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Panel
discussion: Beyond Budgeting – breaking free from the annual fixed budget
News categories:
Enterprise and business strategy, Finance and accounting, Performance
management and controlling
Panel discussion at the 5. SAP
Leader’s Club meeting of Chief Financial Officers on “Beyond Budgeting” on June
24, 2003, at SAP Switzerland in Zurich, Switzerland, with representatives from
Nestlé, Unilever and Borealis - organized and moderated by Juergen H. Daum
The Beyond Budgeting management model is a new emerging
concept for adaptive performance management that has been developed by the
Beyond Budgeting Round Table (BBRT). It is gaining growing awareness and has raised interest
worldwide. The mission and intention of the BBRT and of the Beyond Budgeting
model is to help companies to become more productive and more nimble and
adaptive organizations. But the camps are divided: some companies and their
managers think budgets should be totally abandoned (that is actually what
Borealis did in 1995), others think traditional budgetary control systems
should be just reengineered. But nevertheless, a fast majority of companies
expect that they will change their traditional budgeting system within the next
2 years.
One of them is Nestlé. Nestlé is actually on the way to reengineer its enterprise performance management concept and processes. The objective is to make the performance management process within Nestle more flexible. A key enabler for this is what is called within Nestlé “Dynamic Forecasting”. Another company is Unilever. Unilever has started last year a project for introducing what they call “Dynamic Performance Management”, which is not only looking on the performance management process itself, but also on other important elements surrounding it, such as the incentive system. In the following discussion we want to share some more detailed insights into Beyond Budgeting from a practical perspective with representatives from these two companies and from Borealis. The participants in this discussion are:
Jean-Daniel Luthi, Group Controller of Nestle. He is in charge of the so
called “Dynamic Forecast” project.
Steve Morlidge,
change leader for Dynamic Performance Management at Unilever, Unilevers “Beyond
Budgeting” project. Mr. Morlidge is also the actual chairman of the European
arm of the BBRT.
Dr. Rainer Gunz,
head of controlling and cost accounting of Borealis Austria.
Juergen H. Daum,
Management Adviser, Enterprise Performance Management expert and Chief Solution
Architect at SAP AG, facilitates the discussion.
The following panel discussion is
an extract from Juergen Daum’s forthcoming new book on Beyond Budgeting (“The
Beyond Budgeting Field Book”) and has been published in a
shortened version
in German in
the Magazine “Controlling” (issue March 2004).
“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
|
Panel Discussion:
Juergen Daum1: What
are the opportunities and challenges organizations are facing on their way in
implementing a more flexible and effective approach to enterprise and
performance management? Abandoning budgeting – is that realistic and feasible?
Why should companies consider something radical like this? What should they in
fact do? That is a bunch of questions that we would like to discuss now with
these gentlemen on this panel. Let us start with Mr. Luthi. Nestle is one of
the largest consumer products companies in the world. Can you imagine that it
is possible to manage such a large organization without any budget?
Jean-Daniel
Luthi: When we are
discussing about budgeting or abandoning budgeting, I think first of all you
would have to properly define what a budget is. Depending of to whom you talk
to in the organization, the understanding of what a budget is can be very
different. Therefore it can be dangerous to talk about abandoning budgeting,
because you do not know about what you are talking and what might be the
consequences. A few years ago, when I just started as group controller, our CEO
was going to talk at a meeting of market heads, the general managers of our
country organizations. Just before speaking he said to me, “don’t be afraid, I
will announce that we are going to stop the budget”. I was a little bit
surprised, you can imagine, and I asked him, “are you going to say that we will
stop everything we had so far to control our business and manage its
performance?” He said, “no, of course not.” Then I said, “then you should
qualify. Because with this message coming from you, if you say you would stop
the budget, they will take your words, but will interpret them in their
individual way”.
Juergen
Daum: And nobody
would know exactly what it means, what will be stopped and what will still
continue.
Jean-Daniel
Luthi: Precisely. So you have to ask yourself, for what are
you using the budget? Are you using the
budget for forecasting, as a communication tool between headquarter and markets
- both ways, to delegate authority, for target setting, or for all of that? I
think that is the first thing that you really have to define. And now, coming
to your question, whether we could live without a budget. We as Nestle, as a
multinational company with about 175 reporting entities worldwide, we have to
have an idea of where we are going. We have to know, whether our strategy, our
vision is really taking place in the world and whether we are going to achieve
our company objectives. And for this we need tools and procedures. Many years
ago, when I started my career in Nestle, communication facilities were very
poor. I never called Switzerland from Indonesia for several years, where I was
a CFO of a local Nestle company - you could not get a line, you could not call.
So at that time the annual budget was really the only way to have an
understanding between headquarters and the countries. And it was o.k. to do
budgeting once a year and to focus on the financials, as our country
organizations were acting more or less independently from each other and had
their own local strategy. Also the environment was much more stable at that
time. But nowadays, when things are changing so fast, you have to be much more
reactive, and with today’s global markets, it’s not just enough to have a
strategy for one particular country. So I agree that the traditional annual
budget might not be any more the right tool today to steer and manage a company
like Nestle. We need something, which allows us to become more dynamic and to
not just focus on financials, but to manage the strategy of the group. But I
cannot imagine having nothing for the future, to have no steering tools, if
this is what you mean with having no budget.
Juergen
Daum: Mr.
Morldige, what is your view? Is it possible to manage without a budget and what
means Beyond Budgeting?
Steve
Morlidge: I fully
support what Jean-Daniel Luthi just said. The budget and traditional budgeting
institutionalizes in companies a set of tools and procedures that lead to a
fixed annual performance contract – between headquarters and business units,
between business unit leaders and operational managers and so forth. It creates
an interlocking set of fixed annual plans, typically arrived at by a process of
negotiation, that has few to do with customers and market demand, and that is
tied to rewards in a deterministic way. Resources are allocated centrally and
in advance, incentives are set in advance, and as a consequence everyone in the
company is focused on making the budget numbers, not on satisfying customers,
not on beating the competition or on reacting to markets changes as fast as
possible in order to leverage them as opportunities for growth and for building
competitive advantage. So in essence, Beyond Budgeting means, getting rid of
the fixed annual performance contract. And any move away from these fixed
processes locked together is a move towards Beyond Budgeting. There is an
extreme example like Svenska Handelsbanken. They created over the last 30 years
an organization that is self-adaptive, where customer orientation,
entrepreneurship, immediate reaction to market development and to new customer
demands have become a natural behavior of every employee and it is now part of
the company’s culture of it’s organizational genes so to say. And people like
to work for Handelsbanken that helps them to develop and use their full
potential, both for the benefit of the company and themselves. But not every
company is able to fully follow the Handelsbanken model and to emulate that
success – for various reasons. But nevertheless I believe, any step away from
the fixed contractual management system is not only good for business, because
it allows you to be more flexible, but I also think it’s a more humane
workplace. One of the reasons for doing what I am doing at the moment is that I
am not willing to tolerate anymore seeing so many talented people spending too
much of their live doing something really stupid, such as budgeting and
adhering to a budget, and knowing, they won’t adding any value. So, it is
possible to be like Svenska Handelsbanken? Theoretically yes, but any move away
from where we are now is a good move. That’s my point of view.
Juergen
Daum: Dr. Gunz,
Borealis has already made the experience of living without a budget. Borealis
started as one of the pioneers with “Beyond Budgeting” and abandoned budgeting
in 1995. What would you define as the most important “lessons learned” during
the process?
Rainer
Gunz: First of all
Beyond Budgeting doesn’t mean that you have no border and no target. When
Borealis decided to skip budgeting, our vision was not, just to abandon it and
then have nothing. Instead we asked us first, what had been the purposes of the
budget for us, what had been the problems with the budget approach, and then we
tried to develop tools, which are better suited to meet our purposes. One of
the first things that became very clear was, that we had to separate financial
forecasting from target setting and performance management. You never will get
accurate and honest forecasts if bonuses and performance appraisal of people
are linked in some way with these forecasts. So we introduced rolling financial
forecasting that looked beyond the fiscal year. We implemented it as an
independent tool and process, independent from target setting and performance
management In general we splitted the budget apart into four separate tools,
rolling financial forecasting, the Balanced Scorecard, rolling investment
management and benchmarking, which allowed us to become more flexible and to
reduce the gaming with the financial numbers. So Beyond Budgeting doesn’t mean
that you have nothing – the contrary. It means to develop and implement tools
that are more appropriate to help you to manage your specific business than the
traditional fixed annual budget is able to do. And it worked for our company,
for several years. But it’s mainly an issue of mindset, not of tools. Basically
it comes back to the one question: Do you have a fixed contract or are you
prepared to live with moving, relative targets? That is: targets based on
benchmarks that are dependent on factors and developments outside the company
The important task is then to explain to and to challenge people to accept a
moving target. A moving, relative target, means, that managers actually do not
know, at the time they agree to the target, where they really will end up in
terms of absolute numbers. That requires the turn of a mental switch, if you
come from traditional budgeting. You have to understand that it is important to
see the target, but that you do not need to know an absolute number in advance.
This will help that people give their best, that they look at the competition,
what they are doing, to the market, how it is developing, and not at a budget,
which is just an internal committed thing that need not to reflect
reality.
Juergen
Daum: Mr. Luthi,
Nestle has decided recently to implement a new concept that you call “Dynamic
Forecasting” that should replace somehow the old fixed annual budget and that
should serve in the future as the foundation for your performance management
process. Can you tell us why you choose to implement “Dynamic Forecasting” and
how it will work?
Jean-Daniel
Luthi: As I have already explained, the main objective for
us, when we talk about Dynamic Forecasting, is to become more flexible in
managing the performance of our company. And that starts with strategy. We had
what we used to call a long-term plan that should focus on strategy. The
intention was, that it should be a strategy document, focusing on strategy, not
a three or four years budget, focusing on numbers. But my experience is, if you
start mixing strategy together with planning, sooner or later planning takes
over. And that’s what happened after a few years. We were focusing on numbers,
not on strategy any more. And we saw not much value in that. We don’t need
numbers for that. Our market heads know their business, they know where they
are, so they can describe their strategy with words and can talk about it, when
they are going to present it to our senior management. So when I proposed to
discontinue the long-term plan, management agreed instantly. So our Dynamic
Forecasting starts first with the agreement of strategy. This is really
discussed at the top and then communicated down. It is a top down process. And
once strategy is approved you then translate it into objectives, long term and
mid term objectives and milestones. And these objectives are then updated once
a year, because you don’t change your strategy all the time, normally. But when
you communicate your strategy, milestones and objectives down, are you sure
that the staff below understand that and believe in it? How do we know? May be
they are saying, “Hey, the boss is dreaming”. Therefore, as soon as the
strategic objectives have been communicated, we start forecasting bottom-up. We
ask the staff, what their forecast should be, what is possible in terms of
concrete objectives. And then we discuss these long-term objective proposals
and come to a decision.
Juergen
Daum: What are the
other elements of Dynamic Forecasting at Nestle?
Jean-Daniel
Luthi: It’s the
forecasting process, which relates to another problem with the traditional
budget. It always stops on 31st
of December or whatever period you have. One of our managers said, it’s like
you die on every 31st of December and then you are reborn on the 1st
of January. But real life is different, things continuously evolve and change
all the time. So you shouldn’t just look out until the year-end. And this is,
where rolling forecasting will help us to look in a rolling way several
quarters out into the future, beyond the 31st of December. And my
opinion is, for the same reason that Dr. Gunz already mentioned, that managers,
who are in charge for achieving targets, should not set up that forecast. They
would start thinking, “What is my boss expecting from me?” So if they give him
or her a forecast that goes beyond their strategy or target, they will be
afraid that next time the boss is going to ask for more. So you would never get
an objective forecast from these managers. Another problem is consistency of
forecast information. In enterprise computing we are used today to have
integrated transaction systems. We are used to the one number principle. You don’t want to have, for example, several
volume numbers: one number for the expected sales or demand, another number for
buying your raw materials, another one for production. You would end up in
chaos. So you want only one number as a basis for all that different processes.
And for forecasting it’s the same – we need the one number principle.
Therefore, forecasts have to be set up in a way that makes this kind of consistency,
the one number principle, possible.
Juergen
Daum: How do you
use these forecasts in the performance management process?
Jean-Daniel
Luthi: These
forecasts show the gaps, gaps between your targets or milestones and between
your estimates according to the forecast, which show where you probably may end
up, if you change nothing. It shows negative gaps but also positive gaps that
may represent new opportunities. Why should you stick to your budget, if new
opportunities come up? You want to make use of them. So you have to be
tolerant. You have to allow those gaps. And you even have to allow a gap, where
you have no explanation for the moment. As the responsible manager you are then
going to work on it, you are analyzing the gap and you will decide, what you
are going to do about it. And three months later you report back. And setting
up the forecast shouldn’t be that complicated. It should be simple. Why not,
for a start, just copy last year’s, last period’s actuals? That is what I
suggested. And somebody said, “But that’s wrong, we can’t do that”. But if you
say it’s wrong, you are already making a forecast. You see what I mean? This
will focus you not on the numbers, but on the real activities of your business
unit or market. It focuses you on why things should change. If you do not
manipulate forecasts, if you do not modify it, because your boss wants you to
show something better, you are going to show the gaps. And that creates
conflict. And we would like to have creative conflict. We should not be afraid
of conflict. We have to manage trade-off. We have to manage priorities. And
this it what counts.
Juergen
Daum: Why did you
call it Dynamic Forecasting?
Jean-Daniel
Luthi: We decided then to call it the Dynamic Forecasting,
because you have to be careful with names. We first called it rolling operating
plan. But we already had an operating plan and everybody had a different
understanding of that. So we wanted to signal: this is new. It was mentioned
before by Rainer Gunz, Beyond Budgeting is not about another reporting system.
It’s about a change of mind set. And this requires this kind of signal that you
can only create with a new name.
Juergen
Daum: So you
finished with the annual operating plan?
Jean-Daniel
Luthi: We still maintain an operating plan. We use the
operating plan to reach top-down targets for the bonus. We call them bonus
targets. That is still based on the calendar year, which is still the basis for
the whole bonus and reward system. So we still have a bonus target based on the
yearly achievements. But the process is very much a top-down process. It is not
much subject to a lot of negotiations. And bonus target setting is a different
process, different from managing the activities that allow you as a manager to
achieve these targets. Here you want to hear whether the organization has a
plan to reach those targets and what measures we are going to take in order to
reach them. May be some managers are proposing short-term measures to achieve
their targets at the detriment of the long-term company objectives. But this
will then show up in the rolling forecast. The rolling forecast will serve as a
constraint for such unwanted behavior.
Juergen
Daum: Dr. Gunz,
after you have implemented the Beyond Budgeting tools at Borealis, what was different
then compared with traditional budgeting?
Rainer
Gunz: When we
skipped the traditional budgeting we focused on the main points, the critical
issues for us. A critical issue for us was and still is, for example,
investment management. In our capital investment intensive industry it is
important to keep the general asset levels low. It is also important to invest
in the right area which supports your strategy and the growth of the business
best. Because business conditions are changing so rapidly, a key requirement
that we defined was, that we needed a more flexible approach for investment
management that allows us to dynamically adapt overall investment volumes, also
during the fiscal year, to changing economic conditions. We also wanted to be
able to change priorities in investment policy, when we feel that this is
necessary from a business perspective. So we implemented a rolling investment
management process, which allows us to continuously reconcile our investment
projects with our business strategy, their current economic potential and with
opportunities that show up. With this approach it is now possible, that
profitable investment ideas that come up “late” – after the timeframe of the
annual budgeting and investment appraisal process has been finished have still
the chance to be realized. We also do not need to release all projects in
advance. Instead we decide at the “lastest possible date”, which also gives us
more flexibility.
Juergen
Daum: And the other
tools, what was the main benefit they provided?
Rainer
Gunz: The Balanced
Scorecard gave us a broader perspective in performance management than the
traditional budget, which was focusing just on the financial numbers. It gave
us the ability to include the driver perspective. That is to focus on the
driver of business and financial performance, such as intangible assets or
other non-financial business drivers, instead of just on financial results. The
rolling financial forecast was going to solve another problem, which was the
same that Jean-Daniel Luthi already mentioned: to break out of the limited
annual time horizon, that becomes shorter and shorter as you approach the year
end and that narrows step by step your view in performance management and
reduces step by step your options to act. Therefore we said, we want to have a
continuous view on the next eight quarters, to see more than just the actual
year and to have at least two years in front, when we look at our estimation
and when we think about changing our priorities or about corrective actions.
When doing the rolling financial forecast we focus on the most important driver
information such as changes in prices, exchange rates, volumes etc..Then we
calculate forecasts based on a model, by taking these driver informations as
input parameters. That speeds up the process and allows us to forecast every
quarter using a minimal amount of resources.
It’s a straightforward process, much simpler and faster than budgeting.
We have no iterations, result forecasts have not to be approved. Because we
have now every quarter a new forecast, we can better plan for example required
financial funds or liquidity. It also gives us a lot of early warning
information that may trigger strategy adaption.
Juergen
Daum: How does the
fourth tool, benchmarking, fit into that picture?
Rainer Gunz: Benchmarking
means comparison in relative terms. You compare yourself against a peer group –
usually a set of competitors. And that is what enterprise performance is all
about: it’s a relative measure. Investors and other company stakeholders
compare your performance with that of other, comparable companies. If the
market goes up, all companies, for example in the petrochemical industry, will
show better results. So a result that grows equally with the market is not a
fundamental better performance. It’s just a result of the market going up. If
you want to show better performance in the eyes of an investor, you have to
have higher result grows than your competitors have. The same applies vice
versa, if the market goes down. That is the basic principle of benchmarking.
But if investors judge companies that way and evaluate their performance that
way, you should manage your performance internally according to the same
principle. That is the reason, why we are doing benchmarking. We benchmark the
efficiency of operational processes, activities and costs on a different
levelsFor us,benchmarking is also very important to be able to define relative
targets, that move with the environmental developments. It’s the basis to define
solid and acceptable targets, for example the target is, to be best in class or
in the first quartile of your peer group in a specific area. Only with such a
benchmarking approach your are able to define self-adapting targets relative to
the competition. And continuous benchmarking makes differences between your own
view of yourself as a company and from the view of an outsider, from a
competitor or from a market perspective transparent and thus motivates you to
ask some important questions. In addition, benchmarking forms an important
foundation for our other performance management tools and processes: it is an
important measure in rolling financial forecasting to show, if things are
moving in the right direction, it helps us to define challenging targets and
prioritize targets and measures in the Balanced Scorecard, and it helps us to
prioritize investment projects from a market/competitor perspective.
Juergen Daum:
Recently you have introduced a fifth tool, rolling business planning. Can you
explain why and for what?
Rainer
Gunz: The
reintroduction of the 3-years-business plan
could be seen as a response of several requests. When OMV and IPIC became
investors in Borealis they asked for something like a budget that they can use
as input for their own budgeting and financial reporting process. Beside this
the new owners and also the new management had been not satisfied with the
overall performance of the company. Both facts had an effect on our beyond
budgeting approach. But we wanted to avoid to loose all the good effects of our
four tools. So we came up with a solution that serves both requirements:
flexible steering and control of our business within Borealis where it is
necessary, based on the four Beyond Budgeting tools, and a tough management of
internaly managable areas. With the 3-years business plan we also generate an
output that can be used by our owners to oversee their investment and to help
to steer the business form a shareholder value perspective. The business
planning process is integrated with the other four tools: with the financial
estimates produced through the rolling financial forecasts, with cost targets
defined through benchmarking, with financial
and non financial targets and measures that are also used in the
Balanced Scorecard and with the results of our investment management process.
It is a rolling process that looks 3 years ahead into the future. And similar
to the operational plan at Nestle that Jean-Daniel Luthi mentioned, we are also
using the business plan to define annual bonus and incentive targets for
management. So what we tried was, to combine both of best worlds: to combine an
internal Beyond Budgeting management approach that gives us the necessary
flexibility we need in our business, combined with the possibility to oversee
and steer the business from a more high level financial / owner perspective.
Juergen
Daum: Mr. Morldige,
as a BBRT member and chairman, in terms of tools needed, what would you tell
companies, their CFOs and controllers, who want to make the first step in the
direction of Beyond Budgeting? What are the most important tools to begin with?
Steve
Morlidge: That’s the
question I am asked most often. And there is a danger, the danger being, that
you think you can just put in some new tools and that’s it. I often see this
attitude in the consulting community. Consultants are often too desperate to be
able to say, in order to do Beyond Budgeting you need one of these, this
software, or you need a Balanced Scorecard, or you need this. And the people
who head consultants in the Beyond Budgeting area have a lot of pressure put on
them to recommend approaches, to make a business out of it for their companies.
That’s not a good development, because Beyond Budgeting is not about tools.
It’s about – and that was said already several times here – it’s about a
mindset, about trying to move from a fixed view of the world to a dynamic view
of the world. You have to make that move first. It’s like to turn a switch in
your mind, as Rainer Gunz said. If you have done that, the question of tools is
not a big problem any more. But the biggest step is to pull that switch and to
help other people in your organization to understand it and to do the same, to
make that move of perspectives. I believe that most competent finance people,
once you decide to make that transition, they will find ways to make it work,
they will find, develop and implement the right tools. If we can offer some
help then, it may be o.k.. But as I said, fundamentally Beyond Budgeting is not
about tools. However, the easiest place to start in terms of tools, and that is
the experience from the Beyond Budgeting Round Table, is in measurement. It’s
very easy to say, what we will do is moving to annual totals instead of
year-to-date and year-to-go type measures. It’s very easy to say, we will stop
doing variance analysis against plan and may be do variance analysis against
last year or move from variances to time series, e.g. cost control based on
moving averages. These are easy steps to take. And our experience is, that this
starts the process to changing the mind set, particularly if you present it in
the right way. The area where a single change would make the biggest difference
is rewards, but it’s not the easiest. I would like to think as honest human
beings you do the right thing for the business, regardless of how you get paid.
But all the evidence suggests that reward systems work. People do what they get
paid for, even if it’s not the right thing.
Juergen
Daum: In most of
the Beyond Budgeting cases the
concept was mainly targeted at the market facing units, where the need to react
in a flexible way to customers is perceived usually as more urgent – as for
example at Handelsbanken. On the other end of the internal value chain,
production controllers are usually more skeptical. Dr. Gunz, you are the representative of a production site. Do you
think “Beyond Budgeting” works for any kind of unit? What could be the
restrictions?
Rainer
Gunz: Well, indeed,
the production part is maybe more problematic than a market unit. But even here
you can improve flexibility. On the one hand there is the business process from
demand planning, to production and then to selling - that’s the question of
improving supply chain management, of making it more flexible. In enterprise
management, which looks on the company from a general management perspective
and of course also extends to production sites, you can do target setting on
relative, moving targets, instead of having fixed performance targets such as
in traditional budgeting. And that works also for the production people. This
will improve the overall effectiveness, and also the cost function, the quality
etc.. So those parts are working. A challenge might arise from the management
structure. If you have a one-to-one relation between a production unit and a
market unit then I don’t see a lot of problems. But when you have a mixture,
when you have one production unit to which several market unit are linked to,
then you have the problem, that you cannot really divide the responsibility of
the result. And then it becomes a problem. And that is indeed the case within
Borealis. this was for example one area, where we did not have the success that
we had in other parts, for exactly this reason.
Juergen
Daum: Mr. Morlidge,
what is your opinion? Does Beyond Budgeting work for any type of organization
or unit?
Steve
Morlidge: I would say,
in principle, I wouldn’t see any reason why it should not work for any
organization. In fact, our most active members in the BBRT are actually from
the charity sector. That might be surprising for people from the commercial
world, who’s initial response would be, that they don’t see how Beyond
Budgeting could work in a non-profit organization, where, that’s their feeling,
the budget is the only steering and controlling tool. But it works in charities
and quite well. That’s number one. Number two is, in terms of production, if I
look at my company, our production people have transformed the nature of the
way we produced despite budgeting, rather than because of budgeting. They
filled in our budget forms, but if you
are going to a manufacturing plant at Unilever now, you see TPM (Total
Productive Maintenance), which is all about eliminating ALL waste. Not variance against budget, but zero
waste. Another example is Kaizen, continuous improvement - not continuous
improvement provided that it is in the budget, but ‘get better all the time –
with no limit’. If you look on all the significant things that have happened
within the production environment within our business, they have been on the
principle of, get better and beat the competition, not negotiate a budget and
compare yourself to it. Now having said that, I think there are still open
issues, such as transfer pricing, which has been a problem for ever and I don’t
see an immediate solution for it, but my believe is, there is a way out, with
goodwill and the right mindset. My guess is that marketing & sales as well
as production are in general not the problem areas when it comes to Beyond Budgeting.
They feel the pressure to become flexible and customer centric and they are
usually the first to agree to abandoning the fixed annual budget. I think the
problematic areas are more liekly to be internal units where the benefits are
less obvious and there is likely to be a fear of loss of control and power. I
will give you an example which realtes to an internal service unit. We have an
HR shared services center. And they were setting up the budget and budgeted to
recruit five hundred people for their internal customers. But their internal
customers asked them to recruit thousand people and would have been quite happy
to pay for it, but they couldn’t. The budget had already been negotiated, so
they had to ask somebody externally to recruit those people, because the budget
constrains them from building up the resources needed to meet the demand. Once
we allow internal service units like HR to operate without the constraints of
arbitrary budgets we can make itwork anywhere.
Juergen
Daum: Mr. Luthi, do
you think within Nestle you need
different approaches for the market units and the production units?
Jean-Daniel
Luthi: I think on
the contrary. We really want to approach the entire organization, because we are more aiming at aligning and
integrating all the various parts of the organization to basically the single
goals of the business. So I wouldn’t see any difference, on the contrary.
Juergen
Daum: Now, the last
topic I would like to touch in this discussion: change management. Mr. Luthi,
what are your intentions to approach the implementation of “Dynamic
Forecasting” within Nestlé and to initiate the required changes?
Jean-Daniel
Luthi: Well, first
of all, you need the full support of the management. The objective is to change
the mindset, to move to a more dynamic view of the world, as Steve Morlidge
said. It’s not just another reporting tool. So the management must really
understand that. You may have heard from the press that we have the so-called
GLOBE project in Nestle, where we are really reshaping our entire business
processes. We are looking at best
practices and as part of it, we are changing also the software application
tools. We had consultants to help us, and together with IT people and project
management they came in to see me and said, “well you know, according to our
road map it starts with the strategy, and with planning and budgeting. So you
are first. What do you want?” And I said, “sorry, but I just took over not so
long ago and I don’t know”. “So do we set up a team for that?”, they asked. I
said “No. The team is the general management. That’s the team”. If we start to
change our enterprise and performance management approach, we are touching the
culture of business,
that is, how the management wants to
deal with the corporation, how they want to drive the corporation. So you have
to start there. And not everybody sees the need to change right away. You have
to be patient. You have to go and repeat and to discuss and re-discuss these
issues. And even sometimes, when everybody seems to understand and to agree,
you have to come back on it, because you find out the agreement is not exactly
as it should be.
Juergen
Daum: So the first
step is, that you have to create awareness in the management team and that you
have to try to get their commitment. What is the next step?
Jean-Daniel
Luthi: The next
thing we had to do, was to get support in the organization. The reason why you
don’t change the budget or your planning system is: you don’t change it because
it takes time, you are always so busy, you have other priorities and people
think the old process has worked so far so it can still work for another one or
two years. But I thought that this was wrong. We have really to try to tackle
it. So we had to get support from the people from the business. So the next
step was, to present the idea to the heads of finance/control of our market
units. In the presentation I started to name all the problems we had with the
current system. And they all agreed. They all agreed that we have to change. I
said not more. It didn’t promise anything. I didn’t say what we are going to
do. But we had a common agreement that we need to change. Afterwards we started
to work on it and the second presentation was made again to management to keep them
in the loop and to get their commitment. Then we presented our new concept to
what we call our top 15 large market heads, people who are running businesses.
And they also agreed. And then somebody proposed, and that is a classical
thing, “well, I think we need a pilot market” - because then you can delay it a
little bit. But what was good was, that somebody immediately raised his hand
and said, “yes, I’ll be a pilot market”. His own boss looked at him and said,
“Hey, we haven’t discussed it yet. We don’t know where we are jumping in to”.
But because the CEO was present, he accepted the proposal and we had our first
pilot market. We have now four pilot markets and the three other pilot markets
came then voluntarily, which was really refreshing for me.
Juergen
Daum: What else was
critical in the process, beside the fact that you have to get full management
support?
Jean-Daniel
Luthi: You have to include the people from the business in
the decision making process. We therefore again made a presentation to all the
market heads, to the business people. And we told them, that at the end of the
presentation we will have a working group meeting, with some of them. And we
said, we will take the decision to go or when to go based on their
recommendation. And they were highly favorable. It was surprising, how
enthusiastic they were. So you have to really understand that this project,
what we now call Dynamic Forecasting is not about financial reporting. It’s
about to manage the business in a much more flexible and dynamic way. So you
have to talk to the business people and they are usually in favor of getting
rid of the old fixed annual budget and to replace it through something more
appropriate. They often see the need to change faster and they perceive it as
more urgent than central staff people do. And in fact, where I had resistance,
was mainly in so called head quarters, from those who are remote from the
business. . So business people are
usually much more aware of the problems of the budget than headquarter staff.
This is because they have to introduce new products and they have to plan
promotions in a constantly changing market environment. On the other hand they
are already starting now, in June, to deal with the retailers for next year.
And they want this to be captured, to be taken into account somehow. So who
should really drive the change process? So basically I believe that
finance/control people should not drive this process. But the problem is, if
you put the finance/control people aside and then ask, “who else?”, you are
usually back to finance/control. Why? May be because we are more used to
systems, more used to be agent of change, to communicate, we have a strong
internal network. But even if finance is running the project, you have to make
sure that it is not be perceived as being a finance project, that it is
regarded as an implementation project
for new financial tools. That’s a key issue.
Juergen
Daum: Dr. Gunz,
based on your experience at Borealis, what would you recommend to other
companies who want to become more flexible, who intend to implement some type
of “Beyond Budgeting” concept?
Rainer
Gunz: Well, when
you are looking for a change in budgeting, then you have to think about, what
you want to change. According to the BBRT Beyond Budgeting model you have these
two areas: one is the leadership part, the leadership principles, and the other
is the performance management. When you only want to change performance
management, then the focus is usually on changing your tool box, on developing
and implementing new tools - that’s the easier part. I would say that’s an easy
going. But when you want to go one step further, to really empower people, to
have a different leadership model behind, then you are entering an area, where
things become more complex. Then you have to deal with the culture of a
company, with the soft skills. Usually you cannot fully separate the two areas.
We mentioned it earlier, also changing the tools in order to become more
flexible requires some changes on the behavioral side, in the mindset. I fully
believe that an approach from the leadership model can create much more
benefits than just improving the tool set. But you have to be aware that this
is a hard job and such a fundamental change is not easy and it will take some
time. And it will take at least the senior management to support and to drive
the change process. But a good start will be to move from fixed target to
relative target.
Juergen
Daum: Mr. Morlidge,
you mentioned earlier, in your presentation, that trust is one of the most
important things it takes to move away from the budgeting model, from the fixed
performance contract. I think that might be the biggest challenge at all in a
Beyond Budgeting project. Many people say, that traditional budgeting is nourishing
mistrust in the organization. So if you have a typical budget organization,
where people so far have been used to gaming and where mistrust is present all
the time, how do you move away from that to an organization that can work on a
trust basis?
Steve
Morlide: In order to
answer that question, I will tell you a story from my private life. My
organization there is my family. I have three children. The eldest is nineteen,
the youngest is ten, and my middle one is sixteen. We have a very relaxed household,
with a very few rules. We just rely upon the kids to do the right thing, to
help without being asked and all that kind of things. But my middle daughter is
different temperamentally to the other children. Now for the eldest and for the
youngest, we give them freedom and they don’t abuse it. So for us, control is
not a problem, because we know, we can rely upon them. My middle daughter
however, is, as I said, different and it has got to a point, this weekend
actually, where my wife was getting so upset with my middle daughter, that we
had to have a family conference. I am telling you this not to unburden myself
of my family problems. But for me, that illustrates the issue. Trust is about
letting go. But then, when somebody abuses that trust, as my daughter did, you
have to tackle it. And I tell you, I hate having these conversations, because
you have to sit down with her and tell her some things that she doesn’t like.
When you love your children, you hate doing these things. But we had to do it.
And we drew up an agreement about what she will do and what she will get from
us and we have now to police that agreement and hopefully she will abide by
that agreement and so one day we will tear it up and put it in the bin. So for
me, establishing trust, is about letting go, accepting the consequences, but
when those consequences are negative, taking action, but hopefully
rehabilitating the child rather than throwing her out to the street. So, the
only way for me to establish trust is to start. Start, let go, and react to
what happens.
Jean-
Daniel Luthi: But sometimes
wrong behavior is also a question of personalities and the fit of these
personalities with the rest of the organization. If you put for example a
general manager with a certain style in an organization to lead it for a few
years and then you replace him by somebody very capable but with a total
different style, may be the organization is not going to function the way it
used to and people start to “misbehave”. So it’s not doing wrong things, but
it’s because the organization was used to a different personality with a
different style. So sometimes it’s not about trust, but about fit of
personality of a general manager with the rest of organizations that create
behavioral disruptions. We should be aware of this issue as well.
Steve
Morlidge: I think you
are right. That was my little daughter, which is different compared to my other
children.
Jean-Daniel
Luthi: So you have
to care, to care about the organization and how people may fit in or not.
Juergen
Daum: I am afraid
that I have to cut of now for time reasons this very interesting discussion.
Thank you very much Mr. Luthi, Dr. Gunz and Mr. Morlidge for being with us.
1 Juergen H. Daum is an internationally recognized expert, author,
speaker and consultant in enterprise management. As Chief Solution Architect at
SAP AG he is advising enterprises and business managers in:
strategy/organizational design for finance, financial and management
accounting, controlling and enterprise management, management information
systems and financial IT solutions. He was working with the Beyond Budgeting
Round Table since a couple of years and he is actually helping several SAP
customers 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 anagement topics and he is the author of the book
"Intangible Assets and Value Creation" (website: www.juergendaum.com)
Additional Resources:
"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
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen Daum
Website of the Beyond Budgeting Round
Table
Juergen Daum’s Beyond
Budgeting Information Center
SAP’s White Paper “Beyond
Budgeting”, which was co-authored by colleagues at SAP AG,
Juergen Daum, and the Consortium for Advanced Manufacturing International 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)
Intangible Assets and Value
Creation – a book from Juergen Daum, focusing on a new enterprise model and
on the new management system “beyond budgeting” for the new knowledge and
intangible assets based economy of today, comprising many examples and case studies.
It describes the new environment and its consequences for businesses, the rules
that can be extracted from this understanding for the design of a new
management system, and it develops a framework for a new management system and
describes its elements, as well as how a company can set it up and bring it to
live.
Why
today's accounting, controlling and management systems fail - in an
interview with sapinfo.net, Juergen 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:
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
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