Bjarte Bogsnes
Transcript
Thank you and good morning.
Thank you very much for the invitation to come here and speak at Lean Kanban France. So my name is Bjørte Bokssnes. I'm based in the finance function in a
Norwegian oil and gas company called Statoil. I'll come back to that in a minute. So I'm a finest person by education and background, but I've also worked some years in human resources. I've been heading up an HR function. And that's relevant for what I will talk about today, because there's a big doses of people into this. I've also been in different leadership roles for more than 20 years, also relevant because there's a big doses of leadership into what I will talk about. I even have a short IT career, not working in IT, but from finance being the project manager when Statoil was implementing a new accounting system many years ago, back in the late 80s. And the system we implemented was a great system that you could really play around with in a very iterative way. So we knew what we didn't want to do, and we had a word for it. We told IT that we don't want to do this waterfall. And we were fighting IT for half a year because they wanted this done in their way. And in the end, we won. And we ran this project. And when I look back to how we ran this project, we didn't have a word for it. at that time, but I think now it has a word, or it has many words, because that was an attempt to do this in an agile way. But it was really hard, especially fighting IT, so I said, IT projects, never again. And I've kept that promise.
By the way, my first, I've been in many leadership roles, my first leadership or management role has started back in 1984. That was as head of the corporate budget department. I've been handling up more budget processes than I want to be reminded about. Looking back, I've actually done a lot of stupid things in my life, but as long as you can learn from that, I guess it's okay. And when I will be critical today, not just to budgeting, but to traditional management, I do it from a very kind of solid practical platform.
When I joined Statoil, it was a smaller company than what it is today. And most small companies, they want to grow and become big, and that's fair enough. And many succeed, but many also discover that we have not only become big, we have also become slow, bureaucratic, inflexible. We've lost a lot of that agility, flexibility we had as a smaller organization. This is just like the aging process of man. As we grow older, we do lose a bit of the flexibility we have as teenagers. I have passed 50, so I have some practical experience here. And when it comes to man, that's the way it goes. We have no choice. Companies, however, they have a choice. It's written nowhere that because you are big, you should be inflexible, rigid, and all the things that we don't want to be. So I think the big question for any big organization should be, how can we find our way back to what we had as a younger organization without losing the benefits of being big? So don't misunderstand me. There are many benefits of being big, but how can we be big and small at the same time should be the big question for big organizations. For small organizations, my advice would be, when you are growing, don't adopt everything that the big companies are doing, because you might end up in the same place.
What I would like to share with you today is first problems. I would like to talk about problems with traditional management. This is where we need to start.
And I'd like to start off a little bit philosophical, then I'm going to make this more concrete as we move on. Then I've got a few slides on this thing called Beyond Budgeting. It's actually a somewhat misleading name because the purpose of Beyond Budgeting is not necessarily to get rid of budgets. The purpose is to create organizations which are more agile and more human because we think that's both good and necessary for great performance. In order to do that, you need to change traditional management. And what do we find at the core of traditional management? We find the budgeting process, the budgeting mindset. So that's where the name is coming from. But this is basically call it agile on enterprise level.
Then we shall spend some time talking about how we are trying to do this at Stottor. Everything I will talk about here is decided. We started out in 2005. It's written into what we call the Stottor book. But that does not mean that all of this has reached every head, every corner of Stottor to 100%. This takes time. It's actually quite painful for a number of managers who are used to doing things in a different way. So we've had a long journey. We've made mistakes. We've been falling down. We have detours. We have resistance. But that is what real change is about. Real change is never a straight, nice line from A to B. Real change is actually quite messy.
I'm going to make the commercial quite short. Statoil is a Norwegian oil and gas company. We also into renewable energy, offshore wind. We are Scandinavia's largest company. There is some data on the company. I won't go through that in detail. But you might have heard about Transparency International. Transparency International has ranked Statoil as the most transparent listed company in the world across businesses. And on Fortune 500, we rank around 40 plus minus, depending on the oil price. But some years ago, Fortune ranked us as number one on social responsibility across businesses and number seven on innovation. Across businesses. And of course on innovation that has a lot to do with technology given the kind of company we are. But maybe there was an element of management innovation into this as well. Because that's actually what I'm going to talk about. Management innovation. Management is in desperate need of innovation. A lot of the stuff practiced in organizations today are 100-year-old technologies. Invented in the US 100 years ago, probably worked well at that time, maybe also 50 years ago, but not anymore.
Let's talk about some problems. I'm going to start off a bit practical actually.
One problem with budgets is that there is often a weak link between strategy and the budget. Another problem is that it's a very time consuming process. Some people think this is the biggest problem. It's definitely not. It belongs on the list, but maybe it's the smallest problem. Budgets can often force us to make decisions too early and often too high up in the organization. That is a problem. Budget assumptions quickly outdated. Budgets can prevent us from doing stuff we should do because it's not in the budget. And the other way around. It can lead us to do things we shouldn't do because it is in the budget and spend it or lose it.
Then budgets can lead to a funny forecasting horizon. When finance people do budgets, they are interested in understanding 12 months or four quarters of next year. When they move into the budget year, first quarter, they are only interested in understanding three quarters ahead because they can still see till year end. Half year, two quarters is enough because they can still see till year end. And in the autumn, one quarter is enough. They can still see till year end. Before they suddenly become interested in 12 months again because then it's budget time and budget for next year. So you have this accordion forecasting on forecasting horizon, which is quite funny. Last but not least, budgets can often be a bad yardstick for evaluating performance. A very narrow mechanical language. It's not just because assumptions are quickly altered. It's simply the whole notion of defining performance in such a narrow mechanical way. Now, I've shared this list of problems with tens of thousands of managers across the world over the last years, and very few disagree. The list might look slightly different, but more or less like this. And I find that fascinating. How come so many agree with these problems at the same time the same companies continue to do this stuff? And there can only be two kind of reasons for this. I mean, one reason can be that, well, we know it's a flawed process, but what's the alternative? Well, this is where Beyond Budgeting is coming in as an alternative. The other reason might be that, well, we know it's a flawed process, but these are kind of... These problems are not that big that it really justifies a big change. So we can kind of live with this. These are more like kind of irritating itches. This is not a serious disease. That is wrong. This is much more than irritating itches. It's actually symptoms of a much bigger problem. And that problem is that this process that was meant to support good performance very often leads to the opposite. It becomes a barrier for getting the best possible performance in our organizations. And if that is true, we have a serious problem here.
And performance is a key word in what I will talk about. That is the reason why we embarked on this journey in Startup, because we think it's good for our performance. And I would like us to reflect a little bit around performance in a... slightly different setting than business before we move back to business. I would like us to move into traffic. Because in traffic, we would also like to see good performance when we are driving to work in the morning or back home. And a definition of good performance in traffic could be a safe and good flow of traffic. That's what I would like to experience when I'm driving to work. And traffic authorities, they're also doing this stuff called performance management. It's actually a label I don't like, but they are managing performance to make that happen. And here is something we often meet put up by traffic authorities with that purpose. Two questions here. Who is actually managing here and based on which information?
Well, those managing are, and by the way, this is the good old-fashioned traffic light. There's no sensors, there's no high-tech. So those managing are the guys who program this light. And where would that person be as you are sitting there waiting for that green light? Well, probably in the office programming the next one. Certainly not in the situation with you. There's nobody inside that pole, as far as I know. I never checked, but I don't think so.
And the information this programming is based on. Would not be entirely fresh information as you are sitting there waiting, right? It would be some historical trends.
This programming was based on some historical trends, maybe some forecasts about what the future might look like, but not fresh information. Now, do we have an alternative to the traffic light.
The roundabout, same questions, very different answers. Who is managing here? Who is in control? Well, we are as drivers, based on which information? Based on fresh, real-time information. Very different answers. Could be interesting to compare these two ways of managing.
So let's do that.
Which of these two is normally most efficient?
It's the roundabout. It's been proven that the roundabout is more efficient. And maybe that has to do with what we just talked about, access to fresh information. Well, of course you have access to fresh information in front of that traffic light as well, but what we don't have in front of that traffic light is the authority to act on that information, because that rests with someone else. I would argue that there's one more thing that needs to be in place for the roundabout to be more efficient. I'll come back to that in a minute. Which of these two is most difficult to drive in?
It's the roundabout. And I would argue that everything that we are trying to leave behind at Start Oil is from a leadership point of view in a way much easier than what we are trying to do instead. But our guiding star can't be to go for what's easy because it's easy. We have to go for the stuff that's good for performance. And sometimes that is a bit more difficult. So competence is key here. Last but not least, is it relevant to talk about values in this setting of traffic? And I would argue, yes. We often talk about values-based management, and the opposite of values-based management is rules-based management. Traffic light, one simple big rule. Red, stop, green, drive. And you can always discuss yellow. But it is a very simple rules-based system. And if there is a value set, a mindset among drivers waiting for that green light, which is about me first, I don't care about the rest. That is normally not a big problem in front of that light. But in the roundabout, that kind of mindset is a big problem. In the roundabout, we are much more dependent on having a positive common purpose of wanting this to forward. Here we have to be kind of more considerate. We have to interpret each other's intentions. We have to interact with people in a very different way compared to what we have to do in front of that light.
So it's not enough with fresh information authority to act on it. We also need that positive value set.
What we see on the left hand side is a situation where traffic authorities actually are managing performance or trying to manage performance very actively. I think the roundabout is actually about something else. That's more about creating conditions for great performance to take place. And after that it's actually a bit hands off. And I think that is the mindset we need as finance and HR people.
I think we need to give up this illusion that we can, unless we manage performance, then nothing will happen. A lot of finance and HR people believe in that illusion. I don't think that's true, but it's not bad news because there's a lot of great things we can do when it comes to creating conditions for great performance to take place. The left hand side is a situation where traffic authorities actually are managing performance or trying to manage performance very actively. I think the roundabout is actually about something else. That's more about creating conditions for great performance to take place. And after that it's actually a bit hands off. And I think that is the mindset we need as finance and HR people.
I think we need to give up this illusion that we can, unless we manage performance, then nothing will happen. A lot of finance and HR people believe in that illusion. I don't think that's true, but it's not bad news because there's a lot of great things we can do when it comes to creating conditions for great performance to take place.
The roundabout is a more self-regulating model than what the traffic light represents. And I would argue that in today's business realities, we need more self-regulating management models, and we need it for at least two reasons. The first reason has to do with our business environment. Which is very different from when I started my budget and planning career in Stottle in the early 80s. There's a lot more out there today of what they in the military called VUCA. You might have heard that expression, V-U-C-A, volatility, uncertainty, complexity, ambiguity. If we take that VUCA seriously, it has significant implications for how we design our management models, compared to if we think that there is no VUCA out there. The other reality we need to take seriously is not external. It's internal, and it has to do with people. It has to do with asking ourselves, What kind of people do we think we have in our organizations? And there are many languages and labels you can use for that discussion. We chose to go back to good old Douglas McGregor, who wrote a great book back in 1960 called The Human Side of Enterprise. And he introduced theory X and theory Y as two opposing views on people and what motivates people. Theory X, very much a negative view, a view that most people in an organization is a bunch of potential thieves and crooks. They must all be managed tightly. They must be kept on short leashes. Because if not, we know what will happen. They will all run away, do a lot of stupid things, and spend money like drunken sailors.
Well, that's the popular version. I think McGregor was a bit more polite and academic in his book, but I think that's what he meant. Then you have theory Y, very much the opposite view, a view that most people beyond being well-educated actually are competent, responsible people who want to do a good job, want to be involved, want to perform, want to be listened to, want to be treated as adults. And again, without so far having a view on what is right or wrong, I have a view, but without having a view on that so far, whether you believe mainly in X or mainly in Y should have significant implications for how you design your management models. So that is also a reality you need to take seriously. If we combine these two realities, the world out there, people in the organization, it might look like this. You will recognize the two dimensions I talked about. And I would argue that traditional management lies in that lower left-hand corner with a conscious or unconscious assumption that the world is still a quiet, planable place and that most people belong on the X side. A few more words on X and Y before I continue, because this is not an issue of being naive here. Every time I talk about X and Y, there are some faces popping up in my head. And I can see those faces right now, and those faces belong to colleagues of mine at Statoil that I definitely would put on the left-hand side. I think you need to keep a close eye on those guys. And maybe there are a few... Faces popping up in your heads as well now. I don't know. But those guys typically exist in all organizations. That's not the issue. The question is, do they constitute a minority or a majority? And if they exist but constitute a minority, we cannot base the design of our management models on minorities. Then we need to start with our majority view. And if that is theory Y, then that must drive the design of our management models. And then we need to find other ways of dealing with those guys on the left-hand side. I mean, it's just like in a free society, we are not putting everybody in jail because someone has done or will do something wrong. We are all free citizens within certain boundaries. Now, in order to get out of traditional management, we need to address both leadership in the horizontal dimension and management processes in the vertical dimension. And what we need to get out of... Traditional management, I would argue, is something that's very rigid, it's very detailed, it's very annual, very rules-based, micromanagement, centralized command and control, a lot of secrecy, and a strong belief in sticks and carrots as ways to motivate and drive performance to the extent we can drive performance. I recall when I made this slide, then I said to myself that, Bjørte, now you're a bit hard on traditional management. Don't overdo it. But I've been sharing this slide with tens of thousands of managers across the world, and I've seen so many nodding faces. when I put up this. So my conclusion is that I wasn't too hard. Maybe I could have been even harder. There might have been a time when this was the right place to be, the right thing to do. I'm not arguing that. There might still be places where this is the right thing to do. But for us in Startall, that is a completely uninteresting discussion because We know that our business environment is up there and not down there. And we believe that the majority of people in Stottl is on the Y side. So we can't be down in that lower left-hand corner. We need to move out by addressing both dimensions. On the leadership side, we need to be more values-based than rules-based. This doesn't mean no rules. It simply means that the stronger you are on the value side, the less rules you actually need. We need more autonomy. In this VUCA world, there isn't always time to run nine floors up to get that decision. Then it might be too late. And also, decisions aren't always improved because they are lifted up. Very often it's the other way around. We also need more transparency. And this is good news for all the managers I've met who are afraid of leaving a comfortable lower left-hand corner because they are afraid of losing control. And I can understand that fear in a way, even if a lot of the controls these guys are afraid of losing are nothing but illusions of control. Then the fear is still real. So here are some good news for scared managers. Transparency can be a very effective control mechanism. It's a social control mechanism. There is a reason why thieves and crooks operate at night, because then it's dark. Here is a wonderful story from a Swiss pharmaceutical company called Roche, quite big, quite traditionally managed. They did a very interesting experiment recently around travel cost. In a pilot in a part of the company, they kicked out the travel budget, they kicked out most travel rules and regulations. What they implemented instead was full transparency. So with a few exceptions, everybody could see everything. If you traveled, to where, and did you fly, eat, sleep, cheap or expensive? Open for your colleagues to see and vice versa. And what do you think happened with travel cost in that pilot versus travel cost in the rest of the company? Came down through a very simple self-regulating control mechanism. This was about tearing out pages in the rules book instead of adding even more pages.
Last but not least, we need to get hold of that internal or intrinsic motivation in people that can move mountains if you really can reach it. But unfortunately, a lot of the stuff practiced in organizations falls on the left-hand side. It's about sticks and carrots. It's about external, extrinsic motivation. And I'll leave it for yourself to reflect on individual bonuses as a motivational mechanism, on which side that falls. I could have talked for the two next hours about that. I don't have time for that. But let me put it this way. It's not only budgets I have lost my belief in over the last 15, 20 years.
At Startall, we've always tried to be a values-based, people-oriented company. At least we've tried seriously since we hit the ground running in the early 70s. So our challenge was maybe more that we had management processes that had a different message. Because it doesn't help to have these theory Y leadership visions if we have theory X management processes. That creates gaps between what we say and what we do, and those gaps are poison.
So we worked hard to adjust our management processes to reflect what we say about people, leadership and values in the starter book. And let me give you a few examples of what that might mean in practice.
Typically, you need to do something with the budgeting process because that represents so much of what I defined as traditional management. But linked to that, we need, for instance, to think differently when it comes to targets and goals. We need less of what I call 29.2 targets. The target is 29.2, anything above is good, anything below is bad, end of story. That is a very narrow mechanical performance language in this kind of VUCA world with these kind of people on board. Sometimes we need to think more relative. Well, how are we doing versus others? It doesn't help to hit 29.2 if the other guys are doing 30 or 35 and vice versa. Maybe values should play a role. How did we achieve those results? Maybe hind Our insights should play a role when we are evaluating performance, looking at things that we know afterwards that we didn't know up front. And that measurement maybe is not picking up. We call this a holistic performance evaluation. Last but not least, we need more dynamics into the stuff we do. Why should all these processes be organized around January to December or the fiscal year? Very often that is an artificial construct from a pure business point of view. Not from an accounting point of view, not from a tax point of view, but from a pure business point of view. So we need to organize our processes more on business and event-driven reasons instead of the calendar year. And this is actually what Beyond Budgeting is about. Trying to move up in that upper right-hand corner by addressing both leadership and management processes in a consistent way. It is as simple and as difficult as that.
Startle is in no way alone in trying to move up in that upper right hand corner. A number of companies globally is on the same journey in some form or shape. And here is an overview of some of them.
On the left hand side, some Scandinavian companies, in the middle some other European companies. On the right hand side, some US companies and in between a few Asian companies, South American companies.
No French companies on this list so far. But we've actually had several meetings with Michelin, who are seriously interested in this.
Yeah, so we'll see.
The pioneer here is a Swedish bank called Handelsbanken, which we find on top of this list. That bank today operates across Europe. They are quite big in the UK. It's the fastest growing bank in the UK, actually. And this bank completely abolished budgeting already back in 1970, not as a goal in itself. But that was just one of many things they did in order to move up in that upper right hand corner. And this bank has been sticking to this very different way of managing ever since. Very different from other banks. No budgets, no targets, hardly any forecast, very simple management model, very high local authority at branch level.
So, since they have been operating for such a long time, it becomes relevant to ask the question we should ask, namely, well, does this work? Is it good for performance? Because if it isn't, we shouldn't do it. Well, look at this bank. This bank has been performing better than the average of its competitors every single year since 1972. Every single year. This bank is among the most cost-effective universal banks in Europe. And this bank has never needed a bailout from the authorities because they messed it up. I can think about a number of other prestigious banks who needed help because they messed it up. This bank, never. It can't be a coincidence, this kind of coincidence. consistent great performance and a very different management model.
And it's not just about kind of the simplicity of the management model, it's also very much about the view on people. They also have a book, they call it the Blue Book, and they're a bit secretive about that Blue Book for some reason. They're quite open about a lot of things, but that book, I asked to get a copy once and they said no. But I was allowed to kind of flip through that book when there was a branch manager sitting next to me. And the first words that hit my eyes when I opened that book was the following. And just listen to this.
We have an unshakable belief in people and their will and ability to do good things well. Fantastic words. And a great bank. By the way, a Norwegian business school did a study on banks within without budgets. They looked at around 100 banks, 8 or 9 of these operated without budgets. And guess which group was the most profitable? Banks without budgets were more profitable. This is good for performance.
I could have talked a lot about other wonderful cases here, but time is short, so we need to move on. Handelsbanken and some other banks inspired what became known as beyond budgeting and the beyond budgeting principles in the late 90s. Most companies here are inspired directly or indirectly. by these principles, including Statoil. And I want to share with you those principles on the next slide. Just two reflections around those.
I can put them up. I won't go through this in detail, but before I will talk about a few of them, but just two reflections first. A lot of people, especially finance people, they find this as kind of, well, this is big stuff and a bit scary, especially the leadership side of this.
I can understand that, but you don't have to do everything at the same time. In most of these organizations that we saw, this has been more of an evolution than a revolution, but it is important that every step we take point in the right direction. The other thing I want to stress around these principles is that these principles do not represent some kind of management recipe. Kind of tick the boxes, do this, do that. This is more some guiding principles, a philosophy, some ideas. What this should mean in your organization, that depends. It depends on what kind of business you're in, what kind of culture you have, what kind of history you have. So it's not identical what happened in those companies, and that's the way it should be.
I don't like management recipes and a lot of those are coming from the US by the way. They are very descriptive telling you exactly what to do and I find that quite revolution but it is important that every step we take point in the right direction the other thing I want to stress around these principles is that these principles do not represent some kind of management recipe kind of tick the boxes do this do that this is more some guiding principles, a philosophy, some ideas. What this should mean in your organization, that depends. It depends on what kind of business you're in, what kind of culture you have, what kind of history you have. So it's not identical what happened in those companies, and that's the way it should be. I don't like management recipes, and a lot of those are coming from the US, by the way. They are very descriptive, telling you exactly what to do, and I find that quite...
Boring but also quite dangerous because all the thinking is done for you your only job is to implement other people's thinking I find that again both boring and dangerous if you like to think for yourself there's a lot of great news here you will recognize some of the things I talked about on the left hand side values based transparency autonomy has some important principles on the process side again careful with 29.2 as the standard way of defining performance principle 8 a view on rewards which I will come back to in a minute principle 9 and 10 partly talks about the reason make it more continuous more event driven and then it's first on principle 11 that beyond budgeting talks about cost resources and here the two most common misunderstandings around beyond budgeting. The first misunderstanding is that it's only about kind of, it's a different way of managing cost. Well, it's about much more than that because, I mean, just one principle is directly about cost. The other misunderstanding is that, well, beyond budgeting must mean no budget, and for most people a budget is a cost budget, and that must mean that cost is not important, I can spend whatever I want. Big, big, big misunderstanding. It's actually the other way around. Cost is important, together with a lot of other things.
And because cost is important, we need more intelligent ways of managing cost than what the traditional budget can offer. Because that is about sitting at corporate level every autumn, handing out millions of bags of money to the organization. In a company the size of Statoil, we talk about millions and millions of bags, divided on cost centers and on activities, projects, cost accounts, and so on. And what we do then in the autumn the year before is to sit as finance people and define the optimal size of each of these bags down to the last dollar in the autumn the year before. While we at the same time agree that, yes, there's a lot of uncertainty out there. We're not quite sure what will pop up or fetch an opportunity. It doesn't hang together. So we need more effective, intelligent ways of managing costs, and that is something that Beyond Budgeting is offering. Last key. issue here is coherence. This is an attempt to create coherence or consistency between what we say on the left hand side, on leadership, and what we do on the right hand side in our management processes. And let me share with you a few classic examples of the opposite, lack of coherence that you often find in organizations. Because it doesn't help that we on the left-hand side talk loud and warm about we and us and together and team. If everything we do on the incentive side, principle eight, is based on individual bonuses. One message here, another message here, guess which one is strongest?
Another example, it doesn't help that we talk equally loud and warm about how fantastic people we have on board.
The organization would be nothing without you and we trust you so much, but not that much. Of course we need to manage you through detailed travel budgets, if not we know what will happen.
One message here, another message here. Gaps between what we say and what we do, poison.
When we started out in Startall 2005, we were actually a bit careful with showing this slide too broadly because we didn't want to scare people. If you scare people, you risk not getting started. Today, that would not be an issue. But at that time, we were a bit kind of cautious. So we decided to start out in a... In a less scary area, especially for finance people, more than... directly linked to budgets. But it's a great place to start where you later can kind of, that can lead you into discussions around these principles. And it's a starting place you discover if we ask ourselves a very simple question, and that is, why do we budget? What's the purpose of a budget for an organization? And I've asked that question again to tens of thousands of managers, and most come up with a list of three different things. These budgets, company budgets, are used for setting targets, financial targets or sales targets, production targets. At the same time, these budget numbers are used as a kind of forecast of what the next year might look like in terms of financial capacity and cash flows. So, second purpose, forecasting. And the last purpose is resource allocation. We use the budget to manage cost by handing out these bags of money. Cost and investments. So three different purposes. And the problem does not lie in each of those as such if they are done in a good way. The problem comes when this is combined in one process resulting in one set of numbers like we typically do in a budget. Because what happens, let's assume that we are moving into a budget process, and it's important... Oops.
That was the recording. There will be a big bang on that video. Sorry about that.
What happens? Forecasting is important for us. We want to understand financial capacity, cash flows. So we ask our salespeople first, what's your best sales forecast for next year?
But by the way, don't forget that that sales forecast that you know give me, that will also come back as your sales target for next year. And they might be a sales bonus linked to hitting that sales target. Because this has to be one and the same number. What might happen with that potentially good sales forecast when the sales guy knows that this is not just a forecasting process. I'm negotiating my own pay here. Well, that forecast might start to fall. And I wouldn't blame the sales guy. I would blame our question and our model because we are putting this person in a difficult situation. So maybe we thought that sales forecast was a bit low, but we are busy. We have to move to the cost side. So we ask the same people, other people, what's your best cost or investment forecast for next year? But everybody knows that this is not just a forecasting discussion. This is my only shot at getting access to resources for next year. Whatever number I'm coming up with, somebody's going to cut that with 30%. So what might happen to my cost forecast?
If I'm smart, I'm adding on something so there's something to negotiate on. This is a problem, not just because it destroys the core. quality of our numbers, but maybe even more that this is something that stimulates a behavior on the borderline of unethical. All the gaming, the low-balling, the negotiations, that is not the kind of behavior we would like to see in our organizations. Fortunately, there is a very simple solution here. We still do these three things at Statoil, but in three separate processes, because this can be different things. Different numbers done at different times, different time horizons. A target is what we want to happen. A forecast is what we think will happen, whether we like what we see or not. Brutally honest, expected outcome, unbiased. And resource allocation is about how can we optimize scarce resources in the best possible way. And the beauty of separating is that this opens up a big improvement agenda. Then we can start to have much more intelligent discussions around each of these. How can we do these three things in a better way?
Where we take the VUCA into account and where we take our people view into account. How can we set targets that really inspire and motivate, that are kind of robust against this VUCA, but where we don't have the gaming, the low-balling?
Do we in some areas need to set targets at all? Maybe not. That's one of the conclusions some companies have arrived at. They simply skip target setting. How can we have a lean, simple forecasting process where we quickly get on the table an unbiased set of numbers that we know we can trust because we have removed the reasons for games? gaming these numbers and how can we find alternatives to the traditional way of managing cost and these are actually some examples from from from start oil and how can we do all of this on a more event driven business driven rhythm It's this third purpose that our managers struggle the most with, this dynamic resource allocation. And let me give you a quick kind of just taste of what a different way implies. When it comes to projects, we still have project budgets. There are some problems with that as well, but they are less than kind of the other kind of annual detailed budgets. But what we don't have is that annual... Investment budget where everything is decided up front in the autumn the year before. Instead, the bank is open 12 months a year. You can always forward a project for approval. Whether you get the yes or no depends on two simple things. How good is that project against the criteria we have? And do we have the capacity to do this as things look today? Do we have the money, the people? That is coming out of our latest forecasts. So, a kind of dynamic, organic way of managing a project portfolio. When it comes to operating cost, running cost, we have a menu of different things. It could be everything from some kind of overall burn rate guiding. operate within this activity level expressed in money as a rough number until anything else is decided. There might be some unit cost target. You can spend more if you produce more, you can spend more if you sell more, and vice versa. There might be nothing at all, no budget, no target. We simply, in those cases, we simply monitor actual cost developments and if there is an issue we investigate it. Very often it turns out that it is an issue, it's quite okay. Cost could be increasing but it's good cost that's increasing, not bad cost. And good cost is not the problem, they create values. The bad cost we need to get rid of. And very often people in the front line, they know better what good, the distinction between good and bad cost are compared to people higher up in the organization.
But if we investigate actual cost, then in some cases we might find that somebody have abused the trust that lies in this model. This is about showing more trust than in a traditional model. And the only thing you know for certain, if you show trust, someone will abuse that trust. I've thought on it has happened, it will happen again. There are two things you can do. The first thing is the easy thing, that is to put everybody in jail because somebody did something wrong, right? This trust thing doesn't work. Look at what happened here and happened here. That's the easy thing to do. As a CEO, CFO, you don't even need to talk to people. You can just issue the... memo and everything trust cancelled period. The right thing to do is a bit more challenging from a leadership point of view. That involves taking that serious talk with those involved, those guys, that team, that manager, and let it have the necessary serious consequences. This is not about being soft. It's simply about not putting everybody in jail because someone did something wrong. Let me give you another example of how this can work. I've talked a few times about the relative targets. These are the main financial targets we have at Statoil. And the two metrics certainly have their weaknesses and are not that unique, but it's more unique that we think in relative terms, not in absolute terms. On the right-hand side, return on capital. There's no 12.5% target. Our target is to do well against our competitors who are listed here. And the same goes on the left-hand side. And you can see where we have drawn the target line. And we've had these targets now for six or seven years. We don't need a big process every year to kind of calculate and reset these targets. They are more evergreen targets. And by the way, how we perform against these targets, that is what drives the common bonus scheme we have at Stotter. Everybody on board. Us against in the same boat us against competition. We also have some individual bonuses. I'll come back to how we handle that Most of our relative KPIs are actually internal. They are not external They would be about comparing
for instance platforms in the North Sea on operational issues like regularity, safety and so on. And it is a way that kind of drives performance by itself, even if there's no target, because nobody likes to be laggards.
So a gentle way of using transparency to stimulate performance and to stimulate learning, which is maybe just as important. We want platforms who are struggling to have a talk with platforms who are doing well to see what can we learn from you. Now let me move to how
All of this kind of comes together in a process that we call ambition to action, which is basically our management process. Three purposes, translate strategy, secure this flexibility I talked about, and activate words in this book. Activate what we say about values, people and leadership in this book. If nice words are left like nice words in a book, they are worth nothing. They have to be activated in your management model. Ambition to action is a kind of a hybrid between the so-called balanced scorecard concept and beyond budgeting. The reason for that is that Stottl had balanced scorecards already from the late 90s. I have a very ambivalent view on balanced scorecards, if you are familiar with that concept. Because in so many organizations, that concept is used to reinforce traditional management. Centralized command and control, micromanagement. If that is what you like, the balanced scorecard can be a fantastic thing, compared to if you only have a financial budget to do your micromanagement through. We are trying to use it in a very different way. I'd like to share with you how. There are some steps here which you might have something similar in your organization, but I think the way we do this might be somewhat different. We start with strategy out on the left side, outside of this slide. Then we try to translate strategy into strategic... Objectives what does success look like on a medium-term time horizon then we So here we start, in a way, the goal and target setting process, but more on words than on numbers. Then we are trying to find KPIs that can measure that we are moving in this direction.
The only problem with measurement is that measurement alone moves nothing. Nothing happens just because we measure. I'd like to share with you how. There are some steps here which you might have something similar in your organization, but I think the way we do this might be somewhat different. We start with strategy out on the left side, out on the outside of this slide. Then we try to translate strategy into strategic objectives what does success look like on a medium-term time horizon then we are so here we start in a way the goal and target setting process but more on words than on numbers then we are trying to find KPIs that can measure that we are moving in this direction the only problem with measurement is that measurement alone moves nothing Nothing happens just because we measure.
You don't lose weight simply by weighing yourself, which I have tried by the way, and it didn't work. Then my wife, she told me that, Bjørte, maybe you didn't stand there long enough on that weight. And that would have, of course, been one kind of action, but it's not, we want actions, but not those kind of actions. But actions is important for us.
Also trying to understand consequences of actions through forecasts. And then there is a translation of all of this into, well, what does this mean for you and me and the teams that we are into? And here we are straight into the HR process. And here is an example of activating words in this book. Because the very first words in this book says that At Stottol, the way we deliver is as important as what we deliver. And with the way we deliver, we talk about values and behavior, and that decision came from our CEO. And to make sure that everybody understood that he was serious about this, he put the weighting between the what and the how. In all consequences for your career, for your pay, base pay, bonus, he put that weighting to 50-50. Now, you might say that that was a brave decision.
Yes, but also an obvious decision, because how can we
How can we say that we are trying to be a values-based company, which we are trying to, if everything around values are completely absent in our management model? That would have been a big, big gap between what we see. said and what we did.
This is an integrated process running all the way from strategy via finance into HR. We work very closely together to make this hang together in a seamless way. Good news. Bad news is that it's partly based on the balanced scorecard. And the bad news in this context is that all our competitors, they also use balanced scorecards in some form or shape. So if we should get competitive advantage out of this, we have to do it in a better way than those guys. So let me share towards the end here, let me share with you some areas where we try to be distinctly different. The big difference is, of course, that we combine beyond budgeting and balance scorecard, and it becomes something else. But more specifically, around KPIs, if we look at our competitors, very often their so-called scorecard is only about KPIs. There's nothing on, or very little on the left-hand side or on the right-hand side. And that is a problem because of the IE in KPI, which stands for key performance. indicators. Now these are indicators. They are trying to indicate that we are moving towards those objectives. But they are not called KPTs, key performance truth. They are not always telling the full truth, revealing the full truth. I've been working with KPIs and balanced scorecard now for more than 20 years. When this stuff came from the US in the early 90s, I was extremely fascinated, especially with these KPIs that would come and tell us everything we hadn't understood about the drivers in our business. Expectations to these KPIs are up here. Reality, actually, bit more down here in the sense that it wasn't that easy to find these fantastic KPIs that told us everything. But I'm a very stubborn person and my hunt for that perfect KPI continued for many years afterwards. But today I've given up. I've given up the hunt for the perfect KPI because it doesn't exist. Don't misunderstand me, there are good KPIs out there, there are combinations that can make them better, but the perfect KPI, forget it. The KPIs need help in this job we give them of being a place where we express targets and then we shall measure that we are moving towards these targets. There has to be a richer, broader performance language, something on the left-hand side, right-hand side, and we also need this holistic evaluation where we take off the measurement glasses and look at what measurement did not pick up before we conclude. I'll come back to this a little bit later. Albert Einstein, you might have heard what he said around measurement or counting. Not everything that counts can be counted. And not everything that can be counted counts. Measurement can be a good servant, but as a master, measurement can be a disaster. And we have seen, unfortunately, too many examples of that. Here is an example of an ambition to action. Take it straight out of the system. Forget the content, you can't read it in any case, but you will recognize the first three steps from the previous slide and the HR process then coming on the right-hand side.
And today we have around 1,400 of these in the organization.
And let me use this slide to illustrate two other areas where we try to be different. The first purpose of ambition to action was to translate strategy, which means that there has to be a red strategic thread throughout these 1400. It can't be an anarchy. The easy way to create that is called cascading. That is about sitting at corporate level and then instructing all the way down. These are your objectives, KPIs, KPI targets, actions. It's a wonderful way of getting, if you like, perfect alignment, all the numbers adding together. Finance people, they love that kind of process. They can add up all the numbers and it kind of matches the corporate targets up there. Wonderful. They bring with them their accounting mindset that kind of everything has to hang together and the best way is to buy it through instruction from above. The problem with that in our culture is that if your own ambition to action out there only becomes a landing ground for instructions from above, in our culture then you lose the commitment, the involvement, the motivation, everything that is needed in order for this to work. So for us it's very important that the main purpose of an ambition to action in a team is for the team to manage itself. It's not mandatory to have an ambition to action. Teams decide for themselves. We often get questions, well, should we have one? We would say we would definitely recommend recommend it but we tell these teams that your motivation for using ambition to action should be that this is something that you and your team perceive as a meaningful value-adding thing to do right if not that's in place you shouldn't do it
So that's the easy way, again, cascading. The right way, which we try to do, is called translation. And this is more than playing with words. Cascading, this level instructing this level. Translation, this level translating. These guys or maybe ambition to actions even further up maybe they want to look all the way up to corporate and a bit left and right if they have internal relations so how what does our ambition to action need to look like in order to support direction ambition levels in other ambition to actions And those discussions should take hours and hours in these teams to make sure that there is a common understanding and commitment around the content. If such a translation should go wrong when it comes to direction, ambition level, point in this direction instead of this, ambition level here instead of ambition level here, Of course the team above should intervene and do, or the manager above should intervene and do what he's paid for, but trust me, it's almost not an issue. And one reason might be transparency again, because with a few exceptions are all of these ambition interactions open for everybody. So it means that if you try to have by the way, through your own stupid ambition for action, I mean, everybody else can see it. The other reason why we use transparency is that how can you translate if everything else is secret? So transparency is key here. This doesn't mean that we never instruct from above. There are situations where that is the right thing to do, but it should be much more the exception than the rule, and then it's also more accepted when it happens.
The last area where we are trying to be different here has to do with time. We used to have annual versions of Ambition to Action. We made a new one every autumn for next year, not anymore. Now all these teams can change whatever they want on their own Ambition to Action when there is a need for doing it. They can change Objectives, if strategy change, they can change KPIs. If objectives change, or if it's simply finding a new and better KPI, they can even change their KPI targets if these targets have lost their meaning. And lost their meaning, that can mean two things. Either this target is impossible to achieve. Everybody laughs about it. Those targets, they don't work. They don't inspire, they don't motivate. They have only one purpose left, and that is punishment, which is not that motivating. Or it could be the other way around, that this target is a piece of cake. The only control mechanism we put around this is to say that, well, if you're here, And if you want to change something that's big, you still need to seek approval one level up. If it's small, you simply inform to the same level. Big or small, always make sure that you inform others affected by your changes. That's the coordination part of this. And we have left it for teams themselves to decide what is big and what is small. It's not something we can define at corporate level. So we want this process to be as self-regulating as possible. Back to the traffic example. The less we need to intervene from corporate, the better it is.
Let me, towards the end here, say a bit more around this principle of a holistic performance evaluation. And holistic here means two things. First of all, it's the 50-50, looking both at the what and the how.
Within the what, within business delivery, which is defined by ambition to action, then holistic means that we should, when we evaluate performance, we should not kind of only look at those KPIs in the middle and then conclude. Because if performance evaluation only is about looking at the color of KPIs, Green is good and red is bad. If that is what performance evaluation is about, the only qualification you need as a manager to do that job is that you are not colorblind. And I think we should have somewhat higher requirements towards our managers. So yes, we do measure, but then we take off the measurement glasses. To look at things that measurement maybe didn't pick up. We pressure test measurement through five simple questions. Yes, I see that that KPI is green, but have we really moved towards those objectives? How ambitious were those targets? Assume two teams, one stretched, set themselves an ambitious target, didn't completely make it. Red KPI. Another team, better at the low-balling, the gaming, negotiations, were able to get the target down here, performed here, above, green KPI.
Well, if you take away those targets, which of these teams performed best? Well, this team did.
And should we punish teams who stretch and don't completely make it? To the extent we should punish someone, should it maybe be the other guys? So this is about creating comfort in our management model around stretching because without such a question I would argue that the most if you think as a rational manager the most stupid thing you can do is to set and set yourself stretch targets that just reduces the chances of hitting those targets and getting the nice things following so there has to be these questions to create a feeling of fairness Has there been significant changes in assumptions? Headwind, tailwind of such a nature that we should take it into account? Was there an earthquake in Japan that made things a bit more difficult? Was there a competitor going bankrupt that made that target a kind of plain sailing? We shouldn't take everything into account, but big things should be taken into account. And a few other questions, and when those are asked, we can have a view on performance. There's a scale here from one to five in both dimensions.
And in this case, it was a three on delivery, a four on behavior. That's a discussion on its own. Should you have these scales and so on? I'm not a big fan of it, but I think the main message here is that it is a holistic evaluation. The outcome of that rating is the basis for development plans for all employees and also rewards. base pay adjustment, and if you are on an individual bonus, we do have individual bonuses, quite modest compared to our competitors, but we still have it. But what is important is that that also, it's the same evaluation that drives that individual bonus, so there's no kind of mathematical link between a KPI target and a bonus. That is extremely dangerous. Because of these KPIs, they are indicators. And also they can lead to stupid performance if you are not kind of pressure testing through questions like this.
So to conclude and to go back to where I started out with the roundabout, I hope you've seen that
everything, or a lot of things we are trying to do is about moving the whole sentiment of how we think around this into something more self-regulating. When it comes to cost management, the rhythm of the process, translation versus cascading, relative KPIs, and last but not least, transparency. This is an attempt to simplify, but simple is not the same as easy. It's actually quite difficult to make things simple. And from a kind of simple point of view, well, From a leadership point of view, as I said earlier, this is not necessarily more simple. It's more challenging. But our management processes, I think, have become simpler.
This is our CEO and a few words that he has said about Ambition to Action coming back to the world out there and people in the organization. Unfortunately, he has just left us, so we are now in an interim period.
Who the new CEO will be will be important, but we have a CFO there who is a big supporter, and I'm optimistic about how this will end up.
So that is what I wanted to share with you. I don't know if there's time for any questions, but if any of you want to contact me later on, feel free to contact me on these coordinates. If you want to follow me on Twitter, that's highly appreciated. I only tweet about Beyond Budgeting and this stuff. And if you're even more interested, there's something called the Beyond Budgeting Roundtable. It's a network of companies interested in this. I'm the chairman of the European one. If you want to participate as a guest, we always have guests at our meeting. You're more than welcome. We normally meet in London. We just had a meeting in October. The next one will probably be in March. And if you want us to come in and talk about this in your own companies, that is something that we do if we can find the necessary openings in our calendars. And what you just heard was actually the short version of... This stuff. There is a longer version, so the second commercial for today. I wrote this book not just about what we have done in Startup, but also what we did in a company called Borealis in the mid-90s, where we also kicked out the budget. That was my first experience with it.