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Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
Linking budgets to strategy
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Linking budgets to strategy

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  • In Straight from the Gut, Jack Welch quickly highlights the “Budget Game” as it is played in many companies: “ You know the drill. There’s a business team in the field, working for a month on a presentation at headquarters, trying to develop the case for the minimum number they think they could ‘sell.’ The headquarters team comes to the same meeting armed to squeeze out the maximum. The field team comes in that morning wanting 10. Management pushes for 20. The presentation usually takes place in a windowless room. No customers are present. You know what happens. After mountains of PowerPoint and hours of give-and-take, the budget is set at 15. The field team flies back, high-fiving one another. They didn’t have to give all they had to headquarters. Top management thinks it had a great day, ratcheting the objectives to new heights.” NOW, I ask you…. is anything adding value in this discussion? Did the customers win? Your investors or shareholders? Your prospects? Your employees? ion.” Jack has it right…budgeting is a game. I like to call it LIAR’S POKER…forecasts are built on lies, budgets are spent fully each year to prevent getting cut the following year, customers are lost in the process…even worse… and we’ve seen recently that it works best at destroying the ethical foundation of many companies. My question: At what point does stretch become fraud?
  • It is too detailed and complex . The average billion dollar organization has 10 different ledger systems, 12 different budgeting systems, and 13 different reporting systems . There are too many spreadsheets and reports, and too many information systems and tools. The average company’s plan has 372 line items! It is too long and expensive . The average time taken is over 4 months. It takes 20-30% of senior executives’ and financial managers’ time. One global company reckoned it cost over $1bn. One 2003 survey estimated that US companies with 500+ employees in total spent $55 billion on the process
  • In Straight from the Gut, Jack Welch quickly highlights the “Budget Game” as it is played in many companies: “ You know the drill. There’s a business team in the field, working for a month on a presentation at headquarters, trying to develop the case for the minimum number they think they could ‘sell.’ The headquarters team comes to the same meeting armed to squeeze out the maximum. The field team comes in that morning wanting 10. Management pushes for 20. The presentation usually takes place in a windowless room. No customers are present. You know what happens. After mountains of PowerPoint and hours of give-and-take, the budget is set at 15. The field team flies back, high-fiving one another. They didn’t have to give all they had to headquarters. Top management thinks it had a great day, ratcheting the objectives to new heights.” NOW, I ask you…. is anything adding value in this discussion? Did the customers win? Your investors or shareholders? Your prospects? Your employees? “ It’s an enervating exercise in minimalization.” “ Why is this game played? Over the years, people everywhere have learned that if you made your number, you got a pat on the back or better, and if you missed your budget, you’d get a stick in the eye or worse.” Jack has it right…budgeting is a game. I like to call it LIAR’S POKER…forecasts are built on lies, budgets are spent fully each year to prevent getting cut the following year, customers are lost in the process…even worse… and we’ve seen recently that it works best at destroying the ethical foundation of many companies. My question: At what point does stretch become fraud?
  • Budgets create a ceiling and a floor. So, budgets create a small room – the ceiling is the floor.
  • Steve Morlidge of Unilever Systemic diagrams on performance What happens in the budgeting process if you miss…you stuff it in reserves You quit once you reach the redefined point so you sub-optimize For example, you assure 4% if you know the range of volatility is between 3-12% Then, you are safe. If there is too much good news and growth, you slow down the company to hold it in reserves for future.
  • Focus will be on areas of triage This is not a shadow organization…consistently making clear switches of ownership
  • Focus will be on areas of triage This is not a shadow organization…consistently making clear switches of ownership
  • Focus will be on areas of triage This is not a shadow organization…consistently making clear switches of ownership
  • Transcript

    • 1. Linking Budgets to Strategy – Not Negotiation and Run Rate Presented by: Steve Player Program Director BBRT North America Region Jim Robertson, CTP Director, Corporate Planning & Performance Management Verisign© 2006 Steven Player and James A. Robertson, Jr.
    • 2. Speaker – Steve Player• Director, Beyond Budgeting Round Table North America Region.• Over 20 years experience in implementing performancemanagement, strategic planning and process improvements.• Managing Director of The Player Group and founder of theActivity-Based Management Advanced Implementation Group.• Co-author/editor of four books on Activity-Based Management.• Former Managing Partner of Arthur Andersens Advanced CostManagement Team. 2
    • 3. Speaker – Jim Robertson, CTP• Director, Corporate Planning and Performance Management atVeriSign• Over 20 years experience in finance, planning, treasury, strategy,M&A, and performance management• Consulting, staff and line positions.• Member BBRT, Palladium OSM Program, BSC User’s Group, AFP• MBA, The Wharton School 3
    • 4. A long, long time ago (well, the early 1990s) , in an organizationnot so far away, the Balanced Scorecard promised an improvedset of metrics… Traditional “Kaplan” Balanced Scorecard Traditional “Kaplan” Balanced Scorecard Strategic Themes 1 2 3 n Financial Perspective Lagging “How do we look to our shareholders?” Measurement Indication Framework Perspectives Customer Perspective “How do we look to our cs customers?” Business Processes e tri “What business processes are the value M drivers?” Organization Learning “Are we able to sustain innovation, change and Leading improvement?” 4
    • 5. Over time, we found a need to align metrics with strategicobjectives in order to measure what we wanted to achieve Traditional “Kaplan” Strategy Map Traditional “Kaplan” Strategy MapThe mission & Strategicvision are Themes Themes 1 2 3 ndecomposed • Serviceinto 3 to 6 innovator Financial Perspectivestrategic themes “How do we Framework Perspectives • Partnering look to our with shareholders?” Customers • Corporate Customer Perspective es Growth “How do we look to our tiv • Good customers?” Mission Corporate Citizen c & Vision Business Processes “What business bje“By 2006, to be recognized as processes are the value drivers?” Oone of the top 3 leading Organization Learning providers of “Are we able to sustain services innovation, change and nationally” improvement?” 5
    • 6. Once we had objectives and measures aligned, it was much easier to selecttargets and initiatives that supported the strategic objectives Strategic Theme: Objectives Measurement Target Initiatives Operating Efficiency Financial • Profitability • Market value • 30 % CAGR Profitability • More • Seat revenue • 20 % CAGR More customers • Plane lease • 5% CAGR Fewer Planes customers • Fewer cost planes Flights on • Flights are • FAA On-Time • #1 • Quality time Lowest one time arrival rating management Prices • #1 • Lowest • Customer • Customer Customer prices ranking (Market loyalty program survey) Internal • Fast • On-Ground • 30 Minutes • Cycle time Fast ground ground time • 90 % optimization turn-around turn- • On-time around departure Learning Ground crew • Ground • % Ground • Year 1 70 % • ESOP alignment crew crew trained • Year 2 90 % • Ground crew alignment • % Ground • Year 3 100% training crew stockholders 6
    • 7. But there had been lessons learned many years earlier thatexecutives and managers had forgotten or been lured away fromHOW TO USE OBJECTIVES - Objectives are not fate; they are direction.If objectives are only good intentions, they are worthless. They must degenerate into work. And work isalways specific, always has – or should have – clear, unambiguous, measurable results, a deadline anda specific assignment of accountability. But objectives that become a straitjacket do harm.Objectives are always based on expectations. And expectations are, at best, informed guesses. Theworld does not stand still.The proper way to use objectives is the way an airline uses schedules and flight plans. The scheduleprovides for the 9 AM flight from Los Angeles to get to Boston by 5 PM. But if there is a blizzard inBoston that day, the plane will land in Pittsburgh instead and wait out the storm. The flight plan providesfor flying at thirty thousand feet and for flying over Denver and Chicago. But if the pilot encountersturbulence or strong headwinds, he will ask flight control for permission to go up another five thousandfeet and to take the Minneapolis—Montreal route. Yet no flight is ever operated without a schedule andflight plan. Any change is immediately fed back to produce a new schedule and flight plan. Objectivesare not fate; they are direction. They are not commands; they are commitments. They do notdetermine the future; they are a means to mobilize the resources and energies of the businessfor the making of the future.ACTION POINT: Set and use objectives the way an airline uses schedules and flight plans. Peter Drucker, 1974, Management: Tasks, Responsibilities, Practices 7
    • 8. In an attempt to reposition the balanced scorecard for success, “TheStrategy Focused Organization” was introduced which incorporatedmany of the “old ways” ; however, . . . . Source: Kaplan and Norton 8
    • 9. ….by then, the balanced scorecard hadfallen into the hands of the dark side 9
    • 10. From fixed annual plans STRATEGY A world of front update the line freedom & capability to act strategy Strategic Learning Loop test the hypotheses BALANCED SCORECARD BUDGET A world of top down control & fixed funding Management Control Loop reporting PERFORMANCE performance Input Resources Initiatives & Output Results contracts Programs 10Source: Borealis
    • 11. There have been warnings Jack Welch is not impressed with the way most management teams utilized budgets to manage their organizations.• “You know the drill….”• “It’s an enervating exercise in minimalization.”• “Why is this game played…” Jack Welch, CEO General Electric, 2001 11
    • 12. Traditional budgeting processes are being taken to newheights of command and control, but are we reallymaking progress? Goals and strategic guidelines Fixed performance Contract Set targets Set targets Align incentives • Period [One year] Align incentives“Keeping Agree actions Agree actions • Target [Fixed] Allocate resources Allocate resources • Resources [Allocated]on track” Coordinate plans Coordinate plans • Control [Monthly] • Rewards [Predetermined] Budget • Agreed by [Negotiation] • Signed by [Mgr/Dir] Control performance Control performance 12
    • 13. “Do Right and the Seven Dwarfs”Many current approaches seem to advocate that improving budgeting merely takes the right tools to enable your people to “do right” in terms of accountabilityWe find problems still remain – the seven dwarfs or problems 1. Budgets costs too much to prepare and take too long to prepare (often making them out of date when published 2. Does not add value 3. Requires a crystal ball to predict the future 4. Slows our response time and limits innovation into windows 5. Leads to a gaming and lack of transparency 6. Sub-optimizes results 7. They suck the live out of the organization 13
    • 14. Does budgeting cost too much andtake too much time?• On average it takes 4 months and 20-30% of senior executive and financial managers’ time.• Hackett Group found that organizations spend 25,000 man hours on budgeting and planning per $1 billion of revenue. 14
    • 15. Does budgeting add value?• “You know the drill….”• “It’s an enervating exercise in minimalization.”• “Why is this game played…” 15
    • 16. Is your business predictable? Forecasts Mechanical switches Actuals Electronic switches Source: Jan Wallander, Budgeten – ett onödigt ont, 1994, p24 16
    • 17. Budgets create a ceiling on costs … … they also create a floor 17
    • 18. An illusion of control POTENTIAL Actual performance is predictable with a tendency to come back to plan, but below true potential as surplus resources are held in reserve ESTIMATE rather than deployed as investment. ACTUAL Actual results dip as a result of underinvestment due to the pressure to meet targets 18 through sub-optimized performance
    • 19. Does budgeting erode foundations? The game was well understood at WorldCom. It was all about living up to CEO Bernie Ebbers’ demands: “You would have a budget, and he would mandate that you had to be 2 percent under budget. Nothing else was acceptable.” - The Financial Times, 2002 19
    • 20. During the same time frame, in a land far, far away (well,over in Europe) a group of rebels were assembling• In 1998 the Beyond Budgeting Round Table was formed to find better ways to improve budgeting• What they found over the next few years took the roundtable in the direction of eliminating traditional budgeting practices and moving to adaptive planning and controls• The roundtable expanded to North America in 2002• A wider audience was exposed to the concepts in the 2003 Harvard Business Review article “Who Needs Budgets?”• The findings and practices were published in in the book “Beyond Budgeting” that same year 20
    • 21. There are three key implications of Beyond Budgetingfor setting your Balanced Scorecard free• Disconnect evaluation and rewards from BSC targets not necessarily the measures – Tying incentives to the target will result in “gaming” – Understand your executives and other managers propensity to continue to focus on the budget – Be wary about the budgeting “counter culture”• Provide reward mechanisms against relative performance which may exceed targets – Seek out methods for comparative/relative performance – Ensure performance improvements are of benefit to overall and team performance• Set targets tied to the appropriate time in the future, not the year-end – Ensure BSC targets are aspirational (where do we want to the next 2-5 years) – Focus on measuring medium-term (2 - 5 years) objectives – Closing in on a target should signal the need to replan and reset the target 21
    • 22. Aspirational targets when combined with relativeperformance numbers create a pull and push performancemechanism• Aspirational targets without relative measures can leave people feeling that they are too stretched, “we cannot get there”• Relative measures without aspirational targets can allow us to get complacent in our leading position Kennedy gave us the aspirational Sputnik gave us the relative measurement target to put a man on the moon in a and point that we were behind in the near term decade 22
    • 23. When Balanced Scorecards are tied to fixed performancecontracts, they enable command and control, but it’s really justan illusion Balanced Scorecard Strategic Theme: Object Measure Target Initiative Operating Efficiency ive ment s Financial • Profita • Market • 30 % bility value CAGR Profitability • More • Seat • 20 % Fewer Planes More custo mers revenu e CAGR Fixed performance customers • 5% • Fewer planes • Plane lease CAGR Contract Customer Flights cost • Period [One year] Lowest + on time Prices • Flight • FAA On- • #1 • Quality s are Time • #1 managem • Target [Fixed] Internal one arrival ent time rating Fast ground • Customer • Resources [Allocated] turn- • Lowes • Customer loyalty around t ranking program prices (Market • Control [Monthly] survey) Ground crew • Rewards [Predetermined] alignment • Fast • On- • 30 • Cycle gro Ground Minut time • Agreed by [Negotiation] und time es optimizati turn on - • On-time • 90 % • Signed by [Mgr/Dir] departure arou nd Learning • Groun • % • Year 1 • ESOP d crew Ground 70 % • Ground align crew • Year 2 crew ment trained 90 % training • % • Year 3 Ground 100% crew stockh olders = Illusion of Command And Control 23
    • 24. Balanced Scorecards that employ Beyond Budgetingprinciples enable lean, adaptive and ethical organizations Relative Balanced Scorecard Improvement Strategic Theme: Object Measure Target Initiative Coordinate Operating Efficiency ive ment s Continuous Actions with Inclusive Prevailing + Financial • Profita • Market • 30 % Profitability bility value CAGR Planning Demand • More • Seat • 20 % More custo revenu CAGR Fewer Planes customers mers e • 5% • Fewer • Plane CAGR planes lease Customer Flights cost on time Lowest Prices • Flight • FAA On- • #1 • Quality Rewards Real Time Internal s are one Time arrival • #1 managem ent Tied to Allocation of time rating Fast ground turn- • Lowes • Customer • Customer loyalty Relative Resources around t ranking program Improvement prices (Market survey) Control by Ground crew alignment • Fast • On- • 30 • Cycle Governance gro und Ground time Minut es time optimizati and a Range turn - • On-time departure • 90 % on of KPIs arou nd Learning • Groun • % • Year 1 • ESOP d crew Ground 70 % • Ground align crew • Year 2 crew ment trained 90 % training • % • Year 3 Ground 100% crew stockh olders = Empowerment 24
    • 25. From fixed annual plans STRATEGY A world of front update the line freedom & capability to act strategy Strategic Learning Loop test the hypotheses BALANCED SCORECARD BUDGET A world of top down control & fixed funding Management Control Loop reporting PERFORMANCE performance Input Resources Initiatives & Output Results contracts Programs 25Source: Borealis
    • 26. To continuous planning STRATEGY update the strategy Strategic Learning Loop test the hypotheses BALANCED SCORECARD funding Management Control Loop reporting PERFORMANCE Input Output Results Resources Initiatives & Programs 26Source: Borealis
    • 27. From strategy To action Rolling financial forecast Balanced scorecard - Quarterly update - Non-financial targets - Rolling 5 quarters outlook & measurements - Link to strategy - Targets relative to market Annual Outlook Financial Targets & Measurement BUDGET Limited Cost Annual Plan Understanding Controlling fixed costs Investment management - Activity accounting & - Trend reporting & 5 quarter product costing outlook - Improved cost understanding - Decentralized decisions - Product and customer costing - Frames if needed 27Source: Borealis
    • 28. Balanced Scorecards are a tool that canbe employed toward different ends “As a tool of empowerment, the impact can be positive. But as another tool of command and control the impact will invariably be negative with people seeing more work and few benefits.” Jeremy Hope, 2005, Beyond Budgeting Roundtable 28
    • 29. On which end of the challenge will you employthe balanced scorecard? 29
    • 30. Improving linkages between strategy and budgets needs tobe customized to the enterprise • Every enterprise is unique and there is no one way to get from to • What is certain is that you will not end up where you wanted to be how you thought you would get there. • Balanced Scorecards and Strategy Maps alone will not get you there • These are tools to be used in conjunction with other tools and processes 30
    • 31. Some guiding principles on improving the linkagesbetween strategy and budgets• Organizing Theme: Planning helps people make better decisions – at all levels of an organization• Integrated process makes sure nothing (well, as little as possible) falls between the cracks – Strategic Plan (3+ years) Business Plan (1 year) Budget (1 year)• Focusing upstream drives simplicity downstream – Eliminate multiple budget iterations which strip away ownership and linkages• Tools can help, but introducing or using a tool at the wrong time will wreak havoc – Strategy Maps and Balanced Scorecards are in most cases great ways of communicating and managing the execution of strategy• The world is not your oyster – Understand scope of influence and ability to change 31
    • 32. D x V x S x A > Resistance to Change• Dissatisfaction with Status Quo – Burning issue helps• Vision of Future State – Somebody has to know what a better world looks like and how to move an organization there – Right tools and processes in the right place at the right time• Status of 1st Steps towards change – Something has started• Ability to Change – Planning Team - process and change management skills – Planning group as the vanguard of the revolutionary movement • Make it look evolutionary, not revolutionary • Incognito if needed – Company – how used is it to change? – Top Mgmt support – great if it’s there, but you can structure an approach which includes winning their confidence by demonstrating how planning helps makes better decisions. 32
    • 33. Design Principles The Corporate Planning & Performance Management process has five key goals and related process design principles … Goal Design PrinciplesDevelop and • Stimulate and guide systematic strategic thinking and focus across the organizationcommunicate a clear, • Facilitate top mgmt involvement and leadership in clarifying the strategic goals, defining how strategicactionable strategy success will be defined and articulating the strategy to achieve them • Provide a common, corporate framework and methodology to effectively communicate an actionable strategy to the organization • Structure the strategy so that cross-business strategy related activities are defined and managedAlign the organization to • Structure functional/business unit plans to provide direct linkages to corporate strategic objectivesthe strategy • Identify a portfolio of strategic initiatives (including acquisitions), derived from the themes of the corporate integrated strategic plan as input to functional/business unit plansCommit and authorize • Connect resource allocation decisions to the most important strategic priorities and initiatives byresources in line with ensuring that the necessary financial, human and other resources are committed to the strategythe strategy • Bundle, prioritize and commit funding to cross organizational strategic initiatives by strategic theme/objective and manage them as a portfolio of initiatives throughout the planning and budgeting processBroaden theaccountability for • Establish accountabilities and governance processes to define and execute the strategy including thestrategy planning and assignment of executive level strategic theme and objective championsexecutionManage Strategy • Establish a regular executive level process to obtain feedback on and discuss strategic performance and take corrective action as requiredPerformance 33
    • 34. VeriSign Created a Corporate Planning &Performance Group under the CFO What Is Corporate Planning & Performance Management? The process by which the company identifies it’s strategic goals, defines how they will be achieved and measured and manages the execution to achieve them. Key Components Strategy Development Strategy Execution Develop and Commit and Broaden Align the Authorize Communicate a Accountability for Manage Strategy Organization to Resources in Line Clear, Actionable Strategy Planning Performance the Strategy With the Strategy Strategy and Execution• Answers the Questions: • BU/Functional Level • Commitment of Resources • Establishment of • Review of Performance Where Do We Want to Planning to Address the to Key Initiatives Required Accountabilities and Against Strategic Goals Be? Actions Needed to to Achieve the Strategic Governance Processes Based on Pre-Defined How Will We Define Achieve the Corporate Objectives to Define and Execute Success Measures and Success? Strategy • Allocation of Budget the Strategy Including the Strategic Initiative How Will We Get There? Dollars and Headcount to Assignment of Executive Milestones Year 1 Strategic Level Strategic Theme and Priorities and Initiatives Objective Champions 34
    • 35. Choosing our battles Command & Control Empowerment• Incentives tied to 1 year financial • Expanding incentives to non- targets financial targets• Resources managed at BU and • Rolling forecasts functional levels, not cross- • Strategy maps and balanced company scorecards• Standard planning platform (a • Measured progress towards multi- good thing) year objectives using KPI’s • More strategy, less tactics in quarterly reviews •Using business reviews to link strategy to planning 35
    • 36. For more information• Go to www.bbrt.org• Attend the 2007 BBRT Annual Conference on May 2 -4 in Orlando, FL• Call the BBRT North America office at (214) 239-0155 36

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