Beyond Budgeting: an interview with Bjarte Bogsnes (part 1)

Bjarte Bogsnes, Vice President – Performance Management Development at Statoil, is speaking at Nordic Project Zone. I caught up with him to find out more about the ideas he’ll be presenting.

Bjarte, what is Beyond Budgeting?

Beyond Budgeting is a coherent set of leadership and management principles. The name is actually misleading. The purpose is not to get rid of budgets. The purpose is to create more agile and human organizations. This requires significant changes in our management models. But changing how we think about management and leadership also requires a radical overhaul of the budgeting process and the budgeting mindset, because it sits at the core of traditional management. It is about taking reality seriously, not just a dynamic world around us but also people in the organization.

It sounds radical. What are the principles of Beyond Budgeting?

They are:

1. Values: Govern through a few clear values, goals and boundaries, not detailed rules and budgets.
2. Performance: Create a high performance climate based on relative success, not on meeting fixed targets.
3. Transparency: Promote open information for self management, don’t restrict it hierarchically.
4. Organisation: Organise as a network of lean, accountable teams, not around centralised functions.
5. Autonomy: Give teams the freedom and capability to act, don’t micro-manage them.
6. Customers: Focus everyone on improving customer outcomes, not on hierarchical relationships.
7. Goals: Set relative goals for continuous improvement, don’t negotiate fixed performance contracts.
8. Rewards: Reward shared success based on relative performance, not on meeting fixed targets.
9. Planning: Make planning a continuous and inclusive process, not a top-down annual event.
10. Coordination: Coordinate interactions dynamically, not through annual planning cycles.
11. Resources: Make resources available as needed, not through annual budget allocations.
12. Controls: Base controls on relative indicators and trends, not on variances against plan.

There’s more at bbrt.org about this great model, which has inspired and guided so much of the Statoil journey.

So how have you implemented this at Statoil?

We simply asked “Why do we budget?”

At Statoil, we try to take reality seriously, not just a dynamic and unpredictable business environment, but also all the competent and responsible people in the company. It sounds obvious, but requires fundamental changes in how we lead and manage. In 2005 we started on a journey of radically changing our management processes, which included abolishing traditional budgeting. In 2010 we also decided to “kick out the calendar” wherever possible. These were both key steps towards a more dynamic, flexible and self-regulating management model.

Most companies make budgets for three very different reasons: target setting, forecasting and resource allocation. Those budget numbers represents a set of targets, a forecast of what the future might look like, and an allocation of resources for next year. But these are all different things. The three purposes can’t meaningfully be handled in one process resulting in one set of numbers. A target is what we want to happen. A forecast is what we think will happen, whether we like what we see or not. And resource allocation is about trying to use our resources in the most optimal and efficient way.

Our solution to this serious problem was dead simple. We separated the three purposes, which made it possible to optimize each one in much more tailored processes. This allowed for instance for different numbers, updated on different frequencies and time horizons in each of the three processes.

How have you changed forecasting?

The quality of our forecasting has also improved because we have taken out much of the gaming bias that came from target setting or resource allocation. Our forecasting process is now leaner and with much less detail, although there is room for even more simplification. Some still believe that their cost forecast is their “budget application” for resources. Some also mix target and forecast, and believe they need to “deliver” on their forecast. What we want to deliver on is our targets, and forecasts are there to help us. They might for instance show that we are heading in the wrong direction, towards places that we absolutely don’t want to go.

The question we want everybody to ask when making cost decisions is not “Do I have a budget for this?” but

• Is this really necessary?
• What is good enough?
• How is this creating value?
• Is this within my execution framework?

Read the next part of this interview with Bjarte here.