Beyond Budgeting at LESS 2011

One of the things that attracted my interest to LESS 2011 was the Beyond Budgeting track. Having read the book a couple of years ago, it is definitely a topic that catches my interest. And it was even better that the first keynote was presented by Bjarte Bogsnes, talking about how beyond budgeting is used at StatOil

As any presentation write-up, this is just my understanding about what was presented, so please don’t hold the presenter on to what I’m writing here :)

Why ?

The first question Bjarte addressed was why the need for something different. And I believe this sentence explains it all

January-December is artificial for business and just works for accounting. But this is not accounting

He followed by explaining that StatOil is always trying to get the best performance they can (who isn’t!), and coupling everything they do to an accounting mechanism (the budget) doesn’t make sense for them. He illustrated it with a comparison between the use of traffic lights and roundabouts. While the first is easier to use and provides more control, the latter actually provides better results because it relies more in the current situation than on statistical analysis.

We need to find more self regulating ways to manage a business, and beyond budgeting is one of them.

Bjarte used Douglas McGregor’s Theories X and Y to explain how we traditional management doesn’t usually trust people and relies on a stable environment to succeed, but in a dynamic environment in which most companies are inserted today, we need to start trusting our employees much more, and that is where beyond budgeting stands.

He had a nice example to show the lack of trust some companies impose, about a friend who is a SAS pilot, and even when he is trusted to fly planes full of people around, if he wants to change his shirt more often than it’s stated in the company’s policy, he needs a written authorization for it.

How does it work ?

According to Bjartes, the problem with budget is that it’s a single tool used for three separate purposes: Setting targets, creating forecats and allocating resources. Since these results are usually different from each other (targets are what we want, forecasts are what we expect to get), we won’t get an optimal result from using it.

In StatOil they have developed an alternative format of planning called Ambition to Action. These are a few principles that are used when cdefining it:

  • Good performance is being better than those we compare ourselves with
    • It could be external companies or even ourselves, which means we are learning.
  • Do the right thing
    • Every new joiner receives a StatOil book (a thin one!) with some of the principles that guide the company, so they can all use their business judgement and make decisions when needed.
  • Resources are made available and allocated on a case by case basis
    • Bjartes compared having an yearly budget to having a bank that opens for only a month throughout the year. How can anyone make timely decisions with that ?
  • Business is forward looking and action oriented
  • Performance measurement is holistic, and composed by 50% results and 50% behaviour

These principles are used to define what to do in the company, in a process that goes like this:

1. Strategic Objectives -> 2. KPI’s -> 3. Action & Forecast -> 4.Individual goals

So the company is going to set strategic objectives which are then converted in KPI’s. These are used to define the things that need to be done (Ambition to action), which reflect on how performance is measured for everyone in the company.

Some interesting thoughts he shared when explaining the process were:

  • The perfect KPI doesn’t exist, since not everything that counts can be counted.
  • StatOil creates around 1100 Ambition to action plans, and these are not a reporting tool, but more a guidance on how you as an employee should manage him/herself. Apart from that, everything is open, so everyone can see everyone’s else goals.
  • Performance measurement is usually based on teams and, as said before, divided between results and behaviour. Assuming that the environment very often changes, how someone behaved in that occasion is as important as the results he/she delivered.

The last point that was made during the presentation is how StatOil is moving from a calendar-driven model to a business-driven one. There are no more annual versions of Ambition to Action being created, and they can be changed at any time. The performance review is still happening annually, but Bjartes mentioned they are currently revisiting it now.

Overall it was a great introduction to Beyond Budgeting and how it is applied at StatOil. If you are interested, there is more information here and here.

Bjartes is speaking in the Thoughtworks Live Australia event. If you have a chance to go, don’t miss it.

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