Implementing Beyond Budgeting by Bjarte Bogsnes

Which calls for replacing forecast budgeting with rolling budgets + balanced scorecard.

From a casual review of the art, the discipline seems to have not changed much since the early 2000s. Forecast budgeting, Activity-Based Budgeting, and Zero-Based Budgeting still seem to be the big three. That said, getting actual prevalence data seems not easy since budgeting is an internal process, ie. it is not reported in SEC filings.

"Why have a budget?" is a question raised, and probably the best answer is that it is a simple shared tool that affords discussions of the sources and uses of cash by anyone privy, eg. shareholders, bondholders, ratings agencies, auditors, etc.

The biggest issue with a budget is that it can quickly become politicized (ie. devolve into Chimpanzee Politics). ZBB was an attempt to contain that politicking, and Beyond Budgeting seems to follow in its footsteps by separating the concerns of Reporting, Incenting, and Allocating.

However, Beyond Budgeting seems to require Nordic levels of consensus because Not-Budgeting means there is a huge pile of unallocated cash that everyone has to agree to not touch. It then seems not-a-coincidence that Bogsnes worked for years at Statoil.

Granted, it may be that BB can succeed in other work cultures. It's just not clear exactly what trade-offs need to happen that make BB better than ZBB or ABB or plain old forecast budgeting. Instead of providing a sclerotic straw-man defense of one alternative (forecast budgeting), Bogsnes should have evaluated all the contending corporate budgeting methods and given his thoughts on each's strengths and weaknesses.

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 f l ower grow by pulling on it.

What we can do, however, is to create the conditions needed for growth and performance.

What is it that really drives great performance in organiza-tions? 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 ques-tions 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.

The problem gets bigger because not only one bag is handed out. There are a lot of smaller bags inside: “Of course, we can-not just give you one big bag of money!” We are talking about a huge mountain of bags, labeled salary, overtime, travel, consul-tants, and so on, often split further into even smaller monthly bags. There is actually some trust involved, because the organi-zation is sometimes allowed to do monthly budget distribution themselves.

We end up with a budget close to or sometimes even equal to the accounting detail level (same cost item lines, cost centers, periods, etc.). Even in smaller companies with a few hundred cost centers and “only” 30 to 40 budgeted cost item lines, thou-sands of bags are handed out each year.

This is not an attack on coordination in general, only on the annual coordination stint. We need a coordination that is continuous and customized, where those who need to should communicate as they choose themselves, on a schedule and time horizon relevant for their business relation.

It is not easy to force the real world into our well-organized processes. We are trying to make order out of chaos. We strug-gle and fail, year after year. Maybe the time has come to do the opposite and adapt our processes to the real world instead.

Imagine if we started from scratch, with no baggage or historical constraints, and designed a process based on business rhythms and realities. Would everything be squared into years, quarters, and months? Would everybody in the company be on the same rhythm?

Before implementing SAP, Statoil had a Swedish account-ing system called Horisonten (Horizon)—a great name: The farther you travel, the more you discover over the horizon.
I recall our Investor Relations colleagues being quite worried when we f i rst communicated these new metrics to the market.

Would investors and analysts think we were trying to escape their tough scrutiny, by no longer committing to hardwired and concrete return targets, only promising a competitive return?

They hardly blinked. This is what we do all the time, they said: Compare the performance of one company to that of other potential investment candidates. They probably rank us on more parameters than we do ourselves!

Many companies going Beyond Budgeting solve this incon-sistency by introducing rolling forecasting. The forecast is typ-ically updated every quarter, and always with the same time horizon of, for instance, f i ve or six quarters.

... The solution became Dynamic Forecasting, with no f i xed and predef i ned frequency or time horizon. Units update their fore-casts when events occur or new information becomes available that they deem important enough to justify an update (external forecasting). An event can also be an action taken that will have a forecastimpact(internalforecasting).

Eliminating the traditional cost budget probably strength-ened the impression among some at Statoil that cost was less important. Looking back, we should have been even more clear and explicit that this was not the case. We should probably also have put more effort into designing better and more self-explanatory cost reports. The way the industry captures and allocates cost for later charging to joint ventures is not always as transparent and simple as in many other businesses.

The low number of true internal prof i t centers didn’t help either. Still, I strongly disagree that Beyond Budgeting was the reason for a slipping cost focus. Volume and growth over cost and value was a conscious strategic choice. The entire industry had the same priorities and experienced the same problem, and everybody else had traditional cost budgets. In Statoil, we were actually very happy that we didn’t enter 2015 with a detailed cost, revenue, and investment budget based on the autumn 2014 price level of +$100 oil, as the price already in February had fallen below $50.

Many want to start their Beyond Budgeting implementation with rolling forecasts. It may seem like the easiest way to get started, jumping the fence where it is lowest. My question is then always how the other two budget purposes will be handled: target set-ting and resource allocation. If the answer is through the rolling forecast, there is trouble ahead. What you end up with is noth-ing but a rolling budget. Almost none of the budget problems will be solved, and the price is a lot more work. There must be new and clear processes in place at the same time, describing how target setting and resource allocation also will be handled.

It is, of course, possible to continue to run the two in a tradi-tional budget process.

In both Borealis and Statoil, balanced scorecards were high on the list of tools and processes that replaced the budget. I like the concept, because it helps us to make connections: long term and short term, cause and effect, f i nancial and non-f i nancial, line and support, strategy, f i nance, and HR.