Presentation and case on Beyond Budgeting in London April 29th 2009 by Sigurd Aune CFO SpareBank 1 Gruppen

TekstDynamicManagement

Rollingforecasts

Culture andorganization

Benchmarkingand scorecards

Bonus andincentives

Dynamic ManagementThe SpareBank 1 group’s road to a new corporate governance based on the principles of Beyond Budgeting

Sigurd Aune, CFO

BBRT, London29 April 2009

2

Agenda

1.Company presentation2.How we started3.Four implementation projects

1. Rolling forecasts2. Benchmarking and scorecards3. Bonus and incentives4. Culture and organization

4.What have we learned so far?5.Challenges ahead6.Contact information

3

SpareBank 1 Gruppen AS – the structure

SpareBank 1 Gruppen AS

Focus areas– Brand– Technology– Competence– Common processes and use of best practices– Purchasing

Regional competence centers– Payment services: Trondheim– Credit: Stavanger– Training: Tromsø

SpareBank 1SR-Bank (19,89 %)

SpareBank 1SMN

(19,89 %)

SpareBank 1Nord-Norge (19,89 %)

SparebankenHedmark (11,14%)

SamarbeidendeSparebanker (19,89 %)

LO(9,29%)

Alliance Co-operation Programme

SpareBank 1 Oslo

(100%)

SpareBank 1Skadeforsikring

(100%)

SpareBank 1Livsforsikring

(100%)

ODIN Forvaltning

(100%)

Actor Fordrings-forvaltning

(100%)

Argo Securities

(75%)

SpareBank 1 LTO

(100%)

SpareBank 1 Factoring(100%)

Verdigjenvinning(100%)

First Securities(24,5%)

SpareBank 1 Boligkreditt

EiendomsMegler 1

BNbank

(Bank owned activities)

SpareBank 1 Gruppen Finans

Holding AS(100%)

SpareBank 1Medlemskort

(100%)

4

The SpareBank 1 Alliance

The SpareBank 1 Alliance, key figures (31.12.08)

- 20 independent savings banks - Including 7 exchange listed primary capital

certificate banks- Co-ownership of two commercial banks (BNbank and

Bank 1 Oslo)

– Total assets: ca NOK 583 billion (incl. BNbank)

– 352 branches across Norway

– 378 distribution offices

– Total no. of employees: ca 6,300

– Internet customers: ca 530,000

SpareBank 1-banks:SpareBank 1 Nord-Norge, SpareBank 1 SMN, SpareBank 1 SR-Bank, Sparebanken Hedmark, SpareBank 1 Ringerike, Rygge-Vaaler Sparebank, SpareBank 1 Hallingdal, SpareBank 1 Buskerud-Vestfold, SpareBank 1 Gran, SpareBank 1 Gudbrandsdal, SpareBank 1 JevnakerLunner, SpareBank 1 Nordvest, Halden SpareBank 1, Sparebanken Telemark, Modum SpareBank 1, SpareBank 1 Lom og Skjåk, SpareBank 1 Nøtterøy og Tønsberg, SpareBank 1 Volda Ørsta, SpareBank 1 Hardanger, SpareBank 1 Kvinnherad, Bank 1 Oslo and BNbank.

Product companies in SpareBank 1 Gruppen AS:SpareBank 1 Livsforsikring, SpareBank 1 Skadeforsikring, ODIN Forvaltning, Argo Securities (75%), First Securities (24,5 %), SpareBank 1 Gruppen Finans Holding – a holding company for a subgroup consisting of SpareBank 1 Factoring, Actor Fordringsforvaltning, SpareBank 1 LTO and Verdigjenvinning.

Other enterprises owned by the SpareBank 1-banks: SpareBank 1 Boligkreditt, BNbank and EiendomsMegler 1.

5

The SpareBank 1 Alliance has a strong position in Norway2008

2,30

2,00

0,850,75

0,55

0,210,10

0,00

0,50

1,00

1,50

2,00

2,50

DnB NOR SpareBank 1 Storebrand Terra-Grp. Nordea N. Danske/Fokus HandelsbankenN.

Mill

ion

352

210189

125

5542

26

0

50

100

150

200

250

300

350

400

SpareBank 1 DnB NOR Terra-Grp. Nordea N. Danske/Fokus Storebrand HandelsbankenN.

Number of branches *

Total assets (NOK billion)Market shares

16,4 %15,4 % 15,4 %

17,4 % 17,5 %

19,1 %

12,2 % 12,0 % 11,7 %12,6 % 12,3 %

14,6 %

10,2 % 9,8 % 9,9 % 10,0 % 10,0 % 9,8 %

15,9 %

13,8 %

17,3 %

19,4 %20,3 %

12,8 %

0,0 %

5,0 %

10,0 %

15,0 %

20,0 %

25,0 %

2002 2004 2005 2006 2007 2008

Loans - retail market Loans - corporate market P&C insurance ODIN mutual funds

Retail market – Number of customers *

1832

583 549

382

198 190 172

0

200

400

600

800

1000

1200

1400

1600

1800

DnB NOR SpareBank 1 Nordea N. Storebrand Fokus Bank *** Terra-Grp.** HandelsbankenN.***

NO

K b

n.

* Numbers as of 2007** Numbers as of 3Q 2008*** Estimate based on average lending growthSources: Accounting reports, Statistics Norway (SSB), Norwegian Financial Services Association (FNH), Norwegian Mutual Fund Association (VFF).

6

The SpareBank 1 AllianceStrategic Platform

• Maximizing shareholder value and value created for the market regions covered by the banks by maintaining a regional structure of independent banks – through:

Purp

ose

Cor

ners

tone

s

Efficiency Local Market Focus

• As a group, the banks seek to increase their efficiency as compared to competitors by:

- Economies of scale- Mutually increasing critical core

competencies- Sharing development investments

• Each bank continues to maintain its link with its local community by:

- Keeping its own name and legal identity

- Taking advantage of its proximity to the local market

ALLIANCE PROGRAMME SEPARATE LEGAL IDENTITIESCOMMON SUPERBRAND

7

Agenda




8

Change starts at the top of the organization

• Eldar Mathisen was hired as new CEO starting June 2007

• He was acquainted with many of the Beyond Budgeting principles from his experience at Sandsvær Sparebank

• Group economy invited external speakers to top management meetings; including Lennart Francke, Jan Bergstrand and Bjarte Bogsnes

• Top management developed interest in the Beyond Budgeting principles

9

Analyzing the current situation- Project launched by top management

0

200

400

600

800

1000

1200

Feb.05

Apr.05

Jun.05

Aug.05Oct.

05Dec.0

5Mar.

06May

.06Ju

l.06

Sep.06

Nov.06Feb

.07Apr.0

7Ju

n.07Aug.07Oct.

07Dec.0

7

MN

OK

Budget Pre-tax profit

• The trend had already been discovered – the budget was outdated by February

• The project’s main purpose was to investigate a more dynamic model for corporate governance

• It was important to see how decisions could be made closer to the customers

• How could we as an organization be more ambitious?

10

Main conclusion

BONUS(incentive)

GOAL(desired future)

FORECAST(unbiased)

RESOURCE ALLOCATION

(best use offunds available)

• Universal tools, like the budget, will never quite cover the intended purposes satisfactory

Budget

11

Convincing the board of directors- “By separating processes you’re letting go of illusive control and gain actual control and flexibility”

”Traditional”budget/plan

Step 1 - Separate Step 2 - Improve

Goal• Front-loaded

• Ambitious

• Relative if possible

•Goal

•Forecast

•Resource allocation

Forecast

• Action-based

• Expected outcome – early warning

• Both financial & non-financial

• Limited detail

Resource allocation

• No pre-allocation

• Projects - decision gates & criteria

• Operations - relative KPIs etc.

• Monitoring - intervention if needed only”Same number –conflicting purposes” ”Different numbers”

12

Informing the organizationImplementing Dynamic Management is a big step and it will take time

• Video presentation to be able to reach all employees

• Use of social media to allow feedback from the organization

• The most important message we have communicated is:

“Continue to do what you’ve always doneuntil you’re being told otherwise”

13

Agenda





RollingforecastsCulture and

organization


Bonus andincentives

Rolling forecastsBrutally honest

15

The budget column has not been replaced by rolling forecasts

Change Year To Change ChangeFebruary from last Date from YTD Rolling from last

Figures in MNOK 2009 month 2009 2008 12 months 12 monthsSpareBank 1 Livsforsikring Additional provisions recognised as income in consolidated accounts ODIN Forvaltning SpareBank 1 Skadeforsikring Bank 1 Oslo EiendomsMegler 1SpareBank 1 Medlemskort Argo Securities SpareBank 1 Gruppen Finans Holding Correction subsidiaries - pro forma IFRSNet result before tax from subsidiariesTotal operating costs holdingNet investment charges holdingGains from sale of companies holdingShare of associated companyAmortisationPre-tax resultTaxesNet result for the periodMajority interestMinority interest

16

Rolling forecasts – process

• Rolling 12 months forecast each quarter

• Due to owners that still operate with a budget, the forecast made in October is 15 months

Jan Apr Jul Oct Jan

17

A one way process

3

2

1

• Quick build-up – bottom-up

• No immediate time to change, feedback, revision nor negotiation

• The manager is responsible for the forecast when it is sent up one level

• Forecasts should be built on information already available

18

How should we follow up on a forecast?

Q22009

Q32009

Q42009

Q12010Q2 2009

Q12009

Q22009

Q32009

Q42009Q1 2009 ∑ 12

months

∑ 12months

• The forecast created in Q2 2009 should be compared with the forecast created in Q1 2009

• Why did the forecast change?– Why is the result different than what we predicted last quarter?– Have any of the assumptions changed?– What actions can we take – if any?

19

Action plans

1. Does the forecast indicate that we will not reach our long-term goals?

2. Analyze – can or should we take action?

3. If so – what kind of action should we take?

3a. Strategic decisions 3b. Continuous improvement

– Meet new competition– Diversification– Changes in company portfolio– Organization structure– Etc.

– Reducing department costs– Efficiency improvements– Innovation– Etc.


Rollingforecasts



Bonus andincentives

Benchmarkingand scorecardsDaring to be ambitious

21

League tables

• How many football teams have a budget for the number of goals they will score in a given season?

• What action does a team falling behind take?

• How can you advance on the table next year?

• A league table with competitors that are comparable will tell you about your company’s real performance

F A GD Pts

Man Utd 61 - 23 38 77

Liverpool 66 - 26 40 74

Chelsea 56 - 20 36 71

Arsenal 60 - 32 28 65

Aston Villa 50 - 44 6 55

Everton 48 - 36 12 53

Fulham 34 - 28 6 47

West Ham Utd 38 - 38 0 45

Manchester City 53 - 45 8 44

Tottenham 41 - 41 0 44

Wigan Athletic 31 - 38 -7 41

Stoke City 33 - 49 -16 39

Bolton 40 - 51 -11 38

Portshouth 35 - 50 -15 37

Blackburn 37 - 55 -18 37

Sunderland 31 - 46 -15 35

Hull City 37 - 59 -22 34

Middlesbrough 25 - 49 -24 31

Newcastle 37 - 53 -16 30

WBA 33 - 63 -30 28

22

Reaching your long-term goal

TARGET

Q1 • If your long-term goal is to win your league, your short-term target is to score more goals than your opponent

• There are a number of ways to reach your short-term target

• It is therefore crucial to be able to make new plans when changes occur

23

Reaching your long-term goal

TARGET

Q4 • If your long-term goal is to win your league, your short-term target is to score more goals than your opponent

• There are a number of ways to reach your short-term target

• It is therefore crucial to be able to make new plans when changes occur

24

From plenty of goals, targets and activities to few and ambitious goals

Kunden opplever trygghet, nærhet og en enklere hverdag.

Nær og dyktig

Må følges opp√ OK

Må handles/besluttes

1. Vekst i balanse

3. God avkastning på

risikojustert kapital (RORAC)

4. Redusert kostnadsprosent

12. Profesjonell rådgivning

10. Vi snakker samme språk

13. Tar relevante initiativ

8. Tilgjengelighet i

alle kanaler

7. Til å stole på

9. Lokal engasjert

støttespiller

17. Vi har beste prosesser

18. God samhandling mellom enhetene

26. Engasjerte og læringsvillige medarbeidere

21. Yter det ”lille ekstra” 25. Lederne er

gode forbilder 22. Tar ansvar for helheten

2. Vekst i andre inntekter

11. Engasjert og interessert i kundens

behov

14. Økt kundeaktivitet

15. Flere medarbeidere i

salgsrettet arbeid

16. Bedre innsikt i kundelønnsomhet

5. Flere kunder(nye + beholde)

6. Selge mer til hver kunde

20. Tydelige krav til

rådgivere og ledere

19. Frigjort tid til kundearbeid

23. Økt kundeorientering i støtte og linje

24. Mer kremmerånd/salgs

kultur

"Vi ser ikke skogen for bare trær"

“You can't see the forest for the trees”

25

Breaking down a long-term goal

The most successful bank

Greatest improvement in

cost/income ratio

Return on equity close to average

Largest growth in loans and deposits

2004 2005 2006 2007 SnittBank 1 Oslo 7,7 15,3 16,8 8,0 11,9Hedmark 9,6 10,3 8,9 9,3 9,5Møre 11,8 13,8 13,5 15,3 13,6Sør 12,2 12,2 10,8 11,0 11,6Øst 17,2 24,7 7,0 13,2 15,5Pluss 10,5 11,4 13,1 12,0 11,7Sogn & Fj. 11,5 11,3 11,2 12,8 11,7Vestfold 12,1 14,2 12,6 11,1 12,5Sandsvær 13,6 15,8 10,5 10,4 12,6Snitt 12,3 14,2 10,9 11,9

SR-bank 19,5 25,5 22,6 16,1 20,9Midt-Norge 18,8 22,9 23,6 15,8 20,3Nord-Norge 14,8 20,2 22,8 14,6 18,1

2004 2005 2006 2007 SnittBank 1 Oslo 68,9 74,5 59,9 73,4 69,2Hedmark 52,2 49 54,3 56 52,9Møre 47 50,4 51,3 48,3 49,3Sør 53,3 53,2 54,7 51,6 53,2Øst 46,6 57,1 67,8 50,8 55,6Pluss 46 43,3 39,3 39,7 42,1Sogn & Fj. 52,9 56,1 56,5 50,1 53,9Vestfold 54,1 53,5 55,8 55,2 54,7Sandsvær 55,2 54,7 52,2 53,2 53,8Snitt 52,9 54,6 54,6 53,1

SR-bank 47,8 45,7 49,9 53 49,1Midt-Norge 48,5 50,1 49,7 52,2 50,1Nord-Norge 52,9 51,6 49,2 55,2 52,2

2004 2005 2006 2007 SnittBank 1 Oslo 0 14,4 13,6 18 11,5Hedmark 10,1 14,1 13,9 7,9 11,5Møre 5,4 10,5 14,8 13,9 11,2Sør 10,1 12,4 16,8 17 14,1Øst 4,7 8,9 16,3 10,9 10,2Pluss 16,7 17,4 17,6 16,7 17,1Sogn & Fj. 9,4 11,7 15,1 25,8 15,5Vestfold 17,7 13,9 11,4 11,3 13,6Sandsvær 7,2 28,2 16,7 1,7 13,5Snitt 9,0 14,6 15,1 13,7

SR-bank 11,8 13,7 25,4 13,4 16,1Midt-Norge 5,3 33,4 16,8 11,4 16,7Nord-Norge 3,3 9,9 11 8 8,1

League table League table League table

GOAL

TARGET

CHECK


Rollingforecasts


Benchmarkingand scorecardsBonus and

incentives

Bonus and incentivesLinked to ambitious goals and league tables

27

New bonus and incentive program- Fixed maximum amount to all employees

Group level: Maximum

• Profit sharing• Based on a certain return on equity NOK 16,000

Company level:

• Relative performance• Position in league of ambitious goals NOK 34,000

Maximum amount NOK 50,000

28

Relative performance:Avoiding negotiation of short-term fixed targets and dysfunctional behavior to meet the numbers

• Bonus is dependent on relative performance in league tables

• The league tables are connected to the long-term goals to avoid short-term focus

• The target connected to the ambitious goal may change if necessary in order to be the most successful bank

GOAL

TARGET

CHECK



cost/income ratio










Example:

AVERAGE

75 % 60 % 95 % 77 %

Bonus: 34,000 * 77 % = 26,000


Rollingforecasts



Bonus andincentives

Culture andorganizationThe only implementation project still active

30

The devolved leadership principles of Beyond Budgeting as a starting point

1. Customers Focus everyone on their customers, not on hierarchical relationships

2. Organization Organize as a lean network of accounting teams, not as centralized functions

3. Autonomy Give teams the freedom and capability to act; don’t micro-manage them

4. Responsibility Create a high responsibility culture at every level, not just at the top

5. Transparency Promote open information for self management; don’t restrict it hierarchically

6. Governance Adopt a few clear values, goals and boundaries, not detailed regulations

31

New management policy = three words

Business insight

Involvement

Responsibility

32

Business insight

Business insight

Involvement

Responsibility

• Strategic information should be transparent

• Emphasis on developing skills

• Stimulate knowledge and understanding of business models, competitive conditions, value drivers, etc.

• Discussion of strategic questions on lower management levels

33

Involvement

Business insight

Involvement

Responsibility

• Involve middle management and other employees in decision-making processes

• Employees should be involved on higher levels in the organization

34

Responsibility

Business insight

Involvement

Responsibility

• Delegate responsibility to employees

• Processes for authorization and freedom of action must be developed as a foundation

• When you have the business insight, involvement and responsibility should come naturally

35

Agenda




36

Some lessons we have learned

1. Top management involvement is crucial

2. External speakers are great motivators

3. Look for best practice companies in all business sectors, not just your own

4. You don’t need to buy a new business intelligence system before you start

5. Communication: “Continue to do what you’ve always done until you’re being told otherwise”

6. Implementation projects have final dates

37

Agenda




38

How can we create a uniform corporate governance?

How should we follow up on a forecast?

Q22009

Q32009

Q42009

Q12010Q2 2009

• The forecast created in Q2 2009 should be compared with the forecast created in Q1 2009

• Why did the forecast change?– Why is the result different than what we predicted last quarter?– Have any of the assumptions changed?– What actions can we take – if none?

Q12009

Q22009

Q32009

Q42009Q1 2009 ∑ 12

months

∑ 12months

Action plans

1. Does the forecast indicate that we will not reach our long-term goals?

2. Analyze – can or should we take action?

3. If so – what kind of action should we take?

3a. Strategic decisions 3b. Continuous improvement

– Meet new competition– Diversification– Changes in company portfolio– Organization structure– Etc.

– Reducing department costs– Efficiency improvements– Innovation– Etc.

GOAL

TARGET

CHECK



cost/income ratio










New management policy = three words

Business insight

Involvement

Responsibility

39

The Balanced Scorecard- Do we need it?

• Does it add value?

• If so, which parameters should we focus on?– Only value drivers?– Critical result indicators?

• What should replace the old budget and fixed targets?

• Should we combine it with league tables?

• What about staff functions?

40

The financial crisisIn

dex

Index showing the value of subprime mortgages

Perc

ent

Delinquency rates, all banks, real estate loans, residential

thou

sand

bill

ions

US

D (t

hous

and

billi

ons)

World, Standard & Poors 1200, Index, Market Cap, USD

• A cost reduction program has been initiated by our owners

• How can such a central initiative be combined with delegation of responsibility?

• Will it undermine our new corporate governance?

41

Our ownership structure, the SpareBank 1 Alliance, presents an extra challenge

SpareBank 1 Gruppen AS

Focus areas– Brand– Technology– Competence– Common processes and use of best practices– Purchasing

Regional competence centers– Payment services: Trondheim– Credit: Stavanger– Training: Tromsø



SpareBank 1SMN

(19,89 %)

SpareBank 1SMN

(19,89 %)







LO(9,29%)

LO(9,29%)

Alliance Co-operation ProgrammeAlliance Co-operation Programme

SpareBank 1 Oslo

(100%)

SpareBank 1 Oslo

(100%)


(100%)


(100%)


(100%)


(100%)

ODIN Forvaltning

(100%)

ODIN Forvaltning

(100%)


(100%)


(100%)

Argo Securities

(75%)

Argo Securities

(75%)

SpareBank 1 LTO

(100%)

SpareBank 1 LTO

(100%)








EiendomsMegler 1

BNbank



EiendomsMegler 1

BNbank



Holding AS(100%)


Holding AS(100%)


(100%)


(100%)

SpareBank 1 Gruppen AS – the structure • Some owners budget while others operate with rolling forecasts

• They are used to the illusive control that the budget has represented, when following up on SpareBank 1 Gruppen’sresults

• For the several product companies, it is difficult to find relative targets and league tables

42

"....a continuous journey of learning and adaption"Jeremy Hope et.al, BBRT

43

Agenda




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