Beyond Budgeting does not mean that cost is not important. It simply means that we need better and more effective ways than traditional management
Traditional budgeting is a hundred-year-old management technology. It was invented for challenges that organisations had a hundred years ago, and those challenges have today changed radically, which is why we need different and better ways, including when it comes to managing costs.
You are advocating for more agile and humane organisations during times when we often hear that people and even companies will become obsolete if they do not perform like virtual robots. How does this apparent omnipresent “robotisation” fit into your perspective?
I think that, when it comes to automating business and manufacturing operations, that is something different from what we are talking about here. Any company going into robotisation will still most likely operate in a dynamic and unpredictable business environment. You still need dynamic management models even if you have automated or robotised your manufacturing process. So, I see no conflict here, because I think robotisation is addressing different issues than those addressed by Beyond Budgeting.
If we go a step further, how does your vision elaborated in Beyond Budgeting fit into an economy that is both stagnant and increasingly fragile, as well as being prone to a variety of risks – from terrorism to climate change and financial shenanigans?
I think that Beyond Budgeting makes sense in any business environment, stagnant, growing, fragile or stable. However, as you are indicating here, there are various risks that mean a variety of uncertainties, and that again is an argument for having management models that makes you more flexible and agile so you can respond faster when things are happening. And, yes, that would also make you more secure.
How does the Statoil Group perform in comparison with its competitors by relying on the principles for which you advocate in today’s volatile times?
When it comes to our performance, as you might know, we define performance in terms of how we are performing compared to others. And over time we have performed quite well, one example of which is when it comes to unit cost on production, which is the key metric in our business; we are the most cost-effective oil and gas producer in the world if you look at the cost per barrel.
What sort of change has that meant for Statoil and how keen was the management to make changes?
First of all, we have had the full support of top management from the beginning here, so that has been very important to us.
There are a lot of big changes in our management processes and maybe those are the biggest changes, because when it comes to changes in our culture and behaviour I think we have always been a people-orientated, values-based company, but we have management processes that had a different message, so this has very much been about trying to change our management processes to reflect what we say about people and values and leadership, and at the same time making our management processes more robust against the uncertainty out there.
You are a finance guy, but it seems – at least at first glance – that you are against budgeting. However, what does the philosophy behind your different approach to budgeting mean in the real life of companies?
Yes, I am a finance guy. But I have also worked in human resources and I have also been a leader for more than twenty years, and I think both of these are also relevant because there are big doses of people and leadership in Beyond Budgeting. I am against additional management, of which budgeting is an important part, but traditional management is more than budgeting, and when it comes to real-life in companies that means that we have management processes that are more agile and continuous, enabling us to respond faster and perform better.
Any company going into robotisation will still most likely operate in a dynamic and unpredictable business environment. You still need dynamic management models even if you have automated or robotised your manufacturing process
The next thing was to get rid of the calendar. Again, what does that mean in the daily work of the company?
We started out with all the other things back in 2005, but we actually didn’t address the calendar before 2010 – the reason being that we had considered it in 2005 but felt it would be too much to propose that on top of everything else, so we waited some years and went back to the committee in 2010 and got a big ‘yes’ to move ahead with this. What could have been scary back in 2005 was no longer scary, because by then they had seen the other steps that went quite well?
When it comes to daily work, it means that we have management processes that are less calendar-based and more event-driven, more business-driven. That doesn’t mean that you can get rid of the calendar year in all settings. When it comes to statutory counting, taxes and reviews, of course, we need to relate to the financial year, the quarters and all that, but for the more forward-looking stuff that we are talking about here, we are much less calendar dependent than we used to be, which makes us more agile and more flexible.
Let’s say that companies understand that they have to change. How can they let go of their old model and stay on their feet?
One way of getting started is simply to separate; simply ask people why they budget and they will usually come up with three different reasons why they make budgets. In our case, it does not matter if the oil price is high or low, the target is just as relevant all the time.
Then you can move on to discuss how you can improve the forecasting process, how you can establish a process where you can quickly get on a table and a simple set of numbers that you know you can trust, thus you have removed the reasons for gaming on these numbers; a forecast is what we think will happen, whether we like what we see or not, brutally honest and an expected outcome, whereas a target is what we want to happen.
This should be ambitiously stretched and can’t be the same. And, last but not least, how you can find more effective ways of managing costs than those offered by traditional detailed annual budgets. Separation is a way of getting started and moving into the bigger discussions about what our management process should look like if the world is dynamic and unpredictable and what our management processes should look like if we believe that we generally have quite good, competent and trustworthy people on board.
Do these changes require new people in management or a new way of thinking for existing management personnel?
It doesn’t necessarily require new people in management, but it does require new thinking among managers, and not everybody copes. We have seen examples of not coping with this, but fortunately, that is a minority. So, this is definitely more demanding from a leadership perspective compared to traditional management. Traditional management contains big doses of command and control, which is actually quite easy from a leadership point of view. It is much more challenging to manage without command and control.
What and how does the management manage when you have got rid of the strict control of the organisation you manage?
If you have a general workforce, it needs no action for the organisation for which they work. You can still do a lot of sensible things in the management process dimension of Beyond Budgeting – the six principle steps that have to do with management processes – but it is more difficult to do things on the leadership side that relate to autonomy and trust and belonging and so on. If that is the situation, it would be more challenging but not impossible. There are still things you can do.
I am convinced that in twenty years’ time we will smile a bit about how we used to think about traditional management, just as we smile today about the days before the internet
On the other hand, some companies are experimenting heavily with cutting hierarchy. Some even see almost every employee as a kind of free agent operating in different teams, like gaming company Valve. In your opinion, where is the right trade-off in terms of management and the freedom of employees?
There are a lot of exciting companies out there. We have great examples in Norway as well; we have a fantastic IT company in Norway called Miles. It has no budgets, no targets and simply nothing of traditional management processes, but the company performs extremely well. We are not as radical as some of these companies, for instance…And I don’t think there is one right answer to where you should be. We often say that what Beyond Budgeting should mean in your organisation depends on your organisation, your business, your culture and your history.
So, Statoil has a different history and a different business… So we need to adapt the model to what suits our realities. That is why Beyond Budgeting is not a management recipe, but rather a set of twelve principles that provide guidance.
How do these different approaches to control, management, micromanagement etc., impact on the ability of companies and their employees to innovate?
The moment you move to management innovation, it is suddenly scary. That is why so few companies dare to embrace this, but that is good news for brave companies that dare to embrace management innovation. That’s because you can gain just as much competitive advantage from management innovation as you can from technological and product innovation.
I would also argue that this kind of management model actually stimulates innovation on the technology and product side because it is easier to have your voice heard, to challenge the status quo and accepted ways of doing things. This is a management model that takes people and their views and proposals seriously, so I will argue that this is a great model for supporting innovation.
You spoke about people and productivity at the recent FT conference. In your opinion, what makes people productive?
Yes, I was at the Financial Times Conference and I got this question and I think that in my answer I quoted management guru Peter Drucker. He once said that most of what we call management is about making it difficult for people to do their job, and I would agree.
I think it is more interesting to mention that in a free society it is obvious that we should elect our own leaders. However, in a company that would be unthinkable. In a free society it is obvious that everyone should have a voice, in a company it is obvious for many that the boss should decide everything. In many ways, traditional management – in comparison to politics – is more similar to political dictatorships than political democracies, which I find interesting.