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The new New Economy Analyst
Report – April 30, 2005
Juergen Daum’s new New Economy
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©2005 Juergen Daum. All rights reserved.
From Management Accounting to Business Support: “Beyond
Budgeting” at Boots/BHI. An Interview with Matthias Steinke, CFO BHI Germany.
News categories: The
New Economy Economics, Finance and Acounting, Performance Management and
Controlling
This is a
condensed version of an interview taken from the forthcoming book by Juergen H.
Daum on Beyond Budgeting and Performance Management.
Boots
Healthcare International (BHI) is the fastest growing division of the Boots
group, which is listed in the FTSE index of the London Stock Exchange. BHI
manufactures and markets prescription (“reembursement” market) and
non-prescription drugs (“over-the-counter” market) as well as healthcare
products. Brands include Strepsils (throatcare products), marketed in Germany
under the names Dobendan and Dolodobendan, Nurofen (pain relievers), Clearasil,
Balneum, Balneum-Ölbad, and Hermal (skincare and products for the treatment of
skin diseases). Hermal is the market leader for dermatological products in 
Germany.
The products are marketed worldwide, in 130 countries. BHI operates development
labs in Nottingham, Paris, and Reinbek.
Matthias
Steinke (see picture on the left) is head of Finance and Control at Hermal Kurt
Herrman GmbH & Co. OHG, the German subsidiary of BHI. Originally educated
as a teacher, Steinke decided to pursue a second degree in business and
eventually became a management accountant after gaining practical experience in
several traineeships. He is also a graduate of the 5 Stage Program at the
Controller Academy in Gauting, Germany. When his company was acquired by the
Boots group a few years ago, Steinke became closely involved with the
transition from traditional budgeting practices to a Beyond Budgeting model,
and from a German to an English management culture.
In this
interview with Juergen H. Daum Matthias
Steinke explains the Boots/BHI “Beyond Budgeting” management system and its
ramifications for the management accounting/controller function.
Juergen H. Daum: Mr. Steinke, is it possible to dispense with budgets completely and still manage a company successfully? Are management accounting/controlling and budget-less management contradictions in terms? What is your perspective on these questions a controller in a company that has no fixed budgets?
Matthias Steinke: In my
opinion there is no contradiction – on the contrary. In actual practice,
budget-less management functions better for us than the traditional approach
with fixed annual budgets. Although we still begin each fiscal year by
compiling an operational plan, our intent is not to lay down what resources and
measures will be needed for the entire year in advance. Instead, the
operational plan is more of a rough guideline that we modify repeatedly during
the year to adapt to changing conditions. Its purpose is not to come up with
exact figures for the future but to serve as a catalyst for the management
dialog – a basis for discussing where we want to go and how we want to get
there.
Juergen H. Daum: Can
you explain more about how you work with an operational plan that is not fixed?
Matthias Steinke: The
operational plan is continually modified and fine-tuned during the course of
the year. A few weeks after the operational plan is compiled, it is subjected to
a rolling forecast process that forms the actual basis for management. The
forecasting process analyzes the original assumptions to see if they still
hold. If significant changes have occurred, we modify our plans. This is the
only way to remain competitive in a dynamic market, which is of course the
whole purpose behind management accounting. On this basis, it is difficult to
see a contradiction between management accounting and budget-less management as
I have described it. The Beyond Budgeting model has quite simply proven to be
more effective for us.
Juergen H. Daum: Why
is this approach more effective?
Matthias Steinke: We at BHI Germany are part
of the larger worldwide business unit BHI, which in turn is part of the Boots
group and must operate in accordance with its objectives. In this context,
experience has shown that it is much easier and more sensible to react to
changing markets on a weekly or monthly basis, or even daily if necessary,
instead of trying to meet fixed budgets come what may. For example, will the
positive list for the reimbursement market in Germany come in July, August, or
September? In our industry, such factors can have a significant effect on the
annual results of a business unit. We need to seize opportunities as quickly as
possible even if they were not part of the original plan, and we need to react
to negative trends that are outside our control by compensating for them in
other areas. The bottom line is that corporate or business unit objectives can
be met much better this way than with traditional budget planning.
Juergen H. Daum: Can you
explain the flexible planning and management process at BHI in more detail?
Where do you start?
Matthias Steinke: The management process, or performance
management, starts and ends with what is called a performance contract, which
all business units in the Boots group enter into. This contract contains a
commitment to reach certain goals regarding sales, profit, cash flow, economic
profit,
and value. The last mentioned is a discounted cash flow – that is, the net
present value of the free cash flow of the next five years. The performance
contract is updated annually. Each business unit, including BHI, then breaks
its performance contract down onto its individual
SPCs (SPC= Strategic Profit
Center, i.e. the local sales&marketing
units).
The top-down requirements are initially only very rough and are based on core
statements. The focus is on “organic growth” – growth that can be achieved
internally and not through acquisitions. This ensures comparability with
previous years, so that we are comparing apples with apples – we call this
“like-for-like.” At the same time, the focus should be directed toward
development of the internal growth capability of a unit. The financial figures
do not normally provide much guidance here. For this reason, planning and
management focus on questions such as: How did I establish an existing brand in
the market and how do I defend it against the competition? How do I increase my
market share? The goal is to make the core competencies of the unit
transparent, create sales growth, improve results, and generate value. These
goals are continuously monitored and must then be taken into consideration in
bottom-up planning for the SPCs. For example, a region with ten SPCs will know
the key figure targets in total and for each individual SPC. At the beginning
of the fiscal year, everyone knows their own share. That is the snapshot we
call the operational plan. But unlike the traditional annual budget, the
operational plan does not remain fixed. Four weeks into the new year we are
already thinking about a forecast based on recent developments. We have official forecast meetings four or five times a
year.
Juergen H. Daum: Do you
also run ad hoc forecasts outside the normal forecast meetings?
Matthias Steinke: Yes, of course. We see forecasting not just
as a routine institutionalized process for satisfying the information needs of
the corporate office. Forecasting actually takes place all the time. This is
because it first serves management at the local SPC level and then at the
regional level. Forecasting has an important function at the regional level
since that is where we can make adjustments for developments at the local level
– the local SPCs themselves are not in a position to do that. Local forecasts
that indicate a threat or an opportunity but which cannot be dealt with locally
immediately impact the regional level and prompt an ad hoc forecast for the
entire region with all its SPCs.
Juergen H. Daum: What would
be an example of a local threat?
Matthias Steinke: Say the annual outbreak of influenza in
Poland doesn’t materialize. This would threaten local sales in the upper
respiratory illness category. If the expected sales drop is significant and
there is no possibility of compensating for it locally, we would want to run an
ad hoc forecast for the entire region. The forecast might show for example that
the sales and profit targets at the regional level will be endangered if
nothing is done. In that case we would increase marketing support in other
areas in an attempt to compensate for this local sales drop. For instance, we
might consider moving up the product launch of a Clearasil line extension to
boost sales in the Netherlands, or see if we can increase Rx sales in Germany through cooperative arrangements or by
leasing in additional sales reps. This is how we respond flexibly during the
year – always with an eye toward meeting overall targets and utilizing any
opportunities that may arise, which we can use to offset negative developments
that we have no control over. We track possible ups and downs and use the
trade-off management process to limit risks and seize opportunities.
Juergen H. Daum: How does
it affect the controller’s job when a company moves from traditional budgeting
with fixed annual budgets and monthly target-actual comparisons to a more
flexible beyond budgeting approach where forecasts are constantly being updated
and plans adjusted? You were directly involved with this type of transition
when your company was taken over by Boots. Can you say something about your
personal experience in this respect?
Matthias Steinke: Moving from a German to an
English management culture was a big change for us. Suddenly there was a
hands-on mentality that we as a traditional German company had never known
before. Today we no longer juggle numbers for days on end – it is more
important to jot down an idea on a scrap of paper than to be concerned about
getting the numbers right down to the last decimal point. The term for this is
80:20 precision. We sacrifice a bit of accuracy so that we can react more
quickly and be more up to date. We don’t wait for the entire planning process
to be run in the ERP system for each cost center, cost element and so forth
before putting down a forecast idea on paper. This was a sea change for us.
Juergen H. Daum: What were
the consequences for the “Controlling” department, which was the German name
used at the time?
Matthias Steinke: The most visible change was
in the name. Immediately after the takeover, Boots changed the name of the
department to “Business Support.” But this was more than just a simple name
change. It was accompanied by a drastic alteration in the nature of the
controllers’ work: away from simply reporting numbers and toward actively
supporting the business. This includes evaluating initiatives and providing
guidance for business processes, ideas, and plans of all types. And “guidance”
means actual business consulting: pointing out the financial consequences of
decisions and what the future management accounts would look like.
One
important change is that controllers look now more toward the future. They no
longer simply explain how yesterday’s figures turned out to be different from
what we had predicted the day before yesterday. I can’t change the past, but I
can change the future. So now we focus more on monitoring opportunities and
risks, since they indicate where you can affect the future by taking steps that
help you reach your targets despite unfavorable developments, even in a dynamic
environment where original assumptions and conditions are continuously
changing.
Juergen H. Daum: What
advice can you give to those of your controller colleagues who want to move
from budget-based management to a beyond-budgeting approach in whatever form?
Where should they start?
Matthias Steinke: I think there’s a wide
range of possibilities. As a controller, you can start at the lowest level:
your daily work. You don’t need to launch a big change management project. Try
to move away from thinking in terms of rigid budgets and more toward flexible
targets. Create more transparency with respect to higher-level goals so that
everyone can understand them. Become involved in the work of other departments.
No decisions should be made that are not accompanied by input from the controller.
To achieve this, you must offer value to other departments. This means
listening, commenting, moderating, consulting.
Juergen H. Daum: In your
opinion, what prerequisites must be met before controllers can do this?
Matthias Steinke: First of
all, they must become proactive. They shouldn’t just sit in their office with
their laptop writing up fancy reports. They must be prepared to be pushy in a
nice sort of way, playing an active role in other departments and providing
business support. They need to continually remind others that everyone serves
the company as a whole and that all activities must, in the end, benefit
overall financial results. Beyond this, company management must communicate the
will and need to create an environment in which controllers are directly
involved in decision support. The new culture must be introduced by top
management, but it must be understood and practiced at lower levels as well.
The idea is to create a corporate culture in which controllers are no longer seen
as “bean counters.” Accountants should not be asking why a target somewhere was
missed by such a wide margin and who the guilty party is. Instead, they should
ask how departments can work together to offset the discrepancy in the future
and figure out how they can still reach targets despite it. This requires the
united efforts of top management and controllers. This is the only way to
transition from traditional, numbers-oriented management accounting to business
support.
Juergen H. Daum: Mr. Steinke, thank you very much for this interview.
About
the Author
Juergen
H. Daum is
Management Advisor, Finance & Enterprise Control Expert, and Chief Solution
Architect of the Business Solution
Architects Group EMEA of SAP (based at
the SAP headquarters in Walldorf/Germany). For the
CFOs, controllers and other finance professionals of many European companies he acts as an idea generator and catalyst
for redesigning the finance organization and the enterprise control system. He
regularly publishes articles in journals, speaks at conferences on enterprise
management and finance topics, and runs workshops with finance profesionals. He
is the author of Intangible Assets and Value Creation (Wiley,
2003). Before
joining SAP in 1992 he was the CFO of a midsized German company. Website: http://www.juergendaum.com
Key
Topic: Moving Beyond Fixed Budgets
“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
> First German Beyond Budgeting
Summit, 8-10 June 2005 (in German)
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 | J.D.’s
Beyond Budgeting Info Center |
Additional Resources:
Why a new Management System ? –article by Juergen H. Daum
Performance Management
Beyond Budgeting: Why you should consider it, How it works, and Who should
contribute to make it happen – article by Juergen Daum
Website
of the Beyond Budgeting Round Table
J.D.’s Beyond Budgeting Info Center
Juergen H. Daum's book on:
Intangible Assets and Value Creation, Wiley 2002
J.D.’s Best Practice Channel – Finance
Related articles from
earlier new New Economy Analyst Reports:
Interview with Patrick M. Georges: How can executives improve their personal productivity?
Panel discussion: Beyond Budgeting – breaking free from the annual fixed budget
Beyond Budgeting on the move: report from the First Annual Beyond Budgeting Summit in London
Interview with Lennart Francke: Managing without budgets at Svenska Handelsbanken
Approaching the next level of shareholder value management – basics (part 1)
Corporate Performance Management: Managing profitability and growth in the new environment
How to create value with Real Options based innovation management
Leveraging e-Business Opportunities for Finance – Q&A with Juergen Daum
Interview with Leif Edvinsson: Intellectual Capital: the new wealth of corporations
How Systems Thinking / Systems Dynamics helps to identify limits to growth to boost innovation value
Interview with David P. Norton: "Intangible Assets and the Balanced Scorecard"
Beyond Budgeting: How to become an adaptive sense-and-respond organization
“The Mind of the C.E.O” by Jeffrey E. Garten
The book of the month: “The Innovator’s Dilemma” by Clayton M. Christensen
The Book of the Month: “The Strategy-Focused Organization” by Robert Kaplan and David Norton
More about Enterprise Management Best Practice and related topics will
be continued in the new New
Economy Analyst reports. To subscribe for Juergen Daum’s
free-of-charge e-mail newsletter (a regular summary of the recent reports) click here.
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