- The problems with traditional management, including budgeting
- The Beyond Budgeting principles and companies on the journey
- Statoil's "Ambition to Action" model;
- redefining performance - dynamic and relative targets and a holistic performance evaluation
- dynamic forecasting and resource allocation and no traditional budgets
- from calendar-driven to event-driven; a more self-regulating management model
- Implementation experiences and advice
Bjarte Bogsnes: When I heard that I would close the keynote, I ... It's great. I mean, thank you for the invitation; but I thought on a Friday, how many will turn up? Then I learnt that the conference party will be the night before. Then I wondered, those turning up, would they be sober or not? Anyway, I don't care whether you're sober or not. I'm very happy that there are so many of you here.
My name is Bjarte Bogsnes. I'm not an IT guy; I'm a finance guy by education and background. I'm based in the CFO organization in a company called Statoil. I'll come back to that in a minute. I've also worked some years in human resources. Quite relevant for what I will talk about. I've also been in different leadership/management roles for more than 20 years. Also relevant for what I will talk about. By the way, my first management job in Statoil, back in 1984, that was as Head of the Corporate Budget Department. I've been heading up more budget processes in that job, later finance management jobs than I want to be reminded about.
Looking back, I've done a lot of stupid things in my life, at least on the professional side. I guess it gives me a platform for being critical; because when I will be critical -not just to budgeting, but to traditional management- I do it from a very practical platform. I've been there; I've done that. I even have a short IT career. Not working in IT, but working with IT in the late eighties.
I was the Project Manager for the implementation of a new accounting system in Statoil. I recall the we were fighting IT for half a year, about how to run this project. The system we were implementing, the great [Swedish 00:01:57] system. You could play with it, model it, and you need a very iterative processes. We had a word for what we didn't want. We said, "We don't want this waterfall thing." We didn't have a name for how we wanted to do this, and how we ended up doing it; because we won. Looking back, I realize that what we did at that time now has a name. It's been wonderful to see the agile movement growing over these years.
Why am I here, as a finance guy? I don't think I'm here because of my short IT career. I think I'm here because scaling agile is a big topic here. I would argue that you guys can be as agile as you want in your software development community, but at one level you're going to hit the big system. If that big system is constructed around very different principles, then we have some problems. This is where beyond budgeting is coming in. I think that scaling agile up to the executive level using the agile language, the agile framework, will be difficult; especially if IT is not the core business, if IT is a support function. Again, this is where beyond budgeting can help. Another label for beyond budgeting could actually be the agile enterprise. This is about agility at enterprise level, and it fits wonderfully well with what you guys are doing in your development area.
When I joined Statoil back in 1983, it was a smaller company than what it is today. Most small organizations, they want to grow, they want to become bigger. That's fair enough. Many succeed. They become big, but they might also discover that we have not only become big, we have become inflexible, rigid. We've lost a lot of that agility and the spirit that we had as a smaller organization. This is just like the aging process of a man, right. As we grow older, we do lose a bit of what we had as teenagers. I have some practical -I'm past 50- so I have some practical experience here. When it comes to man, we have no choice; that's the way it goes. In the end, age takes us all.
When it comes to organizations, well they have a choice. It's written nowhere: That because you are big; you should be slow, sad, and bureaucratic places to work. I would argue that for a big company, the big question is: How can we be big and small at the same time? How can we find our way back to the agility we had as a small organization, without losing the benefits of being big? How can we be big and small at the same time?
For the small organizations, my advice is don't adopt everything that the big companies are doing; because that will lead you straight into that misery. That's one way of positioning beyond budgeting, and what I will talk about. More specifically, I want to start with the case for change. What's the problem with traditional management? I'd like to start off a bit philosophical, and we're going to make this more concrete as we move on. I've got some slides on the beyond budgeting principles.
Again, beyond budgeting is a somewhat misleading name because the purpose of beyond budgeting is not necessarily to get rid of budgets. The purpose is to create organizations that are more agile and more human, because we believe that's good for performance. We know that's good for performance. In order to do that, we need to change traditional management. What do we find at the core of traditional management? We find a budgeting process and a budgeting mindset. That is where the name is coming from, but this is much broader than only budgets. Then, I'm going to close off with talking about how we are trying to do this in Statoil. We started out on our journey back in 2005. We are in no way finished, because this is not a quick fix; but I will share with you the basics of how we are trying to do this stuff.
I'm going to make the commercial very short. This is Statoil in a nutshell. Norwegian energy company with significant international activities; including here in the US, offshore, Gulf of Mexico, and also onshore, shale oil and gas. You will see a few date on the company here. We are listed in New York and in Oslo, but the Norwegian state still has a majority shareholding. Statoil, let's leave it with that.
Let's start to talk about some some of the budget problems that I often hear executives complain about. Some say that, "Well, there's a weak link to strategy in budgets." I agree, very often the case. Very time consuming process, a lot of people talk about this as the biggest problem. I would say it's the smallest problem, but it belongs on the list. It forces decisions to be made too early and too high up in the organization. Assumptions, very often, quickly outdated. It can prevent value-adding activities to take place, because it's not in the budget. The flip side of that is that it can lead us to do stupid things we shouldn't do, because it is in the budget; and spend it or lose it. You know the game.
Also, budgeting leads to a very strange forecasting horizon; because at the beginning of the year, when finance people do forecasting, they're interested to understand what lies ahead all the way till end of the fiscal year, typically end of December. In the first quarter, they are still interested in understanding that; but then, we are only looking at the nine, three quarter horizon. Then, we are kind of less interested in the future. Mid-year, two quarters and so one, before we are suddenly into the budgeting process. Then, we are interested in the four quarters for next year. It's kind of an accordion forecasting process, which I find a bit strange. Last, but not least, budgets are very often a very bad yardstick for evaluating performance.
Now, are these ... Well, these are problems; but are they more kind of irritating itches, or are these symptoms of a much bigger problem? That is a leading question. I would argue yes. The problem is that budgets, and that with the traditional management can be a big barrier for performance. That's the only reason we do this stuff; because we think it shall help our performance. I don't think that's the case.
I would like us to reflect a little bit around performance, because it is so important. 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 and back home in the afternoon. Traffic authorities, they are also doing this stuff which is called performance management. It's actually a label I don't like, because I'm not sure that you can manage performance; but that's a different story.
They are doing performance management. What we often meet in traffic, put up by traffic authorities to get good performance in traffic, that is a traffic light. A definition of good performance in traffic, that would be a safe and good flow of traffic, right. That is what the traffic light, or the stop light, is there to achieve. Two questions here. Who is actually managing, who is in control? And based on what information? Are those managing, are those who programmed this light? The information they're programming would be based on, would -for obvious reasons- not be entirely fresh. As you are sitting there waiting for that green light, because it would be based on some historic facts and maybe some forecast. It would not be entirely fresh information as you are sitting there. This is one way of managing performance in traffic.
Here's an alternative. Very common in Europe, maybe not that much in the US. You've got kind of the four-stop thing, which is a kind of a variant of this. Same questions here. Who is in control? Well, drivers are. Based on which information? Based on fresh, real-time, here and now information. Very different answers to the same questions. It could be interesting to compare a bit these two ways of managing, so let's do that.
First of all, which of these two is normally most efficient?
Audience: [crosstalk 00:10:48] The light. [crosstalk 00:10:52] Roundabout.
Bjarte Bogsnes: A roundabout. It has been ... Sorry. It has been actually proven that the roundabout is more efficient. Maybe that has to do with what we just talked about. Access to fresh information. Of course, you have that in front of the traffic light as well. You can see what is happening; but you don't have in front of that light, is the authority to act on that information. That lies with somebody else. In the roundabout, you have the authority to act. I would argue that there is 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 one of these is most difficult to drive in? It's the roundabout. I would argue that everything we are trying to leave behind in Statoil, or traditional management, is -in a way- it's much easier than what we are trying to do instead. Our guiding star cannot be to go for what is easy, because it is easy; we have to go for what's good for performance. Sometimes that is a bit more difficult. Competence is a key issue here. It takes more competence to drive in a roundabout, than in a traffic light.
Last question before we leave traffic. Is it relevant to talk about values in the setting of traffic? I would argue yes. The opposite of values-based management, we often call rules-based management; and the traffic light, the stop light, is once very simple, rules-based system, right. Red, stop; green, drive. We could always discuss yellow, but it is a very simple rules-based system. If there is a value set among drivers waiting for that green light, which is about me first, I don't care about the rest. Normally, not a big problem in front of that light. In the roundabout, that kind of mindset is a big problem. In the roundabout, we are much more dependent on having this common [policy 00:12:48] of wish and purpose of wanting this to flow well. Here, we have to be more considerate. We have to interpret each other's intentions. We have to interact with people in a very different way than we have to do in front of that light.
The roundabout is a more self-regulating management model than the traffic light is. I would argue, moving back to business, that in today's business and people realities; we need more self-regulating management models. We need that for two reasons. The first reason has to do with the world out there, our business environment; which is very different compared to when I joined Statoil in the early eighties. There's a much more of what the military call VUCA. You might have heard that expression, V-U-C-A: volatility, uncertainty, complexity, ambiguity. It's spot on to describe the kind of business environment we're operating in. If we take that VUCA seriously, it has significant implications for how we design our management models. That's one reality we need to take seriously.
The other reality we need to take seriously is not external; it's internal, and it has to do with people. Asking ourselves what kind of people do we have in our organizations. There are many labels and languages you can use for that discussion. We chose to go back to good old Douglas McGregor, 1960, "The Human Side of Enterprise", a fantastic book. He introduced Theory X and Theory Y. Two opposite views on people and what motivates and drives people. Theory X, very much the negative view. A view that most people in an organization is a bunch of potential thieves and crooks. They must all be managed tightly, kept on short leashes; because if not, we know what will happen. They will all run away, do other stupid things, and spend money like drunken sailors. That's the popular version. McGregor, he was bit more polite and academic; but I think that's what he meant.
You have Theory Y, very much the opposite view. A view that most people in an organization, beyond being well-educated and competent, are actually responsible and mature people; who want to do a good job, want to contribute, want to perform, want to be listened to, want to be treated as adults. Again, it makes a big, big difference on the design of your management models, whether you mainly believe in X or mainly believe in Y.
If we combine these two realities, the world out there and people in the organization; then it might look like this. You recognize the two dimensions. I would argue that traditional management lies in this lower left-hand corner, with assumptions consciously or unconsciously that the world is still a quite, plannable place, and that most people, it believes, belongs on the X-side.
A few more words on X and Y before I move on here, because this is not a question of being naïve. Every time I talk about X and Y, there are some faces popping up in my head. I can see those faces right now. They belong to colleagues of mine in Statoil, which I actually would put on the left-hand side here. I think you need to keep a close eye on those guys. There might be some faces popping up in your heads as well now, because those guys you will typically find in any organization. That's not the issue. The issue is, do these guys constitute a minority or a majority? If they exist but constitute a minority, we cannot base the design of our management models on minorities. We need to start with our majority view. Then we need to find other ways of dealing with these guys. This is just like in a free society. We are not putting everybody in jail, because somebody has done or will do something wrong, right. We are all free citizens within certain boundaries.
Now, in order to get out of this, we need to address both the people side and the management process side. What we need to get out of is something that's very rigid. It's very detailed. It's very angular. It's very rules-based; there's a lot of command and control, micro-management. A lot of secrecy, and a strong belief in sticks and carrots as ways to manage. I recall when I made this slide, and I thought that, "Bjarte, here you are a bit hard on traditional management." After having shown this slide, actually for quite a long time, I don't think so; because I always see so many nodding faces when I describe traditional management in this way. It is a bit scary. That is what we need to get out of.
There might have been a time when this was the right thing to do. There might even be places around, maybe, where this is still the right thing to do and the right place to be. For us, in Statoil, that is a completely uninteresting discussion, because we know that our business environment is up there with a lot of VUCA. We believe that the majority of people lies on the right-hand side, so we can't be down in that corner. We need to get out of it by addressing both dimensions.
Starting on the leadership side, we need to be more values-based than rules-based. That doesn't mean no rules. Of course, we need operative procedures at our offshore platforms and facilities; but in general, the more values-based you are, the less rules you need. We need more autonomy. In this kind of world, there isn't always time to run nine floors up to get that decision; because then it might be too late. Also, it doesn't always improve a decision, that it's taken further up. We need more transparency. This is good news for all the concerned managers I met, who are afraid of leaving that lower left-hand corner because they are afraid of losing control. I can understand, in a way, that fear. Even if a lot of the controls they are afraid of losing are only illusions of control, then the fear is still real. Here's some good news for scared managers. Transparency is a great social control mechanism. There is a reason why thieves and crooks operate at night, because then there's dark, right.
A nice little story from Swiss Roche, a pharmaceutical giant. Quite traditionally managed, but they did a very interesting experiment recently in a pilot. In an area that we all can relate to, namely travel costs. In this pilot, they kicked out the travel budget, they kicked out most of the travel rules and regulations. What they introduced instead was full transparency. With a few exceptions, everybody could see everything. If you traveled, to where, and did you fly, eat, and sleep cheap or expensive; open for your colleagues to see and vice versa. Then they started out. What do you think happened with travel costs in the pilot versus travel costs in the rest of the company? It came down, through a very simple, self-regulating way of managing. This was about tearing out pages of the rules book, instead of adding more pages. Very fascinating case.
Last, but not least, we need to get hold of that internal, the intrinsic motivation in people; that can move mountains, if you get hold of it. I would argue that a lot of the stuff practiced in organizations does not reach that intrinsic motivation. Of course, on the left-hand side is more about sticks and carrots; and I'll leave it for yourself to reflect on individual bonus as a way to motivate, on where this falls along this axis. That is a speech on its own, incentives and bonus, which we don't have time for. Let me put it this way. It's not only budgets I've lost my belief in over the last 15, 20 years. Let's stop there.
In Statoil, I think we've always been -or tried to be- a people-oriented, values-based company. Our challenge was maybe more that we had management processes which had a different message. 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 in organizations. We need to address also the management process side to make sure that there was a consistency between what we said and what we did.
There's a number of things that you need to do. I'll go through a few here, and a few more things later on. Normally, yes, you wouldn't need to look at the budgeting process; and typically radically change it or kick it out. Linked to that, we need to think differently when it comes to setting goals and targets. We need less of what I call 29.2 targets. When the target is 29.2, and anything above is good and anything below is bad; in this kind of world, with these kind of people on board, that performance language is too mechanical, too narrow. We need a richer, broader performance language. We need to not just blindly measure absolute targets; sometimes we should think about relative targets. Well, how are we doing versus others? It doesn't help to hit 29.2 if most others are doing better, and vice versa. We need to look at values. How did we achieve this result? We need to take hindsight insights into account. All the things we know afterwards that we didn't know up front, when these targets were set. We call this a holistic performance evaluation.
Last, but not least, we need more dynamics into our processes. If you think about it, January to December or whatever your fiscal year is, that is an artificial construct from a business point of view. We need to drive and organize these processes on more business-driven reference, more event-driven reference; instead of blindly sticking to the calendar. Of course, on the accounting side and tech side, we need to stick to the calendar year; but that's not what we're talking about here.
This is actually what beyond budgeting is about. Trying to move up in that upper right-hand corner via trying to address both leadership and management processes in a consistent way. For some companies, the leadership journey is the longest; for some, the management process journey is the longest. For some, both are equally long; but you typically have to -if you want the full potential of this- you have to address both dimensions in a consistent way.
This is what we are trying to do in Statoil. I'm saying trying, because when we move a bit later on to Statoil, then everything I will talk about is decided. It is written into what we call "The Statoil Book". That's not the issue. I will not going to claim that what I'm talking about has reached every head and every corner of Statoil. We still have skeptics; we still have resistance. We still have people who don't like this. We still mess it up from time to time. Right now, we have a big cost focus, and we are trying to stick to our principles, while also addressing the cost side in a meaningful way.
My message here is this is not a quick fix. This is a long journey where the direction, maybe, is clearer than the destination, to the extent that there is an end destination. I'm not sure about that. We are not alone on this journey. There's a number of other companies out there, around the world, on a similar journey. Here are some of them. The pioneer here is a Swedish bank called Handelsbanken, which you'll find on the top. It operates across Europe today. This bank completely abolished traditional budgets already, back in 1970. Not as a goal in itself, but just one of the things they had to do in order to become more agile, more human. This bank has been sticking to this very different way of managing, now for more than 40 years.
It prompts the question that we should ask. Well, does this work? Is it good for performance? If it isn't, we shouldn't do it. This bank has been performing better than the average of its competitors every single year since 1972. More than 40 years beating the average of their competitors. This bank is among the most cost effective universal banks in Europe. Last, but not least, this bank has never needed a bailout from the authorities, because they messed it up. I can think of a number of other prestigious banks who needed a bailout, because they messed it up. It can't be coincidence. I mean this very distinct and different management model, and great performance over such a long period.
Handelsbanken and some other companies here inspired what became known as beyond budgeting in the mid-late nineties. Most companies here are inspired by -directly or indirectly- beyond budgeting, including Statoil. I want to move to those beyond budgeting principles now. There are 12 of them. Before I put up that slide, just two messages around those principles.
Some people find it quite massive, a bit scary, quite big. I don't think you guys would do it, but if I talked to finance people, they do. If I talk to executives, strangely, many of them also get scared. Then I tell them, "Well, this is big, but you don't have to do everything at the same time." Right. This can be more of an evolution than a revolution, but every step you take has to point in the right direction.
The other message I have is that these 12 principles do not constitute a management recipe. This is not about ticking the boxes; do this, do that. The beyond budget principles, like the agile principles, are more [some 00:27:01] guiding [star 00:27:01] philosophy, an idea about how to do things. What this should mean in your organization. That depends on what kind of business you're in, what kind of history you have, what kind of culture you have. It's not identical, what has happened in these organizations. That's the way it should be. I don't like management recipes; because in a management recipe, somebody has done all the thinking for you, right. Your only job is to read the book, and kind of tick the boxes and implement. I find that quite boring, but also quite dangerous. If you like to think for yourself, there's a lot of good news in beyond budgeting.
The principles look like this. I will not go through all of this in detail. You will recognize some of the things that I have talked about already. On the leadership side, again, more values-based than rules-based, transparency, autonomy, and so on. It's important. On the right-hand side, the process side, again, think more relative when it comes to setting goals and targets. [inaudible 00:28:00] on rewards. Principle 11, I'll come back to that in a minute. Principle 9 and 10, planning, coordination, partly talks about the [rhythm 00:28:09] in the process. Make it more continuous, more event driven, and less of these annual stunts.
An important message here. It's only when we arrive at principle 11 that beyond budgeting talks about cost, right. Some people think that well, beyond budgeting means no budget, and for most people a budget is a cost budget. That must mean that I can, without a budget, that cost is not important. I can spend whatever I want. Big, big misunderstanding.
It's actually the other way around. Because cost is important, we need more intelligent ways of managing costs than setting them in full the year before. From corporate level, hand out all these thousands or millions of bags of money to the organization. Defining way too early and way too far up in the organization, what's the optimum level of resource use for next year. Not just that, but what's the optimum size of each of these millions of bags? How do we know that, down to the last dollar the year before, if at the same time we agree there's a lot of VUCA out there? That there's a lot of uncertainty about threats and opportunities. This is not only about trying to find more intelligent ways of managing costs, and I'll give you an example in a minute.
The other message is, again, that cost is just one of 12 principles. This is much, much broader than only cost management. By the way, when I talk about budgets, I'm talking about the typical annual budgets for fixed costs or operating costs or production costs or the detailed annual budgets. Project budgets is a different story. Project budgets has its certain weaknesses. If done in the right way, they do less damage than the traditional annual budget.
A key message here, again, is coherence, consistency between what we say and what we do. What we say on the leadership side, and what we do on the process side. Let me share with you two examples of lack of consistency that you very often find in organizations. It doesn't help, on the left-hand side, to talk loud and warm about how fantastic the organization is, how wonderful people we have on board. We would be nothing without you. We trust you so much, but not that much. Of course, we need detailed travel budgets; because if not, we know what will happen, right. One message on the left-hand side, another message on the right-hand side; guess which one is strongest. It's not what we say; it's what we do.
Another example, it doesn't help to talk equally loud and warm on the left-hand side about we and us and together and team, if everything we do on the incentive side, on the right-hand side, is about individual incentives. One message on the left-hand side, another on the right-hand side. Those kind of gaps are poison in our organizations; we need to close those kind of gaps.
Again, some people find this big and scary. I don't think you will do it, but as I said, finance people do. If we scare people, we risk not getting started; so we don't want to scare people. There is another ... I mean, I've met executives who understand all of this and want all of this from day one. It's wonderful. I mean those guys exist, but the majority think that this is kind of too big a jump. There is a way of getting started, which is less scary, more logical, somewhat more related to budgets. It's a great backdoor into getting started and into these principles.
It is something you discover if we ask ourselves, "Why do we budget?" That is a very simple question, but it's a very good question. There are actually seven reasons why companies budget. This is how we got started in Statoil. We, again, we were a bit afraid of [scaling 00:32:07] the organization at that time. This is where we started out. A budget has, typically, three different purposes. It presents a set of targets, sales targets or financial targets or production targets. At the same time, this budget is meant to provide a forecast of what the future might look like, in terms of cash flows and financial capacity. Two purposes. The third purpose of that budget is this resource allocation; handing out these bags of money to the organization on costs and investments.
Now, the problem does not necessarily lie in each of these purposes, given that they are done in a good way. The problem comes when you try to combine these three things in one process, resulting in one set of numbers. What happens if we ... Let's assume that it's important for us to understand cash flows, financial capacity; so forecasting is important. We ask our sales people, "What's your best sales forecast for next year?" Everybody knows that this is not just a forecasting process. That forecast that I now give, that will also become my sales target for next year; and there's a sales bonus link to hitting that sales target. What might happen to my sales forecast, when I know that I'm negotiating my own pay here? Right. It might start to fall. I wouldn't blame the sales guy. I would blame our process. It's putting this guy in a difficult position.
Maybe we thought that sales forecast was a bit low, but of course it's budget time; basically we have to move to the cost side. We ask the same people or other people, "What is your best cost or investment forecast for next year?" By the way, everybody knows that 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 it by 30%. What might happen with that potentially good cost forecast, that we might have received. Right. We know this game. We know this game, and we might smile about it; but I think it's a serious problem.
Not just because it destroys the quality of our numbers. Well, that's the problem, but there's an even bigger problem. That is that this process, this way of thinking stimulates a behavior that is on the borderline of unethical. The gaming, the low-balling, all the stupid things that we wouldn't like to see in our organizations. That's maybe the biggest problem.
Fortunately, there's a very simple solution out of this. We still do all these things in Statoil, but we do it in three different separate processes; because these are different things, can be different numbers. A target is what we want to happen. A forecast is what we think will happen, whether we like what we see or not. Expected outcome, brutally honest. Resource allocation is about what it takes to make it happen. These can be different numbers. All of this doesn't have to be done at the same time.
The beauty of separating is that this opens up a big improvement agenda. Then we can start to have much more intelligent discussions about how to do each of these. Taking reality seriously, the world out there, people in your organization. How can we set targets that really inspires and motivates, that stretch people without feeling stretched, and where we don't have the low-balling and the gaming? How can we have a lean, simple forecasting process where we quickly get on the table a set of unbiased numbers, because people have understood that they have no reason anymore for gaming these numbers? How can we find alternatives to the traditional budget way of managing costs? What you see here are actually some examples of how we try to do things in Statoil. I'll come back to that in a minute. Last, but not least, how can we do all of this on a more event-driven, business-driven rhythm, instead of letting everything circulate around the calendar year?
Now, let me share with you quickly a few slides on target setting and resource allocation here. On target setting, a key principle here is setting relative targets, instead of absolute targets. What you see here are actually the main financial targets that we have in Statoil. The two KPIs, as such, are not unique, and they have their weaknesses; but that's not the point here. The point here is that what you see here is what, we in Europe, call a [league 00:36:17] table. These are the companies we compete against, and these are the companies that we need to do well against.
We have set targets relative to competition. On the left-hand side, we want to be above average. On the right-hand side, in the first quartile. Right now, we have been doing well on these metrics for a long time, but that's not the message here. The message is that it's relative, instead of absolute. These two metrics, by the way, they drive the common bonus [game 00:36:43] that we have in Statoil. Us against the competition; everybody in the same boat. We do also have some individual bonuses. I'll come back to how we handle those.
Most of our relative KPIs are actually internal, not external. This could be a list of different platforms offshore, different refineries, different units. The purpose of this is maybe more to drive learning, than to measure performance; but you're kind of combining the two here. I would put learning as the main purpose, especially internally; but also externally.
Moving to the cost side, I've got two slides on resource allocation; because that is what the majority of managers find most difficult in this model. How to manage costs without a traditional budget. What needs to be in place is the right mindset, the cost-conscious mindset. The questions we ask are important. We would like to hear less of the questions on the left-hand side. Do I have the budget for this? If I have it, it's okay. If I don't have it, it's not okay. I'm simplifying a bit now. The budget role is a bit more advanced, but there is some truth in that.
By the way, that budget line that you see here, in a way it works. It's a kind of ceiling that we put on costs, right. You cannot spend more than this, but what we forget is that ceiling is just as effective as a floor. People tend to spend their budgets. Again, of course they do, because it's rational management behavior. It's spend it or lose it. If you're a rational manager, I mean don't overspend because then you're beaten up; but don't underspend either, because then you might get less next year and maybe you're a little bit beaten up. "Why did you ask for more resources than you really needed?" Right.
We want to hear more of the questions on the right-hand side. Is this really necessary? What's this good enough? How is this creating value? Is it within my execution framework, because we have some boundaries here? This is not anarchy, but we want these questions to be asked all the time, for every penny we spend. For some reason, those questions on the right-hand side, you do hear them in budget organizations; but very often toward the end of the fiscal year, right. At the beginning, you don't hear those questions because the budget bag is full. No worries. At the end of the fiscal year, we can see the bottom of the budget bag. "Hey guys, we have to be cost-conscious, because the bag is almost empty." We should be cost-conscious all the time, every day.
This mindset is necessary, but not sufficient. We do have something more. For our big projects, we have a dynamic resource allocation process, where basically the bank is open 12 months a year, right. You can always forward a project for approval, but the outcome would be driven by two things. First of all, how good is the project? Does it meet our decision criteria? Second, if we look at our forecasts, do we have the capacity to do this; people wise, money wise? That will drive the decision. We are trying here to make decisions as late as possible; because the later you make decisions, the better information you have. Not just about a project that you should have a view on, but also our capacity. Do we have the people and the money?
One way to position this is that we are tying to make decisions at the right time, meaning as late as possible; at the right level, meaning not everything at the top, as much as possible out there; and last but not least, with this kind of mindset, these kind of questions. Again, we need something more, especially when it comes to managing operational cost. It's actually quite easy to operate beyond budgeting if you have distinct projects, because then you have these very distinct decision points. What about operating costs? What about travel costs? How do you manage travel costs without a budget?
What you see here is a menu to manage those more operational costs. What we want to leave is the traditional, annual, detailed budget that you see on the left-hand side, for the reasons I've talked about. We want to move toward something that has more freedom, more flexibility, more autonomy. Here's an alternative. We call it a burn rate guiding. It is a guiding that, until something else is decided, operate within this activity level expressed in money. Here it's the range of thousands. It doesn't say thousand point zero. Within that, you have a lot of freedom to make the right decisions. There's much more freedom within this than on the left-hand side.
Sometimes, it can be hard to know what the right burn rate guiding level should be, so you can use unit cost target or unit production cost target. You can spend more if you produce more. You can spend more if you sell more; and so on, vice versa, more self-regulating. Or you can make that even more relative by saying that, "No, you don't have a unit cost production target; but your unit costs should be competitive versus peers, externally, internally. Or you can manage through bottom line targets. If there is a tough target on the bottom line, you cannot run away and spend money like a drunken sailor, right; but it might be okay to spend more cost if what you spend is what you should call good cost. Good costs, they create value; it's the bad costs we want to get rid of.
Last but not least, there is an alternative of nothing at all. No KPIs at all. You might talk about costs through actions and what you call strategical objectives. In this corporate staff unit that I'm based, we've been trying this for many years; and it works perfectly well. Cost does not explode. I think we have been talking more about costs when we don't have a cost target than when we have. From time to time, and right now, we're more on the left-hand side with, we have the burn rate guiding. The point is that this is a menu where you can select based on what makes sense in your business. The more to the right you are, the stronger the need for strong values and a clear, understood strategic direction.
Now, let me -coming to the end- let me share a process we use to do all of this; the framework around this. We call it "ambition to action". Ambition to action has three purposes: translating strategy, securing flexibility, and also activating values and what we say about people in leadership in this book. It is a process that is based on the balanced scorecard concept. If you are familiar with the balanced scorecard, you might recognize a bit here. Our problem, if we only did balanced scorecard, is that all our competitors, they're also doing balanced scorecard. We need to do this in a different and better way. The big difference is a combination of beyond budgeting and a balanced scorecard. I'll come back to what that means in practice.
It is a process where we try to translate strategy into more concrete strategical objectives. What does success look like on a medium term time horizon? Then we are trying to find KPIs that can measure that we are moving towards these objectives. 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've tried, and it didn't work. By the way, then my wife told me that, "Bjarte, maybe you didn't stand there long enough." Now, that could be. Yes, you need some kind of action to make things happen, but I don't think those are the kind of actions we want; but yes, we do want actions and trying to understand consequences of actions through forecasts.
Another [inaudible 00:44:50] translation of this ... What does this mean for you and me in the teams that we are in? Here we are, straight into the middle of the HR process, and here is the key principle, which is about activating values. It's not just a question of what we deliver; it's also a question of how. How is defined by the values in this book. That decision came from our CEO, and to make sure that everybody understood that he was serious about this, he put the weight thing between the what and the how. In all consequences for your career, pay, bonuses, and so on; he put that to 50/50. That is the way you're activating values. You might say that was a brave decision; but in a way, it was an obvious decision. How can we claim to be a values-based company -which we do- if everything around values are completely absent in our management process.
As I said, all our competitors are doing some kind of scorecards. Let me share with you, towards the end, a few other areas where we try to be different. It starts with KPIs, because with many of our competitors when you look at the scorecard, the only thing you find are KPIs. That is a problem, because the "I" in KPI stands for "indicator". They are not necessarily telling the full truth. I've been working with KPIs and balanced scorecard for close to 20 years.
When this stuff came from the US in the early nineties, Harvard Business School, [Kaplan Norton 00:46:13], I was extremely fascinated with this new concept and especially with KPIs, that would come and tell us everything that we hadn't understood about our business. Expectations up here to what these KPIs could do; reality more down here. It wasn't that easy to find these fantastic KPIs that told us everything, but I'm quite a stubborn person. My hunt for the perfect KPI continued for many years afterwards, but today I've given up. I have given up the hunt for the perfect KPI, because it doesn't exist. Don't misunderstand me, there are good KPIs out there. Combinational KPIs can make them better, but the KPIs need help in this job we give them of being a place where we express targets and then we shall measure if we hit those targets. There has to be something on the left-hand side. There has to be something on the right-hand side. We need a richer, broader performance language than only these KPIs.
I'm not Einstein. Not everything that counts, can be counted; and not everything that can be counted, counts. Don't misunderstand me. Measurement is still an important part of the model, but there has to be room for more than measurement. Measurement can be a good servant; but as a master, it is a disaster. We have seen examples of that.
Here's an example of an ambition to action, just to make this a bit more concrete. Forget the content here. This is actually a screen shot from the system where we keep this. You recognize the three first steps from the previous process. Then the HR process coming on the right-hand side here. What you see here is actually an evolution of Statoil's ambition to action, not the latest version; but you get a feel for what this might look like. Today, we have around 1,400 of these in the organization.
Let me use this slide to illustrate two other areas where we try to be different. The first has to do with alignment. How do we create this strategic alignment throughout these? Because one of the purposes was to kind of translate strategy. The easy way to do it is called cascading, right. Sitting at the corporate level, cascading, instructing down; these are your objectives. KPIs, KPI targets, actions. Finance people love it because they get mathematical alignment. They can add together the numbers, it all matches, and, "Gee, we are in control."
The problem is that if through that cascading, you destroy all the commitment, the involvement, all the good things you need to make this real; that alignment is worthless. If your own ambition to action only becomes a landing ground for instruction from above, then you lose that. It becomes something you do for others; it's not something you do for yourself. We are obsessed with making this a tool that mainly exists for teams to help themselves, to manage themselves. I'm not saying we are always succeeding, but that is what we're aiming for.
At the same time, we need this alignment. It can't be anarchy. Things have to hang reasonably well together. The way to do that is not cascading; it is translation. Right. Each team translates other relevant ambition to actions. What does our ambition to action need to look like in order to reflect the ambitions and strategic directions of those that we have a relationship with? Typically the one above, further up, maybe a bit further up, maybe a bit left and right. A team should spend hours and hours discussing that, to create that common understanding and the ownership of this. If such a translation should go wrong, which very seldom happens, then of course the team involved should intervene and do what is needed.
In order to translate, you need transparency. All this ambition to actions, with a few exceptions at the top with some share-sensitive information, all information is transparent and open for all employees. Very important. That doesn't mean that we never cascade from above. There are situations where cascading is both necessary and the right thing to do, but it should be the exception than the rule. If that's the case, it's also more accepted.
The other area I want to address here is time. We used to have annual versions of ambition to action. Right, so in 2008, in the fall, we made a new set for 2009; and so on. In 2010, we decided to abolish the calendar year in this process. Now, all these teams, well they have an ambition to action until something changes. There is no annual versions. All of these teams can change whatever they want on their own ambition to action whenever there is a need for it. You can change objectives if strategy changes. You can change KPIs if your objectives change, or if you simply find a better KPI. You can even change your KPI targets, if these targets have lost their meaning. Lost their meaning can either be: This is impossible to achieve, everybody laughs about it; or the other way around, this is a piece of cake.
It's not anarchy. We do have a control mechanism around this. Very simple. We are saying that if you want to change something that big, you still need to seek approval one level above; but you can do it at any time. 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. This is the coordination part of it. We have left it to the organization to define what is big and what is small. We can't define that at corporate level. Again, this is an attempt to have a more self-regulating management model. The less we need to intervene here from corporate, the better.
Closing off with what I touched upon earlier, holistic performance evaluation. Holistic means two things. First of all, as I said, not just looking at business delivery defined by ambition to action; also looking at the whole: behavior, values, and the two count 50/50. Holistic also means that when it comes to measuring business performance through ambition to action, it's not just a question of reading those KPIs. You saw we have these colors, red and green. It's not just a question of reading these colors and then [computing 00:52:20]. If performance evaluation is only about reading the colors of KPIs, red or green; then the only qualification you need as a manager to do that job is that you are not colorblind. I think we should have somewhat higher requirements towards our managers. I wouldn't pass by the way, because I'm almost colorblind.
Anyway what we do is ... Yes, we do read colors and we do measure; but then we take off the measurement glasses, and we pressure test measurement before we conclude. I see the KPI is green, but have we really moved towards those objectives? How ambitious were those targets? Right, this is very important questions. If you have two teams where one team stretched and didn't make it, the other low-balled and gamed and made it; who performed best? Right. We shouldn't punish teams who stretch and don't make it. If we should punish someone, it should probably be the other guys. Has there been changes in assumptions, [tailward, headward 00:53:13], of such a nature that we should take it into account and so on.
This is applying common sense on top of measurement. It's only when we have done that, that we can have a view on what kind of performance we are looking at. Yes, we do have a one to five rating here. Whether that is the right thing to do is another discussion. I think the main point here is that the outcome of this is the basis for development plans for all employees and rewards, including individual bonus for those on individual bonus. This is very important, that we do this pressure test thing, and behavior counts 50%. You can't walk over dead bodies to hit those numbers and get your bonus.
To sum it all up, going back to the traffic metaphor. Everything we are doing is about trying to move our process into a more self-regulating mode, a more dynamic mode. I'm not saying we are there; but that's what we are aiming for, inspired by this metaphor. This is an attempt to simplify, but simple is not the same as easy. It's actually quite difficult to make things simple.
I'd like to close with a quote form our CEO, Helge Lund, who has been with the company now for more than ten years. He's a great CEO. He is actually coming back to what I talked about in the beginning: A world after, with a lot of VUCA, and an organization with great people on board. Here he is, Helge Lund. Look at that quote.
That's it. Thank you very much.
Speaker 3: Thank you. That was awesome.
Bjarte Bogsnes: Thank you.
Speaker 3: Awesome.