Beyond Budgeting: An interview with Bjarte Bogsnes (part 1)
Bjarte Bogsnes, Vice-President – Performance Management Development, StatoilBjarte Bogsnes is speaking at Nordic Project Zone. I spoke with him to learn more about the ideas he will be sharing.
What is Beyond Budgeting, Bjarte?
Beyond Budgeting is a cohesive set of leadership principles and management principles. The name is misleading. The purpose of the project is not to eliminate budgets. The goal is to create more human-friendly organizations. This will require significant changes to our management models. However, it is necessary to change the way we think about leadership and management. This is because the budgeting process is at the heart of traditional management. It’s about taking reality seriously, not only the dynamic world around us, but also the people within the organization.
It sounds radical. What are the principles behind Beyond Budgeting?
Values: You should govern by a few clear values, goals, and boundaries, and not through detailed rules and budgets.
Performance: Create a high-performance environment that is based on relative success and not on meeting specific targets.
Transparency: Encourage open information for self-management, but don’t limit it hierarchically
Organisation: Create a network of accountable, lean teams and not rely on centralised functions.
Autonomy: Don’t micromanage your teams.
Customers: Don’t focus on hierarchical relationships but on improving customer outcomes.
Goals: Do not negotiate fixed performance contracts, but set relative goals for continuous improvement.
Rewards: Reward shared success on the basis of relative performance and not meeting predetermined targets
Planning: Plan as a continuous, inclusive process and not an annual event.
Coordination: Coordinate interactions dynamically and not through annual planning cycles.
Resources: Make sure resources are available when they are needed, not through annual budget allocations.
Controls: Base controls are based on relative indicators and trends, but not on variances from plan.
You can find more information at bbrt.org on this model that has inspired and guided so many of the Statoil journeys.
How did you implement this at Statoil, then?
We just asked “Why do you budget?”
Statoil tries to be realistic. Not just in a dynamic and unpredictable environment but also in all the competent and responsible employees. Although it sounds obvious, fundamental changes are needed in the way we lead and manage. We began a journey to radically change our management processes in 2005. This included the elimination of traditional budgeting. We also decided to “kick the calendar out” whenever possible in 2010. Both of these were key steps towards a more flexible, dynamic, and self-regulating management system.
Budgets are often created by companies for three reasons. They can be used to set targets, forecast the future, or allocate resources. These budget numbers represent a set of goals, a forecast of the future and an allocation for next year’s resources. These are all different things. These three purposes cannot be combined into one process that results in one set of numbers. A target is what we want to see happen. A forecast is what we expect to happen, regardless of whether or not we like what we see. Resource allocation is about maximizing the use of our resources.
This was the solution to our serious problem. The three purposes were separated, which allowed each to be optimized in more specific ways. This allowed for example for different numbers to be updated at different frequencies and over different time periods in each of the three process.
How has forecasting changed?
We have removed much of the gaming bias from resource allocation or target setting, which has led to a better quality forecasting. Our forecasting process has become more lean.