At the 2017 Beyond Budgeting Conference, Mira Gvozdenovic talked about how Beyond Budgeting was implemented at Coloplast, and how this created impressive results across the business.
In 2008, Coloplast’s board appointed a new leadership team, who had a very different approach to the previous team. As part of this, they created the Coloplast Agenda – a new focus and agenda that was rolled down to the whole organisation and communicated frequently at all employee meetings once per quarter. During this process, the leadership team realised that traditional budgeting did not fit with the new business model, and so they changed to the Beyond Budgeting method.
In this new method, the company set a couple of high-level ambition aspirations that they wanted to achieve in three to five years, with rolling forecasts updated quarterly so they are more responsive to changing markets. Budgets became much more flexible – available on demand when the opportunity arose. Quarterly business reviews focused more on the business performance and risks, challenges and opportunities, rather than financial KPIs.
After six years, Coloplast was outperforming their peers in financial performance, the global cost-to-income ratio reduced from 2.3% to 1%, employees were more motivated and engaged – and so their customers were happier, too.
- Short on time? Click here to watch a two-minute clip from Mira’s talk – The Problem with Annual Budgets.
- The Happy Manifesto by Henry Stewart – click here to get your free eBook, full of great ideas for creating a happy workplace
- Click here to watch more videos from the 2017 Beyond Budgeting Conference
- Is it Time to Move Beyond Budgets? – a blog by Henry Stewart about what Beyond Budgeting is and how other organisations have used this system with great results
- How Well Do Your Staff Know Your Organisation’s Finances? – a talk by Pim of the Corporate Rebels at the 2017 Happy Workplaces CEO Conference
Hello, everybody. I’m very happy to be here today with you at Happy. It was three or four years ago when I met Henry for the first time. It was at the Beyond Budgeting conference on the other side of the Thames. I was thinking, I changed job in the meantime, I moved office buildings several times, I moved my desk several times, and what has followed me is this small blue book: the Happy Manifesto. It really made an impression on me.
Today, you are learning about Beyond Budgeting and I’m learning about how to arrange workshops and how to run the training in a very efficient way.
As Henry mentioned, I work for Leo Pharma, which is a Danish pharmaceutical company specialising within dermatology. I would rather present the Coloplast case to you today because it’s a more mature case. We’ve been running Beyond Budgeting at Coloplast for eight years, so I have more to tell you.
The Coloplast story is a great story, it’s about a company who has faced challenges and who has understood the need to change. Coloplast has focused on empowerment and ability to adapt. The board appointed a new leadership team and a very lean executive team; we got Lars Rasmussen as our CEO and Lena Scola as our CFO and they did the turnaround and they did the job over the upcoming six years after 2008, so it was a different leadership style, different approach. We suddenly experienced trade talk, fast decisions, we started looking into performance in a different way, and we’ve started with simplification of our organisation. We embarked on a journey which has changed Coloplast from being a small regional player to become a truly global company.
As a response to the challenges we have faced, they have rather quickly defined what needs to be done on target so we have set our focus on profitability. So growth, yes, but the growth needs to be profitable and we need to have a more balanced approach.
Direction. A new strategy was developed for the company which was kept only at the corporate level and rolled down to Disease (company department). As you recall, ostomy continents and wound care – nothing below.
What was introduced was Coloplast Agenda. That was kind of a short-term focus; what are our priorities for this year or year and a half? This agenda was communicated frequently at all employee meetings once per quarter.
Effectiveness: we did quite a lot of cost-cutting over the coming years.
Question from audience: How did you enable faster decision making?
The organisation has become more lean, more flat; you didn’t have that many layers. Not from day one, but that’s what we’ve experienced: if you look at full value chain in manufacturing, R&D, marketing and sales.
An example could be our affiliates. Earlier, you had a head of an affiliate where he had eight, nine direct reportees and that changed. So the Head of Affiliate has become either the Head of Sales or Head of Marketing, and all support functions were gathered under business support, so he had two or three reportees going. The decision enabled him to focus more on the business rather than administrate all the requests from corporate.
That was the time where we have discovered that the traditional budgeting didn’t support us on this journey. Could you spend a minute or two in your groups and talk about why traditional budgeting does not work? I don’t know if you are finance people, but everyone seems to come into contact with budgets in their daily work.
Input I got so far was that the budgets are outdated and that it’s just a gas. A gas, we are spending a lot of resources on, I would say.
Well, what we identified at that time was that it was budgets that were driving wrong behaviour. You know this ‘use it or lose it’ mentality? When you’re approaching the year end in November/December, you spend three times more than in the beginning of the year. Of course, because you need to secure your baseline and preferably you should also negotiate some additional resources.
Another thing: budgets are often prepared for a single department or a function so that makes a disconnect of strategy, and this drives a lot of sub-optimisation.
Third thing: you said it takes a very long time and a lot of resources are put in such a process – two, three, four months. Not only finance people, but all leadership is involved in this exercise and when you think of the resources put in it and the value at the end, it doesn’t balance.
The last thing: budgets are outdated. You know all these iterations: version 12, 13, 14; finally it’s approved, they let us submit it in our system, and what happens is we make an organisational change in our marketing function and what you can see in front of you is that you have a year where you’ll do the variance explanation because of the phasing.
One member cannot do the job. What Anders showed to you this morning was that there were a lot of different and conflicting purposes with budgets, and that’s what we’ve tried to define in a new performance model when we decided to skip the budgets and introduce the new model for our organisation. So we said: we will work by setting high-ambition aspirations where we’ll look three to five years from now. We will establish rolling forecasts, very high-level. Forecasts aren’t prepared at department level but at functional level, and it’s updated once per quarter and we decided to look five quarters into the future just to come above this frame called financial or calendar year.
Another thing we worked with was opening for resource allocation, making it more flexible – available on demand after the need when you have the opportunity, not the [traditional] way, where the bank opens once a year.
The last element is where we have tried to adjust our bonus model. We were spending a lot of time defining different individual bonus goals, and what we have done is introduce relative targets rather than fixed numbers, and we started working with ranges, but we were not able to completely skip bonus scheme.
It was relatively internal. I was discussing with one of my table-mates this morning: what does it mean to have fixed target and trying to make it relative? Fixed target: you are supposed to sell for a certain amount; you can reach that and then lay back, or you can see in the middle of the year that it will not be possible because there some some external factors and then you lay back in the middle of the year and wait for the next year. When we are defining these fixed targets, we don’t know how the world will look because the world is changing with a much faster pace today than it used to. Look at the share price development; say it has grown 5% over the last six months. Not bad. But what if the market in that industry had grown 10% or 15%? Then we are behind. So we have incorporated in market sales in our major and mature market where that was possible. Emerging market was a bit difficult because we did not have data. But you can make your targets relative by thinking: what is the Delta you are making? It does not have to be comparing to the rest of the world.
Is it working? Yes, you could say it is working. It has really shown great results across all parameters. After five or six years, we started outperforming our peers in our financial performance. Our shareholders were happy again. We got motivated and engaged employees – about the average [of happy] employees and customers are the most important factors, because that is something that will secure your future.
Look at what our users, our patients, say about us. For a number of years, they have chosen Coloplast as the best medical device company on a number of different parameters like product solution, customer service, etcetera. So, it works.
When we talk about ambitions, we did not just stop there. They still have the idea of growing more, say growth between 7-9%. It’s not 7% because we work in ranges, and I can tell you that it’s quite ambitious because the global market was estimated to grow between 3-4%. Then if you look at the profitability, we’re still improving it by 50 to 100 basis points a year.
When you work with these ambitions, how do you get people to relate to this? How can they understand and how can they contribute to this overall goal? What we have used is what we call Coloplast Agenda. It was a kind of framework about the activities or initiatives which we were focused upon in short-time. It was structured around growth, profitability, and people. We were all supposed to recognise ourselves on one of those initiatives, whether we were working in manufacturing in China, if we were a Sales Rep in Buenos Aires, or me sitting at Headquarters in Finance in Denmark. It helped a lot. This was one of our main communication tools.
Working with ambitions. This is something which has characterised the work at Coloplast a lot; ask for the impossible and you won’t get it, but you will get something which is close to that. What does ‘ambition’ or ‘aspiration’ mean? It means that you do not target your ambition as a function or a region, you’re asked to go and define your ambitious self: where do you see yourself in the future? You need to have an idea [of] which actions and initiatives will bring you there. It’s not a three or five year plan where you know exactly where you are in year three or four from now, but you need to know that the things you are doing are the right things and that they will bring you to the ambition you defined.
We made a mistake the first year we started working with this. We asked the organisation to come and present their ambitions like they usually presented budgets and, even worse, we consolidated everything, like we do in finance, and that was not the idea. The idea is to give the ownership for the ambitions to the business, to discuss this at the business reviews and look at how you’re performing. Rolling forecast is a very important tool which is helping to close the gap towards ambition. Are you on the right way?
Ambition or aspiration is long tern. It’s meant to be defined at a rather high level. It doesn’t mean each and every department has ambition underneath and if you look at my existing company, Leo Pharma, we have the number of patients we would like to reach, the engagement and financial performance.
If you look at the regions or R&D functions, everybody needs to link in with their KPIs and it’s really difficult, but it makes a lot of sense to keep it to very few but relevant KPIs, otherwise you drown in it.
We changed the regular quarterly reviews. We no longer focused that much on pure financial KPIs and a regional function. They prepared the agenda for the business review. It was not like reporting to corporate. It was about what are our risks, what are we dealing with, if we have any opportunities – more like a business review, not a financial review.
Alright, now I have a couple of examples of what could be an ambition for a function (or department).
For a function like finance, at that time we started working with this concept, we had the global finance cost ratio with revenue of 2.3% and if we compare it to all companies – best in class, world class – they had a ratio of 1%. The ambition was said that we should go down to 0.75%. What did we do? We implemented the standard ERP solution: we standardised, automated our reporting, we established a shared service centre in Poland, a number of things. When I left the company the ratio was around 1%, so it had significantly decreased. Whether they will ever reach 0.75%, I don’t know, it doesn’t matter, it’s not linked. It’s just setting the direction.
Back to examples from ambitions. There is one example of non-financial ambition. It was from our Belgian subsidiary where they aimed in getting two out of three MPD’s. That was relevant KPI in the medical device industry. It was in Coloplast, two out of three newly discharged patients leaving the hospital with Coloplast products because the probability that they would keep using the same products for the rest of their life was rather high.
An example for a regional ambition. At that time I worked with a region Europe and that was in a very mature market it had been in for more than 50 years so we had very high market shares so we were not expected to grow double digits, it was not possible. The ambition was to grow above market growth and make it profitable.
Last but not least, the ambition for the company was to become the best medical device company. You have seen that there are different parameters to measure this success about being the best. Here we look at the journey. Here where we started in 2008/2009. If you look at the focus we put on profitability, the blue line is the EBIT margin, by 2010/2011 we had doubled our EBIT margin. You could say “that’s great” and it was, but compared to our peers we were still far away.
So it continued and you can see it tripled. In these years the focus was very much on cost cutting and profitability and it was in 2012/2013 when we began to invest on growth initiatives. It was quite a shift for the organisation to change this focus. Now there has been four or five years considering costs and now because we have a certain amount of money we would like to invest in sales initiatives. It took six months that year before they understood the bank was open, that they could come with the proposal. There was an expression “the bank is open but the cash machine is broken” because that was their experience of years working with profitability.
So resource allocation, it’s not only about getting approval for the big investments. It also for the lowest levels. You don’t have a forecast, you don’t have a plan, you don’t know how much to spend, you don’t have a budget scheme. You ask yourself, “Is there any money left, can I attend the conference today?” it’s more, “Is this the right thing to do?” It has been a huge mindset change, especially for middle managers, they felt naked without budgets. So we said go and spend what you think you need to spend and we will monitor the development cost, not comparing to the forecast but to the previous years. You would need to justify your spending if you asked.
But when we talk about the mindset I would say about 25% of our organisation just waited. They could see the meaning behind the model. We had another 50% that embraced the change, but they had to work to understand it, but they managed, and today they think it has been a good idea. Then we have the last 25% who never managed to adapt, and who left.
Prioritisation. Yes the bank is open, but you need to have the big picture when you are allocating your money and that’s what we’ve tried with emerging markets.
So the mindset change, defining the tools and the new performance model is one thing, making it work and getting people to understand what is their role and what behaviour [is expected is] another.
So now I have some travel statements. “Where are we coming from? Where are we moving to?” It’s something which we used for workshops we ran with colleagues from HR. It is moving from a one year target to long term ambitions. It is also a kind of summary. We were moving from upfront allocation once per year in budget exercises to this concept that the bank is open and you don’t need to wait till September next year, “Come with your proposal now.” Instead of doing things in the same way, think in a different way. Instead of command and control, move to empowerment, which we have talked so much about today.
Behind this are four simple but very strong leadership principles and they have not changed since I left Coloplast.
It is about ambition and challenging your team, that is the mantra of our CEO. It is visible and decisive leadership, not physically visible now we are working globally, but showing with your behaviour and communication that is clear what you expect from your team. Be open and honest about your performance even when you are facing challenges, don’t hide it away. “What is the magnitude of the problem? What are you doing about it? Let’s liaise about it.” Then focus on the business results and enhance team performance.
So the last thing. How did finance deal with this change? From my perspective I can say that my job made much more sense than it used to. It is not easy to be a finance person and say, “We are not preparing budgets, you can spend as much as you need.” It requires some different capabilities, a different profile from finance. But it was moving from details, planning, systems and reconciliations to giving more time to the overview, the big picture, and coming closer into the business to have the right discussions and come with better proposals.
Backward looking performance. Now we were talking about, “Are we in index hundred 425 comparing to budget?” It doesn’t really matter. “Are we growing compared to last year? Are we creating our costs? What is behind this?” We had a rule that we should spend our meetings one third on actual performance and two thirds on the future.
Lessons learned. What was really important in this change was we were privileged at Coloplast to have 100% of our management’s support behind us. They really wanted this and they walked the talk. At the time we considered whether we should start the implementation or not. We were encouraged to be brave even though we had a lot of questions that we didn’t have the answers for.
Learning by doing. When you don’t plan at that detailed level it’s important you have a high quality of your actual data. So if you have a solid ERP platform it’s a prerequisite.
Mindset change, HR we have already talked about. We could have involved our colleagues from HR many years earlier. We would have done much better. Why HR? Because it’s such a big change, and to help people to understand what is expected of them [is important]. It’s not just a new financial planning model, it is also linked to the leadership principles. It’s to help us get the line across. It’s not about working in different silos, with us in finance and them in HR – we need to work together as an organisation. What we experienced in the later stages, we arranged workshops on leadership and Beyond Budgeting, and that was very well received.
I hope you liked this and found it interesting. Thank you!
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