Anders Olesen is the Director of the Beyond Budgeting Institute, and in this full-length video, he talks about the 12 Beyond Budgeting principles and the benefits scrapping the annual budget has to your organisation.
Short on time? We also have uploaded a short, two-minute video with one of the main points from Anders’s talk around the paradox of management innovation.
Prefer to read a blog? Here is a full transcript of his talk.
I’d like to give you an introduction to what Beyond Budgeting is all about, and then I, myself, look very much forward to the rest of the day, because what you will experience is a lot of companies who have put these principles into practice. What you’ll find is what they’ve done is very different from company to company, but I really hope that that will give you a lot of insights and inspiration so that you would like to start moving in your own organisation.
So to start with the start, let me say a little bit about our network, how it started. The Beyond Budgeting Institute started in the UK 20 years ago when a relatively traditional management network came together and discovered that they had the same problem in all of their organisations. They all had this annual process called the Annual Budget, that they had to do once a year, and all of them felt that that was a pain. But at that time, no one knew if there were alternatives.
So that was the first task that our network took upon itself – to find out if it was possible to run a big complex organisation without a traditional annual budget. It took a bit of time in those days to find out, but it turned out that yes, there were indeed alternatives, but what was even more interesting was that they then started looking into the performance of the companies that operated in this different way, and they found that the companies that operated without the traditional budget did much better. And then it began to become extremely interesting.
What was it that made performance so much better in companies that had abolished something that was there to improve performance in the first place?
This is what gives us nourishment, this is what gives us energy – this fact that it is possible to get organisations to be more effective without the traditional tools. What we normally find is that not only are they more effective but they typically use less efforts in operating the companies.
This is something that we have been focusing on. We provide information about it, we provide courses about it, we do consulting in this stuff and help companies on the journey.
By now we have a fairly extensive network around the world – so this is not just something that a few companies are working on, this is something that has been going on for many years. It’s unfortunately not yet the common practice, but this is what we’re aiming at. We really hope that some day, maybe in our lifetime I’m not quite sure, but some day this will be the way that companies are managed in the future. A lot of great stuff is going on out there, and you’ll hear some exciting stories here today.
The 12 Beyond Budgeting principles
I’m not going to go through this in detail, but this is how we’ve decided to summarise and frame these issues. We’ve developed the 12 Beyond Budgeting principles, and this is our attempt at inspiring organisations to get this stuff in order. The idea with this is to serve as inspiration when you start looking into this – this is not a management recipe, ‘do this in this order’.
The thing we find is that this stuff is extremely important, as if you are not aligned in these elements, bad things happen and you are not going to be able to have everyone running in the same direction with a high degree of efficiency. It’s not because managers or the people who design organisations have bad intentions; the budgets and a lot of the other stuff we have in organisations are put in place for good purpose and with good intentions. The problem is that despite this, bad things happen, because in most companies we find that people are not aware of this stuff. They are more focused on the strategy and the business model, which is also important, but this stuff we refer to as the ‘management model’, and this stuff is just as important.
We find companies in our network that have gained competitive advantage, not because their strategy or their product is better, but because their management model is better.
Are your leadership principles and your management processes aligned?
One other message in the principles is that on the left-hand side we have what we refer to as the leadership principles, and the right side the management processes. The left-hand side is the principles, the values, the purpose of the organisation.
Most companies, especially in our part of the world, have great statements about purpose and values and principles and you’ll have them on the walls in most companies – what is very often missing is that the management processes that are in place do not support the principles. We say that we trust people, but in reality we don’t and people get frustrated, lose motivation, make bad decisions and get a bit cynical. We say we want to work as teams, but then HR listens to best practice from consultants and they install individual bonuses which go counter to teamwork and what’s good for the customers, or whoever you’re serving. It’s not to say that there’s one way of doing things, in some organisations I’m sure it’s OK to have more control than in others, but if you do want to have an organisation that is effective and that lives by its values and principles, you do need to have these things hang together. That is one of the key elements of Beyond Budgeting: making sure that these elements hang together and making sure that the leaders discuss this stuff.
I had a great experience recently. I met with a CEO of a very large, global company, and he was pretty frustrated about them not being able to live their principles and values in the company. They had this long legacy, nice statements of principles and values on the walls, a true wish from him and his management team to live the values throughout this enormous global company, but he had realised that this was really, really difficult and that the bigger they became, the more difficult it was. When I showed him the 12 Beyond Budgeting principles and talked a bit about it and it clicked immediately. He said ‘of course, of course! we’re doing all of the management processes stuff with professional HR people, professional finance people and IT, and doing all of this stuff that is regarded as best practice in isolation, but in combination they go counter to the values and the principles and maybe even between the functional silos’.
Unless you are aware of that and start dismantling that, or avoid that as you grow as a company, things are going to go wrong. You may be a big company but rather bureaucratic and not very efficient and you might not be able to keep all of the bright people that thought it might be interesting to work with you when you were a smaller and more interesting company. So this is really, really important to think about.
The paradox around innovation
In order to do this stuff, people say you have to be innovative about how you develop your company and how you manage, and so we refer to this as ‘management innovation’. But there is a very interesting paradox about innovation, because normally when we talk about innovation, people think about their strategy and their products, their services, their technology.
For most people this is very very exciting, people smile when they think about innovation. They would like their company to be innovative, they would like to be regarded as a first mover, leading edge, being able to attract the top notch, most innovative people, so this is seen as something that is really really great – when it comes to technology. Do you recognise that?
But when we start talking about management innovation, all of a sudden, especially the managers, are not so excited. It’s a little bit more scary. Maybe because it comes closer to oneself, and I think also because we have so many beliefs about what works and what doesn’t work. It’s very difficult, especially for senior managers, to get out of this comfort zone, this zone where they are.
It’s really a bit of a paradox because in both cases it’s about getting better performance, so the purpose is exactly the same, but again when we’re over here, we always get these questions immediately – ‘well, what’s best practice? We’re a company of 5,000 people and we’re this industry and we’re based in UK, what do others in our industry do?
You never get these kind of questions when you’re in the technology space, you would want to bypass your competitors and do something that’s different to ‘best practice’. But when it comes to management innovation, unfortunately people are insecure about what to put in place instead, and that’s where we try to help with events such as this.
Another interesting issue is that due to the fact that technological innovation is so interesting, everyone is talking about this, this is a very crowded place – a lot of competition. But over here, in the management innovation space, not so much. This is much more ‘blue ocean’ as opposed to the red ocean space. So if you’re really looking for a competitive advantage in your company, I would ask you to think more about your management model and spend more time on that – and maybe a little less time on the technological innovation side, if you have to choose. I think it will be easier for you to out-compete your peers in that space. It’s about better performance, both of it.
“A lot of this was set up a long time ago.”
Another way of describing what Beyond Budgeting is all about is to think about it in this setting. When you think about the budget process and a lot of things that we do in management, a lot of this was set up a long time ago. The budget was set up a long time ago, the process itself is almost 100 years old, and a lot of the other stuff that we do and learn at business schools are things that were invented by people 10, 20, 30 years ago and we tend to continue working on the same tools and methods – without thinking, well, when these processes were invented or designed, what were the circumstances in that point in time? Do we have exactly the same challenges and problems as they did at that time? And again, a lot of things have happened.
When you take the budget, as an example, things have changed enormously since the budget was invented – things change so fast, we have a business environment today that is much more dynamic, hectic and ever-changing, surely that must be something that we have to think about when we design our processes? And likewise, when it comes to Theory X and Theory Y, depending on where you are on that scale and how your company looks like and your people, that should also have an impact on how your design your processes. What we find in this lower left-hand corner, is something that worked well at that time, and was the right thing to do at that time, but seeing with today’s eyes, it seems pretty rigid and out of date, and something that reinforces an old fashioned command and control style, with secrecy, stick and carrots to improve performance, which in my book is a bit outdated and doesn’t work very well, especially if you are in a Y environment.
What we encourage you to do is to leave some of this behind and start thinking more about if you really are a Theory Y company and working more on values. And this is not to say that only values as opposed to only rules-based management – in some companies a lot of rules are needed for regulatory purposes. It’s not black and white, but it’s about having a more values-based management, and providing more autonomy, showing trust to your people, being more transparent about what is going on so people have access to information and can make fast and better decisions, and tapping in what we call the internal or intrinsic motivation and not using the methods of the past. Likewise, when we come to the processes, if your company or your organisation is in a volatile environment, you have to work in a more dynamic way, you have to be able to respond to changes and react when things happen that were not expected. When setting targets for example, it doesn’t make sense in my book to have a fixed target such as ‘we want to grow from 1000 to 1073 next year’, as if your environment is very dynamic it’s just a waste of time. Another example – how to evaluate performance, there must be a more holistic way rather than just counting the number of targets that you hit that were set one or two years ago.
Find your business rhythm
This is another way of describing what Beyond Budgeting is about, it’s about making sure that you have management process that take into account what kind of people you have in your organisation, how dynamic are we, what is our business rhythm, how fast do we need to react? Getting that right and finding that balance, which will be different from company to company, as you’ll see today in the other presentations, but finding your own path and your own balance is extremely important. What we’ve found is that companies become more agile, become more human, more interesting places to work – more efficient and with less waste.
So what do we mean by business rhythm? The reason why we address that is that we find that in almost any company, the rhythm of the business processes are tied to the calendar year or the fiscal year, because we have to file a tax return or we have to file some accounts, and maybe we have to tell the shareholders about how things are going, so we use this as the default period for planning. Of course that has very much to do with the fact that the people designing the processes are people like myself, finance guys, so for us, a one year period is nice, neat and makes sense. But if you’re in the oil industry, for example, and you’re looking for oil on the Brazilian cost, your planning period is not one year. Or if you’re a company that trades financial products, maybe your business horizon looks two or three weeks ahead – I don’t know. But the business horizon and the way you plan resources will vary enormously from a few days or weeks to decades. There’s a few companies where the calendar year fits very well, and that is legal, as their products go out in November and December so for them, this one year planning makes a lot of sense. But think about your own company, its activity may have very little to do with the calendar year.
What we recommend is that you think very long and hard about what are the planning needs in your company? Then do what you need, but no more than that. We find that when you have this annual mindset and these annual targets, you drill them down and you keep measuring if you’re on track to meet the annual target throughout the year, you put so many processes in place that lead to so many stupid meetings and unnecessary waste – bad things really. Find out what works for you and what fits your industry.
As you can hear, Beyond Budgeting is about so much more than just budgets. If you’re here to learn about how to do a budget in a better way, I’m very sorry to disappoint you! But I will say a few words about the budget though. There are so many problems with annual budgets, and we find that that process is so important to do something about – getting rid of the budget doesn’t solve everything and it’s not the only thing we should work on, but since the budget in many organisations has such a central part of the performance management methodology, doing something about the budget is a very good place to start. Once you tackle that, you start a lot of great thinking about how things can be done differently, which can be passed on to other parts of the organisation.
Have a think about your organisation – why is it that you do annual budgets, what is the purpose of the budget? What are you trying to achieve with the budget?
When you start thinking about the annual budget and why we do it in the first place, it’s usually something about setting targets, setting a direction for where we’re heading, having a financial plan for the coming year, and something about allocating resources – and all of these things are sensible things to do, they make sense. The problem we find is that you’re doing them all with the same process. A target is something you’d like to see happen, it’s something that’s taking you to another level of performance than where you are today, and forecast is about predicting about where we’re heading and to plan, and allocating resources is about who can spend what – they’re all very different things. our very brief recommendation to get out of this trap is to regard these things as different things and design different processes for each one. So if we need targets, we need to design a target-setting process, which could be a one year, or 10 year, or three month. Forecasts – make the forecast that you need to drive your business, no more or less, and allocate resources when you need them – when you have full information about what’s the right thing to do. When this happens you’re able to improve each of these processes enormously and gain a lot of the benefits that we talked about before, and make them more coherent with your values.
During the day you’ll see some examples of companies that have done this, and how this can work in practice. Thank you.
Anders Olesen is the Director of the Beyond Budgeting Institute. In addition, Anders is a Partner in Basico, a Danish consulting company specialising in helping private companies improve their financial management practices. Before joining Basico, Anders worked 15 years in various finance and management positions in several international industrial companies; including Borealis which abolished traditional budgeting in the mid 90’s. Follow Anders on Twitter at: @AndersBasico.
Anders was speaking at the 2017 Beyond Budgeting Conference in London. Click here to view more videos, PowerPoint and blogs from the event.
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