Friday, November 11, 2011

Beyond Budgeting - Fixing the Budget Mess

The audience at LESS 2011 conference was fantastic. Interested, educated, bright, and enthusiastic. Great people to meet and speak with.
The chief cause of problems is solutions.
–Eric Sevareid
At the LESS 2011 conference an entire track was dedicated to solving the problems caused by the annual budgeting systems most organizations use.

Yes, caused! We have used annual budgeting for a long time. This means annual budgeting was created to solve problems in a world quite different from ours: The world moved slower, in more predictable cycles.

Today, the world changes very quickly, and is a lot more unpredictable. This is not a bad thing per se. You can turn it to your advantage (which is what I talked about at the conference), but doing that while hanging on to an antiquated economic model is very difficult, to say the least.

Does this sound familiar:
  • "Great idea, but we can't do it right now. Let's wait for next year's budget." The great idea will be delayed, which means your company will lose the money it could have earned during that delay. Even worse, delaying implementation means someone else may get there first, and take your market away. Or, the great idea may simply be forgotten. The employee who had the idea may get tired of waiting and move on to another company, or start up a business of her own.
  • "To ensure that we get the budget we need next year, we need to spend the money we have budgeted this year." Utter insanity from the point-of-view of the whole organization. And yet it makes sense from the point-of-view of a department or a project.
  • "Unfortunately cross-the-board budget cuts forced us to close down X. Without X, so much revenue was lost that we had to cut Y. We lost the company in the end, but there was really nothing else we could do." To put it very frankly: Bull! Truly hopeless situations are rare. Most of the time, the real problem is that the way we solve problems isn't very good. At the LESS conference, I demonstrated a Chinese problem solving method with the cut-the-budget method common here, and showed how the Chinese method can generate solutions simply not available to a person with a focus on the budget. (We also used the Chinese method, very informally, at a breakfast meeting to generate some nifty strategic moves for next year's LESS conference. That was fun!)
There are of course upsides to budgeting, primarily the feeling that you are in control. If you control the numbers, you control the organization, right?

No, you do not! Controlling the numbers is actually a very weak form of control. Look at this model of leverage points you can use to lead an organization (or change any system):
The picture shows Donella Meadows model for changing organizations and other systems. This model has been used for many years now. Unlike budgeting systems, it has stood the test of time.

Note that setting constants, parameters, and numbers, and setting buffer sizes, are the two weakest forms of controlling a system. In other words, relying on making a prognosis and setting a budget is like bringing a couple of knives to a gunfight. Moving Beyond Budgeting frees you to use more powerful means to lead the organization.

The weakness inherent in how most organizations are managed and lead shows up in the statistics. I find this little piece of information more than a little worrying:

The slide above is from my own presentation at LESS 2011: In 1937, an S&P Fortune 500 company had a life expectancy of 75 years. Today, the life expectancy is 15 years, and still dropping.

If you just sit and wait, you will join the growing casualty list. Moving from a budget based system to a more flexible Beyond budgeting system is not the only thing you will have to do, but it is an essential part of it.

When you do that, you will suddenly be able to deal with many other problems concerning organization, employee motivation (, and your own motivation, I might add. You'll be a lot happier.), strategy, customer satisfaction, profitability, innovation,... the pieces will begin to fit. This immensely increases your chances to survive and thrive.

They are moving Beyond Budgeting right now!

Many organizations have moved beyond budgeting, or are doing it right now.

Bjarte Bogsnes, a keynote speaker at LESS 2011, is heading the Beyond Budgeting project at Statoil. He has also implemented Beyond Budgeting at Borealis. In his presentation he mentioned more than thirty companies using or currently moving to Beyond budgeting. These companies include:
  • Statoil
  • Borealis
  • Handelsbanken (a very successful Swedish bank)
  • Google
  • Telenor
  • COOP
  • Arla
  • Southwest Airlines
  • Gore & Associates (makers of Gore-TEX)
  • Kongsberg Automotive
  • American Express
  • Sparebank
  • Jernia
  • Ahlsell
...and the list goes on.

You too can move Beyond budgeting!

Leaders in these companies are facing reality, and have determined to break the bad habit of budgeting. After all, budgeting is not a necessity. There are proven alternatives. Budgeting is a bad habit, like smoking. Changing bad habits is difficult, but it can be done. Survivors do it all the time.

The first step: Find out more!

Start by finding out a bit more about Beyond Budgeting:

Beyond Budgeting Round Table is a web site dedicated to Beyond Budgeting. There you will find more information, and links to books.

Implementing Beyond Budgeting (link to Kindle edition) by Bjarte Bogsnes is a very good book on Beyond Budgeting. Bjarte heads the Beyond Budgeting project at Statoil. He also implemented Beyond Budgeting at Borealis.

Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (link to Kindle Edition), by Jeremy Hope and Robin Fraser is also a good book.