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
© BBRT 2003 - All rights reserved3Beyond Budgeting, 18 June 2003
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�.
© BBRT 2003 - All rights reserved5Beyond Budgeting, 18 June 2003
Dissatisfaction is widespreadLow value process� Takes too much time� Rapidly out-of-date� Adds little value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
© BBRT 2003 - All rights reserved6Beyond Budgeting, 18 June 2003
�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
© BBRT 2003 - All rights reserved7Beyond Budgeting, 18 June 2003
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 2003 - All rights reserved8Beyond Budgeting, 18 June 2003
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
© BBRT 2003 - All rights reserved9Beyond Budgeting, 18 June 2003
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
© BBRT 2003 - All rights reserved10Beyond Budgeting, 18 June 2003
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
© BBRT 2003 - All rights reserved11Beyond Budgeting, 18 June 2003
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%
© BBRT 2003 - All rights reserved12Beyond Budgeting, 18 June 2003
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�
© BBRT 2003 - All rights reserved13Beyond Budgeting, 18 June 2003
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�
© BBRT 2003 - All rights reserved14Beyond Budgeting, 18 June 2003
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)
© BBRT 2003 - All rights reserved15Beyond Budgeting, 18 June 2003
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