Bjarte Bogsnes about Beyond Budgeting at ALE2011

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  • (NB Slide show!) Let’s move from mindset to some of the new tools we have available. On a scale towards more freedom and responsibility, traditional budgeting lies to the far left. One step is to drop the details and manage against a total cost figure only, although this still is close to a traditional budget The next step is to move from absolute to relative KPIs, either by setting unit costs targets, or by comparing own units costs with others and setting a ”league table position” target instead. Costs can be managed even more indirectly. If a unit has a profit target only, it cannot spend unlimited if the costs do not bring in additional income. It is also possible to manage without costs KPIs, and address costs only through strategic objectives and/or actions. It is recommended to select from this ”menu” based on type of business and the actual situation in each unit. The further to the right, the higher need for a strong value foundation and a clear strategic direction. Remember that we in a addition always monitor the cost trend through actual costs and forecasts. If the trend reveals irresponsible spending, we have not abdicated the right to intervene and bring such managers all the way back to the left of the scale if necessary. But we do this only when and where needed, and not for everybody like in a traditional budget..
  • Bjarte Bogsnes about Beyond Budgeting at ALE2011

    1. 1. Beyond Budgeting – a new management model for new business realities Bjarte Bogsnes Vice President - Performance Management Development Chairman - Beyond Budgeting Round Table Europe
    2. 2. Outline <ul><li>The case for change – what is the problem? </li></ul><ul><li>The Beyond Budgeting principles </li></ul><ul><li>The Statoil model – Ambition to action </li></ul><ul><li>Next steps </li></ul>
    3. 3. Statoil in brief <ul><li>Turnover and market cap approx. 75 bn. USD </li></ul><ul><li>20.000 employees in 34 countries </li></ul><ul><li>World’s largest operator in waters deeper than 100 metres </li></ul><ul><li>Second largest gas exporter to Europe </li></ul><ul><li>World leader of crude oil sales </li></ul><ul><li>Listed in New York and Oslo </li></ul>US Gulf of Mexico South America West Africa North Africa Caspian Middle East Russia Arctic North Sea & Norwegian Sea Canada Current production of oil and gas
    4. 4. Fortune 500 ranking (2011) Social responsibility Innovation
    5. 5. Statoil performance – as we define it RoACE – 2010 * Peer group: Anadarko, BG, BP, Chevron, ConocoPhillips, Devon, Encana, Eni, ExxonMobil, Lukoil, Occidental, Petrobras, Repsol, Shell, Statoil, Total. Source: Barclays Capital RoACE – 2009 Target Target Total shareholder return 2010 Target Target Total shareholder return 2009
    6. 6. Managing traffic performance - one alternative Based on which information? Who is in control?
    7. 7. Managing traffic performance - another alternative Based on which information? Who is in control?
    8. 8. Which is most difficult ? In which are values most important? Which is most efficient ?
    9. 9. The world has changed – what about the way we lead and manage? People Business environment Traditional management “ Theory Y” “ Theory X” Dynamic Stable
    10. 10. We must address both processes and leadership Leadership Processes Beyond Budgeting “ Theory Y” “ Theory X” Dynamic Stable 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 Values based Autonomy Transparency Internal motivation
    11. 11. Companies on a similar journey Classification: Internal 2010-09-10 ” I have been waiting for this for 20 years” (CEO) (Main Norwegian cases) (Some international cases) Europe’s most cost effective universal bank Beating the competition 40 years in a row
    12. 12. The Beyond Budgeting principles 12. Controls - Base controls on relative indicators and trends, not on variances against plan 6. Customers - Focus everyone on improving customer outcomes, not on hierarchical relationships 11. Resources - Make resources available as needed, not through annual budget allocations 5. Autonomy - Give teams the freedom and capability to act; don’t micro-manage them 10. Coordination - Coordinate interactions dynamically, not through annual planning cycles 4. Organization - Organize as a network of lean, accountable teams, not around centralized functions 9. Planning - Make planning a continuous and inclusive process, not a top-down annual event 3. Transparency - Promote open information for self management, don’t restrict it hierarchically 8. Rewards - Reward shared success based on relative performance, not on meeting fixed targets 2. Performance - Create a high performance climate based on relative success, not on meeting fixed targets 7. Goals - Set relative goals for continuous improvement, don’t negotiate fixed performance contracts 1. Values - Govern through a few clear values, goals and boundaries, not detailed rules and budgets Change in processes Change in leadership
    13. 13. The start of the Statoil journey - solving a serious budget conflict Improve “ Same number – conflicting purposes” ” Different numbers” <ul><li>Unbiased - expected outcome </li></ul><ul><li>Limited detail </li></ul><ul><li>Ambitious </li></ul><ul><li>Relative KPIs where possible </li></ul><ul><li>Holistic performance evaluation </li></ul><ul><li>Dynamic - no annual allocation </li></ul><ul><li>KPI targets, mandates, decision gates & decision criteria </li></ul><ul><li>Trend monitoring </li></ul><ul><li>Budget = </li></ul><ul><li>Target </li></ul><ul><li>Forecast </li></ul><ul><li>Resource allocation </li></ul>Step 1 Step 2 Target Forecast Resource allocation The budget purposes Separate “ Event driven - not calendar driven”
    14. 14. Key principles – Ambition to action Performance is ultimately about performing better than those we compare ourselves with Do the right thing in the actual situation, guided by the Statoil Book, your Ambition to action, decision criteria & authorities and sound business judgement Within this framework, resources are made available or allocated case-by-case Business follow up is forward looking and action oriented Performance evaluation is a holistic assessment of delivery and behaviour
    15. 15. The CEO on Ambition to action
    16. 16. Ambition to action - a process which balances … … alignment – from strategy to people … with flexibility and freedom Strategic objectives KPIs Actions & forecasts Team/ individual goals Where are we going – what does success look like? <ul><li>Most important strategic change areas </li></ul><ul><li>Medium term horizon </li></ul>How do we measure progress? <ul><li>Indicative measure of strategic delivery </li></ul><ul><li>10-12 KPI’s, annual/ longer term targets </li></ul>What is my contribution? <ul><li>My Performance goals (MPG) </li></ul><ul><li>Delivery </li></ul><ul><li>Behaviour </li></ul>How do we get there? <ul><li>Concrete actions and expected delivery (forecast) </li></ul><ul><li>Clear deadlines and accountabilities </li></ul>
    17. 17. Ambition to action example Where are we going? ” Strategic objectives” How do we measure progress? ” Key Performance Indicators” How do we get there? ” Actions” Finance Market Operations HSE People & Org.
    18. 18. Ambition to action - one size does not fit all Global Local Temporary Continuous
    19. 19. More than 1100 ”Ambition to actions” across the company … ..and more
    20. 20. A new performance language - from narrow measurement to a holistic assessment <ul><ul><li>B e h a v i o u r </li></ul></ul><ul><ul><li>D </li></ul></ul><ul><ul><li>e </li></ul></ul><ul><ul><li>l </li></ul></ul><ul><ul><li>i </li></ul></ul><ul><ul><li>v </li></ul></ul><ul><ul><li>e </li></ul></ul><ul><ul><li>r </li></ul></ul><ul><ul><li>y </li></ul></ul><ul><li>Living the values </li></ul><ul><li>Day-to day-observations </li></ul><ul><li>360°/ 180°/ 90° surveys </li></ul><ul><li>People survey </li></ul>50/50 <ul><li>Pressure testing KPI results: </li></ul><ul><li>Deliver towards the strategic objectives? </li></ul><ul><li>How ambitious KPI targets? </li></ul><ul><li>Changed assumptions, with positive or negative effect? </li></ul><ul><li>Agreed actions implemented, or corrective actions initiated as needed? </li></ul><ul><li>Delivered results sustainable? </li></ul>Ambition to action <ul><li>Development plan </li></ul><ul><li>Rewards </li></ul>
    21. 21. The journey continues ...
    22. 22. The controller and the fisherman ...
    23. 23. Ambition to action – new principles From calendar-driven to business-driven No annual versions <ul><li>Update when necessary, triggered by external or internal events (“big for you”) </li></ul>Simple change and coordination controls <ul><li>Seek approval if big, inform if small. Inform other affected units </li></ul>[email_address] <ul><li>No change, but consider taking Ambition to action further out </li></ul>Varying time horizons <ul><li>Target and forecast horizons reflecting urgency and lead times </li></ul>
    24. 24. <ul><li>Questions or comments – now or later? </li></ul><ul><li>Bjarte Bogsnes [email_address] </li></ul><ul><li>+ 47 916 13 843 </li></ul><ul><li>Beyond Budgeting Round Table www.bbrt.org </li></ul>
    25. 25. Want to hear more? <ul><li>The problems with traditional management </li></ul><ul><li>The Beyond Budgeting model </li></ul><ul><li>The Borealis case </li></ul><ul><li>The Statoil case </li></ul><ul><li>Implementation advice </li></ul><ul><li>Out on Wiley (US) 2009 </li></ul><ul><li>Available from Amazon.co.uk </li></ul>
    26. 26. Back-up
    27. 27. A forecast – what we think will happen … not a promise, not an application for resources - whether we like what we see or not!
    28. 28. A forecast is a call to action <ul><li>Get issues on the radar screen early enough … </li></ul><ul><li>… to be able to take corrective actions </li></ul>
    29. 29. A target – what we want to happen <ul><li>Relative where possible </li></ul><ul><ul><li>Input/output or benchmarking </li></ul></ul><ul><li>Translation - not cascading </li></ul><ul><ul><li>Must all targets add up? </li></ul></ul><ul><li>Ambitious - without overstretching </li></ul><ul><ul><li>Remember Aristotle </li></ul></ul><ul><li>SMART* </li></ul><ul><ul><li>but not too SMART </li></ul></ul>*SMART: Specific, Measureable, Achievable, Realistic, Timebound
    30. 30. A different mindset Budget OK Not OK OK? OK? OK? OK? OK? Is this really necessary? Do I have a budget for this? <ul><li>Does it support Ambition to action? </li></ul><ul><li>Is it within our decision criteria, decision authority and capacity? </li></ul><ul><li>Can I justify this? </li></ul>Dynamic resource allocation: – cost conscious from the first penny
    31. 31. Dynamic resource allocation – the menu Traditional cost budget Ambition level / burn rate Relative KPIs Unit cost input/output Unit cost vs peers EBIT RoACE (abs/rel) Strategic objectives or actions only Absolute KPIs No KPIs Xx Xx Xx Xx Xx Xx Xx Xx 1000 1000 ” USD/bbl” ” USD/customer” ” USD/employee” ” 1. quartile” ” Above average” Increasing freedom and flexibility Bottom line focus only ” Cost effective and competitive operations” ” More video – less travel” ” Reduce consultancy spending” 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

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