Constitutional Bylaw on Budget Acts and Beyond Budgeting. Comparing two budget reforms

by Nicolas Berland

About the author

Nicolas Berland, a professor at Université Paris-Dauphine, specialises in organisational management and management control. His research interests include the history of management control, the financialisation of control practices, experiments with the beyond budgeting approach, and the advent of management control in public institutions.

In 2004, France embarked on a sweeping reform of its public finances with the Constitutional Bylaw on Budget Acts (LOLF), which aimed to recast the principles of government expenditure. As well as bringing in a new budget process, a results-oriented culture and a greater focus on performance indicators, the LOLF introduced a cost calculation system and new human resource management practices, including a performance-related bonus scheme. This article examines the LOLF and draws comparisons with “beyond budgeting”, a budget reform process applied in the private sector.

The idea behind the LOLF was to take budgeting practices applied in private organisations and repurpose them in a way that was suited to the culture of the public sector. The reform completely changed the way budgets were structured, doing away with the previous system of budget “chapters” and introducing Operational Budget Programmes (OBPs), in which expenditures are organised by broad public policy aims.

The reform was unquestionably inspired by private-sector management practices. Yet, somewhat paradoxically, it came at a time when many companies were themselves reforming their budget processes. In the 1990s and 2000s, fierce criticism of the conventional corporate budgeting model prompted some organisations to rethink their approach. This movement, which became known as “beyond budgeting”, saw businesses adopt solutions that, in some cases, bore many similarities with the measures introduced by the LOLF.

For the purpose of comparison, this article examines the beyond budgeting model adopted by Rhodia, a French multinational that was founded in 1999 when Rhône-Poulenc spun off its chemicals division into a separate company, and was later acquired by Belgian company Solvay in 2011. For OBPs, the author draws on both his own experience and a substantial body of publications and case studies on the Budget Directorate’s website (



Beyond budgeting: the example of Rhodia

Before examining the example of Rhodia in detail, it should be stressed that beyond budgeting is by no means a one-size-fits-all model. Rather than abandon budgeting altogether, organisations have overhauled their processes – each in their own, distinctive way, but all guided by a set of clear principles.

How the system worked

Spring, Rhodia’s version of the beyond budgeting approach introduced in autumn 1999, was a three-phase process:

  1. Strategic planning
  2. Devising action plans aligned with strategy
  3. Producing 12-month rolling forecasts.


Spring: a three-phase process


As part of the Spring project, Rhodia overhauled its traditional annual objective-setting process. First, line personnel up and down the chain – from senior managers to front-line employees – were given a much bigger say in the process. This move turned out to be one of the system’s greatest strengths, because personnel were able to see how their own objectives dovetailed with corporate-level objectives. Second, the number of objectives was reduced in order to limit costing work to strategically important objectives only. This approach, which marked a clean break with the conventional – and exhaustive – budget process, was to a large extent what made Rhodia’s system so distinctive.

Strategic planning – phase one of the process – happened within individual group businesses. First, each company’s management committee set strategic objectives, known as key value drivers (KVDs). Managers were then expected to draw up a list of strategic actions (SAs) – practical steps that could be taken over the coming five years in order to achieve both the KVDs and objectives set by group executives. Each SA was financially assessed to gauge its impact on value creation, and only those SAs with the most significant impact were retained.

The KVDs, deliberately limited in number, captured the company’s priorities for maintaining its competitive edge and achieving its long-term strategy. As the name (“key”) suggests, the idea was not to cover all bases, but rather – in line with the Pareto principle – to focus on the 20% of variables that would generate 80% of the effects on the company’s value.

Once the strategic planning process was complete, phase two involved translating long-term strategic objectives into short-term action plans for the coming year. Recognising the inherent difficulty in aligning long-term objectives, KVDs and SAs with shorter-term action plans, Rhodia developed an impact matrix in order to “document and validate” the selected SAs and help line personnel develop appropriate annual action plans. The matrix served as an optional decision-making support tool, cross-referencing the KVDs and SAs against the corresponding processes. Officially speaking, the impact matrix was the first step in phase two of the process (the action plan phase). Yet its role as a bridge between long-term objectives and short-term implementation meant that, for line personnel, it was often framed as the final step in phase one (the strategic planning phase) – a shift that typified Rhodia’s determination to align long-term vision and short-term action.

Impact matrix

The management committee began by using the impact matrix to assess how various processes contributed to the achievement of each SA, looking specifically at the tasks and activities that would need to be performed. Rhodia developed the matrix after observing that, in many cases, action was being taken before its impacts had been quantified, and with no estimate of the resources (people, money and equipment) that would be needed. This planning deficit led to resource shortages and meant that many SAs were only partially achieved, or in some cases not achieved at all – a situation that skewed business forecasts. More important still, one unintended by-product of this lack of preparedness was that it hindered effective cooperation and coordination between departments. With the impact matrix, Rhodia was better able to prioritise projects, focus the effects of its action, and avoid – or at least limit – irrational resource allocation.

A pioneering model

Rhodia’s beyond budgeting model marked a significant break with conventional practice. Costed objectives, negotiated by each business, were quickly translated into action plans, meaning they could be rolled out more efficiently across the group. Managers were no longer seen as heads of responsibility centres. Instead, their role in strategy implementation was determined by the action plans that fell within their remit. This meant that, at Rhodia, group executives, division managers and company management committees were all involved in the strategy-setting side of the budget process. Moreover, strategy cascaded down the chain of responsibility in a regimented manner, where it was discussed and debated before the costing exercise began. Under the conventional budgeting model, too much time was devoted to the costing side, and the action plan phase was sometimes skipped altogether. But this new approach signalled Rhodia’s determination to rebalance the equation, spending less time on costing and more on action plans.


A new budgeting model: from accounting to strategy

Under the conventional model, a budget is an accounting tool that captures all of an organisation’s revenues and expenditures. But not all expenditures hold the same strategic importance, meaning considerable time is spent on unnecessary costing work. According to one school of thought, this model may be seen as beneficial because it fits neatly with accounting processes. Yet this all-encompassing approach misses the main point of what a budget is supposed to do: capture what really matters. This observation raises an important question: is it really necessary for a company’s management control and strategy-setting system to cover all revenues and expenditures? On the face of it, there is no justifiable reason why it should – perhaps other than to allow the organisation to check that its figures match reality.

Yet managing priorities was one of the central planks of Rhodia’s new management control model, which dispensed with the idea of controlling everything and focused instead on the 20% of variables that affected 80% of the group’s value (the Pareto principle). This approach could be considered a version of “management by exception” (or MBE), an established practice in conventional budgeting whereby only significant deviations from a budget or strategy are brought to the attention of management. In an effort to focus the attention of front-line staff, however, Rhodia moved MBE earlier in the process, shifting from retrospectively analysing deviations to screening strategic priorities in advance – hence the limited number of KVDs and SAs in its system. In other words, line personnel were expected to conduct a strategic review then agree on a restricted list of priorities. Rhodia abandoned exhaustive budgeting and embraced partial budgeting. The new management model did not cover certain expenditure items such as erasers and pencils, for instance, giving the impression that the company was only partially in control of its costs. Yet the advantage of this incomplete system was that it highlighted those things that really mattered. Likewise, relinquishing some control was by no means an indication of a more relaxed management style.

Rethinking responsibility centres and budget cycles

The traditional budgeting model has its own drawbacks. First and foremost, it assumes that organisations can be carved up into standalone responsibility centres. This approach overlooks the fact that organisations function as systems, in which the actions of one department have knock-on effects elsewhere. In conventional practice, this issue is addressed through a series of back-and-forth budget adjustments designed to take account of departmental constraints. Yet the need to constantly adjust and review action plans, then redo the associated costing work, demands a great deal of coordination and makes the budget process particularly burdensome. It is easy to see why budgets tend to vary so little from one year to the next. And once the equilibrium of the past is gone, the sheer complexity of the process – devising, costing, then reviewing action plans – means that establishing a new equilibrium takes time. For this reason, Rhodia’s decision to dispense with responsibility centres and to budget instead on the basis of cross-cutting KVDs, SAs and action plans seems to have been a wise move.


The LOLF: budget reform in France

In autumn each year, the French government submits the following year’s draft budget to Parliament. The budget takes the form of a single document covering all government expenditures and revenue forecasts. In 2001, Parliament adopted the Constitutional Bylaw on Budget Acts (LOLF), a major overhaul of fiscal and accounting rules that dated back to 1959. The LOLF was enacted on 1 August 2001 and applied for the first time in 2006. Under the new budget preparation and monitoring framework, France has shifted away from expenditure-oriented budgets and towards a results-oriented model. Budgets are now based on a three-tier structure:

  • Missions, which correspond to major policy objectives and span one or more government departments.
  • Programmes, which encompass appropriations for a particular action or a coherent set of actions under the responsibility of a single department.
  • Sub-programmes (actions), which encompass appropriations for a particular purpose within a given programme.

The LOLF has three main aims: to make budget documents easy to understand for MPs, senators and anyone else who chooses to read them, to improve the adequacy of public expenditure, and to instil budgetary discipline guided by the principles of performance, transparency and sincerity.

Under the new system, Parliament allocates departments a global budget along with a set of objectives and indicators to measure performance. This approach is designed to improve both the budget-setting process itself (i.e. in government and Parliament) and the way expenditure is managed within individual departments and other government bodies. The objectives and indicators introduced by the LOLF necessarily demand a performance-based management system, the idea being that such a system makes government more effective and efficient. Programme managers are required to produce two documents: :

  • Annual performance plans (PAPs): these documents, appended to initial budget bills (PLFIs), give a multi-year overview of the programme manager’s commitments based on the constituent elements of the programme. They describe the actions included in the programme, the associated costs, and the objectives and expected results for the coming years, as measured by a set of precise indicators and objectives (i.e. expected levels of performance).
  • Annual performance reports (RAPs): these documents, appended to budget review bills (PLRs), give an account of programme performance. They are expected to show both deviations from PAP forecasts and measures taken since the previous RAP. The reports give an overview of performance, summarising the objectives, results and indicators for each programme and detailing implementation costs. Because PAPs and RAPs are identical in structure, comparing forecasts and achievements is straightforward. The approach is similar to a conventional management control system, under which achievements are compared against forecasts and managers are expected to explain any gaps.

Performance management under the LOLF

The process of translating strategic objectives gives rise to three types of operational objective:

  • Translated strategic objectives: the strategic objectives set out in the PAP are translated into objectives that are specific to a given area of activity or policy, or to a particular territory. For instance, the objective of reducing the length of court proceedings can be translated into objectives for different types of court. This same principle is easy to apply to service quality or management efficiency objectives, although socio-economic effectiveness objectives can be more difficult to translate.
  • Intermediate objectives: these objectives represent milestones on the way to achieving the desired results in the PAP and can be helpful in guiding departments and agencies as they seek to achieve strategic objectives. Intermediate objectives concern the means and tools available to department or agency managers and can relate to inputs (consumption volume or rate, or distribution of certain resources), activities (volume, distribution or implementation of certain actions or processes) or outputs (volume or distribution of certain outputs).
  • Complementary objectives: these objectives, which relate to activities not covered by the PAP, are specific to a given operational level and may be pursued in addition to those based on national objectives. These complementary objectives must, of course, not contradict the strategic objectives set out in the PAP.

This three-tier structure, a manifestation of the so-called “performance cascade”, is designed to ensure that department-specific objectives are presented in a standardised way that shows linkages with the strategic objectives of the PAP. Implementing this cascade is not straightforward, and departments can sometimes devote significant time and resources to devising and monitoring indicators that are of little practical relevance.



Beyond budgeting and the LOLF: two initiatives, mixed results

Both Rhodia’s Spring project and the LOLF share many features in common. We will cover these briefly below before turning to the differences between them, which are a source of more valuable insights.

Beyond budgeting and the LOLF: what they share in common

In both cases, the reforms involved a shift away from expenditure-based budgeting and towards a greater focus on aims. This has organisational implications, with the responsibility centre model giving way to a more holistic view of the organisation.

Likewise, both Rhodia and the French government adopted a similar structure that more closely aligns budgeting with strategy:



This triptych, which is normally applied to balanced scorecards and quality management programmes, exists in various forms in many organisations. And although the terminology may differ, the three-part structure remains the same. So in that sense, it is nothing new. But what sets Rhodia’s Spring project and the LOLF apart is that this model was applied to budgeting.

Both initiatives have another feature in common: the organisations in question have found it difficult to implement the reforms at the operational level. The evidence suggests that new budget models cannot easily trickle down the chain of responsibility and that, in many cases, budget allocations continue to be managed using conventional principles.

Two systems, two different rationales

The many differences between the two systems speak volumes about their fundamental characteristics.

First of all, Rhodia opted to apply its new method only to those expenditures with the greatest impact, managing all other expenditures on an as-needed basis. The LOLF, however, applies to all government expenditures without exception. Both of these approaches carry risks. For Rhodia, this risk came at the priority-setting stage – some of the prioritised expenditures might not have been the most impactful, while more significant expenditures could have slipped through the net. Under the LOLF, meanwhile, the potential for having “catch-all” programmes that include routine operating expenditures risks watering down the method. In some government bodies and agencies, routine costs can amount to as much as 50% of total expenditures.

In addition, private organisations find it much easier to set priorities than the public sector, not least because decisions that exclude particular actions – and therefore certain users, citizens or taxpayers – are hard to justify. It could be argued that this difference speaks to two competing rationales: one economic, the other political. Although these rationales exist in both the private and public spheres, economic motives dominate in the first, while political considerations take precedence in the second. For politicians, the priority is to build the broadest possible support base and, in doing so, to secure a path to victory. In many cases, they cannot countenance making decisions that exclude certain groups – because inclusion matters more than efficiency.

Differences in management: rethinking aims and treating objectives as a means to an end

Budgeting is based, implicitly at least, on the existence of performance contracts setting out the objectives to be achieved at different levels of an organisation.

Yet an objective, in isolation, gives line managers no indication of what action they should actually take. There are many different ways to achieve an objective, and uncoordinated action can undermine effective management of the entire organisation. Without proper coordination, the whole fails to add up to the sum of its parts. Merely setting objectives is no guarantee of coordination. Objectives can only be only effective if they are set with input from line personnel, if their meaning is clear, and if their full implications have been duly considered. This view seems to be shared by Kaplan and Norton (2001), who posit that, under a management-by-objectives system, performance indicators serve little purpose without genuine strategic focus. They further argue that personnel responsible for strategy implementation need to understand and accept not just the strategy itself, but the way in which its success will be measured. In other words, objectives and performance contracts are meaningless unless they are supported by a robust mechanism for collective strategy-setting.

In a management-by-objectives system, organisations focus all their attentions on so-called “service-level contracts” and give scant regard to concrete action plans. This approach makes the firm little more than a “nexus of contracts” (as defined by agency theory). Yet shaping and executing action plans requires robust coordination. Consequently, this excessive focus on negotiating and implementing service-level contracts could indicate a deliberate shying-away from the difficult, emotionally charged conversations that form a part of the strategy-setting exercise – perhaps even suggesting that organisations that adopt this approach are struggling to come to terms with some of the interpersonal aspects of management. Setting objective-based targets without an in-depth discussion of how they will be achieved avoids organisations having to drill down into the detail of what their employees actually do. Employees’ performance is appraised solely on whether or not they meet a given target. Yet while indicators give an “objective” demonstration of employees’ suitability for their role, they leave no room for critical thinking and, in doing so, shield the manager from the person on whom they are passing judgement. In recent times, there has been a move away from this management-by-objectives model and towards a different approach known as “management of objectives”. This shift explains why introducing budget reforms has proved so challenging, because it bursts the protective bubble that, by implicit agreement, has become a common feature of large organisations.

Reconsidering objectives


This new approach does not advocate abolishing objectives altogether. Far from it. The idea is to use action plans as a way to redress the balance in management by transitioning from management by objectives, to management of objectives. Objectives are not an end in themselves, but rather a means to check that an organisation has achieved its aims. This approach marks a shift away from service-level negotiations and towards a participatory objective-setting process, in which a wide range of competing views enrich strategy formulation debate.

Under the conventional budgeting mode, significant resources were allocated to devising and discussing action plans. Yet organisations did not always devote enough time to this process, and many gave the impression that setting performance targets was a bigger priority. Hofstede (1967) documented numerous instances of political game-playing between stakeholders, while Cyert and March (1963) observed that these processes often resulted in only slight changes to pre-existing balances. Rhodia sought to neutralise this game-playing in budget negotiations by setting strategy-based objectives and giving line personnel a greater say in the process.

This participatory, collective approach to objective-setting is not quite so easy to transpose to the public sphere, for two reasons. First, as we have already seen, setting priorities is much harder in the public sector and, as a result, managers’ attention is divided. Second, the culture of public-sector organisations tends to be rules-based rather than contract-based.




The similarities between Rhodia’s Spring project and the LOLF provide useful insights into the nature of these two budget reform initiatives. Yet the differences between them are equally instructive, showing how the reforms were carried out in markedly different institutional contexts, each with its own priority-setting processes and capabilities, and each with its own management culture. These factors matter just as much as the technical architecture of the systems themselves. They point to a need – in both the public and private sectors – for a collective rethink of organisational aims and strategy, and of the way in which managers use objectives as strategy implementation tool.




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