FP&A Today, Episode 58, Breaking Bad: Getting to Beyond Budgeting

Bjarte Bogsnes has worked with companies, from IKEA, H&M,Pernod Ricard, Volvo and Equinor (Scandinavia’s largest company). His work involves a framework to scrap traditional budget approaches and move to “Beyond Budgeting”. In today’s episode Bogsnes rails against the “misery” and “borderline unethical behavior” in traditional budgeting within companies, as he talks about the seachange happening in businesses. He talks to Paul Barnhurst as he publishes his new book, This Is Beyond Budgeting: A Guide to More Adaptive and Human Organizations (2023).

The episode covers

  • Definition of beyond budgeting as an antidote to “serious problems with traditional management”
  • How traditional budgeting gets “trust” and “predictability” wrong 
  • Your answer to “Why are you budgeting?” shows the problems inherent in existing process
  • How budget process are “borderline unethical”
  • Equinor (Scandinavia’s case study) change 
  • Making organizations more adaptive and human in the process of transformation
  • Don’t start with rolling forecasting 
  • How a Vinyl collection of 3,5000 is a unique musical passion 
  • How Beyond Budget “will happen” in the next decade 

Links 

Bognes Advisory bogsnesadvisory.com

FT (case study of Ikea): CEOs forced to ditch decades of forecasting habits

Bjarte Bogsnes: This Is Beyond Budgeting: A Guide to More Adaptive and Human Organizations

Follow Bjarte Bogsnes on LinkedIn

YouTube video of the episode

Follow Paul Barnhurst on LinkedIn 

Follow Datarails on LinkedIn

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Paul Barnhurst:

Hello everyone. Welcome to FP&A Today. I am your host, Paul Barkers, aka the FP&A Guy. And you are listening to FP&A Today. FP&A Today is brought to you by Data Rails, the Financial planning and analysis platform for Excel users. Every week we welcome a leader from the world of financial planning and analysis and discuss some of the biggest stories and challenges in the world of FP&A. We’ll provide you with actionable advice about financial planning and analysis. This is going to be your go-to resource for everything FP&A. I’m thrilled to welcome today’s guest on the show. Bjarte Bogsnes, welcome to the show.

Bjarte Bogsnes:

Thank you Paul.

Paul Barnhurst:

Really excited to have you here with us. And just so lemme give a little bit of his background and then I’ll give him an opportunity to introduce himself. So he comes to us from Norway. He is the author of the book. This is Beyond Budgeting, A Guide to More Adaptive in Human Organizations. Congratulations on that. He is self-employed running his own advisory company and he’s also chairman of the Beyond Budgeting Roundtable. So if you could go ahead, maybe just tell us a little bit about yourself and your background. We’d appreciate that.

Bjarte Bogsnes:

Yes. So I’m a finance guy. That’s where I have my education, but I’m actually one of the few in finance that also have been working in human resources, heading up an HR function for a number of years. But my finance career started in quite a traditional way. I was working for Scandinavia’s largest company. It used to be called Statoil, now Equinor. And my first management job, by the way, in this company was head of the corporate budget department. So I’ve done quite a lot of stupid things in my life in that job and in many other finest manager jobs in different places in Europe. So I worked a number of years abroad. But then in the mid nineties through coincidence we got a chance to kick out the budgets in the company that Equinor were owning 50%, and it was wonderful. This was actually before beyond budgeting was invented. So that’s how it started and I never looked back.

Paul Barnhurst:

Great, I’m, I’m excited to get into that a little bit more and talk a little bit more about that. But before I do that, you’d mentioned you’d worked in hr, I know you’ve done some project management classically trained in finance, but quite a diverse background for your typical finance professional that’s writing books about beyond budgeting and things. So what interested you in kind of doing HR and trying these different roles outside of finance?

Bjarte Bogsnes:

Well, my way into HR was that I had a lot of views on how HR should be run. I was quite outspoken and then I was offered a role and I have to say it was a wake up call for me when it comes to the people and leadership side of beyond budgeting, which I will come back to. And I think that the problem with finances in HR is that very often they are like cats and dogs in organizations. They talk not much with each other. They talk a lot about each other and it’s not very nice what is said on either side. And that’s a problem because both of these functions work with performance and if they’re not aligned, if they don’t talk together, that is a problem for the organization. If they do talk together, if they work together, the whole implementation or for instance beyond budgeting also becomes much more powerful. So one of my implementation advices to finance is actually team up with your human resources colleagues if there are good ones. And normally there are at least some.

Paul Barnhurst:

Sure. And I can definitely, I know I’ve been in companies where like you mentioned, it was more kind of fighting and badmouth and you didn’t really work great together and it caused a lot of problems. It put more strain on me as a finance professional for sure because there was things I was doing that really should have been a partnership or more done by HR. And so I can relate to what you’re talking about of the importance of having a good relationship there. And then I’ve been in situations where I’ve had great relationships with some of the HR people and it makes a big difference. And I imagine even more so when you get into beyond budgeting.

Bjarte Bogsnes:

Absolutely. So

Paul Barnhurst:

Speaking about that, I know you recently wrote your book, this is Beyond Budgeting A Guide to More Adaptive and Human Organizations. Can you maybe talk a little bit about that experience and why you wrote the book?

Bjarte Bogsnes:

I wrote this book because I’ve actually written two other books also about beyond budgeting, but those were thicker books than this one. And I mentioned this because the ones we need to reach be beyond budgeting are busy executives who very often don’t have time to read those thicker books. So this book is kind of condensing the messages, it’s shorter, it’s possible to read it on a longer flight, but it also got a lot of new stuff, a lot of learnings and insights from working with a lot of great companies in the year since the previous books came out. And I’m also extremely proud that Gary Hamel wrote of the book Gary Hamel, when we talk about management innovation, I mean he’s number one in the world and he’s written a beautiful forward.

Paul Barnhurst:

That’s always great when you can get one of the experts to write a forward. I’m sure that was a nice thing there. So you wrote two books previously and it sounds like those were both beyond budgeting. So were those more, you said they were a lot thicker books. So was it more technical, more getting into the details to how to implement it versus this book?

Bjarte Bogsnes:

Not more technical but I went deeper into cases what we did in Bois in the mid nineties, what we did in Equinor 10 years later in 2005 when we kicked out the budgets and a lot more. And I was heading up that activity as well. So it’s basically a book with more of or books with more of everything. And so that’s why this new one is somewhat different and the feedback so far has been very good.

Paul Barnhurst:

No, it’s definitely when I was brought up to me to have you on the show and I looked up the book, I’m like, I’m going to have to order that it’s on my list. I have a number of books I’m trying to get through right now. And I was like, this will be really interesting because I’ve always thought it’d be interesting to learn a little bit more on beyond budgeting. I mean I’ve read the basics and I know the general idea, but I’ve never implemented it at a company, never been involved in it at any detailed level. So I’m excited to dig into the book a little bit and see how it’s benefited the organizations you’ve talked about. So when it comes to the book, what would you say you hope people get out of the book For those who read it, what’s kind of the takeaway you hope they have?

Bjarte Bogsnes:

Well, first of all, I hope they understand and appreciate the serious problems with traditional management, including, but not limited to budgeting. Cause beyond budgeting, it’s about much more than budgets that we’ll come back to. So that’s why I spend actually quite some time talking about that case for change, these serious problems because without that understanding the appetite for doing something will not necessarily be what it has to be. So then I talk about what budgeting is, great cases from around the world and some very practical implementation tips from coming from my own experience helping close to 50 companies over the years getting started. So it’s both, it’s theoretical and a practical book. And I hear you have a long list, but I mean this one won’t take you that long to read. Again, it’s not a brick.

Paul Barnhurst:

Yeah, no, I definitely going to, like I said, added to my list. I was like, I need to go out to Amazon and throw that in the cart today. So I’m excited to read through it because like I said, I think there’s definitely some problems with the budget and it sounds like this is one approach to try to solve a lot of those. But before we jump into that in particular, can you maybe talk to our audience a little bit and explain what is beyond budgeting? Just kind of give us the idea of what it is generally, how it works, a little bit of that?

Bjarte Bogsnes:

Well first of all, it is a somewhat misleading name because it is about much more than budgets. It’s about changing traditional management. It is about business agility. But no company can be truly become truly agile unless you also address the budgeting process and the budgeting mindset. This is based on the two assumptions that you can’t trust people and that the future is predictable and plannable. And none of those are true and those are assumptions. We challenge this in beyond budgeting. So the model itself, it has 12 principles, there are six on leadership talking about autonomy, purpose, empowerment and transparency and so on. Not necessarily that unique in its messages around leadership because many other leadership communities and models have similar messages. But very few of these have reflected much on what kind of management process are needed to activate these good leadership intentions. And I think that is what makes beyond budgeting kind of stand out a bit compared to a lot of other stuff out there is we have these than six principles on management processes that can create this coherence between what is said and what is done, what is preached and what’s practiced, which is extremely important. So coherence here between the two is key and beyond budgeting. So leadership and management processes in coherent, consistent way.

Paul Barnhurst:

Yeah. So I mean if I’m hearing you right, it sounds like right, obviously you got the leadership component, you got the management and those six things you mentioned, but it’s really about bringing them together and making sure and it’s it it’s in a coherent manner and that everybody’s on the same page that what you’re preaching is also what you’re practicing. It’s not just, yeah, here’s what we should be doing, here’s what our values and our vision and our principles are. And then you go into the work on the first day and you’re like, okay, nobody follows any of these. We’ve all been in those type of situations. Yes.

Bjarte Bogsnes:

Yeah. So this is why if you want management processes that reflect those hopefully good leadership intentions, you have to also do something with the traditional detailed budget, which is about centralized commodity control and cascading and micromanagement and distrust and no transparency and so on. I mean, classic example, it doesn’t help that executives talk loud and warm about how fantastic employees we have and we would be nothing without you and we trust you so much, but not that much. Of course we need detailed travel budgets. Are you crazy? I mean this is hypocrisy and people notice this, right? And they notice the gaps, the poisonous gaps between what is said and what is done. So that is one reason why we need something to do with do something with budgets. Another reason is all the volatility, uncertainty, complexity, ambiguity out there, it’s too slow, it’s too rigid.

Paul Barnhurst:

Got it. No, that’s helpful. So you’ve mentioned a couple times we’ve talked a little bit about one the future is predictable is that first notion that you say, Hey, we should all be challenging, that it’s really not predictable, which is one of the two main assumptions of budgeting. So first, could you talk a little bit about that idea the future is predictable and why you think that’s a false notion to have and how you should think about it?

Bjarte Bogsnes:

Well I think that one is so almost so obvious that

Paul Barnhurst:

After the last few years, anyone who hasn’t and everything else, yeah,

Bjarte Bogsnes:

I, so we’ve seen so many, I mean year after year, I mean there’s been so much stuff happening, but we’ve had crisis before. But that one for instance, only challenged this one assumption about the future being predictable and planned. But Covid was in a way different because through all the home office work, COVID also challenged the second assumption that you can’t trust employees because it turned out that organizations were forced to trust their people through homework, even whether they wanted or not. And guess what? It’s generally worked extremely well. So if there was anything good coming out of Covid, it was kind of creating these big cracks in that second assumption as well that you can’t trust most people.

Paul Barnhurst:

Yeah, no great point. With Covid and so many companies, a lot of people had the idea you could only be effective if you were in the office. And for many people, COVID turned that on its head. I had worked a lot remote before that, so wasn’t big. I was getting ready to go remote at the time it all came down because they were closing the office I was in. So it wasn’t a big change for me in that sense. But obviously in other areas it clearly was. But I’ve seen some companies go to the point of implementing tools that track how they’re spending all their hours and their time because they’re now remote and we need to make sure they’re working. And it’s like, you know, just need to create a culture of trust and they’ll do the work. And if you have someone who isn’t, you need to address it. Putting the , nanny state or kind of nanny police in place is not going to solve any fundamental problems you have with the output you’re getting from people. Absolutely. I’ve never understood that lack of trust.

Bjarte Bogsnes:

And one issue here is that I guess all organizations probably have a few that you may be can’t trust, but that small minority is used as proof and evidence that you can’t trust people. And I often use this example because I’ve always traveled a lot and the first thing I always check when I enter the hotel room is what kind of clothing hangers do they have? And there are typically two types we meet, right? There’s one with a hook for the rail and there’s one without a hook. And I think we can all agree that that one without the hook is a hassle to use. So how come some hotels offer us these stupid hangers? And we all know why because there were a few hotel guests who stole a few of those hangers with a hook. And what was the response to punish everybody? Cause somebody did something wrong. Actually, one of the problems with traditional management when it comes to trust.

Paul Barnhurst:

It, it’s a great example. It’s the idea, the one bad apple spoils for everybody. And yes, I get it. You know, look at government or whatever. I worked in government and contracts and there were rule after rule that had been implemented where I started my career because somebody was a bad actor. And it’s like, okay is is it really the most efficient to punish everybody for the one or two people? And it’s it often, it’s not often it’s more expensive and doesn’t make sense. Absolutely. The prime example I used, I remember. So the US government used to audit everybody’s travel and reimburse exactly for what it was. This was years ago. And they did an audit and found they were spending as much money to audit everything is they were on travel and they just said, we’re going to give everybody a per diem. They have policies that will follow and we’ll do the periodic audit and just if they don’t spend it, they get some extra money and it was cheaper in the long run. That’s much more of a trust of, hey, here’s what you should need for a day. If you want to spend more, that’s on you. If you want to spend less, there you go. It’s yours versus managing every penny.

Bjarte Bogsnes:

Trust is free and control is not. Sometimes we should do the math, these guys did.

Paul Barnhurst:

No, that’s yeah, agree. And there’s a great book, the concept of trust, but I think it’s the speed of trust by Steven Covey, Steven m r Covey, he shares two examples. He calls it a trust tax and a trust dividend. And he gives the example of September 11th and says, when you went to any airport in the US and pretty much globally right after September 11th, there was a trust tax. It took you three times as long to get on the plane because nobody trusted you anymore. There was more security, there was checks, there is now actual taxes they put in place after that to pay for all that. And he shares the example of a trust dividend and he talks about FedEx when they were starting to do overnight shipping, you’re able to get people to trust them and it allowed them to earn a higher profit because people actually started realizing, oh you can actually deliver on that. And so talk about how in business there can be a trust tax and a trust dividend and you want that trust dividend, you want to have trust among your people.

Bjarte Bogsnes:

Absolutely. Absolutely.

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We’ve talked quite a bit about trust and obviously we’ve talked a little bit about the other assumption, predictability, but why do you think so many companies stick with the traditional budgeting despite the issues? Why do you think that’s such a common method?

Bjarte Bogsnes:

Well the funny thing is that when I share with these companies and these executives and these finance people, my list of budget problems and that’s quite a long list then everybody agrees. Yes, it’s very time consuming assumptions are quickly outdated, stimulates what I call unethical behaviors, creates these solutions of control, forces us off to make decisions too early and so on. People agree. At the same time most organizations continue doing this stuff even if that is changing these days. And one reason could be that these problems are regarded more as kind of irritating itches and not symptoms of a deeper and bigger and more systemic problem. But that is exactly what these problems are symptoms of a big problem, which is also a paradox. Cause here we are, first of all we are looking at quite old management technology. Budgeting is a hundred year old management technology and the inventor mystery, James Mckinsey, the founder of McKensey Consulting, and I never met Mr.

McKinsey but I don’t think he was an evil man. I think he had the best of intentions. He wanted to help organizations perform better. And this was management innovation a hundred years ago. And I’m sure it worked a 100 ago, maybe even 50 years ago. But today this way of thinking, this way of managing, this way of leading is doing the exactly the opposite. It has become more of a barrier than a support for getting out the best possible performance in organizations. And that is a big problem. And that is the problem that not enough yet have understood even if they sense and experience the systems, the symptoms every day.

Paul Barnhurst:

So if I’m hearing you right, it sounds like kind of the fundamental problem you see with budgeting is really you get suboptimal outcome from your team, from your employees. It doesn’t allow you to get the best out of people in that process in part because of the management style, the lack of trust in part because of the way you’re doing it. Is that, did I summarize that right?

Bjarte Bogsnes:

Absolutely. I mean beyond the trust issue, one problem is that we are making decisions too early, right? We are sitting in the full year before deciding exactly what we should do next year, what we shall cost. We are deciding exactly what good performance look like through that bottom line budget. And so one making decisions way too early, which is a problem in the kind of world we’re living in now. So beyond the trust issue, you have the problem that is too rigid, too static and too detailed and so on. So you need management processes that are more continuous, more dynamic and where decisions are made where people have the best information, which is not necessarily always in the executive room.

Paul Barnhurst:

Yeah, I would completely agree with that. It often is not. That’s a good point on the executive room and also just about being able to be agile and quickly change. I still remember with COVID, we just finished our plan and then you could pretty much just flush it and start over because we supported insurance claims and nobody was driving so no accidents were happening so that everything we had forecasted had been turned upside down. Right? Yeah, you almost started over for a lot of our business we had a few other areas so I can totally relate to that of okay, we planned all this out but none of this is going to happen or valid at this point.

Bjarte Bogsnes:

Absolutely.

Paul Barnhurst:

So I know you’ve worked with a lot of companies on this process. Maybe you can talk a little bit about some of the companies you have worked with to implement beyond budgeting. Talk a little bit about that.

Bjarte Bogsnes:

Yeah, I’ve worked with a lot of companies from the very big ones. The largest one has close to 400,000 employees over to small startups who actually are beyond budgeting. They’re born beyond budgeting but they want to understand how they can grow without ending up in the same misery and a lot of companies in between. And what is fascinating is that these companies come from the variety of different types of businesses and activities. The problems they describe are so generic, so common. And that means that we can also apply some common ways of getting started. So with the majority of these companies, the way we got started was to, I always ask them a very simple question, why do you budget? And they all come up after having been thinking a bit with three different reasons. Companies make budgets to set targets, financial targets, sales targets, production targets.

At the same time this budget shall be forecast or what next year could look like in terms of profit cashflow and so on. So that’s two purposes, target setting and forecasting. And the third one is resource allocation. Handing out bags of money to the organization on opex. And it might seem very efficient to solve three purposes in one process and one set of numbers. But that is also the problem. Because what happens when we move into a traditional budget process and upstairs, let’s assume that finance wants to understand next year’s profit. So they ask responsible people starting on the revenue side, what are your best numbers for next year? But everybody knows that what I’m sending upstairs will come back to me as a target for next year maybe with a bonus attached. And we all know that that insight might do something to the level of numbers submitted.

Moving to the cost side, finance is asking the same people, other people, what are your best numbers for next year? But everybody knows that this is my only shot at getting access to resources for next year. And some might also remember that 20% cuts from last year and that insight and that memory might also do something to the level of numbers submitted. And I think you know what I’m talking about. And this is a problem not just because it destroys the quality of numbers, but also because it stimulates this behavior that is at least borderline unethical, the low balling, the gaming, the sand bagging and so on. So that’s the bad news. The good news is that there is a very simple solution in beyond budgeting. We recommend to separate these three into three different processes where you can operate with different numbers and design different processes.

So because they are different things. A target for instance, that is an aspiration, it’s what we want to happen. While a forecast is an expectation. It is what we think will happen whether we like what we see or not should be brutally honest the expected outcome. And last but not least, resource allocation is about optimization of what is often scarce resources, namely money. So having separated them we can now start to improve each one in ways impossible when it was all bundled in one set of numbers in one process. So now we can assign targets which are really inspire and stretch people without feeling stretched, which are more robust against all the uncertainty out there. We can work on the forecasting process to get the politics and the gaming out of it so we know we can trust the numbers. And last but not least, we can design much more intelligent and effective ways of managing cost than what Mr.McKinsey could offer us a hundred years ago. And last but not least, when we have separated the three target setting, forecasting, resource application, we can then organize each of the three on a rhythm, on a cadence which better reflect not just the individual purpose but also the kind of business we run. So we can make these processes more event-driven, more business driven and less calendar driven. So this is a kind of proven tested, very practical way of getting started that later can take you into bigger beyond budgets discussions like target setting, what really motivates people like resource allocation, do we need detailed travel budgets if we say that we trust people and so on and so forth. And the other beautiful thing with this separation is that when people tell me that it’s impossible to operate without a budget and my response is that, well here we still do what that budget tried to do for us, those three things. But because we’ve separated, we can do each one in much better ways. So how scary and how impossible is that?

Paul Barnhurst:

So yeah, no I appreciate you breaking it apart that way. Cause I agree with you three things. You typically think of budgeting, like you mentioned target resource allocation and forecasting. And it sounds like one of the key things you’re saying is look, break each of those apart a separate processes, have their own cadence and manage them accordingly. Obviously is there going to be some overlap? Sure there can be some overlap between all that, but don’t try to put it all into one process.

Bjarte Bogsnes:

Absolutely.

Paul Barnhurst:

Got it. And so could you talk a little bit, I know I appreciate that explanation there and I know you’ve implemented this with small companies, with large companies. I’m curious, I think one of the companies you implemented it with was Equinor, which is Scandinavia’s largest company. Can you talk a little bit of some of the challenges and how that process went? Maybe I know you share in your book a little bit of the case studies, so just a little bit of detail there on what that one was like.

Bjarte Bogsnes:

I guess the challenges in Equinor were not that different from what I’ve experienced in so many organizations. It is the, I mean risk, fear, fear or losing control where actually a lot of people don’t realize that a lot of the controls they’re so afraid of losing are nothing but illusions are controlling, right? Of course it might feel very comfortable to have next year described with a million details and decimals. But the only thing we know is that we don’t know. And when some people say that well control is about that, how much cost you’re going to spend. So you have control over the cost but it’s hitting your cost budget really having control if you shoulda have spent more or could have spent less. So how did you know upfront in the full year before exactly not just the right total cost level but also exactly the spread of this onto each individual cost accounts and on each tiny box on the organization chart.

So a lot of illusions of control and the good news here is that once organizations have tried this, gotten started, they realize that this stuff works. So what then happens is that the fear disappear and there is an appetite for doing more. Companies typically get braver along the way because what is scary today is not scary tomorrow cause it works. So that fear is it’s kind of classical. Then we had the benefit in Equinor of not doing the two classical mistakes in implementation because I had experience from others. And the first one is to start with again to start with the separation of purposes. But companies look at the three and then they said forecasting that seems to be the easiest one. So we are going to start with rolling forecasting and when hear that my response is always, well okay, but how will you then solve the two other budget purposes: target setting resource allocation.

And some people say that we will do that through the holding forecast. Well if that is what you do, what you have introduced is rolling budgeting a lot of pissed off people and you’re doomed to fail. Others say that no, we will still run budgets for those other purposes, target setting and resource allocation. But so you have solve very few of the problems, a little bit better forecasting, but that’s it. So my message here is that I still recommend starting with separation, but you can’t do this sequential first this and then that. You have to do it in parallel. At the same time as you introduce rolling forecasting, you have to explain to the organization how will we know, solve or do target setting and resource allocation. So that one we avoided. The other classical mistake is a two week and unclear case for change.

So the organization is unclear about why we are doing this. I always recommend companies, organizations to spend a lot of time on defining together what are the problems we are trying to solve, what is our case for change? Cause the better job you do here, the easier it is when you start to design new solutions. And when you are in doubt, should we do this or this, you can go back to your problem and look at which of these design solutions would best solve our problem. If that problem definition is foggy, I mean you have a problem. So spend time on creating that case with change and not just as in an isolated executive room throughout the organization, involve the organization and they might bring up problems that executives maybe didn’t even know existed.

Paul Barnhurst:

Yeah. The second one there is you talk about the weak case. That is such a huge problem for any transformation that goes so beyond budgeting, transformation system implementations, I mean change management, having a strategy, communicating, communicating, communicating some more and not just at the top level but throughout and making sure everybody understands and is part of the process. So often people think, well I’ve said we need it so everybody’s going to get on board. No, no, no. They may be in fact think you’re stupid even though you just said you need it without really spending that time to make the case. So I love that example. But I have a question for you. We’ve talked about the rolling forecast part. How do you recommend they separate? How do you manage the target setting in the beyond budgeting and the resource allocation as separate processes? How do companies think about that?

Bjarte Bogsnes:

Yeah, well there are many different ways of doing it, but again the separation is key because once you separate it, you can start about thinking about effective targets without thinking about the other purposes. And one recommendation in beyond budgeting is to where it makes sense and where is possible to think in valid terms. And here I often use an example from European football, not your football. I have yet to meet a footbal team saying that the ambition for next season is to score 30 goals and get 42 points, they don’t think like that. Those are budget goals and they don’t think like that for them. Performance is all about doing well against peers. So what you recommend is that if you can establish a list of internal or external peers then that can be a great way of driving performance then use transparency to compare performance in different units.

And trust me, nobody likes to be Legos, right? It’s a very effective way of driving performance the way you want it. And which is very different from if you have a target discussion about shall the target be 29.2 or 28 or so one, then everybody is negotiating for the lowest targets, right? Yes, yes. But using these, we call it league tables in Europe standings, . Nobody likes to be be done in the fourth quarter. Everybody wants to climb. That’s exactly what you want. So in some of the organizations beyond budgeting organizations, they don’t need to set targets. They just show this information. This is how you compare to others and that drives performance and their thinking is that we don’t know upfront what the right target number would be or performance would be. In any case, how would we know? What they have realized is that we want the best possible performance given the circumstances and it’s only afterwards.

You know what that is when all the uncertainty is gone, when you have what kind of tailwind and headwind you had and changes in assumptions. So actually some of these companies, they’re improving target process and so not setting targets at all, right? They don’t need targets. They say we just simply just compare performance typically internally and that drives performance. You can also operate with targets here you can say that the target is to be above average or in the first portal, but some actually say no we don’t need it. So if you go to Equinor has established a table of 11 other energy companies and on two metrics: return on capital employed and shareholder return, the target is simply to be above average on both every year and their story. Right? Interesting. So there’s no predefined number. You don’t need a big calculation negotiation round.

And the company has had the same targets for now since they started out in 2005, so 17, 18 years. And these targets are also robust against changes in assumption. Doesn’t matter if energy prices are high or low, are they high than they are high for everybody and vice versa. So very kind what you call VOCU targets. So that’s one example on targets on forecasting. Then you have to remove the reasons for why people game on the forecast. And the classical reason is that it’s forecasting is mixed with target setting. So it’s a bit into a target negotiation or the forecast is a bid for resources. So you have every reason to present the forecast that is as high as possible.

Paul Barnhurst:

Correct? Yeah, it’s one of the two. It either their bonus is tied to it so they want to maximize their return by minimizing the forecast or they’re trying to make a point around resource allocation. I totally agree. Those are the two most common far and away.

Bjarte Bogsnes:

And when it comes to the last purpose of resource allocation, that is of course where we get most questions. So how can you manage cost the budget? And we have many practical, concrete and tested alternative tools. And let me start with CapEx investments and again one example from eor. EOR does not have a traditional annual investment budget where you sit in the fall every year and decide exactly how much to invest exactly split on these projects and then these project money are handed out to each project as next year’s investment money. If we take some learning from how we think about our private finances, and that’s quite interesting because we are quite beyond budgeting when it comes to how we manage our own money. But imagine that your it’s apron and your car breaks down, you need to buy a new one and you go to the bank and you ask for a loan and the bank politely says that, sorry we are only open for lending in October. The rest of the year that activity is closed.

And of course no bank would do anything so stupid. But that is what budgeting is about. So what Equinor is saying is that when it comes to investments here, the bank is always open. So the line can always forward a project for approval at any time. And whether you get the yes or no depends on two things. How good is your project and can we afford it? As things look today and that information can be afforded and comes out from good unbiased forecasts on for instance cash flow. So it’s not that difficult on investments, it’s a little bit more challenging on operating costs but that may quickly go through the menu we recommend. What we don’t want is that detailed annual pre allocation of cost down to the last decimal split on again all the cost accounts in the accounting system and then handed out to every tiny box on the organization chart too early to detail.

One alternative is something we call burn rate guiding. There’s still a number in the range of a hundred thousand, 1 million, 10 50 whatever within that burn rate guiding. You have full autonomy to do the right thing to spend those money wisely. But sometimes it can be difficult to know should it be 1 million or 10 or what should that number be? Then you can move from absolute thinking to relative thinking. And the first step of relativity here is to think unit cost. So you can say unit cost target, right? $5 per unit. You can spend more if you produce more, spend more if you sell more and so on. So more self-regulating, then you can move to benchmark unicost. So you, there’s no $5 per barrel target but your unicost should be competitive, right? Better than average for instance. Then you can move to even something even more self-regulating if you have internal profit centers.

With a tough bottom line, target, EBIT return, whatever that is also where you’re managing cost cause that unit cannot run away and spend money like crazy. But it might be okay to spend cost if what they spend is what we in beyond budgeting call good cost. Because good cost is not the problem. Good cost, trade value. Correct. As long as we have the financial capacity, we would actually like to see more good cost. Yeah, it’s the bad cost we want to get rid of. Yep. And the last alternative here is what I often call nothing at all. No budget, no target. The only numbers we have in this alternative are accounting numbers coming out of the accounting system. And then we look at trends, we monitor trends and if it looks okay we do nothing. If it looks a bit strange, we take a look at it, there might be some very good reasons.

It doses for good cost and this is important. We might also come across teams, managers who consciously or unconsciously abuse the trust in this model. The further to the kind of right on the menu I was just describing, the more trust we are showing and the only thing if you show trust in an organization is that someone will abuse it. In Equinor it has happened, it’ll happen again. So that is not the issue. The issue is how do you respond and the wrong response is the hotel hanger response to punish everybody, right? Everybody back to the traditional budget because this trusting doesn’t work the right thing to do, which takes a bit more of leadership is to take that very firm talk with those involved and let it have the necessary consequences. This is not about being soft and evasive, right? It’s about not punishing everybody because somebody did something wrong. And finally these list of alternative tools and mechanism can then be supported by two additional guardrails. One is decision authorities. So how big a decision can you take expressed in money before you have to go one level up That has nothing to do with budgets. And last but not least, kind of spending standards. Again Equinor in Europe we fly coach in intercontinental, you can fly business. It has nothing to do with travel budgets that simply helps people to make decisions.

Paul Barnhurst:

Yeah, no thank you. That was very helpful really that was very thorough in what you walked through there and you’ve made me even more interested. I’m looking here at my card going, okay I need to put that number in and order the book when we’re done because I really like what we’re talking about and it makes a lot of sense to me. So thank you. I appreciate that detailed explanation there. And I want to go back to the book here for a minute. From the little bit I scanned kind of online what I could see, one of the things you talk about is how the process make organizations more adaptive and human. Can you talk a little bit why that is? What it that causes it to be more human? Is it the trust factor or what’s the kind of key underpinning of that assumption?

Bjarte Bogsnes:

It is the combination of the 12 beyond budgeting principles. Again, when it comes to more human, I mean not just good and humanistic leadership intentions, but management processes deflecting that and people notice and people appreciate it. And organizations also become more adaptive through implementing these management processes. Also on performance, and rewards management processes. So it’s the totality of these 12 principles that makes organizations more human and more adaptive. And of course this hangs together. A human organization is actually also more adaptive and an adaptive organization is also very often more human. So these two hang together.

Paul Barnhurst:

That makes sense how they hang together, more human, more adaptive, they feed upon each other or work together. Absolutely. Totally makes sense. So let’s just say somebody’s listening to this and they want to implement this in their organization. What advice would you offer to that person?

Bjarte Bogsnes:

Well get the book, I’m not selling books here, but I mean it if you’re kind of cold on beyond budgeting, it is, it’s a good place to start. That is what people tell me. Then check up the Beyond Budgeting Roundtable, which is it’s an international network of organizations, companies and individuals interested in this. Sign up for our newsletter, our web address is bbrt.org. We’ve just launched a new website, it’s an beta version so it’s quite primitive so far, but you will find more and more stuff and then sign up for our newsletter which will give you information about what happens. We used to have a round table organization also in the US right now that is, it’s not existing so we are looking at ways to get this restarted. So if you are one of those that could be interested in making that happen, let us know. And you want might also want to check out my website. A very simple one but I think it contains what it needs to contain so

Paul Barnhurst:

Great. We’ll make sure to put all those in the show notes for people. The BRT, the newsletter, your book and your website so that they can see those resources and get easy access to them. We’re coming up toward the end of our time. I think I could keep talking forever on the subject cause I find it really fascinating. But I mean I know we all have things to do. So just a few more questions here. So if someone’s looking to implement, maybe you’d offer that kind of advice of resources, but what do you see as the most common challenge that you would make sure they should be aware of those kind of watch out things as they start to implement it that sometimes you go this is too hard or you kind of give up because you’re like can’t manage. So what are some of those things you just kind of recommend they look out for and really pay close attention to as they’re going through the process?

Bjarte Bogsnes:

Well I think I touched upon that a little bit earlier because that would be the make sure that you build a strong case for change. And also don’t start with rolling forecasting only and what I could recommend addition, that’s another book which I haven’t mentioned and that is I guess many are familiar with the business model, A great way of documenting, discussing business models. So far there has been nothing discussing describing management models, but now there is one based on the 12 beyond budgeting principles, we have together just finalize the book, which is on its way out called the Vable Map. And it kind of helps you on when it comes to discussing what is the management model because we might have very different views on what that is to get everybody in the same place. What is the management model to describe, well what’s the current management model in this company? You can use it to diagnose problems and issues with that model and you can use it to design better ways all based on the beyond budgeting model. So it’s a very practical book inspired by the business model book and it’s great work. So that is a book that we hope can help organizations on getting started on implementing beyond budgeting in addition to my other recommendations

Paul Barnhurst:

Here. Great. No, I appreciate all those and I’ll coordinate with you to make sure we get everything like I said in the show notes for that. So just a couple last questions here. The first is one, we like to ask everybody a little more of a personal question. So kind of switching gears on this one, what is something unique about you that you could share with our audience, maybe something they wouldn’t find online that makes you unique?

Bjarte Bogsnes:

Well, I don’t know if it’s unique, but I love music, great music and I am a vinyl guy. CD streaming Spotify, not my thing, of course I have it, but vinyl, that’s the thing. The sound of it, the smell of it, the look of it. So I never gave up collecting vinyl when the city came. A lot of others sold off their vinyl collections. I didn’t. So today I have around three and a half thousand and listening to music on vinyl on my turntable is something I simply love.

Speaker 2:

That’s great. And I’d say that’s probably something that, yeah, not many people do anymore. I remember growing up listening to vinyl, but I will say I graduated from that so to speak, and that I don’t have any vinyl, but it is kind of a fun when you see it or listen to it, my parents still pretty sure my parents still have some of their vinyl. So that that’s a fun one. I like that.

Bjarte Bogsnes:

It might be worth fortune these days I don’t think.

Paul Barnhurst:

Not surprised. And so I’m going to let our audience know he got out of the Excel question because he let me know he hasn’t used it for 20 years. That’s when we’ve asked everybody in our audience what their favorite thing is and we always get to see the different answers. But you know, get to

Bjarte Bogsnes:

Question, I mean when I joined eor, I was actually using the second PC that arrived in a company back in 1983. It was an IBM 32 70 with a double floppy station and those disc were very floppy and there was a spreadsheet program called Supercalc

Paul Barnhurst:

I remember that vaguely. I do remember seeing that,

Bjarte Bogsnes:

Right? And I transferred all my manual tasks into super and it worked wonderful. And after a couple months a guy came to me and said, I got some good news and some bad news. There’s a new spreadsheet coming which is much better. It’s called Microsoft 1 23 or something, whatever. The bad news is not compatible. So I had to do all my work over again. So back then I was actually the spreadsheet expert in Equinor, but the way my career kind of turned out, I have hardly used it for 20 years. So the few times I asked my colleagues for help on some stuff, I could see the kind of smug smiles, this old guy not getting anything. Then I gently reminded them about, there was a time when I was the expert.

Paul Barnhurst:

Yeah, no, I hear

You Excel, sorry.

Yeah, no, depending on what you’re doing. I think a micro, I spent four hours a day and I don’t spend near as much now as I’m doing my own business and work. So I get it, things change, priorities change that. That’s a great story. And I do remember SuperCalc and some of those things. So last question

Bjarte Bogsnes:

Lotus 1, 2, 3 was that program? Yeah, please. Locus 1, 2, 3. Yes,

Paul Barnhurst:

Yes, yep. Lotus Knows 1 23. I remember that one. Using that in high school is where I used it. So I remember writing a wrote a business plan and we used Lotus Notes 1 23 to create it.

And then college, we were still using some of the, it wasn’t all Microsoft at that point, they just started I think training on Excel. So date myself a little bit, but it’s definitely changed a lot. You look around today. So last question here. If people want to get in touch with you or learn more about you or beyond budgeting, what’s the best way to do that?

Bjarte Bogsnes:

Well again, check out the website or if you want to reach me, check out my website, Bogsnes Advisory, you’ll find the contact details. And again, since I left Equinor a few years ago with a heavy cause, it’s a great company and then started Bogsnes Advisory, my capacity to help companies getting started is has of course increased significantly. I’ve been doing this alongside my work Inor for many, many years, but now I can do it and I would love to help your organization as well. And if I could leave you just with one final message here. What we have discussed today, it will happen, it will happen. I don’t care if it’ll be called beyond budgeting or business agility or whatever. That is not important. But in 15, 20 years time, maybe much earlier, when we look back at what was mainstream management in 2023, including budgeting, we will smile, even have a laugh just like we today smile about this before the internet or before the smartphone and how long ago is that?

And here, organizations that have a choice. They can use to choose to be early movers, vanguards and get the competitive advantage of doing this early, or they can choose to be dragged into this as one of the last ones or anything in between. And every year you wait, competitors will be ahead of you and maybe you also have a choice, maybe you can be remembered as one of those that made this happen in your organization or remembered for the opposite. If you resisted and said no or ignored, if you said simply didn’t take a stand and whatever you choose I wish you all the best.

Paul Barnhurst:

Thank you so much. I appreciate that and I appreciate you making time to be on the show. I’m really excited to share this one with our audience. So thank you and I hope you have a great rest of your day and look forward to chatting with you again. Thanks.

Bjarte Bogsnes:

Thank you Paul.