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The new New Economy Analyst
Report – Febr 24, 2003
Juergen Daum’s new New
Economy Best Practice service
©2003 Juergen Daum. All rights reserved.
Interview
with Lennart Francke: Managing without budgets at Svenska Handelsbanken
News categories:
Enterprise and business strategy, Finance and accounting, Performance
management and controlling
An early pioneer and user of a “Beyond
Budgeting“
management concept is Svenska
Handelsbanken. Svenska Handelsbanken, a Swedish
retail bank with branches all over Northern Europe and in Great Britain, has
had no budgets since 1970. Nevertheless, it is one of the most successful banks
in Europe and has outperformed all Scandinavian competitors with regard to a
bank’s most important performance measures such as return-on-equity,
cost-to-income ratio and customer satisfaction
– and this consistently over 30 years. Lennart
Francke1 (see
picture) Executive Vice
President und head of the Group Control & Accounting department of Svenska
Handelsbanken explains in this interview with Juergen H.
Daum2, how they
manage and control the Handelsbanken Group without
budgets.
This interview is an extract of the interview with Lennart Francke in Juergen H. Daum’s forthcoming book about „Beyond Budgeting“ and performance management . This shortened version has been published in German in the magazine "Controlling & Management / krp kostenrechungspraxis" in May 2003.
(visit
also J.D.'s
Beyond Budgeting Info Center
- New!)
Juergen Daum: Mr. Francke, are you not afraid to loose control of the business without any budget?
Lennart
Francke: Keeping tight control of the economic development of the whole
Handelsbanken group is absolutely necessary of course. And I would say even
more necessary in a decentralized and devolved organization like ours. Thus,
part of this devolved organization concept is that all units are defined as
profit centers. This includes 560 branch offices, the regional head offices and
the staff departments at central headquarters. And we have one common
accounting system for the whole group. It allows us to account for the revenues
and costs of all profit centers of the entire organization. If you have such an
accounting and management information system in place, you don’t need a
budgeting system for keeping control.
Juergen
Daum: What was the reason why Dr. Jan Wallander, the architect of the
Handelsbanken management model back in the early 1970’s, abandoned budgeting at
Handelsbanken?
Lennart
Francke: Abandoning the budgeting process was only one of a number of things
what Mr. Wallander did, when he had taken over the position as CEO of the bank.
It was one part of the whole concept under which he changed completely the
strategy and the organization of this bank. It was very centralized before and
he now decentralized the organization. Before, it had been very much run
through a product marketing concept and he changed that in a truly customer
driven marketing concept – which was revolutionary at that time. And Mr.
Wallander from both his positions and experiences as the former CEO of a
smaller provincial bank in Sweden and as an academic in social science, who had
been working with a forecasting institution connected with the Swedish
industry, he had come to the conclusion that it is impossible to forecast what
will happen in a complex commercial market. So, he said, it is much better not
to forecast. He was convinced, that it
is much better to manage a business according to what really happens, instead
of always looking on a fictitious budget, which was set up many months before.
If you have a budget, you tend not to see what happens
in reality and not to be as flexible as if you don’t have such a detailed plan.
He considered the budgeting process as an unproductive negotiation process. They
negotiate a budget figure that they know they would be able to over perform.
The outcome won’t be their best guess. It’s something artificial, which has in
most cases nothing to do with market and business reality. Therefore he said, a budget is totally unnecessary; he even called it
“an unnecessary evil”.
Juergen
Daum: But how do you ensure consistency and coordinate the activities in a
larger organization like Handelsbanken without a budgeting system? I think just
to rely on the accounting system won’t be enough.
Lennart
Francke: The most
important mean for us to keep consistency in the business and of the activities
in the organization is to maintain a very strict and well established corporate
culture, so that all the employees of this bank all the time know, what the
general goals for our activities are. And we have this corporate culture
written down in a brochure called “Our Way”. It describes our corporate goals,
the most most important of which is always to maintain a return on equity that
exceeds the average return on equity of our peer banks in the Nordic area. Part
of this corporate culture is also the decentralized organization. It starts
with the account managers, who belong all to local branch offices and who are
responsible for the total business relationship with their customers. The local
branch manager is in charge of all marketing activities. He may structure his
marketing activities the way he feels would be the best in his local market
according to what kind of customers he has. We measure customer profitability
rather than product profitability. Our product managers do not have the mandate
to impose sales targets on the branch office network. It’s always up to the
local branch manager to decide what products his customers really need to buy.
Juergen
Daum: And what are
the other elements of the Handelsbanken beyond budgeting management model?
Lennart
Francke: The second
element is the way, how we evaluate and measure performance. We evaluate the
performance of the profit centers in the bank in relative terms. We do not
compare actual results with a budget, a fixed plan, or an absolute target. We
always compare the actuals of one unit with the actuals of other comparable
units. So we do a lot of internal and external benchmarking as part of our
performance evaluation process. Especially internal benchmarking is playing a
key role when it comes to the very important branch office network that we
have.
Juergen Daum: Why?
Lennart
Francke: In our bank
the branch office network is far more important than in most other banks of the
same size. This is because we rely so much on the account responsibility, the
local market responsibility and the profit center responsibility that the
branch manager has. We devolve so much of the total result of the bank to our
branch offices. They really account for the total group result that is
generated in their local market. Therefore it is very important for us to be
able to compare different branch offices among themselves in the bank.
Unfortuneately, there are no data available for us to be able to compare our
branch offices with the branch offices of other banks. But external
benchmarking is playing an important role in evaluating the performance of the
central part of the organization, like of group staff departments such as legal
services, which we compare with external lawyers. We check if the legal
department is able to cover their costs by charging market prices. So the third
element of our management system is, that we have an internal market for
internal services. When we have to make a decision, as to how many internal
lawyers should there be in our internal group legal department, the answer to
that question is: as many lawyers as the rest of the organization wants to buy
the services from. So the legal department has to sell its services at or lower
than market price to the different parts of the organization that need them.
The goal for them is to cover their cost by charging the negotiated internal
price.
Juergen
Daum: How do the
senior executives manage the bank? How is the management process organized?
Lennart
Francke: The 25 most
senior managers meet every month for an informal review meeting, before which
every participant receives a bunch of relevant figures showing how business
volumes, market shares and the like have developed during the past month. Then they start a discussion without any
formal agenda. The intention is to find out together, what the actual situation
of the bank is and what should be done in order to react, for instance to
changes in the market place. The result is afterwards communicated to all
branch managers. These recommendations from the senior executive team and the
CEO should focus their attention on issues, which might be overlooked in the
day-to-day business of their branch office, but which are important from the
perspective of the bank as a whole. But they are still in charge to decide,
what has to be done in their branch and their local market. Only if certain
branch office key figures are moving out of a certain agreed bandwidth, then
someone is asking the branch managers about what’s going on and if they need
help or support.
Juergen
Daum: How does
Handelsbanken manage and measure performance on the various levels of the
bank?
Lennart
Francke: As I said,
the group target is to continue to maintain a higher return on equity than the
average of peer banks. Consequently,
the target for each regional bank is to strive to reach a higher return
on capital employed than the other regional banks. That means that we allocate
capital to the regional bank and also to some of the joint group units like
Handelsbanken Markets, Handelsbanken Asset Management and some of the
subsidiaries like Handelsbanken Finance and then we measure their return on
capital employed. But on the branch office level we do not allocate capital and
do not measure return on equity. Instead, we charge capital costs to the branch
office. Then we measure the revenues and the costs they generate. And part of
that cost are the cost of capital. So the most important key ratio on the
branch office is the cost-to-income ratio. We know for all 560 branch offices
what cost-to-income ratio they have, for each one of them. And that’s the way
we compare branch offices among themselves. When a branch office has a
significantly higher cost-to-income ratio than peer branch offices, then the
relevant regional bank head office says, this branch office does not perform
well enough. And that’s when regional bank manager has to ask himself: what is
wrong with the way this branch manager manages his business? Could we support
the branch manager in some way so that he would be able to perform better?
Or, ultimately, should we change branch
manager? That’s the way we measure and manage performance. Every month we
compare the performance of a branch manager with the performance of other branch
mangers – not with a budget of course.
Juergen
Daum: Today most
companies still do budgeting. What is the major challenge for a company that
wants to move to a management system “beyond budgeting” as Handelsbanken did?
Lennart
Francke: In our bank managing without any budget
worked from the beginning. We didn’t miss it even the first year, because the
new way of measuring true performance and to benchmark was so much better
compared to how we did it before. So I think in general, the process of abandoning
the budget is a very simple and an easy one. You just have to dare to take the
decision. But I think there is one major challenge. And that is that you have
to rely on people to be able to run a devolved organization. So the difficult
thing is probably really to devolve an organization and to say to yourself –
being top management – that if we have good people out there and they know what
the company’s corporate goal is and they have the tools to be able to do good
business and they know we will measure their performance in a realistic way
comparing them to peers, then they will do a good job. And having that
decentralized, devolved profit center organization you certainly don’t need a
budget. So the major challenge in the process is to enable the organization to work on a trust basis. And people have
to know what the corporate goals are and they have to know what they have to
do.
Juergen Daum: Mr.
Francke, thank you very much for this very interesting interview.
1 Lennart Francke gained an MBA from the Stockholm School of Economics
in 1972 and studied at Harvard Business School in 1988 on the Programme for the
Management Development. He has been employed at Handelsbanken for over 20 years
whre he has held a number of key positions including 4 years as Foreign manager
and member of the management group of the Regional Bank Eastern Sweden; Head of
the local branch office Gustav Adolfs Torg, Stockholm; Deputy Head of Corporate
Finance, Handelsbanken Investment Banking; Area manager and member of the management
group for the Regional Bank Southern Sweden; Deputy Head of Central Credit
Department; Executive Vice President and Head of Central Credit Department;
annd, since 2001, Executive Vice President and Head of Central Control and
Accounting Department.
2 Juergen H. Daum is an
internationally recognized expert, author, speaker and consultant in enterprise
management. As senior business consultant at SAP AG he is advising enterprises
and business managers in:
strategy management,
organizational design, value
innovation (marketing driven
product development), financial
and management accounting, controlling and enterprise
performance management, management
information systems and IT
management. He was working with the Beyond
Budgeting Round Table since a couple of years and he is actually helping
several companies to move to a management approach "beyond
budgeting" and to redesign their enterprise management concepts, processes
and systems accordingly. He is frequently publishing and speaking about Beyond
Budgeting and other enterprise
management topics and he is the author of the
book "Intangible Assets and Value Creation" (contact: letter@juergendaum.com, website:
www.juergendaum.com)
“Fixed
budgets don’t work today. A
budget is a too static
instrument and locks managers
into the past - into something
they thought last year that it
was right. To be effective in
a global economy with rapidly
shifting market conditions and
quick and nimble competitors,
organization have to be able
to adapt constantly their
priorities and have to put
their resources where they can
create most value for
customers and shareholders. In
order to do that, they need
the right concepts, management
processes and tools –
concepts such as the Beyond
Budgeting Management Model. The
introduction of new management
instruments such as the
Balanced Scorecard, which help
to better align the entire
organization with corporate
strategic objectives and to
focus it on the essentials,
has created the right
foundation. Because if
corporate strategy and the
objectives are clear for all
people in an organization, one
can principally react faster
to changing market conditions.
But then the fixed
budget comes into their way
and prevents them from really
doing the right things. Though
what is often missing is a
more flexible operational
planning and control model.
The Beyond Budgeting model
wants to fill exactly this gap.”
Juergen
H. Daum
New!
-
visit J.H.D.'s
Beyond Budgeting Info Center
-
including latest BB insight
materials, interviews with BB
pioneers etc. - here an
extract:
| J.D.'s
insight article "Beyond
Budgeting" | Interview
with Lennart Francke, CFO of
Svenska Handelsbanken
| Panel
Discussion with Borealis,
Nestlé, and Unilever
| Interview
with Jeremy Hope –
co-founder of the Beyond
Budgeting Round Table
|
Interview with J.D. on
finance and IT
|
Additional
Resources (updated Jan 2005):
Juergen Daum’s Beyond Budgeting
Information Center New!
Website of the Beyond
Budgeting Round Table (BBRT)
Interview with Jeremy Hope
(co-founder of the BBRT):
The Origins of Beyond Budgeting and of the
Beyond Budgeting
Round Table (BBRT)
Enterprise
Management, Leadership and
Business Control for Value Creation
- presentation from
Juergen H. Daum, held at the
Executive Briefing on
Performance Measurement of
the Centre for
Business
Performance, Cranfield
School of Management, 27
January 2004 in London, UK
program
of the briefing
Beyond
Budgeting on the move:
report from the First Annual
Beyond Budgeting Summit in London,
1-2 July 2003
Enterprise
Management in the 21st
Century - A Blueprint for a
New Approachand the role
of Information Systems
Presentation
held by Juergen Daum at the BBRT
member's meeting,
26 June 2003 in
Walldorf/Germany, and held as
well at the First Annual
Beyond Budgeting Summit, 2nd July 2003
in London/UK program
of the summit
"Intangible Assets and Value
Creation" by Juergen H. Daum: Introducing the
enterprise management concepts for the knowledge and information age – now
available!
Successful
Enterprise Management through Employee Empowerment and Financial
Efficiency: "Beyond
Budgeting" - presentation
of Juergen H. Daum prepared for the SAP Human
Resources und Financials Congress, December 2002, in Karlsruhe/Germany
Performance Management
Beyond Budgeting: Why you should consider it, How it works, and Who should
contribute to make it happen – article by Juergen Daum
Presentations
held by Juergen H. Daum at the Beyond Budgeting Round
Table member's meetings:
-
Dec 07,
2000,
London/UK:
Strategic
Enterprise Management
- May
16, 2002,
London/UK:
Information
System Requirements for
Performance Management Beyond
Budgeting
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen Daum
SAP’s White Paper “Beyond
Budgeting”, which was co-authored by colleagues at SAP AG,
Juergen Daum, and the Consortium for Advanced Manufacturing International (CAM-I) Beyond
Budgeting Round Table
Beyond
Budgeting – article from Jeremy Hope and Robin Fraser (the initiators and
researchers behind the CAM-I BBRT concept), published in the U.S. Magazine
“Strategic Finance”, issue October 2000
Panel
discussion at the eCFO conference 2001
of the CFO Europe Magazine, Oktober 18-19, 2001 in Brussels, Belgium: "The
Beyond Budgeting Management Model". Participants: Janet Kersnar,
Editor-in-Chief CFO Europe Magazine; Guiseppe Biamino, manager Budgeting &
Controlling at SNAM Rete Gas in Italy; Robin Fraser, Program Director CAM-I
BBRT; Peter Herold, Senior Manager Deloitte Consulting UK; Juergen Daum,
SAP AG. Can a company really implement the Beyond Budgeting model? This
question was discussed by the participants on the panel: »video
(Real Player) »video
(Media Player)
Why
today's accounting, controlling and management systems fail - in an
interview with sapinfo.net, Jürgen H. Daum explains the limitations of our
traditional management tools in our economies of today and why an overhaul is
necessary
Value Drivers
Intangible Assets – Do we need a new approach to accounting, controlling and
management systems ? – article by Juergen Daum
Performance
Management and Business Controlling in the 21st Century (Presentation
held by Juergen Daum at SAP's
European mySAP Financials Conference, June 2002, Strassbourg / France) deutsche
Version
Previous new New
Economy Analyst reports related to the topic of the new performance management
system (updated Jan. 2005):
Mai 02, 2004 - Panel discussion: Beyond Budgeting – breaking free from the annual fixed budget
July 04, 2003 - Beyond Budgeting on the move: report from the First Annual Beyond Budgeting Summit in London
January
20, 2003 - Adding Value Through IT Investments (part 2)
January
07, 2003 - Adding Value Through IT Investments (part 1)
August 03, 2002 –
Approaching the next level of shareholder value management – basics (part 1)
June 11, 2002 –
Intangible Assets: a central topic at the mySAP Financials conference in
Strasbourg
March 06, 2002 –
Interview with Baruch Lev: Accounting, Reporting and Intangible Assets
Dec 28, 2001 - How to
create value with Real Options based innovation management
Nov 27, 2001 - Leveraging
e-Business Opportunities for Finance – Q&A with Juergen Daum
Nov 13, 2001 - Interview
with Leif Edvinsson: Intellectual Capital: the new wealth of corporations
Oct 16, 2001 - E-Business
requires CFOs and CIOs to redefine their roles and relationships
Sept 11, 2001 - The book
of the month: “Managing the Professional Service Firm” by David H. Maister
July 26, 2001 - How
accounting gets more radical in measuring what really matters to investors
July 18, 2001 - Interview
with David P. Norton: "Intangible Assets and the Balanced Scorecard"
May 22, 2001 - Beyond
Budgeting: How to become an adaptive sense-and-respond organization
March 28, 2001 – The book
of the month: “The Innovator’s Dilemma” by Clayton M. Christensen
Febr 26, 2001 - eXtensible Business Reporting Language
(XBRL) is moving forward
Nov 01, 2000: The Book of
the Month: “Meta-Capitalism” by Grady Means and David Schneider
Oct 03; 2000: The book of
the month: “Future Wealth” by Stan Davis and Christopher Meyer
More about New Economy Economics and Management
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