© Ekan AB

Beyond Budgeting30th May 2014

Rikard Olsson

Ekan AB

© Ekan AB

1905

© Ekan AB

© Ekan AB

© ekan AB© ekan AB

Short facts about Ekan

• Originating in Scandinavian management

through a research foundation at the School

of Business, Economics and Law at

University of Gothenburg

• Founded in 1985

• Around 40 Management consultants

• Offices in Göteborg and Stockholm

• Official representative for Beyond Budgeting

Institute in Sweden

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We help businesses to develop and evolve within their reality

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”The whole problem with the world is that

fools and fanatics are always so certain of

themselves, and wiser people so full of

doubts”

Bertrand Russell

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"The most important thing we can do is to ensure that our

companies can handle an uncertain future. To hold on

and predict how it will go - that is as long as it is wide.

We plan that it will be iffy for a while, and then you have

to simply make sure to have your foot on both the gas and

brake so that you can capture opportunities if it get

better or do anything if it gets worse "

Börje Ekholm - VD Investor, Dagens Industri 2013-03-16

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The reality

Rapid technological progress

Global competition and market complexity

New business models - Knowledge-intensive industries

and growing service content

Money cheaper - but inaccessible

Advanced IT environments and Big Data

Generational Change and Talent Management

Transparency, ethics, CSR

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Manage performance

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How to manage trafficperformance? What is good

performance?

Safe and efficient traffic flow

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Managing traffic performance - one alternative

Who is in control?

Based on which

information?

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Managing traffic performance - another alternative

13

Who is in control?

Based on which

information?

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Which is most difficult?

Which is most efficient?

In which are values most important?

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Do we need Management

Innovation?

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What about the way we lead and manage?

16

Sta

ble

Dynam

ic

People

Business environment

”Theory X” ”Theory Y”

Traditional

management

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Sta

ble

Dynam

ic

Leadership

Processes

”Theory X” ”Theory Y”

Traditional management

Beyond budgeting

Values based. Autonomy, Transparency

No traditional budgeting, Relative and

directional goals

Dynamic planning, forecasting and

resource allocation

Holistic performance evaluation

Rigid, detailed and annual

Rules-based micromanagement

Centralised command and control

Secrecy, sticks and carrots

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What’s a budget?

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Source: Google

Spending

plan

Forecast

Targets

Available

means

Allocated

funds

Mechanical

update

Framework &

guidelines

Operational

plan

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“…two out of three finance executives expect

their 2009 budgets to be obsolete within the

first 6 months of the year, while 28 percent of

finance executives reported that their budgets

were obsolete even before 2009 began.”

Källa: Business Finance May/June 2009

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Five Budgeting myths..

1. No Budget = Chaos and Overspend

2. Good Performance = Hitting the Budget Numbers

3. No individual Bonus = No performance

4. More Detail = More Quality

5. Need to Know = Enough to Know

© ekan AB© ekan AB

A good performance?

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

© ekan AB

Five Budgeting myths..

1. No Budget = Chaos and Overspend

2. Good Performance = Hitting the Budget Numbers

3. No individual Bonus = No performance

4. More Detail = More Quality

5. Need to Know = Enough to Know

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..and the Budget conflict?

• A target?

• A forecast?

• A tool for resource allocation?

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Solving the budget conflict?

25

1. Separate

Target

What we want to

happen

Forecast

What we think

will happen

Resource

allocation

Based on RoI

Different

numbers

2. Improve

• Ambitious

• Relative where possible

• Holistic performance evaluation

• Unbiased – the expected

outcome

• Limited details

• Dynamic – no annual allocation

• Mandates, decisions, criteria

• Trend monitoring

Event driven – not always annully

• Target

• Forecast

• Resource

allocation

Same number – conflicting

purposes

The budget

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Beyond Budgeting

Planning & Control

Forecasts

Targets

Resourceallocation

Leadership

Leadership & management

model

Organization & management environment

Motivation & incentives

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The Statoil case

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Statoil in brief

• Turnover approx. 130 bn. USD

• 23000 employees in 33 countries

• World’s largest operator in waters deeper than 100 metres

• Second largest gas exporter to Europe

• World leader of crude oil sales

• Listed in New York and Oslo

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Fortune 500 ranking (2011)

30

Social responsibility Innovation

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Financial performance - as we define it

31

Total Shareholder Return 2012 Return on Capital (RoACE) 2012

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Ambition to Action - purpose and process

32

• Translating strategy - from ambitions to actions

• Securing flexibility - room to act and perform

• Activating values and leadership principles

Strategic objectives KPIs

Actions & forecasts

Individual or teamgoals

Where are we going –

what does success

look like?

• Most important strategic

change areas

• Medium term horizon

How do we measure

progress?

• Indicative measure of

strategic delivery

• 5-10 KPIs, shorter/ longer

term targets

What is my or our

contribution?

My Performance Goals

• Delivery

• Behaviour

How do we get

there?

• Concrete actions and

expected outcome

(forecast)

• Clear deadlines and

accountabilities

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Ambition to Action example

33

Where are we

going?

”Strategic

objectives”How do we

measure

progress?

”Key

Performance

Indicators”

How do

we get

there?

”Actions”

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More than 1400 ”Ambition to Action’s”across the company

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…..and more

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A broader performance language- from narrow measurement to a holistic assessment

35

B e h a v i o u r

D

e

l

i

v

e

r

y

Living the values• Day-to day-observations

• 360°/ 180°/ 90° surveys

• People survey

50/50Pressure testing KPI results:• Deliver towards the strategic objectives?

• How ambitious KPI targets?

• Changed assumptions, with positive or

negative effect?

• Agreed actions implemented, or corrective

actions initiated as needed?

• Delivered results sustainable?

Ambition to Action

• Development plan

• Rewards

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Towards a simpler, more dynamic and self-regulating process

More cost conscious - less «cost cutting»

More event drive - less calendar driven

More translation - less cascading

More relative - less absolute KPIs

More transparency - less secrecy

Simple is not the same as easy!

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The CEO on Ambition to Action

37

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39

Companies on a similar journey

39

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• Decentralised organisation – with the

branch and its customers in focus

• Profit charing (Oktagonen) rather than

individual bonuses

• Relative KPIs – Cost/Income ratio by

branch and Return on Equity in relation to

peers

© ekan AB© ekan AB

• Focus on leadership and organization

• From function oriented to customer

oriented

• Changed work design, roles and

measures (employee turnover etc)

• From competition to collaboration –

group bonuses

• “From making things to providing

service”

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• Relative KPIs and “Performance League” –

market share, gross margin, indirect

costs/sales and service sales/Number of

trucks sold

• Rolling forecast – and using trends to

monitor progress

• Separation between ambitions and forecast

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Implementation advice

• Create problem understanding before

talking solutions

• What’s the real risk – upside vs

downside

• Design to 80% and jump

• A ”pull-based” approach

• ”One war but a thousand battles”

• Involve HR

• Don’t become a fundamentalist

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The BBI is an international shared learning network of member

organizations with a common interest in transforming their

performance management models to enable sustained,

superior performance.

BBI helps organizations learn from world-wide best practice studies

and encourages them to share information, past successes and

implementation experiences to move beyond command and

control.

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Back-up

46

-

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Budget

OK

Not

OK

OK?

OK?

OK?

OK?

OK?

The mindset required – cost conscious from the first penny

47

Is this really

necessary?

Do I have a

budget for this?

What is good enough?

How much value is this

creating?

Is this within my execution

framework?

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…..and the tools available

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Traditional cost

budget

Ambition level /

burn rate

Relative KPIs

Unit cost

input/outputUnit cost vs

peers

EBIT

RoACE

(abs/rel)

Strategic objectives

or actions only

Absolute

KPIsIf no KPIs found

Xx

Xx

Xx

Xx

Xx

Xx

Xx

Xx

1003,4 ~1000

”USD/bbl”

”USD/customer”

”USD/employee”

”1. quartile”

”Better than

average”

Increasing

autonomy

and flexibility

Bottom line

focus only

” A simplified and cost

conscious way of

working”

“More video - less

travel ”

Select based on what works best in your business

Monitoring of actual development, intervention if needed only

Increasing

need for

strong values

and clear

direction

Detailed and

annual