By Bjarte Bogsnes, VP Performance Management Development at Statoil
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Imagine that we could wake up a CFO who passed away in the fifties and put him (as there were rather few female CFOs around at that time) back in the executive chair.
So much would be completely new and confusing. The PC, the mobile phone, the ERP system, the automated processes and so much more. The management model, though, would most likely be comfortably familiar, including the detailed annual budget process. Traditional management is an almost 100 year old “technology”, left behind as great innovation revolutionized so many other aspects of organisational life.
There is, however, a chance that the CFO was brought back to a company where innovation had also reached this area. Over the last ten to fifteen years there has been a quiet revolution taking place in the way companies are leading and managing themselves. It has been a grassroots revolution, more like the Arab Spring than a well-planned “coup d’état”. The red thread has been a rebellion against that king of traditional management, the annual budget. For many, throwing out the budget has only been part of an even bigger uproar against traditional management.
Many of these organisations are inspired by “Beyond Budgeting”, which is actually a somewhat misleading name. The purpose of Beyond Budgeting is not to get rid of budgets. It is to create organisations which are more agile and more human, which recognize and act on the fact that they are people- and knowledge-dependent organisations operating in dynamic and unpredictable circumstances. Seldom has the military phrase VUCA been more relevant for describing this new business environment: Volatility, Uncertainty, Complexity and Ambiguity. These business- and people-realities require significant changes in traditional management, because it was designed for different times. This definitely includes the budgeting process which sits at the core of traditional management (hence the name).
It is amazing that it hasn’t happened earlier, given the massive and widespread frustration with traditional management in general and the budgeting process specifically. The dysfunctional and unethical gaming it creates has long been a Dilbert favourite. In addition, it takes long to prepare, quickly becomes outdated, often blocks sensible and value adding actions, and can be a narrow and irrelevant yardstick for measuring and evaluating performance. The case for change seems strong and obvious. The reason for survival might simply be the lack of an alternative: “We know it is flawed and ineffective, but what should we do instead?”
Beyond Budgeting represents a credible and tested alternative, and not just for the budget itself. The concept addresses the entire management process in a coherent way. The 12 Beyond Budgeting principles emphasize consistency between leadership principles and management processes, between what we say and what we do. They offer better ways of securing the three typical budget purposes: target setting, forecasting and resource allocation. These three should be separated, enabling each one to be redesigned in more effective ways, like for instance by allowing them to be run on business driven frequencies and time horizons instead of often artificial calendar periods. The redesign also opens up for more meaningful performance measurement and evaluations.
Learn more about Beyond Budgeting at bbrt.org, and read how the principles are applied at the Norwegian energy company Statoil, which ranks #42 on the Fortune 500.