Agile 2014 Closing Keynote: Beyond Budgeting

Bjarte Bogsnes gave the closing keynote talk at Agile 2014. His talk was titled Beyond Budgeting:an agile management model for new business and people realities.

The fundamental premise of his talk is that the current financial models and budgeting process in our organizations is broken and that in order to achieve organizational agility we need to change the nature of the conversations we have and the tools we use to manage expenditure in our organizations.

He started by saying that the conversation about scaling and bringing the benefits of agile to the organization is not resonating with executives because the language is seeped in technical terminology and it is discussing things which don't matter in the C-suite.  He discussed the need for business agility rather than agile methods, and admonished the audience to change the way they approach the conversation with executive leadership.

His talk addressed three topics:

• The case for change – what is the problem?
• The Beyond Budgeting principles
• The Statoil model – Ambition to action (how Statoil have implemented the beyond budgeting philosophies)

The case for change

He explained that the budgeting process is at the core of how organizations are run today, with funding allocated and tracked against a fixed budget allocation far in advance of the expenditure.

He described the symptoms that the current budgeting process most organizations use results in:

• Budgets often have a very weak link to strategy
• The process is very time consuming
• Decisions are made very far in advance and at e wrong level of the organisation (too early and too high up)
• The assumptions made quickly become outdated
• Can result in the prevention of added value activities
• Create an “accordion” forecasting horizon which compresses as the financial cycle runs
• Are often a bad yardstick for evaluating performance

These symptoms are evidence of an underlying problem, rather than being the causes of the problem in and of themselves.

He gave the metaphor of increasing performance in the flow of traffic in a town or city.  There are two contrasting control mechanisms – a traffic light or a roundabout. 

A traffic light is a rules based tool in which the decisions have been made far in advance in the programming built into the switching cycle built into the mechanism.  It is unable to adapt to the current conditions and requires that drivers simply follow the rules.

A roundabout is a dynamic environment where the driver needs to be situationally aware and adapt to the current state of the traffic flows around and  through the intersection. The decision about how to behave is made by the driver based on the immediate circumstances.

He contrasted the two approaches looking at which is the most efficient as well as which is more difficult – the roundabout has been shown in studies to be substantially more efficient in the flow of traffic, however it is more difficult because the driver needs to be aware of not just the state of a single light but the constantly moving state of all the traffic in and around the intersection at any single moment.  He stated that easy is not necessarily good and competence is very important for efficiency.  Driving through a roundabout is a values-based, self-regulating activity (be aware and considerate of other drivers) rather than a rules based activity.

He used this metaphor to discuss how managers think about people in their organizations.

He stated that today’s organizational environment is like a roundabout – full of VUCA, (Volatility, Uncertainty, Complexity, Ambiguity) and the traditional management approaches don't work well in the dynamic environment we find ourselves in today.

He showed a four quadrant grid with two dimensions – static or dynamic business environments and the attitude of management.  The management attitudes are based on two theories - Theory X (people are inherently lazy, left to themselves they will try to take advantage steal) or Theory Y (people are trustworthy, self motivated and want to do a good job):

He stated that Beyond Budgeting is aiming to address both leadership (attitudes and behaviors) and management (rules and structures) as changes are needed in both aspects to be effective. If the leadership attitudes change but the structures and control mechanisms don’t then any change will be ineffective, and vice versa.

He showed a list of organisations who are using Beyond Budgeting and discussed the business benefits they have achieved from doing so.

The Beyond Budgeting Principles

He then presented the 12 principle so Beyond Budgeting:

He discussed how traditional budgeting approaches are about cost, often to the detriment of value delivery. Cost is a factor in beyond budgeting, but is not the only nor the driving factor.

He emphasized the importance of alignment between the two sides of the table – consistency between leadership and process is necessary.

He then asked the audience to consider the purpose of budgeting:

• To define a target
• To provide a forecast
• To help with resource allocation

He argues that in traditional budgeting a single number is assigned and that number is used for all three purposes.  This becomes a self fulfilling prophecy and a source of conflict.  Her presented the example of a sales person asked to define their sales target for the next year. If the salesperson’s income is dependent on reaching the target then the number given will likely be conservative so the salesperson can protect their income. Another example is in expenditure budgets – many organizations have a “use it or lose it” approach where any finances not used at the end of a fiscal period are not allocated again the following year, this results in wasted expenditure at the end of the fiscal period. The same number has conflicting purposes.

He suggested rather using three separate numbers and not relating them to each other – by separating the three elements it is possible to improve outcomes.

Separating the three numbers enables sensible decision making and a cost conscious mindset that moves away from “do I have budget for this” towards “is this expenditure really necessary, and if so how do I maximize the value from it, what is good enough, is this within my expectation framework?”

He provided a set of tools for guiding good decision making regarding expenditure activities, linking them to KPIs and targets:

The further to the right a decision is pushed the more autonomy and flexibility is granted to the people doing the work and the more important the need for strong values and clear direction.

Ambition to Action

He used the example of Statoil to show how strategy is translated into actions at the operational level, with visibility and engagement through the chain.  This secures flexibility, giving the individual team member room to act and perform with clear guidelines and activating the values and leadership principles.

There are four levels in the flow of value:

He discussed how these aspects are values based and go beyond just a balanced scorecard approach. While there are numbers to be measured, the results must be reviewed in terms of a richer and broader conversation than just the numbers. This is truly about holistic assessment at all levels and across the whole value stream.

He wrapped up his talk with a quote from Statoil CEO Helge Lund:

We have a management model which is very well suited to dealing with turbulence and rapid change.  It enables us to act and reprioritize quickly so that we can fend off threats or sieze opportunities.  This is much more difficult in a traditional ‘budget world’