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Beyond Budgeting on the move – report from
the First Annual Beyond Budgeting Summit in London, 1-2 July 2003
News categories: Enterprise and business strategy, Finance and accounting, Performance management and controlling, Information Technology
The Beyond Budgeting Management
Model
The Beyond Budgeting Round Table
(BBRT)
The First Annual Beyond Budgeting
Summit
Additional
Resources (updated Jan 2005)
“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
|
Today
we can sense a growing dissatisfaction among CEOs, CFOs and business managers
and across the whole business community with the traditional general management
approach, which is based on
budgetary control - with a
fixed annual performance
contract, fixed action plans
for an entire year and a higly
politcal budgeting process
dominated by "gaming"
as the result. Managers
increasingly doubt if today's pervasive budgeting culture
in many large organizations
can support
successful enterprise management
and robust and proper
corporate governance. Jack Welch, former CEO of General Electric, once described this with his often quoted statement: “The budget is the
bane of corporate America. It should never have existed. It is an exercise in
minimalization. You always are getting the lowest out of people”[1].
What he was meaning was, that the budget based management systems will lead always to the lowest targets
through the gaming it introduces into a company’s management culture. In
addition, because the budget is functioning as a fixed annual performance
contract, it forces managers to stick to the budget, no matter what changes,
opportunities and threats occur on the market.
Therefore,
the annual budget, which represents the core of the traditional enterprise
management systems, has become in today’s dynamic market environment often a
hurdle rather than an enabler for corporate success. While the budget above all
focuses managers and controllers on keeping budget targets and limits that were
agreed months ago, in today’s dynamic economic environment increasingly the
opposite is expected of companies. By adapting operational plans and
activities, managers and their companies should be able to react more quickly
to market changes. They shouldn’t be restricted to an artificial and too long
period such as the fiscal year to reconcile plans with the business environment
and to adapt them. On the other hand, the fiscal year seems at the same time to
be a too short-term time horizon for planning and steering some major
activities of today’s companies. Most companies are more and more engaged in
activities such as long term R&D or brand and relationship building with
business partners and potential customers in new markets that require a
constant outlook beyond the border of the fiscal year. In addition, the
budget-based performance management system is too inwardly focused. It guides
managers to look in the wrong direction and to pay too much attention to input
factors such as costs and nearly no attention on output factors, such as
customer satisfaction or in general, what a company is able to achieve with its
inputs on the market compared with its peer group. Budgets are also often blamed
to stimulate a culture of mistrust. Every manager tries to negotiate the lowest
target for him- or herself, turning the budgeting process into a big annual
gaming ritual, which is adding no value but is rather destroying value.
Managers are putting cost “buffers” in their budgets and even tend to
manipulate the actuals if it seems that they will not be able to meet their
budget. That is the reason why Jack Welsh named the budget “the bane of
corporate America”. No wonder, that many companies are looking for improving
the traditional budget-based way of steering and managing their business. In a
recent survey, conducted by The Hacket Group among European companies, 69% of
the companies reported that they are still using traditional budgeting (3% have
already no budgets, 28% use a reengineered approach), but that most of them
intend to replace it within the next 2 years through a reengineered approach or
even abandon budgeting at all. They have realized that they have to tackle the
budget – it is not enough to add new tools for e.g. strategic management.
Many
innovations in enterprise performance management in the last couple of years
are failing to achieve its goals. In reality most of the new tools and
techniques that companies were trying to develop and implement were not fully
working. Take the Balanced Scorecard as an example. The Balanced Scorecard was
designed to enable managers to map and describe their strategy, to balance
short- and long-term goals, initiatives and measures, to align the actions of
the ‘top floor’ and the ‘shop floor’, and to focus on the real drivers of
financial performance. As most managers will recognize, while these issues are
partly related to the financial accounts like marketing or fixed costs, they
are much more concerned with how well firms are meeting their customers needs,
how well their internal processes are organized and how well they are preparing
for the future. In other words, it says something about how successful the firm
is at innovation. This has created in many organizations a framework for a more
flexible strategy management process geared much more to value creation. But if
the budgeting system and culture remains in place, there is no way that the
strategic management process will really change the operational manager’s
day-to-day behaviour in the company. Managers will remain focused on achieving
short-term financial results even if this involves cutting key ‘strategic’
investments in people development, training, and customer service. You can have
the best Balanced Scorecard possible, but if you still use your old budgeting
system and a fixed annual performance contract to commit managers to fixed
plans and targets, you will fail to achieve the objectives of the Balanced
Scorecard and you will fail to become a more strategy-focused and adaptive
organization.
The Beyond Budgeting Management Model – result of the
work of the Beyond Budgeting Round Table (BBRT)
The
mission of the Beyond Budgeting movement and of the Beyond Budgeting Round
Table (BBRT – see http://www.bbrt.org/)
– it’s initiator, is to overcome the limits of the budgeting based general
management model. The BBRT is both a research project and an active network of
companies who are sponsoring the continuing research and are now at various
stages of implementing the model. Since its foundation in 1997 in the UK, the
BBRT has analysed 25+ cases of companies that manage without a fixed budget and
that are using a different more flexible management model that empowers
frontline people and managers instead of restricting and “commanding” them by a
centrally controlled budget. The aims of the BBRT are to develop a management
model “beyond budgeting” and to help its members to implement it. It’s work
over the past five years has ended up in the development of a “Guide”, based on
a set of the Beyond Budgeting principles (6 “Leadership Principles” and 6
“Performance Management” principles – see below) and other key requirements for
success. “The Guide”[2]
will help member companies to design and implement budget-free performance
management systems that are in tune with today’s competitive conditions, and
gain a real source of competitive advantage.
Compared
with the traditional management model, Beyond Budgeting has two fundamental
differences. First, it is a more adaptive way of managing. In place of fixed
annual plans and budgets that tie managers to predetermined actions, targets
are reviewed regularly and based on stretch goals linked to performance against
world-class benchmarks, peers, competitors and prior periods. Second, the
Beyond Budgeting model enables a more decentralized way of managing. In place
of the traditional hierarchy and centralized leadership, it enables decision-making and performance accountability
to be devolved to line managers and creates a self-managed working environment
and a culture of personal responsibility. This leads to increased motivation,
higher productivity and better customer service. Individually these two main
features can produce significant benefits, but it is in their combination where
its real strength lies.
The
BBRT has identified for each of the two foundations of the Beyond Budgeting
model – adaptive processes and devolved decision-making – six principles. The
six principles of managing with adaptive performance management processes are:
1. Set stretch goals aimed at relative
improvement based on external benchmarks;
2. Base evaluation and rewards on relative
improvement contracts with hindsight;
3. Make action planning a continuous and
inclusive process;
4. Make resources available as required;
5. Coordinate cross-company actions
according to prevailing customer demand; and
6. Base controls on effective governance
and on a range of relative performance indicators.
The
overall effect of the switch to Beyond Budgeting is a performance management
process based on a relative improvement contract rather than on a fixed
performance contract. It assumes that it is not wise to make managers commit to
a fixed target and then control their future actions against it when in fact
the world is constantly changing. The implicit agreement is that executives
will provide a challenging and open operating environment and that employees
will deliver continuous performance improvement using their knowledge and
judgement to adapt to changing conditions. It is based on mutual trust, but it
is not a soft alternative to the fixed performance contract. High visibility of
individual and team performance offers no hiding place. Manages must perform to
high levels of expectations – relative to peers – or face the consequences. The
result of applying the adaptive performance management principles includes the
setting of more aspirational goals, reduced gaming, more ambitious strategies
and fast response, less waste, improved customer service, and a greater focus
on learning and ethical behaviour.
Graph 1a: The new
Beyond Budgeting Performance Management Paradigm
Graph 1b: The new
Beyond Budgeting Performance Management System
And
the six principles of radical decentralization (the new leadership model) are:
1. Provide a governance framework based on
clear principles and boundaries;
2. Create a high-performance climate based
on relative success;
3. Give people freedom to make local
decisions that are consistent with governance principles and the organization’s
goals;
4. Place the responsibility for value
creating decisions on front-line teams;
5. Make people accountable for customer
outcomes;
6. Support open and ethical information
systems that provide “one truth” throughout the organization.
Consequences
for the leadership model in switching to Beyond Budgeting: The
delegation of decision-making and spending authority has always been one of the
key functions of budgeting. However, this delegation usually occurs strictly
within a regime of compliance and control. It differs significantly from the
approach taken by Beyond Budgeting organizations such as Svenska Handelsbanken
which have gone much further and transferred power from the centre to operating
managers and their teams, vesting in them the authority to use their judgement
and initiative to achieve results without being constrained by some specific
plan or agreement. Thus devolution of responsibility is about enabling and
encouraging local decisions, not dictating and directing them. The result of
applying the six principles of managing with a devolved organization include: a
clear governance framework leading to the acceptance of local decision making
by front-line teams throughout the organization; a high-performance climate
leading to sustained competitive success; the freedom to decide leading to
innovation and responsiveness; team-based responsibility resulting in a greater
focus on creating value and reducing waste; customer accountability leading to
greater commitment to satisfying customers profitability; and finally, an
information culture based on openness and “one truth” leading to more ethical
behaviour.
Graph 2: The new Beyond Budgeting Leadership Model
It
is important to understand that these principles represent the ‘best of the
best’ common practices of the organizations that the BBRT has visited and
reported upon. What makes Beyond Budgeting different from other management
models is that it provides a comprehensive management model that does not just
look at one area or tool while overlooking others, rather it seeks to ensure
that all the pieces of the management model are coherent with each other. It is
because it is a coherent model in which all of its components work in harmony
that it can produce outstanding and sustained success (you find more
information about the Beyond Budgeting model at Juergen Daum’s Beyond Budgeting
Information Center).
The Beyond Budgeting pioneers
How
does it work in practice – managing without budgets? Svenska Handelsbanken, a
Swedish bank with branches all over Northern Europe and in Great Britain, has
shown that it is possible. They have had no budgets, no absolute targets, and
no fixed plans since 1970. Nevertheless, it is one of the most successful banks
in Europe and has outperformed all Scandinavian competitors with regard to the
most important performance measures of banks such as return-on-equity,
cost-to-income ratio and customer satisfaction
– and this consistently over 30 years. And the enterprise management
system at Svenska Handelsbanken works in a completely different way to how it
typically is in many companies today: At the bank, controlling is not done by
the controllers but by the managers and employees on the spot. More than 50% of
Handelsbanken staff has some form of lending authority. The business
responsibility is decentralized to a great extent in the branches that are
managed as profit centers. The targets for the profit centers are defined relatively,
as relative targets to the market. Performance measurement takes place using
benchmarking with the competitors, where possible. Profit center managers have
free access (within certain agreed performance parameters based on the
cost-to-income ratio) to resources ad-hoc when they are needed. Internal
service areas must “sell” their services competitively to the operational
units, there is no “political” pricing. Therefore, the focus at Svenska
Handelsbanken is on the market or beating the competitor, and producing the
necessary flexibility for this - not on
meeting a budget agreed on in the past. Two elements are of considerable
importance that create the prerequisite for the high level of freedom of
operational managers and employees: The management culture in the company and
the availability of a cleverly devised information system as the basis for
performance management processes. This system determines the total performance
of the branches on the basis of a few KPIs and makes this information available
to all managers at the same time. In addition, customer behavior is recorded
and analyzed in detail and customer profitability is monitored regularly. As a
result, it is always possible for every branch manager to make a direct
comparison with colleagues. The company uses this to encourage sporting,
internal competition with performance league tables. The clues to
Handelsbanken’s exemplary performance can be found not in the use of modern
management tools - though it used activity-based costing principles long before
they were developed elsewhere - but in the management model itself. A flat,
simple hierarchy with few controllers; well-trained staff; no budgets to act a
barriers to cost reduction; and a few simple-to-understand measures - these are
all factors that contribute to maintaining a simple organization and a low cost
base. In other words, responsible people with the right information don’t need
much support. The Handelsbanken management model introduced by Dr. Jan
Wallander, who became CEO of the bank in 1970, is predicated on the belief that
the only sustainable competitive advantage available to a firm in a
fast-changing world, and especially in a service business, lies with its people
– especially their creativity, insights, and judgements – a model in vivid
contrast to the numbers-driven alternative so prevalent elsewhere (see interview with
Lennart Francke,
actual CFO of Svenska Handelsbanken and the report on his presentation at the
summit below).
Another
pioneer of Beyond Budgeting is Borealis. Borealis, which is a leading
polyolefin plastics producer in Europe today, was founded in 1994 trough the
merger of the petrochemical businesses of two Nordic oil companies, Neste of
Finnland and Statoil of Norway. The petrochemical industry has always been a
very cyclical business challenging companies with fluctuating raw material and
sales prices. The traditional budgeting approach was very badly prepared to
deal with such an environment. So Borealis took the post-merger phase and the
change spirit, which was predominant at that time, as an opportunity to abandon
budgeting. Thus, Borealis introduced in 1995 an alternative more flexible
management system that suited its specific business management requirements
better, than the traditional budgeting approach. The new tools helped Borealis
to become more flexible in enterprise management. Today Borealis is owned by
Statoil (Norway), OMV (Austria), and IPIC (Abu Dhabi). The new owners brought
some additional changes to the performance management tool set at Borealis
namely the introduction of a fifth tool called “Business Planning” – a high
level financial plan targeted towards shareholder value management that serves
as the interface for the communication with the owner company OMM (see the
report on his presentation at the summit below).
Other
cases include Carnaud Metal Box (CMB), an Anlgo-French packaging company, which
was transformed under the leadership of Jean-Marie Descarpentries from a
dept-laden company worth only $19m in 1982 to a market value of $3bn in 1989.
By abandoning the fixed performance contract and encouraging business unit
teams to set stretch targets – based on relative performance (and disconnected
from the rewards system) – he achieved what Fortune Magazine described as one
of the best European corporate transformations of the 1980s. Later, when
Descarpentries was recruited from CMB to transform the French government owned
mainframe computer company Groupe Bull in the early 1990s, he deployed the same
management principles that the used so successfully at CMB. Again the
transformation was remarkable. He turned around Groupe Bull from making heavy
losses into achieving respectable profits. The change was such that the French
government was able to privatise the company in 1997. After abandoning the
budgeting model in 1997, Fokus Bank, a small Norwegian bank, transformed itself
from the worst performing bank in Norway with the highest costs to the best
performing bank with the lowest costs and the highest
return-on-capital-employed. Ahlsell, a Swedish wholesaler of heating, plumbing,
refrigeration, and electrical products abandoned budgeting in 1995. A fast open
information system with a strong emphasis on relative performance now provides
the necessary controls for self-governance by local units. Ahlsell is now the
sector’s most profitable company in Sweden – a major turnaround from its
position in the early 1990s. Other cases are SKF, IKEA and Volvo Cars in
Sweden, Borealis in Denmark, Boots and Sight Savers (a charity) in the UK, and
CIBA Vision in the US. A number of other organizations are now making progress.
Deutsche Bank, UBS and Schneider Electric are among this group.
The Beyond Budgeting Round Table (BBRT)
The
BBRT has been sponsored and funded since 1998 to date by over 70 companies,
mostly large European multi-nationals that include companies like: include:
Anheuser Busch, Barclays Bank, Boots The Chemist, Clariant International, Coors
Brewers, Diageo, Deutsche Bank, DHL, Novartis, Royal Mail in the UK, Scheider
Electric, Siemens, SKF, Standard Life, Texas Instruments, The World Bank, UBS,
Unilever Best Foods and many others.
The
BBRT’s work is driven mainly by the interest of its member companies. The first
focus of BBRT’s work and their researchers Jeremy Hope and Robin Fraser was to
identify those companies that had abandoned the budgeting model, visiting them,
and through case reports and presentations, reporting back to the BBRT members,
who were funding their research with their membership fees. After this first
phase, by extracting best practices, they gradually pieced together a coherent
set of common principles – the 12 principles that form the framework of what
has since become the Beyond Budgeting model. This was the second phase. Having
now successfully finished the two initial phases of their mission, the BBRT is
now focusing on implementation. That includes for example the development of a so
called web-based diagnostic tool: you can log on to a diagnostic tool at BBRT’s website
and, guided through a questionnaire, evaluate against your peers the
effectiveness of your performance management model according to the Beyond
Budgeting principles. It has taken a few years for many BBRT members to move
from being curious observers to committed implementers. They needed to be
convinced by the evidence. The founders of the BBRT believe that their step-by-step
approach to producing a set of principles, then a diagnostic that helps them to
create their internal case for change, and other implementation guides is the
right approach to move forward.
The First Annual Beyond Budgeting Summit: Culmination point
of the Beyond Budgeting research project of the last 5 years and launch pad for
the next phase focused on “going public” and on “spreading the news”
When
the BBRT became operational early in 1998 it focused on research and on
developing the Beyond Budgeting model by working with its members. There hadn’t
been much activity since then until recently that promoted the Beyond Budgeting
model to a broader community beyond its member companies – except for some very
few articles that Jeremy Hope and Robin Fraser published in finance magazines.
This has changed begin of 2003: in February they published an article in
Harvard Business Review to kick-off a broader awareness for the Beyond
Budgeting model (Jeremy
Hope and Robin Fraser: Who Needs Budgets?, in: Harvard Business Review,
February 2003) and in April their book came to market “Beyond
Budgeting: How Managers Can Break Free from the Annual Performance Trap”
(Harvard Business School Press), which is a summary of the outcome of the
first five years of the BBRT research program.
The publication of their book and article in Harvard Business Review
this spring generated a lot of awareness about Beyond Budgeting, particularly
in North America. In parallel the European BBRT, the nucleus and initiator of
the Beyond Budgeting movement, has set up ‘sister’ BBRT’s in North America and
in Australasia. The First Annual Beyond Budgeting Summit, held on 1-2 July 2003
in London can therefore be regarded first as the culmination point of the
development work of the past 5 and a half years of the BBRT (in fact it was the
first public event of the BBRT) and as a launch pad for spreading the news
further and for entering the “marketing phase” of the Beyond Budgeting
movement.
The
two day conference was packed with speeches from the Beyond Budgeting pioneers,
from BBRT members who followed them, from the founders of the BBRT and from
other thought leaders and experts (program of the summit):
In
his opening presentation, Jeremy Hope, BBRT Research Director,
summarized the journey of the BBRT during the last five years. The motivation
to start the BBRT research project was to overcome the limitations of the
traditional performance management process (which is based on budgeting) of
which 90% of firms are dissatisfied. One reason for the need for change
according to Jeremy is, that the environment in which companies operate today
is so much different from the one in which the budgeting model was developed 80
years ago. Another reason is, that budgeting has developed in most companies
from a once helpful support process into a pervasive budgeting culture that
undermines true performance of modern organizations:
-
Budgets do not work in
turbulent markets and are ineffective tools in times of rapid change
-
Budgets stimulate the wrong
behaviour and encourage even unethical behaviour as managers do anything to
meet the numbers
-
Budgets are divorced from
strategy and focus on functions & departments rather than on strategy and
value
-
Budgets are too expensive and
do not create much value: budgets absorb over 20% of total management time; 77%
of time does not add value
The
mission of the BBRT was thus to develop a new model that helps companies to
steer and manage in the information age. Whereas in the industrial age business
models where based on the “plan-make-and-sell” paradigm (because of steady,
continuous change) and hard assets drove value creation, in the information age
business models have to be based on an “anticipate-and-respond” paradigm
(because of unpredictable, discontinuous change) and soft/intangible assets
drive value creation. This requires other steering tools but, more important,
also an other leadership model. Here are the main differences between the old
budget based on the new Beyond Budgeting model as outlined by Jeremy Hope:
|
|
Traditional (budget based) Management Model |
Beyond Budgeting Management Model |
|
. Target & rewards |
- Incremental targets - Fixed incentives |
- Stretch goals - Relative rewards |
|
Planning & controls |
- Fixed annual plans - Variance controls |
- Continuous planning - KPI’s & rolling forecasts |
|
Resources & coordination |
- Pre-allocated resources - Central coordination |
- Resources on demand - Dynamic coordination |
|
Organization & culture |
- Central control - Focus on managing numbers |
- Local control of goals/plans - Focus on value creation |
A
range of companies have undergone already significant change or have started
recently in order to implement a new Beyond Budgeting model. Jeremy named
companies like Svenska Handelsbanken, Fokus Bank, Unilever, IKEA, Norsk Hydro,
UBS, Schneider Electric, Deutsche Bank and others.
At
the center of the Beyond Budgeting model that these companies have introduced
or are still implementing are not any more central headquarter staff and
managers, who “steer” and control front line people, but the front line people
themselves with the freedom and capability to act. This together with adaptive
performance management processes helps to establish in a company a culture of
empowerment and entrepreneurship - in contrast to a culture of mistrust and
bureaucracy, which the budget based model often stimulates. This leads to more
innovative strategies, lower costs, loyal and profitable customers and more
ethical behaviour – what all drives shareholder value creation. The key to
success is, that the Beyond Budgeting model introduces coherence in changing a
company’s general management concept. It doesn’t just focus in the change
process on specific tools or just on a few selected areas – such as performance
measurement for instance -, which is one of the major reason why many
initiatives to improve the management system have fallen short in recent years
in many companies. Instead, the Beyond Budgeting model represents a management
model that brings coherence to all 4 key areas of a companies general
management systems and makes sure that they fit to each other: target &
rewards, planning & control, resources & coordination and organization
& culture.
The
BBRT helps companies to evaluate, implement, and benefit from the Beyond
Budgeting management model. To facilitate the first step in the process, the
BBRT introduced recently the so called BBRT diagnostic and survey. Interested
companies can log on to the BBRT website (link to the BBRT diagnostic and survey),
answer a list of questions and thus benchmark their existing management model
and processes with the results of other companies in the BBRT’s data base. They
receive a detailed feedback report that identifies their problem areas and
helps them to understand, where and why they need to change/improve their
management model. To create the internal case for change, including a vision
for a new model, definition of plans for new processes and concepts etc., the
BBRT offers membership in one of the regional BBRTs and various services (see
graph 3 below).
Graph
3: How the BBRT supports companies in introducing a Beyond Budgeting management
model (source: Jeremy Hope)
Lennart Francke, CFO of
Svenska Handelsbanken (see interview with
Lennart Francke), who replaced Jan Wallander at the conference,
reported in his presentation about Handelsbanken’s Beyond Budgeting journey, a
retail bank that abandoned budgeting already in 1970. At the core of
Handelsbanken’s management model lays the decentralised organization: most of
the decision power has been transferred to branch managers and 50% of all
employees are authorized to grant credits. This allows Handelsbanken to react
fast to customer requirements and new market trends. Lennart Francke reported,
that the “budget less” steering system was more a consequence from the
decentralized organization model than the aim itself. The real aim was to
create a more productive and agile organization that allows employees and
managers to use their full potential. Therefore Lennart Francke was questioning
the approach that Jeremy Hope mentioned, that companies could start first by
introducing adaptive performance management processes and move afterwards to a
devolved organization model. For Handelsbanken this was not an option, because
they see both areas, the performance management and the leadership model as
tightly interconnected. Splitting them and starting with one part only, he
said, is like making the decision to switch from left hand traffic to right
hand traffic by saying: let’s start with the lorries first.
Gunnar Haglund, Finance Director of Ahlsell AB, a highly successful
Swedish distributor of heating, plumbing and electrical products, talked about
how Ahlsell scraped the budget in 1996 along with a major reorganization of the
company. The decision was made after he read a book from Jan Wallander from
Handelsbanken. The reorganization turned the coporate pyramid upside down, like
at Handelsbanken, and set focus on decentral sales offices while centralizing
back-office task like admin, IT and logistics into central shared services.
Instead of budgets, they used from then on quarterly rolling forecasts and a
set of KPI’s to steer the company. A side effect of the new organization
structure was, that the integration process after an acquisition, something
that happens quite often at Alshell, became a more straight foreward and faster
process: all support functions become part of the central shared service center
by not only transferring the people but by assessing their old processes if
there are some “best practice” the company was not aware of yet and which it
could add to their own practice; sales units became part of the business units
which are in charge to run the sales units within Ahlsell. Ahlsell has, like
Handelsbanken, only a small head office relying much on web based self services
by front line managers (e.g. in the area of financial reporting). As
Handelsbanken they are using legue tables, that is ranking lists to identify
each month the best performers.
Thomas
Boesen from Borealis A/S, Denmark, one of the largest European polyolefin
plastics producer headquartered in Copenhagen, Denmark, is one of the architects of the Borealis
Beyond Budgeting model. He reported about their experience with it during the
last 8 years: Borealis was founded in 1994 trough the merger
of the petrochemical businesses of two Nordic oil companies, Neste of Finnland
and Statoil of Norway. The petrochemical industry has always been a very
cyclical business challenging companies with fluctuating raw material and sales
prices. The traditional budgeting approach was very badly prepared to deal with
such an environment. So Borealis took the post-merger phase and the change
spirit, which was predominant at that time, as an opportunity to abandon
budgeting. Thus, Borealis introduced in 1995 an alternative more flexible
management system that suited its specific business management requirements better,
than the traditional budgeting approach. When Borealis decided to skip
budgeting, the vision was not, just to abandon it and then have nothing.
Instead they asked first, what had been the purposes of the budget for them,
what had been the problems with the budget approach, and then they tried to
develop tools, which are better suited to meet these purposes. One of the first
things that became very clear was, that they 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 they introduced rolling
financial forecasting that looked beyond the fiscal year. They implemented it
as an independent tool and process, independent from target setting and
performance management. In general they split 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. The new tools
helped Borealis to become more flexible in enterprise management.
Other speakers at the summit included:
-
Adrian
Poffley, Finance Director of Sight Savers, a UK charity, which is struggling on the one side
with fluctuating revenues and on the other side the need for stable ongoing
investments in projects in developing countries. The traditional budgeting
approach was not able to cope with this contradiction and that led Adrian to
join the BBRT and to introduce in his company a Beyond Budgeting steering
system
-
Steve
Player, BBRT Director North America, who talked about how budgeting and the budgeting
culture stimulates unethical behaviour of managers in companies
-
Lesley
Jackson, On-trade Finance Director, Scottish Courage Ltd. spoke about the behavioural effects of
managing without budgets
-
Robin
Fraser, BBRT Director International Operations, talked about the role of tools in the Beyond
Budgeting Model. He examined six tools and how they support front line managers
in an adaptive and decentralized organizations. These six tools included:
informations systems and rolling forecasts, CRM, ABM, shareholder value models,
benchmarking and the Balanced Scorecard
-
Jürgen H. Daum, expert on enterprise performance
management concepts, management consultant, Senior Business Consultant at SAP
AG, and a business associate to the BBRT talked about the role of information
systems in a new approach to enterprise/general management in the 21st
century – see graph 4 below (view
here his presentation – pdf as winzip file)
-
Janathan
Chocqueel-Mangan, former UK director of the Balanced Scorecard
Collaborative talked about the role of the Balanced Scorecard in the Beyond
Budgeting model
-
Barbara
Blaber, Beyond Budgeting project leader, Coors Brewers, UK shared her experience of the last five
years in developing the Beyond Budgeting project within Coors
-
Barbara
Heen from Deutsche Bank AG, Frankfurt/Germany, talked about the forecasting and planning project
at Deutsche Bank
-
Cathy
Jorgensen, Director of Performance Management, Fortis Healthcare, USA, talked about the new approach to
performance management at Fortis Healthcare and how she has set up the new
performance management department and abouts its role in the company
-
Preston
Steen, IBM Business Consulting Services, UK, presented the IBM Global Beyond Budgeting Survey
that is based on the BBRT diagnostics
tool
-
Steve
Morlidge, change leader for Dynamic Performance Management at Unilever
UK, presented his vision of Beyond Budgeting in the Unilever
Group (called Dynamic Performance Management within Unilever) and Unilevers
implementation approach.
Graph 4: Today we need a new
balance between a people centric and process centric approach in enterprise
management and in how we design information systems – extract from Juergen
H. Daum’s presentation at the First Annual Beyond Budgeting Summit
The mission of
the Beyond Budgeting movement and of the Beyond Budgeting Round Table (BBRT –
see http://www.bbrt.org/)
– it’s initiator, is to overcome the limits of the budgeting based general
management model. The BBRT is both a
research project and an active network of companies who are sponsoring the
continuing research and are now at various stages of implementing the model.
Since its foundation in 1997 in the UK, the BBRT has analysed 25+ cases of
companies that manage without a fixed budget and that are using a different
more flexible management model that empowers frontline people and managers
instead of restricting and “commanding” them by a centrally controlled budget.
The aims of the BBRT are to develop a management model “beyond budgeting” and
to help its members to implement it. What makes the Beyond Budgeting model
different from other management models is that it provides a comprehensive
management model that does not just look at one area or tool while overlooking
others, rather it seeks to ensure that all the pieces of the management model
are coherent with each other. It is because it is a coherent model in which all
of its components work in harmony that it can produce outstanding and sustained
success (for more information on Beyond Budgeting see Juergen Daum’s Beyond Budgeting
Information Center).
When the BBRT became operational early in 1998 it focused on research and on developing the Beyond Budgeting model by working with its members. There hadn’t been much activity since then until recently that promoted the Beyond Budgeting model to a broader community beyond its member companies – except for some very few articles that Jeremy Hope and Robin Fraser published in finance magazines. This has changed begin of 2003: in February they published an article in Harvard Business Review to kick-off a broader awareness for the Beyond Budgeting model (Jeremy Hope and Robin Fraser: Who Needs Budgets?, in: Harvard Business Review, February 2003) and in April their book came to market “Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap” (Harvard Business School Press), which is a summary of the outcome of the first five years of the BBRT research program. The publication of their book and article in Harvard Business Review this spring generated a lot of awareness about Beyond Budgeting, particularly in North America. In parallel the European BBRT, the nucleus and initiator of the Beyond Budgeting movement, has set up ‘sister’ BBRT’s in North America and in Australasia. The First Annual Beyond Budgeting Summit, held on 1-2 July 2003 in London can therefore be regarded first as the culmination point of the development work of the past 5 and a half years of the BBRT (in fact it was the first public event of the BBRT) and as a launch pad for spreading the news further and for entering the “marketing phase” of the Beyond Budgeting movement. That the Beyond Budgeting movement has the potential to spread out and to become one of the major management themes for the next years was clearly proven by the presentation at the conference that provided insight in what happened in the “Beyond Budgeting companies” that have applied already the Beyond Budgeting principles and model.
[1] Mashall Loeb, “Jack Welch Lets Fly On Budgets, Bonuses, and Buddy Boards,” Fortune, 29 May 1995, p. 73
[2] “The Guide” is part of the joining package that every new BBRT member receives. The joining package is a rich collection of all the material developed since the BBRT’s inception in 1997.
Additional
Resources (updated Jan 2005):
J.H.D.'s Beyond Budgeting Info 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)
Interview with Lennart
Francke: Managing without budgets at Svenska Handelsbanken
J.D.’s Best Practice Channel – Finance
J.D.’s presentation at the First
Annual Beyond Budgeting Summit, 1-2 July 2003, London
Books on Beyond Budgeting / the new enterprise management model for the
21st century:
Jeremy
Hope, Robin Fraser: Beyond Budgeting – How Managers Can Break Free from the
Annual Performance Trap (HBP 2003) “Most of the
solutions generally proposed for management problems involve putting something
new into the organization. In this regard, beyond budgeting is very different.
Perhaps uniquely, it proposes taking something powerful out to make room for
something new and even more powerful. We have all the tools and techniques we
need. What we lack is the right overall context for them to work effectively.
This book provides a vision for that context.” So says Charles T. Horngren,
Littlefield Professor of Accounting, Emeritus, Stanford University, in his
foreword to “Beyond Budgeting” by Jeremy Hope and Robin Fraser published by the
Harvard Business School Press in early April 2003.
Juergen H. Daum: Intangible Assets and Value
Creation (Wiley, 2002) – a book that introduces a new enterprise model and a
new management system for the new knowledge and intangible assets based economy
of today. It summarizes in a synopsis all relevant aspects of intangible assets
management and presents for the first time a comprehensive and integrated
concept for enterprise management that takes intangible assets systematically
into account. Including many practical examples and tips for implementation as
well as interviews with leading experts like David Norton, Leif Edvinssion and
Baruch Lev!
"This book aims at a
paradigm change in management and names good reasons and arguments for it. It
belongs into the management discussion of today. Juergen Daum proves great
thought leadership." (Controller Magazin, issue 5/2002)
Articles, presentations etc.:
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
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
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
Beyond
Budeting: A Model for Performance Management and Controlling in the 21st
century? – article by Juergen H. 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
Value Drivers
Intangible Assets – Do We Need a New Approach to Financial and Management
Accounting? - A Blueprint
for an Improved Management System – article by Juergen H. Daum
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen H, 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
(MS 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
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
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
Enterprise
Management Best Practice and related topics will be
continued here in the new New Economy Analyst reports.
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