The world has changed
– what about the way we lead and manage?
Beyond Budgeting in Statoil
Bjarte Bogsnes
Vice President - CFO PMA Performance Management Development
Chairman – Beyond Budgeting Round Table - Europe
Classification: Internal
Status: Draft
Outline
•The case for change - what is the problem?
•The Beyond Budgeting principles
•The Statoil model - Ambition to action
– Target setting
– Forecasting
– Dynamic resource allocation
– Holistic performance evaluation
Classification: Internal
Status: Draft
Statoil in brief
•Turnover and market cap
Arctic
approx. 70 bn. USD
North Sea &
Norwegian
Sea
•31.000 employees in 40
countries
•World’s largest offshore
Russia
Canada
operator
•Europe‘s second largest
gas supplier
•The world’s third largest
crude oil seller
•Consistent growth (avg 4%)
Caspian
North
Africa
US Gulf of
Mexico
Middle
East
South
America
West
Africa
since 2001
Current production of oil and gas
Classification: Internal
Status: Draft
The smallest problem…
73% of companies need more
than 3 months to complete the
annual budget.
Hackett Group 2008
Classification: Internal
Status: Draft
Most budget assumptions outdated within
3-6 months
Source: APQC Survey, February 2009
Classification: Internal
Status: Draft
Budgets - a safe harbour or an illusion of
control?
”At least I have a
budget!”
Classification: Internal
Status: Draft
What is your view on people?
•Theory X?
•Theory Y?
•People prefer to be directed, do not •Work is as natural as play and rest.
want responsibility, and have little •People will exercise self-direction if
or no ambition.
they are committed to the
•People have an inherent dislike for objectives (they are not lazy).
work and will avoid it whenever
•Creativity, ingenuity, and
possible.
imagination are widely distributed
•People must be coerced,
among the population. People are
controlled, directed, or threatened
with punishment in order to get
them to achieve the organizational
objectives.
•People seek security above all else.
capable of using these abilities to
solve an organizational problem.
•People learn to accept and seek
responsibility
•People have potential.
Douglas McGregor – ”The human side of enterprise” (1960)
Classification: Internal
Status: Draft
What we say and what we do….
Classification: Internal
Status: Draft
The world has changed
- what about the way we lead and manage?
Stable
Dynamic
Business
environment
Traditional
management
”X”
Classification: Internal
Status: Draft
”Y”
People
We must change both processes and
leadership
Stable
Dynamic
Processes
Relative and directional goals
Dynamic planning, forecasting
and resource allocation
Holistic performance evaluation
Rigid, detailed and annual
Values based
Rules-based micromanagement
Autonomy
Centralised command and
control
Transparency
Secrecy, sticks and carrots
”X”
Classification: Internal
Beyond Budgeting
Status: Draft
Internal motivation
”Y”
Leadership
We are not alone!
Classification: Internal
Status: Draft
The Beyond Budgeting principles
Change in leadership
1. Values - Govern through a few clear values, goals
and boundaries, not detailed rules and budgets
Change in processes
7. Goals - Set relative goals for continuous
improvement, don’t negotiate fixed performance
contracts
2. Performance - Create a high performance climate
based on relative success, not on meeting fixed
targets
8. Rewards - Reward shared success based on
relative performance, not on meeting fixed targets
3. Transparency - Promote open information for self
management, don’t restrict it hierarchically
9. Planning - Make planning a continuous and
inclusive process, not a top-down annual event
4. Organization - Organize as a network of lean,
accountable teams, not around centralized functions
10. Coordination - Coordinate interactions
dynamically, not through annual planning cycles
5. Autonomy - Give teams the freedom and
capability to act; don’t micro-manage them
6. Customers - Focus everyone on improving
customer outcomes, not on hierarchical
relationships
Classification: Internal
Status: Draft
11. Resources - Make resources available as needed,
not through annual budget allocations
12. Controls - Base controls on relative indicators
and trends, not on variances against plan
Key principles – Statoil
•
Performance is ultimately about outperforming peers
•
Do the right thing in the actual situation, guided by the Statoil Book, your
Ambition to action, decision criteria & authorities and sound business
judgement
•
Within this framework, resources are made available or allocated case-bycase
•
Business follow up is forward looking and action oriented
•
Performance evaluation is a holistic assessment of delivery and behaviour
Classification: Internal
Status: Draft
CEO messages
in turbulent
times
CEO Helge Lund
“We have a management model which is very well-suited to dealing with
turbulence and rapid change. It enables us to act and reprioritise quickly
so that we can fend off threats or seize opportunities. This is much more
difficult in a traditional «budget world».
One of the main principles in our Ambition to action concept is that
Statoil consists of mature, professional and able people who both can
and want to accept responsibility.
We will not introduce a traditional group-wide campaign to cut costs.
Each and every one of us knows best where they feel the pinch, which
measures are necessary and which priorities need to be made to reduce
costs.”
Classification: Internal
Status: Draft
Ambition to action - a process which…
…is integrated - from strategy to people
…but provides sufficient freedom and flexibility
…and activates our values and leadership principles
Strategic
objectives
Where are we going what does success
look like?
•Most important
strategic change areas
•Medium term horizon
Classification: Internal
KPIs
Actions &
forecasts
Strong
performance
Sustainable
results
Individual
goals
How do we measure
progress?
How do we get
there?
What is my
contribution?
•Indicative measure of
strategic delivery
•Concrete actions and
expected delivery
(forecast)
•My Performance
Goals (MPG)
•10-12 KPIs, annual/
longer term targets
Status: Draft
•Clear deadlines and
accountabilities
•Delivery
•Behaviour
Ambition to action example
Where are
we going?
”Strategic
objectives”
How do we
measure
progress?
”Key
Performance
Indicators”
Classification: Internal
Status: Draft
How do we
get there?
”Actions”
More than 1100 ”Ambition to actions”
across the company
…..and more
Classification: Internal
Status: Draft
Solving a serious budget conflict
Step 1
Traditional budget / plan
Step 2
Separate
Improve
•Front-loaded
Target
•Ambitious
•Relative if possible
Budget / plan =
•Business driven not calendar driven
•Target
•Expected outcome – early warning
Forecast
•Forecast
•Frequency and time horizon – lead time
and target horizon driven
•Limited detail
•Resource allocation
•Dynamic - no pre-allocation
Resource
allocation
“Same number –
conflicting purposes”
Classification: Internal
Status: Draft
•Projects - decision gates & criteria
•Operations - relative KPIs etc.
•Monitoring - intervention if needed only
”Different numbers”
A forecast is not a promise or a target …
…nor is it an application for
resources
Classification: Internal
Status: Draft
A forecast is a call to action
Get issues on the radar screen early enough…
…..to be able to take corrective actions
A forecast should:
•be brutally honest and unbiased
•be done for yourself more than for others
•be actionable
•have the right time horizon and detail
level
•include an uncertainty analysis where
relevant
Classification: Internal
Status: Draft
Relative performance
• Connect input with
output
• Compare with others
Classification: Internal
Status: Draft
Relative Statoil performance
Total shareholder return
Relative RoACE
(12-month average)
(3Q 12-month average)
Rank
1
2
3
4
5
6
7
Target: Above average 8
9
10
11
12
13
14
15
16
Petrobras
Anadarko
Repsol YPF
Lukoil
Occidental
Statoil
BP
BG
Total
Shell
Eni
Encana
Chevron
ConocoPhillips
ExxonMobil
Devon Energy
- 30 % - 10 % 10 %
Classification: Internal
30 %
Status: Draft
50 %
70 %
90 %
Lukoil
ExxonMobil
BG
Target: 1st quartile
Statoil
Total
Petrobras
Chevron
Encana
Occidental
Eni
BP
Royal Dutch Shell
Devon Energy
ConocoPhillips
Repsol YPF
Anadarko
0%
10 %
20 %
30 %
40 %
Dynamic resource allocation:
A different mindset - cost conscious from
the first penny
Do I have a
budget for
this?
Is this the right
thing to do?
•Supports Ambition to
action?
•Within decision criteria &
decision authority?
•Can I justify this?
Budget
Not
OK
OK
OK?
OK?
OK?
OK?
OK?
Classification: Internal
Status: Draft
Dynamic resource allocation – other costs
Relative KPIs
Absolute KPIs
Traditional
cost budget
Absolute
cost KPI
Unit cost
input/output
Unit cost
vs peers
No KPIs
Bottom line
focus only
Strategic
objectives or
actions only
Xx
Xx
EBIT
Xx
Xx
ROCE
Xx
Xx
Xx
1000
(abs/rel)
”USD/bbl”
Xx
1000
”USD/customer”
”1. quartile”
”USD/employee”
”Above average”
”Cost effective and
competitive
operations”
”More video –less
travel”
”Reduce
consultancy
spending”
Monitoring of actual development, intervention if needed only
Select based on what is right and works for your
organisation
Classification: Internal
Status: Draft
Increasing
freedom
and
flexibility
Increasing
need for
strong
values and
clear
direction
A new performance language
- from mechanical measurement to a
holistic assessment
“Ambition to Action”
(Previously
only KPI
targets)
•Strategic objectives
•KPI targets
•Actions
Pressure testing KPI results:
•Deliver towards the strategic
objectives?
D
e
l
i
v
e
r
y
50/50
5
1
5
Behaviour
•How ambitious KPI targets?
Living the values
•Changed assumptions, with positive or
negative effect?
•Day-to day-observations
•Agreed actions implemented, or
corrective actions initiated as needed?
•360°/ 180°/ 90° surveys
•Delivered results sustainable?
•People survey
•Individual development plan
Classification: Internal
Status: Draft
A systematic change of the whole process
”Annual command and control”
Target
setting
•Equal to plan – ”what we can deliver”
•KPI targets
•Absolute targets
More dynamic & flexible
A new performance language
•Aspiration driven –”what we must deliver”. Targets
before plan.
•” Ambition to action”
•Relative targets
•Plan = target, forecast and resource allocation
•Plan = forecast only (actions and expected performance)
•Gaps vs targets hidden
•Gaps vs. targets visible
•One outcome only
•Main uncertainty spans
•Very detailed
•Less detailed
Resource
allocation
•Annual pre-allocation through budgets
•Resources available when needed, but within KPI targets
+ mandates + decision criteria. Monitoring of
development
Business
reporting
•Backward looking
•Forward looking
•Variance vs. YTD budget
•Forecast vs. targets, and actions to close gaps
•Only based on budgets and KPIs
•A broader evaluation: ”Ambition to action” + Behaviour
Planning
Evaluation/
rewards
Classification: Internal
•Budgets ”an entitlement – my money”
Status: Draft
Thank you for listening!
Questions or comments – now or later?
Bjarte Bogsnes
bjbo@statoil.com
+ 47 91613843
Beyond Budgeting Round Table
www.bbrt.org
Classification: Internal
Status: Draft
Want to
learn
more?
Out on Wiley (US)
(Available from e.g.
Amazon.co.uk)
Classification: Internal
Status: Draft