Budgets are the bane of many managers' lives. Months are spent estimating expenditure for everything down to the last paper clip. Yet even by the end of Week 1, some assumptions will be out of date, the constraints and incentives will inhibit action and opportunities will be lost.

Post-Internet timescales are even shorter, and a growing number of companies have decided that conventional budgeting is no longer worthwhile. To them, the reassurance budgets give to nervous chief executives is outweighed by the flexibility needed to create value for shareholders.

Mr Brian Lever, principal consultant at PwC in London, says many companies "want, in theory, to go ahead and abandon budgeting, but are not sure how". The hesitation does not just come from the board: staff have become so used to the budget as a means of control, and a ready-made excuse for either spending or not spending money, that they feel naked without it.

An initiative by about 20 companies in Europe has resulted in a forum called the Beyond Budgeting Round Table*. Mr Robin Fraser, a forum director, says much of the sweat and tears shed by managers over budgets stems from confusion over their purpose.

"It began life as a purely accounting document, used for financial and tax planning. But it came to be used as a target, a forecast even a quasi-contract for performance, control and rewards," he says.

The resulting distortions are well known. If an estimate of the likely outcome is realistic, it cannot be a testing target; the budget becomes a floor as well as a ceiling; there is a rush to spend whatever is left in the kitty at the year end, or else vital moves are delayed to keep within the budget; managers will not risk their bonuses whatever the longterm benefit to the firm and so on.

But the really stultifying effect is the constriction on managers' freedom to respond to customer demands in a fast-changing market. Old command-and-control management styles are no longer adequate, but empowerment and effective horizontal teamwork cannot be realities if staff are restricted by a vertical, top-down budget.

In 1977, Dr Jan Wallander, then chief executive of the retail bank Svenska Handelsbanken, showed it was possible to do without budgets, and the bank's outstanding record since is held up by the anti-budget lobby as proof of the benefits. Some large groups have followed suit, such as SKF, Tetra Laval and, in Copenhagen, Borealis, the merged petrochemical interests that came out of the Finnish Neste and the Norwegian Statoil. Outside Scandinavia, the take-up has been modest.

Sometimes, radical restructuring provides the impetus for change. Mr Pavi Binning, group financial controller of Diageo, the food and drinks group formed from the GrandMet-Guinness merger in December 1997, says: "We started with a clean sheet of paper." As well as the famous stout, the merger brought together many valuable brands. In the new focus on value, rationalising the planning and budgetary processes for the brands was an immediate priority.

In this respect, Mr Binning sees the finance function as an agent, not an opponent, of change. He recalls: "What we needed to create was a focus on consumers, on people, on our brands and their strengths, and on performance. We knew we had to do something to free people from the burden of the budgeting work, and force them to think strategically, but with clear accountability and responsibility.

"We did a hell of a lot of analysis on the value drivers in each part of the organisation, and then added targets that would take us from the strategy to actual execution.

"For example, in the spirits business, a painstaking economic profit analysis was carried out and the markets and brands with the highest value potential selected. Then specific `value levers' likely to improve profit were identified - it could be volume, price, cost, marketing expenditure, or some other factor."

Next, strategies and action plans were devised to work on the levers, and indicators agreed to track progress against targets, while keeping a check on factors such as brand awareness and market penetration. This now forms the control mechanism at Diageo.

For accounting purposes, the usual monthly returns of sales volume, net sales value and trading profit have been retained. The difference, says Mr Binning, is that these are no longer the only measures of progress, and he claims that now the initial spadework has been done, the business is much more focused on the drivers that will improve performance.

"Most companies analyse monthly results against their forecast. At group level, we now focus on year-on-year performance and on whether the operating unit is delivering against the trajectory agreed in its strategic plan. You immediately know if it is off-track or not. Then every quarter we check on progress against the strategy. We're moving towards a continuous planning process linking strategy and execution.

"We started by making changes at the group level. But a significant amount of budgeting actually takes place in operating units, so we've got pilots running at the unit level to develop matching processes."

Before, GrandMet had worked through a fresh strategic planning process every year. It took two to three months, and was followed by a separate process for the annual plan. At the end, the annual plan often did not resemble the earlier strategic plan.

Removing the budget, on the other hand, is only possible once people are ready to accept the responsibility. "Some managers find it difficult," says Mr Binning. "So you need organisational support to change behaviour and build their capabilities. People naturally default to the old behaviour."

Diageo held workshops to help staff define the critical value drivers and levers. "From the first," says Mr Binning, "we encouraged managers to break down the internal barriers. They are now seeing the key things that are important to performance, not a thick document which includes every conceivable number in the business."

"The finance and general management community are hugely supportive," says Mr Binning. "By redesigning the strategic planning process, we've taken out a chunk of work and begun to free up the organisation so it can focus on driving value."

He admits that dispensing with the budget "is a journey, and no one's got there yet. We're making progress and refining it as we go along". Hard-pressed managers will be watching Diageo's progress with interest.

*Beyond Budgeting Round Table, Tel: 00 44 1202 670 717; www.beyondbudgeting.org