Multidimensional budgeting: a tool for transformational leadership.

Schneider, Gary P. ; Bruton, Carol M.

INTRODUCTION

A number of tools have become available to managers in recent years that can help them do a better job of planning and controlling. Many of these tools are based in computer technologies that make reporting, summarization, and analysis of operating results easier (Johnson & Kaplan, 1987; McKinnon & Bruns, 1992). In some cases, these technologies and the techniques they enable have helped managers to do things that were not possible before (Atre & Storer, 1995; Borthick, 1992, 1993; Elliot, 1996).

One of these enabling technologies is online analytical processing (OLAP) software (Callaway, 1995; Fairhead, 1995; Ricciute, 1994). The use of OLAP software enables managers to compile and analyze their planned and actual numeric results in a variety of ways. In the past, managers were at the mercy of finance and accounting personnel who prepared budgets and reports as they saw fit (Borthick, 1992). OLAP software allows managers to independently create and use budgets that compile operating plans and results on multiple dimensions (Schmidt, 1992).

The new multidimensional budgeting techniques that OLAP software enables allow managers to use budgeting in new ways. Traditionally, the budget was the tool of the transactional manager; the person who did not lead subordinates into new areas of endeavor, but rather maintained the status quo. These managers were charged with creating and maintaining stability in the organization (Barker, 1997). Existing budgetary tools provided transactional managers everything they needed to manage routine activities, implement incremental change, and to plan, organize, staff, direct, and control in a stable environment. Often, budgets incorporated standards for prices, quantities, labor rates, and hours that had been developed over years of time-and-motion study and product engineering. Today's product and service life cycles, which have become ever shorter, have destroyed any hope of generating meaningful benchmarks using such techniques.

Transformational leaders need tools that support them as they navigate the shoals of strategic change. Strategic change is frequently non-routine, not incremental, discontinuous, and anything but stable. To lead people into new structures, new patterns of action, and even new belief systems, a manager needs tools that support information flow in the midst of these changes. Multidimensional budgeting provides one such tool for transformational leaders.

TRANSFORMATIONAL VS. TRANSACTIONAL LEADERSHIP

Burns (1978) argued that we knew far too little about leadership. He offered as a remedy his idea that leadership is more than just the traits and observable behaviors of leaders. He argued that leadership was a process of mobilizing persons and resources to realize goals. He acknowledged that these goals might be mutual or independently held, and that the mobilization process generally occurred in an environment fraught with competition and conflict. He also characterized leadership as a reciprocal process.

Bass (1985, 1990) and Bass and Avolio (1993, 1994) have taken Burns' ideas and distilled them into the concept of transformational leadership. Although critics have taken Bass and Avolio to task for a variety of issues (Barker, 1997; Rost, 1991), transformational leadership has become widely discussed and implemented as an alternative to traditional, or transactional, leadership models (Sashkin & Fulmer, 1997; Tichy & Devanna, 1990).

Wright and Taylor (1994) note that an essential difference between the two types of leadership models is that transactional leaders tend to use closed and leading questions in their interactions with subordinates; transformational leaders use a higher proportion of open and reflective questions in their interactions with subordinates. Indeed, most transformational leaders would even use different terminology for referring to subordinates, preferring terms such as "collaborators." Transformational leaders engage their collaborators in probing reflections that do not resemble the staff meetings held by transactional leaders. As Yammarino (1995) notes, transactional leaders operate within an industrial paradigm that is marked by a dyadic supervisor-subordinate relationship structure. This structure is highly functional for purposes of controlling staff that are working at well-defined tasks in a stable environment; however, it is less well-suited to the task of guiding organizations through the major changes in strategy that today's world requires organizations to make.

Barker (1997) explains that leadership might be best understood in political terms; that is, as a nexus of political relationships. Burns (1978) noted that common welfare often emerges from chaotic interactions among people that have conflicting or potentially conflicting goals and accompanying value structures. As people mutually influence, bargain with, build coalitions with, and struggle for scarce economic resources with each other; they engage in a non-rational, uncontrolled process. Barker (1997) points out the futility of applying rational problem-solving approaches to activities that take place in such environments.

Transformational leadership engages and accepts the chaotic interaction of competing forces (Bass, 1985; Rost, 1991). Rost (1993) argues that transformational leadership is the creative influence relationship of leaders with their collaborators that is directed at achieving a set of common goals.

Rost's definition assumes that there is some commonality of interest in the goals or values systems of the leader and the collaborators. Further, Rost envisions multiple leaders, with the leadership role rotating among participants if necessary.

In transactional leadership, one could easily develop organization charts that showed the flow of information and authority. Clear demarcations between responsibility levels exist in a traditional management structure. The accounting systems used by most large organizations follow this hierarchical plan, since the accounting systems of an organization ideally models the structure of that organization. Organizations that have moved, or are moving, to a transformational leadership model will need to find new ways to plan and control the financial elements of their organizations. Since the financial reporting structure plays such a large role in the control of scarce resources, developing new and congruent ways of handling this part of the internal organizational information flow is essential.

TRANSFORMATIONAL LEADERSHIP IN EDUCATION

Transformational leadership strategies are becoming an integral part of successful educational administration initiatives. For example, Cooley (1997) notes that the implementation of technology is not about computer equipment, but is about empowering people to engage in a true transformation. Indeed, technology implementations often provide the impetus for school administrators to move from transactional to transformational leadership. As educational administrative structures take on the characteristics of the transformational model, they will need to adopt new resource management capabilities that are consonant with that model. The classic budgeting and variance reporting models that educational institutions adapted from the corporate world will no longer suffice (Matkin, 1997).

Educational institutions, with their historical grounding in models of shared governance, are prime candidates for transformational leadership models. As educational institutions face the uncertain future expectations of varying constituencies, the transformational model offers hope for finding new paths that make sense for all concerned stakeholders in the educational process and the educational investments required. Distance learning, accreditation standards, new missions, and other sea changes in the environment of educational activity are requiring educational institutions to develop what management theorists call "organizational plasticity" (Freeman & Hannan, 1983; Gioia & Thomas, 1996; Kimberly & Bouchikhi, 1995).

Denison, et al. (1995) note that a key survival element of the plasticity characteristic is that it enables organizations to satisfy multiple and dynamic sets of stakeholders. Since stakeholders often have conflicting criteria for assessing organizational performance, the continued legitimacy and survival of the organization depends on finding ways to adapt and satisfy the most pressing needs of the stakeholders that have become critical at any given point in time. Denison, et al. (1996) describe a first-rate leader as a person that can exhibit contradictory behaviors as appropriate or necessary while maintaining stakeholder perceptions of integrity, credibility, and direction.

A highly plastic organization has the ability to modify itself in response to niche changes. In some cases, that might mean expanding or contracting activities within an established niche. In other cases, plasticity may involve the organization finding new niches to exploit. For example, few educational institutions were engaging in distance learning ten years ago. As that niche expanded and other, more traditional, niches contracted, the more plastic educational institutions were able to move into the distance learning niche. A traditional transactional manager would be encumbered by the lack of well-defined and pre-approved budget lines for the infrastructure investments required to engage in distance learning activities. An institution that had undertaken a transformational leadership would be able to respond creatively to the resource needs of a new niche such as distance learning.

Educational institutions spend a great deal of time and money in their budgeting processes. In this regard, they are similar to large business organizations who spend millions of dollars and involve hundreds of employees in budgeting activities (Schmidt, 1992). In the traditional model of budgeting activities, educational institutions find themselves consuming resources and becoming preoccupied with the mechanics of budgeting rather than dealing with the strategic issues involved. Transactional managers often tend to focus on incremental costs and revenues; assuming that the previous year's budget amounts are solid fixtures on which they can build. In many schools, the only thing that budget committees discuss is the incremental change in budgeted numbers. Full program review or zero-based budgeting techniques are seldom used in educational institutions.

TRADITIONAL APPROACHES TO BUDGETING

The classic approach to budgeting is to plan for incremental growth in specific areas of planned revenue and expense (McKinnon & Bruns, 1992). Managers take past experience and combine it with expected revenues to devise an integrated plan that provides for products or services to be available to customers at the time of anticipated desire. Budgets include plans for acquiring the factors of production and paying for them in an acceptable and timely manner. If short term working capital loans are required, the budget specifies when these will be obtained and when they will be repaid.

Managers engaged in the traditional budget exercise obtain information from strategic plans devised by the organization's top management in a process called top-down budgeting. Alternatively, or in addition to top-down budgeting information flows, managers can obtain information from the sales and operations personnel of the organization. This technique is called bottom-up information flow. However, budgets created in either a top-down or bottom-up mode often fail to enable the organization to adequately respond to sharp changes in the operating environment or to shifts in the expectations of key stakeholders with interests in the organization's performance.

Traditional budgets are organized to mirror the hierarchical structure of the organization. Thus, they have the same inherent rigidity characteristic of that hierarchical structure. True matrix organizations, or organizations that allow themselves to be transformed in response to environmental shifts, have difficulty with traditional budgeting procedures because they no longer maintain a constant hierarchical structure over time.

ACTIVITY-BASED COSTING, MANAGEMENT, AND BUDGETING

A great deal of cost accounting research and development, inspired by works such as Johnson and Kaplan (1987) and Kaplan (1984), has been accomplished in the last decade. These studies and system implementations began in manufacturing industries, but have since spread to all types of businesses and not-for-profit organizations, and can be gathered under the general rubric of activity-based costing (Brimson, 1991; Cooper & Kaplan, 1991; Miller, 1996).

Activity-based costing requires that managers identify key activities or processes that underlie the revenue-generating capability of the firm. It is worth noting that educational institutions can be analyzed using activity concepts. In many cases, educational institutions have revenue-driving activities as a focus. In other cases, a revenue proxy can be developed that allows the same kind of activity analysis used in for-profit firms (Horngren, et al., 1997).

After identifying these activities, managers gather the costs of the activities. This contrasts sharply with the traditional accounting practice of collecting cost information by department or specific job work order. By creating cost pools for each activity, the system allows managers to then combine, in a multiple-stage process, the activity participation of each product or other cost object. Although cost objects in manufacturing enterprises are usually specific products or product lines, in service businesses and not-for-profit organizations, the cost objects can be almost anything about which the organization desires cost information. For example, an educational institution may want to know its costs by student, by program, by major, by academic unit, or by research institute. Since each of these cost objects consumes or uses a specific set of activities, the cost of each activity element is traced to the cost object.

Note that multiple cost objects, including those with overlapping definitions, can co-exist simultaneously. This is a dramatic departure from the rigid hierarchical structure of traditional cost accounting systems. It allows managers to focus their attention on controllable activities and the economic resources that those activities consume. Activity-based costing systems allow organizations to truly "manage" their costs by adjusting the activities that drive those costs. When used in this way, these systems support what is called "activity-based management" (Kaplan, 1992; Swenson, 1997).

Once managers define specific activities and have gathered historical cost information on those activities for a sufficient time period, they can begin to plan for the costs of those activities. This process is called "activity-based budgeting" (Borjesson, 1997; Connolly & Ashworth, 1994). In the hands of a transformational leader, the activity-based budget can enable all collaborators to envision ways in which the economic resources of the entity, characterized as activities, can be brought to bear on the new and unusual problems and opportunities faced by the organization.

When the budgeting system is used to examine multiple possibilities at the planning stage, the process is often called multidimensional budgeting (Schmidt, 1992; Unruh, 1994). Since all cost objects have revenues and costs traced or assigned to them from activity cost pools, a true matching of resource consumption to measured use occurs. This enables creative planning and consideration of alternative uses for the economic resources of the organization. Software that permits easy implementation of multidimensional budgeting is now available for many platforms (Callaway, 1995; Fairhead, 1995; Ricciute, 1994).

CONCLUSIONS

The extant literature on transformational leadership has tended to focus on the characteristics and behaviors that might or ought to be exhibited by leaders that engage in this form of management. Very little has been written on how to implement transformational leadership and how to provide transformational leaders with the tools they need to accomplish organizational change in chaotic and political environments. This paper suggests that one such tool is multidimensional budgeting. We hope that the paper provides help to those engaging in transformation leadership and inspires other researchers to identify practical tools that can enable further use of this approach to organizational leadership.

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Gary P. Schneider, University of San Diego

Carol M. Bruton, California State University San Marcos