Robin Fraser - sasCommunity · Cadbury Schweppes Clariant CIMA Coors Brewers ... Hope and Robin Fraser, published by Harvard Business School Press in ... CASE for CHANGE CASE for

Robin FraserRobin FraserInternational Director, BBRTInternational Director, BBRT

SEUGI Executive Management StreamVienna, 17 June 2003

© BBRT 2003 - All rights reserved2Beyond Budgeting, 18 June 2003

The budget model: A universal problemBBRT members (1998 to 2003) - A wide spectrum of industries and regions

Deutsche BankDHLDiageo � UDVeNiklasErnst & YoungEuropean Bank (EBRD)Halifax Hammond SuddardsHousing AssociationsIBM Business ConsultingInterbrew KingfisherKPMG ConsultingBulmersMarsMencapNational PowerNavigant ConsultingNovartisOmgeoParker HannifinPentland Group

ABBABC TechnologiesAccentureACCO EuropeAC NielsenAdaytumAlstomAnheuser Busch Armstrong-LaingArthur AndersenAscomBarclays BankBG TranscoBootsThe ChemistsBP/Burmah CastrolBT Cadbury SchweppesClariantCIMACoors Brewers (Bass) De BeersDeloitte & Touche

Port of Tyne AuthorityProDaCapo Royal MailRugby GroupSainsburysSchneider ElectricScottish EnterpriseSiemensSight Savers InternationalSKFSouthcoStandard LifeTPG (TNT Post Group)Texas InstrumentsThames WaterUBSUnited Engineering Forgings Valmet Corporation (Metso)Unilever Best FoodsWest Bromwich Building Soc.WhitbreadWorld Bank


Charles Horngren says �

�Beyond budgeting is � a positive idea that uses the abandonment of budgeting as a trigger for improving the entire management control process.�Foreword by Dr. Charles T. Horngren, Littlefield Professor of Accounting, Emeritus, Stanford University, to the book �Beyond Budgeting� by Jeremy Hope and Robin Fraser, published by Harvard Business School Press in April, 2003. Dr Horngren is the author of �Cost Accounting�, now in its 11th

edition.

The message1. There is an alternative to the 'command

and control' management model2. Abandoning 'fixed performance contracts'

is the key to adopting the �new model� 3. This model leads to superior cost management

- Case example4. The first step you can take is to evaluate your

�case for change�.


Dissatisfaction is widespreadLow value process� Takes too much time� Rapidly out-of-date� Adds little value

�Keeping on track�

Goals and strategic guidelines Unresponsive to change

0

100

1984 1986 1988 1990 1992 1994 1996 1998 2000Source: Chem Systems

Petrochemical Industry Profitability Index in W Europe

300

400

500

600

200

Set targetsAlign incentivesAgree actions

Allocate resourcesCoordinate plans

Control performance

BudgetDysfunctional behavior


�Fixed�Performance Contract

� Period [Fixed]

� Target [Fixed]

� Rewards [Fixed]

� Plan [Fixed]

� Resources [Fixed]

� Coordination [Fixed]

� Control [Fixed]

� Agreed by [Negotiation]

� Signed by [Mgr/Dir]

Betterperformance

Tougherperformance

contracts

The conventional, but fallacious belief is �

Rising competitive

pressure

The annual performance trap


Budgets conflict with tools

Aimed at central control

Rolling forecasts

Shareholder value models

Customer relationship management

Activity-based management

Benchmarking

Balanced Scorecard

Budgets support

short term decisions

Budgets focus on internal

comparisons

Budgets focus on departments

rather than activities

Budgets stress sales

targets

Budget contracts dominate strategic

imperatives

Budgets lead to distortion of information


BBRT cases: Breaking free!

� ABB, Sweden/Switzerland, Various

� AES, USA, Power generation

� Ahlsell, Sweden, Distribution

� Boots, UK, retailing

� Borealis, Denmark, Petrochemicals

� Bulmers, UK, Brewing industry

� Ciba Vision, USA, Eye care

� Emerson, USA, Electrical products

� Fokus Bank, Norway, Banking

� Groupe Bull, France, Computer manufacturing

� IKEA, Sweden, Furniture mfg and retailing

� Leyland Trucks, UK, Truck manufacturing

� Rhodia, France, Specialty chemicals

� SKF, Sweden, Ball bearings

� Schneider Electric, France, Electrical products

� Sight Savers Int�l, UK, Charity

� SlimFast, USA, Food sector

� Sprint, USA, Telecomms

� Svenska Handelsbanken, Sweden, Banking

� Volvo Cars, Sweden, Car manufacturing


Handelsbanken: World class key ratios

100 90 80 70 60 50 40 30

Source: Deutsche Bank. Running the numbers, March 2002

Expe

nses

/tota

l ass

ets

%

Cost/Income ratio %

HypoVereinsbank Danske Bank

UBS

SociétéGénérale

S E B

BNP Paribas

FöreningsSparbanken

Deutsche Bank

Dresdner*

Commerzbank

Nordea

IntesaBci BBVA

ABN Amro

CS Group

BSCH

Credit Lyonnais

Lloyds TSB

HBOS

HSBC

Unicredito Italiano

Den Norske Bank

San Paolo-IMI

Barclays

Standard Chartered

Royal Bank of Scotland

Banca di Roma

* Dresdner Bank & Bank of Ireland as at Sept 2001.

Banca Nazionale del Lavoro

Bank of Ireland*

Comparison with largest listed universal banks in Europe, Jan-Dec 2001 (after loan losses )0.5

1.0

1.5

2.0

2.5

3.0

3.5

Handelsbanken


Handelsbanken: Why costs are lower

1. Head office - Fewer layers and people �controlling� the business.

2. Regions and branches - Set up as profit, not cost centres.

3. Group profit sharing scheme - Creates a culture of thrift and cooperation.

4. Frontline responsibility - Leads to lower credit losses.

5. Central services/costs - Exposed to pressure of negotiation, not allocated.

6. Technology - Used to reduce costs where possible.

7. Budgeting - Abandoned, and �cost entitlement� mentality eradicated.

Customers

560 Branch Managers

11 Regional Managers

CEOProduct Companies

Treasury, IT etc


Handelsbanken: Relative measures

Bank to banks(RoE)

1. Bank D 31%2. Bank J 24%3. Bank I 20%4. Bank B 18%5. Bank E 15%6. Bank F 13%7. Bank C 12%8. Bank H 10%9. Bank G 8%10. Bank A (2%)

Region to regions(RoE)

1. Region D 38%2. Region J 27%3. Region I 20%4. Region B 17%5. Region E 15%6. Region F 12%7. Region C 10%8. Region H 7%9. Region G 6%10. Region A (5%)

Branch to branches(Cost/Income etc.)

1. Branch D 28%2. Branch J 32%3. Branch I 37%4. Branch B 39%5. Branch E 41%6. Branch F 45%7. Branch C 54%8. Branch H 65%9. Branch G 72%10. Branch A 87%


Two models: Different philosophies

KEYAbandon �FIXED�

performancecontracts

Adaptiveprocesses

RadicaldevolutionRadical

devolution

�Adaptive�

�Devolved�

Strategy

Annual budget

Control(Versus budget)

Mission/Vision

�Keeping on track�

Incentives(Versus budget)

�Fixed�

�Centralized�


Principles: Adaptive processes

�Fixed�Performance

Contracts Variancesagainst budget

Incrementaltargets

Plannedcoordination

ResourcesAllocated

Incentives in advance

Annualplanning

�Fixed cycles�

Relative KPIcontrols

Continuousplanning

Dynamiccoordination

Resourcesas required

Rewardswith hindsight

Aspirationalgoals

�Relative�Improvement

Contracts

�Adaptive processes�


The journey: Processes before devolution

Adaptive & devolved

organization

(2)

(2) Devolved organization� To retain capable and committed people� To be innovative� To operate with low costs � To be responsive to customers� To be ethical and socially responsible� To create superior shareholder value.

Adaptive processes

(without budgets)

(1)

(1) Adaptive processes� To reduce costs

� To create value continuously

� To reduce gaming

� To encourage congruent behaviour

� To enable devolution.

Management model Adaptive & DevolvedFixed & Centralized

Com

petit

ive

Perf

orm

ance

Hig

hLo

w Traditional organization(with budgets)


First step: BBRT diagnostic and survey

Go to www.beyondbudgeting.org

Change managementChange management ReadinessReadinessCapability for changeCapacity for change

Capability for changeCapacity for change

1. Capable people2. Innovation3. Operational excellence4. Customer intimacy5. Ethical behaviour6. Value creation

1. Capable people2. Innovation3. Operational excellence4. Customer intimacy5. Ethical behaviour6. Value creation

Setting targetsRewarding peopleAction planningControlling performance Managing resourcesCoordinating actionsGovernance frameworkPerformance climateFreedom to decideCapability to actCustomer accountabilityAccess to information

Setting targetsRewarding peopleAction planningControlling performance Managing resourcesCoordinating actionsGovernance frameworkPerformance climateFreedom to decideCapability to actCustomer accountabilityAccess to information

Change requiredChange required

CASE for

CHANGE

CASE for

CHANGE

Need Need External pressuresExternal pressures

Internal pressuresInternal pressures

Market turbulenceLow value processesDysfunctional behaviourIneffective use of tools

Market turbulenceLow value processesDysfunctional behaviourIneffective use of tools

Vision Vision Importance of goalsImportance of goals

Principles of new modelPrinciples of new model

Belief in principlesBelief in principles

Strategic goalsStrategic goals

Robin FraserRobin [email protected]

SEUGI Executive Management StreamVienna, 17 June 2003

www.bbrt.org

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Robin Fraser - sasCommunity · Cadbury Schweppes Clariant CIMA Coors Brewers ... Hope and Robin Fraser, published by Harvard Business School Press in ... CASE for CHANGE CASE for