been found to be closely related to adjustments in the controller role and to new ways of using information in management (Bourmistrov and Kaarbøe
2013; Henttu-Aho
2016), it was deemed important to consider controllers and managers at various levels in the case organisations. This approach afforded a more nuanced understanding of the functioning of MCSs (see Frow et al.
2010). Hence, the focus of the interviews was partly on the controller function (the role of mill, business, and group controllers), while the managerial perspective was captured via interviews with managers at mill and business-organisation level. All the interviews were face-to-face, and each was between half an hour and one and a half hours long. The interviews were audio-recorded, then transcribed in full for analysis. They were supplemented by secondary sources of data: e-mail messages and various publicly available documents, such as annual reports, press releases, and content from the company Web sites. The annual reports were particularly useful for fleshing out the picture. These contained details of the companies’ outlook for the future, strategic objectives, and financial goals, which increased our understanding of the business environment and economic situation of the case companies.
3.3 Data analysis
The data analysis in the study followed the pattern described by Neuman (
2007). Guided by our research question, we began by performing open coding of the data. Our starting point was informed by the budget-related literature’s recent highlighting of one function of budgeting as especially important—planning. To identify the mechanisms of planning, we began organising our data in terms of this conceptual category, starting by searching for the elements ‘realistic’ and/or ‘plans’. In addition, we were able to see where these elements were not presented in the data. While we found many methods—such as long-term planning, rolling forecasting, action planning, and annual plans—that fell under these categories at our three case companies, we were able to detect quite early on that there were slight differences across the companies even for each of these. These piqued our curiosity, and we embarked on a more detailed review of the planning methods we had found, to understand how they were used in connection with other controls in the MCS and, in particular, how the planning function of budgeting was arranged. This analysis revealed that some companies talk about ‘target-setting’ and some about ‘budgeting’ when dealing with the evaluation function of budgeting.
The next step in our analysis employed axial coding, for deeper examination of the methods we found and the interrelations among them. Theoretical work on the diagnostic and interactive uses of control systems guided the analysis of MCS practices—we chose this method in the hope that it would help us understand whether a certain type of control-system use could aid in fulfilling some conditions associated with the key functions typical of budgeting. Finally, selective coding advanced our analysis: we were able to focus on specific fundamental methods within the categories of planning and evaluation and construct a theoretical conceptualisation of the complementarities between them in relation to certain types of budget design.
3.4 An overview of the case companies
Company A is a publicly traded company. At the time of the study, it had 29,000 employees, in more than 35 countries, worldwide. Most of its production capacity and personnel are in Europe. Sales in 2013 came to 10.5 billion euros. According to the annual report for that year, the company has faced structural challenges in Europe, due to excess capacity in paper production but also significant upheavals wrought by a financial crisis. In response, the company was increasing its capacity in areas wherein demand was experiencing growth, choosing to focus more on growth markets, such as Asia and Latin America. Correspondingly, it sought to reduce capacity where consumption was falling, a goal that demanded better understanding of the key assumptions behind the company’s planning. The change in annual budgeting was one consequence of this, but the whole financial-administration organisation was rearranged also.
Company B too is publicly listed. At the time of the study, it employed approximately 21,000 people, worldwide, engaging in production in 14 countries and operating a global sales network. Its sales in 2013 exceeded 10 billion euros. Company B was looking for new growth opportunities through continuous product-development and innovation. In 2013, it adopted a simplified business structure, wherein a specific strategic role and clear targets are defined for each business area. This form of organisation enabled faster decision-making and more differentiated target-setting for the various business areas. The company aimed to improve its short-term profitability via annualised cost savings by the end of 2014, with cost-saving initiatives involving both variable and fixed costs, for all business areas. This company’s challenges were rooted in part in the versatility of the business portfolio, which featured mature but also growth businesses. In particular, problems in the mature paper business had increased the need for planning and analysis processes over the years. Simultaneously, some decreases in volumes and prices, along with unfavourable exchange rates, had started causing trouble, with these recent developments prompting efforts toward enhanced planning and various cost reductions.
Finally, company C is the smallest of the case companies. It is a subsidiary of an international forest-industry group. At the time, that business group had, in total, approximately 11,000 personnel, of whom company C employed about 900. The group’s sales in 2013 totalled 4.9 billion euros, of which company C accounted for 1.3 billion euros. According to the business group’s annual review for that year, business seemed to be on a stable foundation and group-level sales had remained at the previous year’s level. The paper operations in which company C engaged were regarded as traditional in nature; however, the line of business in which company C specialises is considered highly cyclical, which imposes crucial considerations. Also, the company operates in a global market wherein prices are determined on a monthly basis and, even though shipments can be invoiced for in euros, the prices are negotiated in US dollars. The monthly changes in selling prices and currency risks are continuously discussed between sales staff and customers. Such external, market-based factors can exert a significant influence on planning. Sometimes these changes manifest themselves as large variations in budgets, with substantial deviations between budgeted and actual figures. Among the recent developments were some changes in the company’s ownership base: in 2009, company C, which had been owned by two companies, came more clearly into the possession of a single company. This change influenced the budgeting culture and contributed to the re-emergence of conventional budgeting practices in the company.
4 Planning in the case companies
This section of the paper reviews the composition of the case companies’ MCSs with regard to planning. Working from our initial impressions of the developments that had taken place in the company-specific planning processes, we attempted to ascertain the role of rolling forecasting in the planning and how the companies were employing forecasting to serve MCS purposes more generally. For each case, we describe the methods representing the planning function but also look at their influence on processes serving the evaluation function.
4.1 Company A
Interviewees at company A claimed to have abandoned an annual budgeting process. This was evidenced by some interviewees attempting to avoid using the word ‘budget’ in their speech. Instead they strongly emphasised the role of rolling forecasting, which was seen as an important topic and frequently raised in organisational discussions.
The conventional basis for the planning process in company A was a three- or five-year frame, with updating at a high level in the organisation on a rolling basis twice a year. The updates were presented to the Board of Directors. The focus of the
long-
term planning was on strategic issues, such as investments, divestments, asset write-offs, and the assessment of these as a whole. The
rolling forecasting process served short-term planning in company A, with the forecasts getting updated monthly at mills and further reported upon quarterly. The process gave mill controllers up to-date information about price and cost developments. In particular, support functions such as sales, purchasing, and logistics systematically provided information about key forecasting variables (sales volumes and prices, raw-material prices, and freight fees), and the influence of these on each mill’s production plans was assessed monthly by the mill controllers. According to interviewees, efforts toward realistic plans were clearly increasing.
[W]ith this rolling forecasting, we have a much more realistic view of the future than we would have with a traditional budget, which can be regarded as ‘old stuff’ […]. I now dare to use the word ‘system’ in illustrating that our people really want to do things right and they understand what is right […]. So, in a sense, I’m very pleased with this [forecasting] and I trust in it, even though I understand that there is a risk of psychology sometimes driving people to be target-minded. (Group controller, A, 2011)
Thus, the concept of ‘realistic’ appeared to indicate a lack of target-orientation, which from a theoretical perspective means that the planning was expected to provide an unbiased estimate of the future level of performance (Emmanuel et al.
1990). The monthly delivery of values for key forecasting variables by various support functions promoted lateral discussion in the organisation. For example, people at the business-area level of the organisation at company A were able to question the updates to the variables used in forecasting, and, thereby, call into question unrealistic plans.
[I would say] that our forecasting process is really performing well. It is not only a fine document […]. It is especially important that the forecasts are no longer only prepared by controllers, but these forecasting variables are obtained and discussed within business organisations and we are then facilitating that discussion and process, and also challenging things if it seems that they [other functions] have overly positive expectations. (Business controller, A, 2009)
The group controller at company A saw the increased emphasis on rolling forecasting as having changed mindsets, leading members of the organisation to be more realistic in their plans. No artefacts of the old budgeting culture came to mind that could impinge on the new practices. Under the new approach, controllers appeared to play an especially important role in forecasting.
I would say that at the corporate level, we don’t support anything representing remnants of bad budgeting culture […], for example, if one would make an incorrect accounting entry […] or neglect to plan actions such that they don’t run over budget. We don’t have perfect transparency, but I haven’t got any indication of that kind of action. Perhaps this rolling forecasting has been able to change the mindset of people, more or less. And I believe that our controller organisation aims to confirm that the forecast is realistic (Group controller, A, 2011)
Instead of a process of annual budgeting, the company now had a separate
target-
setting process serving the evaluation function typically performed by budgeting. The process of target-setting can be divided into two parts: one focused on financial targets for various parts of the company and the other on personal targets, where the latter encompassed non-financial measurements also. The main difference between the financial (centred on business-unit evaluation) and personal targets (staff evaluation) was that the personal targets were based more on employees’ individual-level responsibilities and could be revised more easily than financial targets (see Sivabalan et al.
2009). In contrast, the financial targets were top-down figures based on the goals of the entire corporation and business unit. The top management usually proposed two or three financial targets, which might be connected with indicators such as EBITA, cash flow, and working capital ratio. The target-setting process began each November or December, at which time each year the forecast was updated to provide a financial view of the entire coming year, typically covering five quarters. This snapshot version of the rolling forecast for the next year was frozen and used as a foundation for target-setting and incentives.
In the autumn, when we prepare rolling forecasts and make plans for the whole of the next year, we usually prepare them in more detail. Then some version of the forecasts is frozen and called a budget. It is supposed to serve as a template for our… we talk about a budget or target for the next year. And then incentives are linked to it. (Business manager, A, 2014)
Since we have our figures [the latest 15-month forecast] uploaded in the system, in October we have the outlook for 2010 [the next year]. Then, in November, we prepare our target-setting proposal for 2010, in which we set our targets, and it is important to keep these [two processes] separate. (Group controller, A, 2009)
This so-called
frozen forecast method appeared to serve as a link between forecasting and target-setting processes, hence serving not only planning but also the evaluation function. The main aim behind the forecasting was to provide a realistic view of the future, which was seen as functioning as a truthful basis for setting targets in the organisation. The comments by the group controller imply that it was important to keep these processes separate, to avoid creating any bias in the forecasts’ figures. Another important pillar of setting short-term goals for the organisation was the long-term planning, through which strategic priorities were communicated.
One interviewee mentioned ‘stretched targets’, under which a worker could be assigned slightly more demanding operative targets ad hoc. Unrelated to the personal targets set at the beginning of the year, these referred to actions viewed as easy to complete in the near future (for example, in light of the progress already made). Usually, such short-term additions arose from managerial action planning. Thus,
action plans6 were revised more frequently than before, and details on the realised effects of the planned actions were fed into the company’s collaboration platform (i.e., business software), enabling forecasts to be adjusted accordingly.
For example, in rolling forecasting we can state that in 12 months the organisation will have reduced the old inventory by half. If they are able to do this earlier, we can give them a stretched target of eliminating all the old inventory […]. And at that moment it becomes an issue of action management […]. Next, if this is deemed feasible, it is included in the next version of the rolling forecast. (Business controller, A, 2011)
Although fixed financial targets were in place, the flexibility of personal targets could be seen as indicative of non-budgeting practices (Becker
2014). The interviewees at company A did not highlight the issue of variance analysis in evaluation. Rather, their primary focus was on reporting of ‘planning accuracy’—i.e., deviations between realised and forecast figures and the ability to adapt to changing circumstances (Hansen et al.
2003). In fact, assessment of forecasts and anticipated changes in them had begun guiding the organisation’s discussion, action planning, and decision-making. We can conclude that at company A, which claimed to have abandoned its annual process of budgeting, the processes related to forecasting appeared to be acting toward fulfilment of the purpose articulated at the outset—namely, accuracy in planning. Moreover, we could perceive two kinds of convergence between planning and evaluation. Firstly, the forecasting-based tool of the ‘frozen forecast’ served as a mediating element between rolling forecasting and target-setting, aimed at providing an unbiased basis for setting targets in the company. The lateral process of rolling forecasting was believed to provide a realistic picture of the expected level of performance in the company. The second important aspect of convergence in the MCS was action planning, a managerial process intended to reconcile the information inscribed in annual targets with the most recent plans in the company. Through this mediation, either the plans or the personal targets ultimately get revised, after discussion of the remedial actions necessary.
4.2 Company B
When the interviewees at company B spoke of budgeting, they appeared to mean many things: the process of rolling forecasting, budgeting of fixed-type costs, and the target-setting process. When talking about rolling forecasting, they took various perspectives on planning, referring to the latest estimates for the near term, estimates prepared quarterly for the next 12 months, and long-term planning. Though the word ‘budgeting’ was used, the typical characteristics of annual budgeting—such as budget negotiations, a master budget, and budget-related variance analyses—seemed absent. Interviewees claimed to have abandoned the annual aspect of budgeting in conjunction with the launch of new processes of rolling forecasting.
The informants at company B stressed the aim of accurate and unbiased estimates in the process of
rolling forecasting. This was borne out in reality by forecasting variables provided by expert functions, organisational discussions and challenging of the figures.
Whether it’s a forecast or a budget, you should never put any slack in there, either downwards or upwards. It should be neither too loose nor too strict. Of course, it always involves a little bit of bias when people are preparing them. But [that bias] must then be cut off by challenging them and discussing [things] with people. (Business controller, B, 2014)
Long-
term planning at company B began each spring with strategy work, wherein the top management and strategy team explored the opportunities and challenges, and established a ‘strategic will’ for the company. This was followed by communication of the strategy and the strategy-implementation process, in which more concrete strategic objectives were set for the organisation as a whole. The time frame for the strategy might be long—for example, 10 years—but more concrete strategic key performance indicators usually were set within a one-to-three-year frame. These top-level objectives were then used in the short-term
target-
setting process in autumn. One important mechanism of the evaluation function was a specific year-end version of the rolling forecast, which was frozen and called a ‘plan’ or ‘budget’, to be used for setting targets. The frozen version of the forecast contained a profit-and-loss-form plan for each month in the coming year. The fixed-costs portion of the plan was not readily changed in response to rolling forecasting updates, whereas the variable part was updated regularly.
In the ‘budget’, we have everything, but what makes the difference is that at the bottom we have fixed costs, depreciation, and investments, the so-called capital components, and [above] we have sales and variable costs. When we prepare the ‘budget’, we have all these elements there, but the bottom part remains as-is and the upper part changes in line with the forecasting. (CIO, B, 2014)
This polarisation between the elements to the forecast (top and bottom) may reflect industry characteristics. Increasing market volatility in the paper industry has brought greater importance to agile planning of sales and variable costs, yet the production system requires a long-term perspective and more stable view of costs. This kind of juxtaposition was reflected in the division between fixed and variable elements, where changes that emerged between the year-end (‘frozen’) forecast and further versions of rolling forecasts indicated variance in the upper part of the forecast—i.e., in sales and variable-cost figures (see Van der Stede
2000). In company B, the purpose of the rolling forecasting process with quarterly updates was to reach consensus as to where the company was going to end up within the next 12 months on the present assumptions. There were explicit aims to apply a realistic approach in forecasting without bringing excessively high expectations into it.
In March, when we update our next forecast, we have advanced one quarter forward and we probably already see some movement there. We may have made some new decisions that were not covered in the ‘budget’. Over the course of time, when we update our second forecast, in June, the deviations can be bigger, and with the third forecast, in September, the deviations are much bigger. So the ‘budget’ (based on a frozen forecast) is target-oriented, and the forecast aims to illustrate the situation that we will probably end up in […]. In rolling forecasting, we look for a realistic outlook on developments in profits, gross margins, and cash flows at the group and business-area levels. (Group controller, B, 2014)
The
target-
setting process in company B involved company-wide and business-area-level components but also personally discussed targets involving some degree of negotiation. These could be related to the frozen forecast or to any other metric. Corporate-level targets were usually fixed, whereas at the business-area level, for example, sales organisations’ targets could sometimes be altered if major changes in market conditions appeared to have rendered this necessary. According to some interviewees, another mechanism for setting targets that are reachable in rapidly changing circumstances was developed through not fixing them too precisely and allowing managerial
action-
planning to consider the necessary actions proactively.
[I]f we, for example, aim to have some level of sales per year, […] we could set that target at a very detailed level if we wanted to. But from my point of view that is not sensible, since it hinders us from making flexible control decisions. [The objective] is more about having a clear understanding of the target and then, working on the basis of forecasting, contemplating which are the right actions within the limits of the targets. (Business controller, B, 2014)
The
variance analysis in company B encompassed comparison both of targets with the actual figures achieved (budget accuracy) and between the forecast figures and the actual figures (planning accuracy) (Van der Stede
2000, Hansen et al.
2003). Assessment of planning accuracy was deemed to be the most important measure in the MCS. Interestingly, analysis of deviation between targets and forecasts was not reported upon systematically.
In summary, while company B claimed to have abandoned its annual process of budgeting in a formal sense, some kind of fixed ‘budget’ target still existed (see Becker
2014). The accuracy of the forecasting had begun to play an important role. Targets were kept imprecise enough to provide managers with wider discretion to apply forecasting-based information in planning the actions such that the ultimate targets could be reached. It appeared that in company B the processes of rolling forecasting and yearly target-setting were decoupled
in the sense of the purpose of each (planning and evaluation, respectively) (Østergren and Stensaker
2011). Convergence between the processes of forecasting and target-setting was evident when forecasts were employed as a realistic template for setting targets, the frozen forecast. Another element of reconciliation was seen in the managerial decision-making and
action-
planning, wherein anticipated deviations from forecasts prompted proactive measures actions within the framework of yearly targets.
4.3 Company C
Between our rounds of interviews, we could observe gradual change in the budgeting culture at company C. In particular, the change in ownership structure appeared to have led to annual budgeting regaining its status in the company. In fact, some interviewees drew particular attention to the choice of the word ‘budget’, which they saw as an influential term in organisational management control. In the words of a financial manager at company C, ‘the budget is the budget is the budget’. Budgeting was seen as the most important evaluation tool in the company, and rolling forecasting and benchmarking were carried out alongside the budgeting process.
The planning at company C was performed in accordance with a group timetable and instructions. Strategic
long-
term planning for the next 3 years was updated in spring, the budgeting process started every autumn, and rolling forecasts were updated quarterly as the year progressed. The executive management team prepared proposed business strategies and budgets to be considered by the Board of Directors. A
nnual budgeting began in autumn with an assessment of the strategic plans and long-term objectives that had been approved for the company. Working from strategic plans, the company specified key short-term objectives, which were then expressed in action plans and numeric-form budgets. Another fundamental input to the planning was the year-end version of the rolling forecast for the next year. Interviewees saw the role of
rolling forecasting as being to provide accurate short-term information, but also a realistic view of the company’s near future. The company’s various departments were not systematically delivering ‘forecasting variables’, their predictions for such figures as sales (volumes and prices) and raw-material prices, to the control department. Hence, controllers always had to request that information from various function-specific teams. In addition to planning, the role of budgeting encompassed setting targets. The interviewees were keen to highlight the difference in purpose between these two processes, budgeting and forecasting.
The forecast has this short-term perspective. It aims to be realistic, telling how it [all] looks. But in the budgeting we want to set some specific levels of volumes and prices and then, accordingly, the level of costs. [Budgeting] really is more target-oriented. (Controller, C, 2014)
Interestingly, one interviewee placed emphasis on the unified nature of these two control elements. Indeed, it was impossible to draw a line between forecasting and budgeting and thereby delineate either main process or the organisational actors within that process. Scholars see an integrated process of this sort as entailing a risk of managers giving a target-oriented twist to their ‘forecasting’ (Østergren and Stensaker
2011). Processes of rolling forecasting and budgeting appeared to be clearly interdependent and ultimately represent the same level of detail in the information content.
We have a uniform process [across the two]. The same actors but also the same system and process. Forecasting is rolling in this way, and the budget is actually only one version of the forecasting that we then take [for budget use] […]. They [the budget and forecast] have the same detail. The forecast has the same extent of information as well. (Controller, C, 2014)
In preparation of the following year’s budget (sometime in October), one version of the rolling forecast was modified to be used as a budget. This procedure appeared to have implications for the main principles applied in forecasting. According to some interviewees, the aim of producing realistic figures in forecasting was de-emphasised at the time of budget-preparation, and the year-end version of the forecast was prepared so as to be more target-oriented.
Our budget is one version of the forecast, which has been frozen […]. Actually, it [the budget version of the forecast] is prepared at a more detailed level than other versions of the forecast […]. It is also slightly more target-oriented. That is the key difference. (Controller, C, 2011)
This kind of target-orientation leads one to wonder about the possibility of actors adding bias to the plans. According to the lead financial manager of company C, the target-orientation meant that the forecast was prepared in accordance with corporate instructions to produce a realistic plan without any slack yet in a manner reflecting an ideal/assumption of continuous improvement. For example, the sales volumes were always planned to be slightly higher than the previous year’s but still achievable. An additional part of the picture is that the corporate management made any final decisions on major revisions related to the next year’s market outlook.
There were several formal elements in place for budgeting, such as guidelines for the process, a master-budget-type summary, and official approval from the Board of Directors. Budget targets were compiled mostly on a top-down basis, but in practice there were bottom-up elements too. Annual budgeting at company C was supplemented with
benchmarking, which appeared to serve as an operational tool for comparing performance across various mills and actually represented application of a relative performance standard in the budgeting process (Hansen et al.
2003). The core element of the budgetary control system was the
variance analysis, viewed as the most important and most formal reporting tool in company C. The variance analysis report was established as a part of the monthly reporting package. Deviations between budgeted and realised amounts and also between forecast and actual figures were reported. Because the forecasts and budgets presented the same level of detail, it was possible to go further, analysing the variance between forecast and budgeted amounts as well.
Variance analysis is one of the most important tools […]. It is a control tool, and it tells us in particular the reasons for variances, rather than about the existence of variances. And then we start to inspect them in more detail case by case […]. Is it because of the timetable, difference in prices, or need for investments? (CFO, C, 2014)
Volatility in product prices and fluctuation of exchange rates created particular risks for this business. Since the variances stemming from larger market forces were ultimately beyond the company’s control, the company found it important to concentrate its efforts on things actually influenced by the internal decision-making. While not placing so much focus on these uncontrollable factors, company C did prepare some sensitivity analyses on the basis of them—for instance, examining anticipated price variations for purposes of better understanding the consequences of certain price levels for profits. Meanwhile, more controllable factors (such as personnel costs and support-material costs) were amenable to accurate budgeting.
We can summarise the situation of company C thus: the annual budgeting was central to the budgetary control system, with great emphasis being placed on the evaluation function of budgeting. This was strengthened by intense use of variance analysis reporting to generate new actions in support of the goals set earlier. In company C, the variance analysis served as a formal mechanism that was routinely employed as the foundation to the planning of new actions. The role of forecasting was to confer some sense of a realistic outlook on the future state of affairs, but a more important effect is that it appeared to support the annual budgeting process in its aims of planning and evaluation.
When one examines the interviewees’ accounts of budgeting at the three case companies side by side, it proves illuminating that the interviewees at companies A and B felt that they had abandoned budgeting in its traditional form (i.e., an annual budgeting process), with company A personnel’s efforts to avoid even the word ‘budget’ being particularly noteworthy. In contrast, employees at company C stressed the literal meaning of the word ‘budget’, which reflected the continuing use of budgets and the value accorded to the evaluation function of budgeting. This kind of rhetoric appeared consistent with the
design of the budgetary control system. In company C, forecasting was strongly connected with annual budgeting. Another finding is that companies A and B stressed accurate follow-up in response to increasing market volatility, and the separate processes of forecasting and target-setting were kept more faithfully in line with their initial purposes, which has been found to be a distinctive feature of non-budgeting practices (Østergren and Stensaker
2011; Becker
2014).
Next, we will discuss the differences among the MCSs in our three case companies from the perspective of diagnostic and interactive use of controls. Investigating the difference in application of control elements may uncover why differences in emphasis with regard to the individual functions of budgeting within an MCS can produce different approaches to environmental uncertainties.
6 Concluding discussion
Recent research has started to emphasise a function-oriented view of control systems and techniques. For example, some new accounting tools such as rolling forecasting are known to be entering increasing use for a planning function formerly fulfilled by budgeting. However, we still lack empirical understanding of how rolling forecasting is incorporated into MCSs. Forecasting might play different roles in connection with an annual budgeting process or in connection with another mix of controls in an organisation. Therefore, in our study, which focused on traditional companies in the paper industry, we investigated how companies differ in their ways of using rolling forecasting in their planning and what implications these choices have with regard to their MCS design. For its theoretical grounding, the study draws on refined definitions of diagnostic and interactive control systems that emphasise the aspect of control-system use (Simons
1995; Tessier and Otley
2012) and the temporal orientation of management control practices (Becker and Messner
2013; Palermo
2018).
In the multiple-case study, it appeared that the three companies examined were using very similar tools to accomplish the key functions typical of budgeting. All of the companies had a process of strategic planning in place that provided key goals for target-setting. Short-term planning was present in the process of rolling forecasting. In each company, target-setting was somehow linked to a year-end version of rolling forecasting (a frozen forecast), from which the targets were set. However, there were differences between the companies in how they emphasised rolling forecasting, which then influenced the use of the control system.
The study contributes to the literature in three ways. Firstly, it responds to calls in the literature to combine a function-oriented view with a more disaggregated MCS approach (Sivabalan et al.
2009; Becker et al.
2016). Instead of a unified system, a budgetary control system can be seen as a subdivided system wherein various management control items, forecasting among them, fill various budgetary functions. In fact, we found two types of use of rolling forecasting to serve an MCS planning function, where the emphasis in planning displayed differences in temporal orientation (Palermo
2018). One involved a
reactive type of planning, seen in one of the case companies. In that kind of system, rolling forecasting and annual budgeting are integrated, forming a unified process serving planning and evaluation tasks, with emphasis on the evaluation function. This kind of hybrid system has been found to be commonplace among adopters of rolling forecasts (Ekholm and Wallin
2000; Sivabalan et al.
2009). This may be explained by our finding that the hybrid use creates an ability to use the same resources and procedures throughout the organisation. In the case company, the joint process of forecasting and budgeting was carried out by one set of people, and the two aspects displayed the same detail of information throughout the process. In that kind of system, variance analysis means a formal calculation of deviations between actual, budgeted, and forecast figures, where the feedback then triggers remedial actions (via exceptions-based diagnostics) (Mundy
2010). Applying the same level of detail in forecasting and budgeting enabled diagnostic monitoring of uncontrollable factors and more stable fixed costs through a variance analysis report, on which basis operational re-planning and solving of problems could be made
ex post (Emsley
2001). The focus of forecasting in a reactive approach is clearly on the
post-
period planning stage: reporting of variances and planning of remedial actions. This MCS approach is based on recognisable temporal cycles, in which procedures of planning can be clearly identified and defined (Palermo
2018).
The other type of forecasting used was a
proactive type of planning approach, presenting itself in two of the case companies. In this kind of approach, the planning function was strongly emphasised, generating a situation wherein the yearly target-setting process and rolling forecasting were decoupled in the sense of purposes. In academic and practice-oriented literature, this separation of control processes on the basis of their purposes is already evident in relation to so-called non-budgeting practices (Becker
2014; Bøgsnes
2009; Østergren and Stensaker
2011). The findings of our study show that this kind of approach enables proactive steering of business. As organisational attention is on the
pre-
period planning stage of forecasting, information about the future contingencies is more readily available and more closely reflects changes in environmental conditions (Palermo
2018). Interestingly, the deviations between forecasts and targets were not reported formally in our data, while the targets were not set at as precise a level as that used in the forecasts. Therefore, interactive process aspects such as short-term action-planning, continuous organisational discussions, and transparency of information appeared to play a crucial role in helping assess the extent of gaps between the targets and future prospects in two of the case companies, but it also generated flexibility within the system (Frow et al.
2010; Mundy
2010). Actually, if we consider Palermo’s discussion again (
2018), from the MCS angle the proactiveness here means not only producing more proactive information for planning but also taking actions proactively in light of that information (i.e., the necessary actions were usually performed much earlier than when the associated effects were known in monetary terms). The findings from our study indicate that traditional types of monitoring variances (formal reports based on detailed calculations of deviations etc.) do not necessarily encourage flexible planning. This supports the conclusions of Emsley (
2001), who points out that waiting until evidence of deviations has accumulated may not be justifiable; on account of the delay, following the planned actions may lead to worse performance. The key characteristics of reactive and proactive approaches in relation to the three case companies can be found characterised in “Appendix
2”.
The second contribution of the study is related to the emphasised role of planning in MCSs. Becker et al. (
2016) state that organisations wishing to reduce their environmental uncertainty aim to execute more accurate planning. Our findings suggest that various emphases on functions typical of budgeting may differ in the kinds of use of control systems they necessitate. For example, the aim of realistic plans in forecasting (planning) could be promoted via an interactive approach in the pre-planning stage and systematic delivery of forecasting variables (Bourmistrov and Kaarbøe
2013). It is evident that the interactive use of controls increases the
amount of information available (Østergren
2009), but we found also that it can improve the
quality of accounting information. Our findings indicate that interactive use of control systems helps to challenge underlying assumptions behind forecasting information (the forecasting variables) held and conveyed by various organisational actors and thereby increase the realistic orientation of the information. This kind of information is considered highly important in a proactive approach (Palermo
2018). Discussions at various levels of the organisation and challenging the providers of forecasting information assisted our case companies in increasing the production of figures that were realistic overall for forecasts and reducing the possibility of bias in the forecast figures. This is in line with the work of Sponem and Lambert (
2016), who state that the interactive budgeting style is also ‘a state of mind to be shared with all collaborators’. Such activity is related to a process of socialisation wherein organisational actors assimilate new values from the management control practices (see Alvesson and Kärreman
2004). Our findings indicate that the ‘preparing of realistic plans’ was an important organisational value that employees were supposed to have adopted and thus could be regarded as representing a belief system (Simons
1995). While Tessier and Otley (
2012) classify a belief system as a design attribute of an MCS, our study actually shows how specific value accorded to some budgetary function strongly affects the way in which the system is designed and, in particular, how it is used.
The third contribution of this study lies in our suggestion of using forecasts as a readily communicated basis for setting operative targets, our findings provide support for the idea that making forecasting a part of an MCS may be beneficial (Malmi and Brown
2008). We found that interactively prepared forecasts were able to serve as a realistic template (via the frozen forecast) for the year-end target-setting process. As we pointed out earlier, decoupling the processes of forecasting and target-setting, particularly
in the sense of their purposes, is vital, yet from the viewpoint of technical processes they were interdependent and supporting the idea of a system (Grabner and Moers
2013). Sponem and Lambert (
2016) imply that the synergies between practices fulfilling the planning and control functions of budgeting can reduce the criticism levelled at budgeting. At all three case companies, one important basis for the target-setting was the year-end version of rolling forecasting for the next year, upon which basis the challenging targets were supposed to be set. In the process of target-setting, the forecasts informed managers of the outcome level that was likely to be reachable and therefore served as a prerequisite for motivational targets (see Otley
1987). This finding is consistent with the study of Widener (
2007), nicely displaying the complementarities between interactive plans and diagnostic evaluation practices in budgeting. However, in a contrast against what has been suggested in earlier work, we found evidence that the interactive use of a particular management control item can actually lead to benefits in the diagnostic use of another management control item (Widener
2007; Mundy
2010).
Budgeting research in the accounting field has emphasised the role of negotiations in revealing the information needed about subordinates’ performance capabilities (Fisher et al.
2000). Our empirical findings indicate that in new arrangements of MCSs the forecasting process may play an important role in efforts to provide a realistic benchmark speaking to the expected level of future performance. Formal budget negotiations are not necessarily needed for informing supervisors about what constitutes a realistic level of performance in relation to which more challenging targets can be set (Fisher et al.
2000). Note, however, that this kind of arrangement is not equivalent to a situation wherein the supervisor unilaterally sets the goal. The forecasting process (providing a template for target-setting) appeared to represent a more horizontal management control process in some of the case organisations. This finding increases our understanding of budgeting and non-budgeting practices in relation to formal negotiations and fixed targets (Becker
2014), and the possibility that the diminishing role of formal budget negotiations and the use of less rigid budget targets actually make budget abandonment easier deserves further study.
Finally, our study goes some way to answering Emsley’s call (
2001) to consider how the different elements of the MCS theoretically interact and jointly operate. The study provides an illustration of the proactive approach to incorporating rolling forecasting into an MCS. The illustration in Fig.
1 explains the points of similarity and discrepancies between forecasting and target-setting from a technical and an MCS perspective alike. It shows that the processes and perspectives of forecasting and target-setting have a relatively controlled relationship at the beginning of the year, after which planning diverges strongly toward its initial purpose—accuracy of planning (see Hansen et al.
2003). The gap between the lines representing forecasting and target-setting provide a space for informal control mechanisms, geared either for triggering remedial actions and new plans or, occasionally, responding to the need for departure from the initial targets.
A more practice-oriented implication of the study is that these more flexible MCSs can be useful for companies that not only operate in heavy industry involving high capital-intensity but also face increasing market volatility. For example, the estimate figures at the top of the forecast template (sales figures and variable costs) can be updated more often than the more stable fixed costs, addressed in the lower section. Also, clearer separation between forecasting and target-setting processes may enable companies in this branch of industry (such as A and B) to adjust as needed. They may set fairly stable strategy-based targets while retaining a more flexible process for planning (Hansen et al.
2003). When a large proportion of the variance that affects plans is related to uncontrollable market factors, forecasting may not be emphasised in planning, since controllable factors such as fixed costs can also be budgeted more easily (company C).
One limitation of multiple-case studies lies in the detail of empirical description. Not all of the interesting findings can be investigated and analysed in detail. They remain to be examined by means of a single-case-study approach, which provides ability to obtain deeper insight into the social mechanisms. Our intriguing finding that companies may use one version of the forecast as a basis for setting targets raises a question of possible bias in producing the coming year’s version of the forecast. A critical and more detailed approach employed in a single-case study might provide valuable information about the mechanisms that might prevent or mitigate biasing of forecasts, along with insights pertaining to dysfunctional effects of setting targets on the basis of forecasting. In a final comment regarding avenues for future research, we should state that the function-based approach to MCSs in combination with new complementary elements in budgeting warrants more research. For example, in relation to the evaluation function of budgeting, research has introduced many interesting tools, such as balanced scorecards and benchmarking. It would be important to investigate empirically how the widely criticised evaluation function of budgeting might benefit from these new tools and how they might be incorporated into other instruments in an MCS context.
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