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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
- Veröffentlichungsjahr: 2016
The future of management is here!
Traditional management was invented for very different times and is today in serious trouble. The level of volatility, uncertainty, complexity and ambiguity in business environments is record high. People’s expectations towards their employers and leaders have also radically changed. A number of organizations are exploring management innovation that can help them not just coping but thriving and out-performing in these new and different realities. Beyond Budgeting may be the most important new idea out there addressing these radical changes, due to its broad scope and coherent approach. Abolishing the traditional, detailed annual budget is necessary, but not sufficient. Organizations on the journey are questioning their old leadership beliefs and are tearing up their old command-and-control management models, with “agile” and “human” as the foundation for a new start.
Implementing Beyond Budgeting is both a theoretical introduction and a practical guide to bringing such a more empowered and adaptive management model to life. Drawing on the author’s twenty years of Beyond Budgeting experience, this book not only demonstrates the serious problems with traditional management through numerous practical examples. It also follows several companies on their Beyond Budgeting journey, including Scandinavia’s largest company Statoil where the author has been heading up implementation since 2005. You'll get a first-hand glimpse at the reality of transitioning a large multinational company, and gain a real-world perspective on what successful implementation entails.
This new second edition has been significantly revised and expanded. It covers the amazing development of the Beyond Budgeting movement and how the Statoil implementation journey has continued since the first edition of this book was published in 2009, sustaining major events like for instance the 2015 oil price crash. A new chapter on “Beyond Budgeting and Agile” has also been added. New implementation experiences, great new case stories, new management innovation examples and management metaphors (traffic controls!) are introduced, as well as the author’s latest reflections on a range of management issues including target setting, forecasting, performance evaluation and incentives.
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Table of Contents
Title Page
Copyright
Dedication
Foreword
Acknowledgments
About the Author
Introduction
Chapter 1: Problems with Traditional Management
Introduction
Which Way in a New Business Environment?
The Trust and Transparency Problem
The Cost Management Problem
The Control Problem
The Target-Setting Problem
The Performance Evaluation Problem
The Bonus Problem
The Rhythm Problem
The Quality Problem
The Efficiency Problem
Chapter 2: Beyond Budgeting
The Philosophy
Beyond Budgeting Roundtable
The Beyond Budgeting Principles
Handelsbanken—the Pioneer
Miles—a Master of Servant Leadership
The Reitan Group—Values at the Core
Chapter 3: The Borealis Case
Introduction
Creation of Borealis
The Journey Begins
The Borealis Model
Implementation Experiences and Lessons Learned
Borealis Today
Chapter 4: The Statoil Case
Introduction
Creating the Foundation
Starting Out
The Statoil Model
A Dynamic Ambition to Action
What Could Be Next?
The Beyond Budgeting Research Program
How Are We Doing?
A New Start for Statoil?
Chapter 5: Beyond Budgeting and Agile
Chapter 6: Making the Change: Implementation Advice
Create the Case for Change
Handle Resistance
Design to 80 Percent and Jump
Keep the Cost Focus
Don't Start with Rolling Forecasting Only
Involve Human Resources and Agile IT
You Can't Get Rid of Command and Control through Command and Control
Do Not Become a Fundamentalist
Balanced Scorecard Pitfalls
Revolution or Evolution?
Closing Remarks
Index
End User License Agreement
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Guide
Cover
Table of Contents
Begin Reading
List of Illustrations
Chapter 2: Beyond Budgeting
Exhibit 2.1 Traffic Control
Exhibit 2.2 We Must Change Both Process and Leadership
Exhibit 2.3 Some of the Companies on the Beyond Budgeting Journey
Chapter 3: The Borealis Case
Exhibit 3.1 The Vision
Exhibit 3.2 The Case for Change
Exhibit 3.3 The Budget Alternatives
Exhibit 3.4 More for Less—the New Model in a Nutshell
Exhibit 3.5 Petrochemical Profitability Index
Exhibit 3.6 Relative Financial Performance
Exhibit 3.7 Business Follow-Up
Exhibit 3.8 Trend Reporting Example 1
Exhibit 3.9 Trend Reporting Example 2
Exhibit 3.10 Activity Accounting
Exhibit 3.11 From Activities to Drivers
Chapter 4: The Statoil Case
Exhibit 4.1 Statoil in Brief
Exhibit 4.2 Ambition to Action—Key Principles
Exhibit 4.3 The Execution Framework
Exhibit 4.4 The Statoil Book
Exhibit 4.5 Separating Budget Purposes
Exhibit 4.6 Ambition to Action
Exhibit 4.7 Ambition to Action Example
Exhibit 4.8 The Ambition to Action Process
Exhibit 4.9 Direct and Indirect Benchmarking
Exhibit 4.10 Relative Financial Performance
Exhibit 4.11 Delivery goals are based on Ambition to Action—directly or indirectly.
Exhibit 4.12 The Mindset Required—Cost-Conscious from the First Cent
Exhibit 4.13 Dynamic Resource Allocation Tools
Exhibit 4.14 Report Example 1
Exhibit 4.15 Report Example 2
Exhibit 4.16 Performance Evaluation from Narrow Measurement to Holistic Assessment
Exhibit 4.17 Performance Evaluation—One Process with Three Different Purposes
Exhibit 4.18 Performance evaluation can never be 100 percent objective.
Exhibit 4.19 The Statoil Performance Process
Exhibit 4.20 Expanding the Room to Act and Perform
Exhibit 4.21 Performance—a Growing HR/Finance Interface
Chapter 5: Beyond Budgeting and Agile
Exhibit 5.1 Manifesto for Agile Software Development
Implementing Beyond Budgeting
Unlocking the Performance Potential
Second Edition
BJARTE BOGSNES
Copyright © 2016 by Bjarte Bogsnes. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data is available:
ISBN 978-1-119-15247-7 (Hardcover)
ISBN 978-1-119-22228-6 (ePDF)
ISBN 978-1-119-22227-9 (ePub)
Cover Design: Wiley
Cover Image: © Eugene Sergeev / Shutterstock
For Jeremy and Peter
Foreword
Bjarte Bogsnes's book is an important contribution to the transformation of finance from the controlling and beancounting office to the company's value-creating office. Bogsnes describes how to transform finance's historical role of ex-post reporting and controlling into a new role that guides the enterprise forward for sustainable value creation. The transformation requires reexamining and, probably, abandoning some of the vestiges of finance's previous management control tools. In particular, several companies in Europe and North America have questioned their use of the annual operating budget, a management tool introduced at General Motors nearly a century ago by CEO Alfred Sloan and CFO Donaldson Brown. Although the operating budget was a great innovation at the time, today's dynamic and highly volatile environment has made an annual fixed operating plan an anachronism. The counterreaction to the high preparation cost, in time and money, of the annual budget and its inflexibility in light of rapidly changing external circumstances and internal opportunities has launched the Beyond Budgeting movement. Several academics and consultants have written articles and books, and led working groups of companies, about how to abandon the fixed annual budget.
The current book makes a major contribution to this movement. Unlike the previous writers, Bjarte Bogsnes has been there and done that. And not just once. Bogsnes was the intellectual and project leader at two transformational projects at major companies, Borealis and Statoil. The book draws on these rich experiences to offer practical advice about how to introduce a new set of planning and performance management systems that inspire both managers and employees to achieve breakthrough performance. This book is an essential read for anyone frustrated with the organization's budgeting process and looking to achieve the intended benefits from the budget with new systems that work better, faster, cheaper, and more flexibly. Bogsnes takes Beyond Budgeting to a new level by describing in detail the management system, “Ambition to Action,” that he helped introduce to replace the budget system. Along the way, he provides vivid examples of the implementation process in the two large companies that enabled them to abandon and replace a strongly embedded management system.
Bogsnes was trained in finance and worked for many years in finance organizations. He does not, however, view finance just through its typical left-brain analytic lens. Rather, he is eloquent on the importance of incorporating right-brain concepts such as trust, empowerment, leadership, transparency, and communication when designing and implementing a new management system, especially with today's workforce and competitive environment. The book is a refreshing integration of analytic left-brain concepts, including activity-based costing, balanced scorecards, and performance objectives, along with vital right-brain sensitivities on motivating and leading organizational change.
I have heard Bjarte speak on many occasions. The enthusiasm, passion, and persuasion that he exudes in person come through well in his writing. Managers searching for new ways to motivate and evaluate their people will find him inspiring, refreshing, practical, and, even, entertaining, terms not usually applied to authors of management control books.
Robert S. KaplanHarvard Business SchoolBoston, Massachusetts
Acknowledgments
It has been said that if you want to travel fast, travel alone. If you want to travel far, travel together. I want to thank all my fellow travelers on this journey.
At Statoil, a special thank-you goes to:
Eldar Sætre, for creating the foundation, securing the green light, and staying rock solid behind ever since
Torgrim Reitan, for all the trust and support
Arvid Hollevik, Stian Flørenæs, Jone Solberg, and Toralf Rugland, for all our great discussions and for backing it all with a wonderful system
My other Finance colleagues and all of you out in the business, who have been taking this into your own units. I dare not list names, because there are so many of you. You know who you are!
My Human Resources colleagues. We are so much stronger together! A special thank-you to the wise and wonderful Siri Bentsen
My new friends in IT. Agile and Beyond Budgeting are a perfect fit.
I am deeply in debt to all my friends at the Beyond Budgeting Roundtable: Jeremy Hope (RIP), Peter Bunce (RIP), Robin Fraser, Steve Player, Steve Morlidge, Franz Röösli, Anders Olesen and Dag Larsson.
Thank you to Thomas Boesen in Borealis for a great job in Finance after I moved to Human Resources, and to everybody else on the Finance team, especially Gunnar Nielsen, Asbjørn Holte, and Anders Frøberg. I am also very grateful for all the support and patience from my HR colleagues.
A special thank-you to Bob Kaplan for the Foreword and for all the support since we first met almost 20 years ago.
A big salute to Katarina Kaarbøe and Trond Bjørnenak at NHH and their colleagues for introducing Beyond Budgeting to academia. Others will follow, but you were early!
And last, but also first, Svein Rennemo: Thank you for the challenge and for all your trust and support. Not everybody dares to ask for the unexpected. You did.
About the Author
Bjarte Bogsnes has a long international career, both in Finance and HR. He has been advocating Beyond Budgeting for more than 20 years and led its implementation at two large European companies, Statoil and Borealis. Bjarte is the chairman of Beyond Budgeting Roundtable (BBRT) and is a popular international business speaker. He is the winner of a Harvard Business Review/McKinsey Management Innovation award.
Introduction
“I may not have gone where I intended to go, but I think I have ended up where I needed to be.”
Douglas Adams
Many years have passed since I sat down in my mountain cabin in Norway and started writing about my Beyond Budgeting journey. The book I ended up with was conceived in the cold and dark of winter, but was written with a burning belief about a new and better way. I am both humbled and proud that the book found its way into academic curriculums, and that business schools around the world are teaching the Borealis and Statoil cases, which the book introduced.
Many have encouraged me to write a second book. I knew I would. There has been so much progress for Beyond Budgeting and so much learning for myself, more than I ever could have dreamt of when my journey started way back in the mid-1990s.
This wealth of new insights and experiences is, however, hard to share in isolation, without linking back to where it all started in Borealis and later continued in Statoil. I was therefore uncertain if I should update the first edition or write a completely new book. My publisher and many others recommended a revision first. I ended up with something in between. I hope returning readers will find it more new than revised.
My writing has been accompanied by countless hours of great music. A big thank-you to Neil Young, Bob Dylan, Van Morrison, Elvis Costello, Tom Waits, Warren Zevon (I have to stop here) and so many other great artists for providing the soundtrack to these words. Many musicians say about their best albums (Yes, I still use that word; I am a vinyl guy!) that they first took those songs on the road before going in to the studio. Without any further comparison, I can connect to that. All the presentations and workshops I have done since my first “album” came out have sharpened and improved old songs you may have heard before, but also inspired a number of new ones. I really look forward to sharing my new set with you!
When I first thought about writing a book about my Beyond Budgeting journey, my immediate reaction was “no.” How could I possibly write 300 pages or more about something that actually should be nothing but common sense? So please bear with me that this book still is no brick. Maybe you don't mind. Maybe there are enough bricks out there. But thank you for spending a few hours on something that is less of a story about budgets and more of a story about leadership and what makes people and organizations perform and excel. The main purpose is not to get rid of budgets. The budget is only a barrier that must be removed, and certainly not the only one. The main purpose is liberation from dictatorship, micromanagement, number worshipping, bureaucracy, calendar periods, secrecy, sticks and carrots, and all the other management myths about what is best for achieving great performance in teams and organizations. This is the regime we have to overthrow in order to make the business world a better place. Welcome to the revolution!
I hope I did not lose you with this slightly emotional outburst. Please hang on. I promise to prove the case with sober evidence and lots of practical examples. Many will be uncomfortably familiar.
I am a finance guy by education. My first job was actually in Statoil's corporate budget department. Trust me; I know the budget game from the inside—not just from that job, but also from many later finance manager jobs. I have paid my dues, almost camping in my office during the frenzy of budget peak periods. Looking back, I did some incredibly stupid things during the early days of my career! Hopefully, it makes my criticism not only credible but also useful.
I am still with Statoil, in the role of vice president of Performance Management Development. I know it is an odd title, but it was the best we could come up with when an organization chart had to be finalized in a hurry back in 2007. Anyway, it is a great job!
For someone used to changing jobs every third year (and often country, too), it has been a surprising blessing to be in the same job and place for more than ten years now. My wife would probably disagree on “the same place,” given my travel schedule. Fortunately, she is sometimes able to join me. She could probably step in and speak for me anytime and anywhere!
I am still actively engaged in the Beyond Budgeting Roundtable: more later about the amazing development of this network that started out in the late Nineties and is today stronger than ever.
Beyond Budgeting is about leadership more than anything else. I have been in leadership roles for almost 20 years, most of the time with international teams outside my home country. I sincerely enjoyed the leadership role. It is the most challenging and rewarding job there is after the ultimate leadership role, which always will be parenthood.
I also learned about leadership in the Norwegian Army, where I spent a year at an officer school before getting to practice it all in a second year. Much of my learning was, as I saw it, about how not to lead, enough to abort my plans about a military career and go for business studies instead. The army has fortunately changed since I got my overdose of command and control back in the 1970s.
I belong to the rather small group of finance people who have also worked in Human Resources (HR). I headed up an HR function for four years. I never learned more in any other job. That period gave me invaluable insights and inspiration for the next part of my journey. First, I realized something that should be obvious, but unfortunately isn't for most finance and HR people: Performance management cuts across both functions and neither will succeed without the other onboard. Second, the leadership side of Beyond Budgeting now gave so much more meaning.
I also have the practical experience of heading up two Beyond Budgeting implementations. Borealis was Europe's largest petrochemicals company at the time, while the energy company Statoil is Scandinavia's largest company. I have shared my experiences from these two companies at thousands of conferences and workshops across the world. I have met and had discussions with countless managers and professionals, and experienced overwhelming and heartwarming support, but also hesitation, confusion, and at times, outright disagreement.
I have always been curious about what lies underneath what we all observe on the surface. I have learned a lot from great stuff written on both leadership and management. This book is very much about the difference between the two. But I am also a practitioner. For me, the crossroads where theory meets practice is the place to be. When I studied at the Norwegian School of Economics (NHH), it was hard to relate to much of the organizational theory, and not only because I was perhaps not among the most frequent visitors to the study hall. I needed the painful but rewarding experience of trying it all out in practice, where theory hits the trenches of real life. This is a story from those trenches. Too often, the theory failed.
When I graduated and joined Statoil in 1983, it was a smaller company than what it is today. Most small companies want to grow. When preparing for the growth journey, many look to those who have already succeeded and become big. How are these companies managing themselves? Discovering their impressive menu of advanced management processes can be a daunting experience: scenario planning, strategy development, balanced scorecards, budgets, risk management, incentive systems, compliance, audits and controls, and on and on. The list is long. Sometimes management consultants are called in to help. It rarely makes the list any shorter! Then the company starts out, both growing and working on the list. New management processes are introduced one on top of the other.
Some succeed, not just in growing, but also in implementing everything on the list. They may even have become one of those benchmarks that small companies now look to with awe and admiration. Many will, however, discover that they have not only become big. They have also become bureaucratic, rigid, inflexible and slow, and sometimes also quite sad places to work. They have lost the agility and the “yes!” spirit they had when they were small.
The growth journey of organizations shares many similarities with the aging process of humans. As we grow older, we lose more and more of what we took for granted in our younger days: the agility and flexibility of youth. I am starting to get some personal experience here! As age takes its toll, some also get weary of life and lose their spirit and that twinkle in the eye. This development in the human body and mind is unavoidable and irreversible, at least the physical part. It can be delayed through a healthy lifestyle, but in the end, age takes us all. We have no choice.
Organizations, however, have a choice. They are not destined to become slow and sad because they grow and become older. If they do, it is mostly self-inflicted and cannot be blamed on destiny or age. Fortunately, the damage is reversible, although dismantling what was introduced during the growth journey will always be much harder than avoiding it in the first place.
The big question for big organizations should therefore be: “How can we find our way back to the agility and humanity we had being small? How can we be big and small at the same time, old and young, wise and brave?” The big question for small organizations wanting to grow should be: “How can we avoid ending up in the same place?” Most organizations are actually born Beyond Budgeting. They become something else because they think they have to in order to grow up. Of course, one cannot manage a big organization exactly like the small one it used to be. But could there be alternatives? Could there be other ways that better balance the benefits of being big, which of course are both real and important, with the benefits of being small?
For humans, older normally means wiser. For organizations, this is not necessarily the case, as many struggle to capitalize on a mountain of collective wisdom and experience acquired during the growth journey. The solution is often another new process: “knowledge management.” Many employees experience instead a “dumbing-down” trend, as they observe more and more strange decisions being made further and further away from their own reality.
Many of the issues raised in this book have been discussed before in some shape or form. Douglas McGregor, for example, addressed many of the Beyond Budgeting leadership issues in his classic book, The Human Side of Enterprise, back in 1960. His “Theory X and Y” is spot on. What are your fundamental beliefs about people? Does your sympathy lie with Theory X? Do you believe that people generally dislike work and responsibility, have low ambitions, and prefer to be directed and controlled? Or do you instead believe in Theory Y, that people want to be involved, take responsibility, develop and perform, and make a positive difference? McGregor's book is timeless reading and is highly recommended.
The issue is not a lack of theory. There are thousands of other books and articles to draw from. The knowledge is out there. What we need is all of this theory to be put to work. We need to get all those managers who believe they finished their education at graduation to understand that they are at risk of becoming more finished than educated. We need to see radical change in the millions of organizations and teams where old-fashioned management is executed every day. Theory X is alive and kicking as if little has happened over the last 50 years.
One label for what this book is about could be “performance management.” I actually don't like that phrase, despite having it in my title. “Performance” is great; it is the combination with “management” I struggle with. How do you feel if someone tells you they are going to “manage your performance”? I know what my response is. My defense system immediately goes on red alert. Nobody is going to mess around in my head! Nobody is going to pull my strings as if I am some kind of dancing marionette! In fact, I do not believe that performance really can be “managed” at all, at least not in the traditional way that so many management theories want us to believe. People are not robots, organizations are not machines, and the future is more unpredictable than ever. Managers can't just sit in the control room, pull strings, push buttons, and “manage” performance. You can't make a flower grow by pulling on it.
What we can do, however, is to create the conditions needed for growth and performance. We can create an environment of trust and transparency, of positive challenge and stretch, of care and support, where people perform because they want to, not because they are told to. But this is all we can do. People are not marionettes. They can choose to respond to these conditions, but they cannot be forced; they cannot be “managed.” Many feel over-managed and under-led. They are hungry for good leadership: direction, inspiration, and support. Good leaders create clarity, capability, and commitment: direction on which mountain to climb, and the ability and wish to get up there. That is leadership in a nutshell, and also very much what Beyond Budgeting is about. It is not so much those budgets we are after. It is more the mindset and the myths and beliefs of traditional management we need to fight. It is the naiveté of believing that if we only describe the future with enough decimal places, then we know what will happen and can safely set sail. It is the blind belief that good performance is all about hitting those budget numbers. It is thinking that as long as we in great detail can explain why we once again got it wrong, we are in control. It is the myth that throwing money at people is the only or best way to motivate. It is Theory X again; unless people are kept on short leashes and are tightly controlled, they will all cheat and abuse.
You will still at times catch me using the phrase “performance management,” because I have yet to find a better one. “Organizational behavior” could be an alternative. Unfortunately, many of those we need to reach with the Beyond Budgeting message immediately switch off when they hear such soft and nonfinancial words. Until we find a better name, I am afraid “performance management” will have to do. Please let me know if you have a better proposal!
There would have been no journey to write about if it weren't for Svein Rennemo, perhaps the best leader I ever worked for, among quite a few great ones. I was reporting to Svein when I headed up Corporate Control (that is a terrible name, and I even picked it myself!) in the newly formed Borealis back in the mid-1990s. Svein was the CFO and later the CEO.
“What do you expect from us?” That was the question I asked him back in 1995, when Borealis was undertaking a full-blown “business process reengineering,” which is (or was) consultancy language for “Leave no stone unturned and look for a better way.” I was asked to head up a part of this project called “management effectiveness,” and I was quite uncertain about what content to put behind such a fancy label. So I asked Svein what he really expected from us. I will never forget his response. He looked at me with his mild and kind eyes, which I knew should never be mistaken for any lack of will or determination, “Bjarte, I expect the unexpected.” That was all. So much challenge, and so much trust, in so few words.
Triggered by that message, some months later we had decided to abolish budgeting in Borealis. For me, those words from a great leader became the start of a long journey. You will learn much more about what we did and how we jumped without any knowledge at the time of anyone else jumping.
Before we get to this story, we have to start with the case for change, with all the problems caused by traditional management. We will do so in Chapter 1, where we discuss how traditional management has become more of a barrier than a support for great performance. The budget is one of the problems, but certainly not the only one. We discuss serious and often overlooked problems related to trust, cost management, rhythm, target setting, performance evaluation, bonus, quality, and efficiency. All sections are revised and expanded compared to how I presented these problems in the first edition. This didn't make them any smaller. On the contrary! I have also added a new section about “control,” undressing some of the illusions of control that unfortunately so many believe in.
In Chapter 2 we move to Beyond Budgeting. First, we review the philosophy behind and the latest update of the 12 principles, before we visit the Beyond Budgeting Roundtable. The chapter has been updated with everything happening since 2009—a lot, actually. There has been significant progress, but also sad and serious setbacks.
We will then make the concept more tangible by taking a look at the famous Handelsbanken case. This Swedish bank made radical changes to its management model already back in 1970 and continues to be a great reference and source of inspiration. I have updated the story with new insights about this fascinating Beyond Budgeting pioneer.
We will also look at two new cases. Miles is an amazing IT company, a master of servant leadership with no budgets and no targets. The Reitan Group is one of Norway's largest companies with a vision of being “the most values-based organization.” You have two wonderful stories to look forward to!
We then move to Borealis and Statoil in Chapters 3 and 4. The Borealis case is a story from the 1990s. If you read the first edition, this might be what to skip, as the chapter is relatively unchanged. Or could I tempt you back to those great questions and defining moments that turned out to be so incredibly important? Take that simple but big question from a very tired Borealis controller as we just had completed two budgets in one year during an extremely busy 1994 startup: “What if we don't budget at all?” Or the relief when we finally cracked it all with another simple question: “Why do we budget—what is actually the purpose of these numbers?” Those were the days!
The Statoil case is a field report from an ongoing journey, which keeps providing great learning even as these words are written. Much of the chapter is rewritten and also expanded as so much has happened in Statoil since the first edition was published in 2009. It was written during exciting merger times between Statoil and competitor Hydro's oil and gas business. I wrote this edition during equally special circumstances. The oil price collapsed once again. This time, the whole industry, including Statoil, has embarked on deep and fundamental changes not only on activity levels but also on operating models. The price crash that again took everybody by surprise clearly demonstrated the need for Beyond Budgeting agility, but it also put the model under pressure as some (so wrongly!) had assumed it meant that cost was not important. The skeptics came out from hiding, eyeing an opportunity for a return to the easier days of traditional management. I promise to come back to how this played out.
Chapter 5, “Beyond Budgeting and Agile,” is new. Discovering the Agile community has been a wonderful experience, and not just because we have so much in common. There are so many warm and wise people in this amazingly vibrant community. Unfortunately, in most organizations where IT is not the core activity, those outside of the function have not yet discovered how Agile has revolutionized the way great software is developed.
I have significantly expanded Chapter 6, which addresses implementation, adding new insights from both inside and outside of Statoil. Today, there are so many companies on the journey that keep discovering new ways and routes. You will, however, find a wealth of implementation insights already in the Borealis and Statoil chapters.
There are also a number of new illustrations, especially in the Statoil chapter.
Before we move on, I need to issue a warning. Throughout this book, you will often find me shouting. You will probably feel that I from time to time make things quite black and white, when for instance criticizing the budget and the damage it causes. I do this on purpose and with no guilt, because I am convinced that something is fundamentally wrong. That starting point is non-negotiable. I just want to make sure that at least some of my worries and warnings about traditional management come through. If I succeed, I also want to offer help and a way out of the misery. As a minimum, I want to leave you with a feeling that perhaps there is something to this. I do, however, have high hopes. I believe most of you will agree with most of what I have to say, because it is nothing but common sense.
If you are a returning reader, I wish you a warm welcome back. Great to see you again! If you are new, I wish you an equally warm welcome to the fascinating world of Beyond Budgeting!
CHAPTER 1Problems with Traditional Management
“Most of what we call management consists of making it difficult for people to get their work done.”
Peter Drucker
Introduction
In this chapter, we take a closer look at the many problems with traditional management, which I have only been hinting at so far. This is where we have to start. If there are no problems, why should we bother changing? Why fix something that is not broken? There has to be a case for change. Some of the problems we will discuss are directly linked to budgets and budgeting. Others are more indirectly linked, but often rooted in the budgeting mindset of command and control.
Let us start with the budget. It is not the only problem, but still a major one. Over the last 20 years, I have asked thousands of managers across the world (and many employees, too) what they think of the budgeting process. It is just like pushing a button. Everybody has a view. The vast majority is very critical, and many are extremely negative. These are the problems they typically bring up:
Weak links to strategy
The strategy and the budget are developed in isolated processes, facilitated by different functions without much mutual respect and contact.
A very time-consuming process
Budgeting consumes a scary amount of time and energy, both when made and when followed up.
Stimulates unethical behaviors
The gaming, lowballing, and hidden agendas that normally would not be accepted are seen as normal and unavoidable in a budget regime.
Assumptions quickly outdated
Many, and sometimes most, of the budget assumptions turn out to be wrong.
Provides illusions of control
Most of the controls the budget offers are nothing but illusions of control.
Decisions are made too early
Decisions about activities, projects, and spending are typically made too early, without fresh enough information to make the right decision.
Decisions are made too high up
Lack of autonomy forces decisions upstairs, often making them worse, not better.
Often prevents the rights things from getting done
“I can't do the blindingly obvious, because it's not in my budget!”
Often leads to the wrong things being done
The flipside is people doing what they shouldn't, because it
is
in the budget: “Spend it or lose it!”
The world ends December 31
The budget year creates shortsightedness and a start/stop rhythm, which is often artificial from a business perspective.
A language ill-suited for performance evaluation
“Hitting the budget number” is a narrow and often meaningless way of defining performance.
That is a pretty long list of problems, representing a massive level of frustration. What I find just as problematic, however, is that while so many complain, the vast majority of organizations continue budgeting, year after year. When so many are so critical, why haven't more done something about it? Where is the revolution, when there is so much dissatisfaction boiling among people?
I have thought long and hard about why. I see only two possible reasons. Maybe managers see no alternative: “What shall we then do instead?” They haven't heard of Beyond Budgeting. Fortunately, this group is getting smaller as Beyond Budgeting finally has entered the global management vocabulary.
Those who have heard of Beyond Budgeting may not regard these problems as big enough to justify the long and hard change journey required. They are seen more as irritating itches than as symptoms of any serious disease.
They are dead wrong. These problems are much more than irritating itches. They are symptoms of something much bigger and deeper. The management technology “budgeting” was invented a hundred years ago, with the best of intentions, to help organizations perform better. It probably worked well back then and maybe even 50 years ago. Today, however, we are in very different times. Not only have our business environments become much more dynamic and unpredictable, but they are just as much about people: the birth of the knowledge worker and the demise of organizations as obedient machines. In this environment, budgeting has become more of a barrier than a support for great performance, something that instead prevents organizations from performing to their full potential.
This serious problem is not fixed by addressing budgeting only. The purpose of Beyond Budgeting is therefore not just, or not necessarily, to get rid of budgets. The purpose is to create organizations that are more agile and more human, because this is both good and necessary for great performance today. This requires radical change in traditional management. At the core of this kind of management we find the budgeting process and the budgeting mindset, which seldom can be left untouched and unchanged.
You might hesitate to buy into this massive attack on traditional management and budgets without supporting evidence. If you are skeptical, I hope we at least can agree that any process should from time to time be reviewed and pressure-tested. There is always a better way. So if your guard is up right now, the only thing I ask for is to let it down during the next pages, where we examine more in depth whether we have a problem. I promise to provide hard evidence. Maybe you won't be convinced. Fair enough. But please give me a chance!
Which Way in a New Business Environment?
What is it that really drives great performance in organizations? What is it that makes people get up in the morning, go to work, wanting to do their best? How do we release creativity and innovation? How do we sense and respond faster than the competition? Why should people work for us and not for someone else?
These kinds of questions have probably been asked from the very early days of organizations and leadership. The questions are the same. It is the answers that have changed. The old answers were quite simple and included strong doses of hierarchical command and control. Much of it probably did work well in the past. Today, there is so much more VUCA out there: Volatility, Uncertainty, Complexity, and Ambiguity. In addition, the expectations from employees, customers, shareholders, and society have also increased dramatically. So has the transparency of business. There are few places to hide anymore.
It is almost as if we have been through a “global warming” of the entire business climate. The “climate changes” are faster, more unpredictable, and more violent than in those reliable summers and winters we might recall from our childhood. Just look at the volatility of oil prices. Many businesses, not just oil companies, have the oil price as a key variable in their business performance. They try to make short- and long-term projections, and keep failing miserably, as the 2014 price crash once again demonstrated. Look at the pace of technology innovation. Making a five-year business plan for a record company today must be a nightmare compared to the days before digital formats, downloading, and streaming. And why should it stop here?
The real global warming still has its skeptics, but no one seems to dispute this one. The evidence of change is everywhere. We are almost overwhelmed with uncertainty. The only thing that has become more certain is that our predictions about what lies ahead most likely are wrong. “The future ain't what it used to be,” as the American baseball player Yogi Berra once put it.
At the same time, life inside organizations has also changed dramatically. The massive difference between market and book value in most companies is tangible proof that something has happened. The value of human capital: innovation, creativity, passion, and people's desire to contribute and make a difference is often the only value that exists, and it can walk out the door any day. Actually it does, every afternoon, often becoming even more valuable as many then mobilize and reveal additional talents. Employees do not see themselves as “workers” in such organizations, and they cannot be managed as “workers.” They have different and higher expectations than earlier generations. Traditional management struggles when people regard leadership as something that must be earned and not assigned through stars and stripes. I learned that lesson the hard way during my short military career.
Companies are not deaf and blind. Most do respond, but in very different ways. Some believe the answer lies in “even more of what we already do.” Their response is to pull harder and tougher on existing management levers. They go for longer budget processes, more analysis, more number-crunching, tougher targets, tighter follow-up, and higher bonuses. The strategy is simple: more of the old answers in order to get back into the “control” they had or believed they had in the past.
This is a tempting strategy. It also represents a major paradox. The more VUCA out there and the more urgent need there is to break with the past and go for radical management innovation, the stronger the fear of letting go and leaving what is perceived as a safe and calm harbor in stormy weather, namely, those familiar and well-tested management practices, including the good old budget.
Some realize that there are problems with the old way, but they lack the insight or the courage required. The go for symbolic change only. This typically means no real change at all, just a bit of singing and dancing; hiring consultants to help introduce some of the latest music in the charts; simplifying the budget process by asking for a little bit less than last year; or maybe introducing a rolling forecast in addition to the inevitable reshuffling of the organizational chart.
Not everybody responds like this. A growing number of companies realize that the answer lies neither in increasing the doses of current medication nor in symbolic change. They realize that the disease is serious and potentially deadly and requires a radically different lifestyle. They believe that in this new business climate, people need more and not less room to move. They understand the need for a broader and more intelligent performance language. They appreciate that not all wisdom sits at the top. They understand that business is continuous, with individual rhythms that seldom match the calendar year. These companies understand that their leadership and their management models must be built on and not against human nature.
In the sections that follow, I will share which deeper problems these companies have identified and understood and why they are rebelling. Many of these go way beyond the budgeting problems we discussed earlier, as they address the much broader issue of traditional management. These problems are about:
Trust and transparency
Cost management
Control
Target setting
Performance evaluation
Bonus
Rhythm
Quality
Efficiency
The Trust and Transparency Problem
Companies going in that opposite direction all have trust as a key ingredient in their leadership philosophy and their management processes. Trust is maybe the most important word in the Beyond Budgeting vocabulary. No one should consider leaving existing practices before being clear about where they stand here.
Where do you stand?
Do you believe that without tight controls and short leashes, detailed budgets and sharp instructions, the organization will drift into anarchy where people will do all kinds of stupid things and spend money like drunken sailors? If this is your belief, you do have a very serious problem, but probably not with your organization. If you hardly trust anyone and believe you are the only responsible person around, then maybe your problem rests more with yourself than with anyone else. By the way, who actually hired all these people that can't be trusted? Someone must have done a pretty bad recruitment job! If they on the other hand became so non-trustworthy only after they joined, then that is also something to reflect on.
Few would admit to thinking like this. Actually, I believe most managers do trust most of their people. So the starting point might be the right one, and also the only one you can have. But it doesn't help to have Theory Y leadership visions if there are Theory X management processes. All those nice words become hollow if the management processes have the very opposite messages, creating poisonous gaps between what is said and what is done. It doesn't help to talk about fantastic employees being the backbone of the organization—“You are all so great and we trust you so much” (but not that much); “Of course we need detailed travel budgets, if not …”
Unfortunately, such gaps exist in most organizations. One reason is a lack of Finance and HR communication and cooperation. HR might be preaching Theory Y leadership while Finance is pushing Theory X management. The two are seldom aware of the inconsistency, as they seldom talk together, although they talk a lot about each other. I know, because I have worked both places! Out in the organization, however, these gaps are very visible as conflicting messages keep hitting frontline teams.
There are similar interesting gaps found also between society and business, between how people think about themselves as citizens or politicians in a free society compared to what they believe in as employees or managers.
