Beyond budgeting – integrated planning and performance management

13 June 2014

Independent consultant Adrian Ryan, with input from Bjarte Bogsnes, explains how businesses can use planning and process management to drive integrated reporting.

In an interview article in the winter 2013 edition of Finance Director Europe, Robin Freestone, group CFO of Pearson, said: "Big business is often criticised for focusing too much on the next quarterly figures." The article went on to suggest that business needs to take a broader and longer-term perspective to external reporting that encompasses long-term strategic goals and sustainability issues, and focuses on outcomes rather than pure financial results.

I think that is right, but external reporting is not the only area where big business needs a change in perspective. The entire way performance is managed internally needs to be changed, and the way people are rewarded also needs to be aligned with the new way of looking at and reporting the outcomes. Bjarte Bogsnes, vice-president of performance management development at Statoil, has espoused the virtues of the 'beyond budgeting' concept in various articles and in his book Implementing beyond budgeting: unlocking the performance potential. So what do organisations need to do if they want to make outcome reporting meaningful rather than just another reporting format?

The current problem

Most organisations operate a performance management regime that is made up of discrete corporate exercises spread out along the annual financial calendar. This starts with strategic or five-year planning, moves on to annual planning and budgeting, and then into periodic forecasting and actual reporting, including KPI dashboard or scorecard reporting; then the cycle repeats itself.

Some common problems cited within these activities include:

  • planning taking too long
  • plans out of date before the year starts
  • forecast accuracy issues
  • lack of visibility and transparency of data
  • lack of trust in KPIs and data reported.

Bogsnes says: "While almost everybody complains about the budgeting process, few understand that their problems are only symptoms of a much bigger and more serious problem, rooted in the entire management model."

Statoil has addressed this by an extensive implementation of the beyond budgeting concept, but many organisations may not be willing to go this far, at least not initially.

In addition to these problems, there is often a disconnect between strategic goals and short-term objectives, as alluded to by Freestone, and forecasts replacing plan targets as so-called 'latest estimates' rather than being an objective range of likely outcomes.

In attempting to improve forecast and planning accuracy, many organisations proceed to analyse at a greater level of detail, erroneously thinking that the greater the detail, the more accurate the analysis. This only serves to decrease transparency and slow down decision-making. However, the chief issues are organisational, in that the various corporate exercises are performed in isolation and sometimes with different ownership. This creates a silo working practice that further diminishes the ability to see the big picture and relate long-term goals to short-term objectives.

Added to this is the formulaic nature of the corporate planning and performance management exercises, which rarely include external factors, such as what competition might do, and other environment risk factors and opportunities.

For example, the annual strategic planning exercise tends to produce a voluminous pack that is then filed rather than regularly updated with emergent strategy - factors that emerge during a financial year that significantly impact the original strategy. Within the traditional corporate-planning and performance cycle, there is rarely any room for factors such as mission outcomes, risk management and sustainability. Why is it done like this? Because it always has been.

A new way

While most organisations may be uncomfortable moving to full beyond budgeting ways of working, a credible first step is to integrate existing planning, forecasting and performance management into one end-to-end process, each feeding from the other. This is as much an organisational change as it is a process one.

The objective is to have the same people involved in all aspects of the process, bringing in specialists where needed. The key here is to set up the corporate calendar in a single-process structure (see figure, opposite) with a single corporate performance management forum at the centre.

The key factor that makes this approach work is the breaking down of silos between functions by constructing multifunctional business teams to work on a particular area of the business across all elements of planning and performance management.

This means doing away with corporate-centre strategic-planning teams and pushing this work down into the business teams responsible for delivery. Single-category businesses may find they can handle this process within corporate centre teams, but they should be multifunctional.

This is not about decentralisation but about empowerment to deliver the best results - rather than micromanaging to an arbitrary set of targets - and gaining transparency of all relevant information in decision-making in as real-time a fashion as possible. The multifunctional team looks across all aspects of the process, building up a picture from strategic views through annual views to tactical decision-making based on regular actual reporting, and the weekly or monthly operational planning process, if used.

For multidivision businesses, there is still a need to consolidate the outputs of the team reviews and decision-making for the global executive, but this should be done on a summary level. Providing too much detail at the global level is a sure-fire way of reducing transparency by data overload.

Strategic planning sets annual objectives as well as long-term goals, and these are not just financial but also outcomes desired. The objectives are fixed as the reference point against which decisions are made and not adjusted because of the forecast. In this way, the concept of the 'latest estimate' re-plan is eliminated and replaced with an actual forecast - the likely outcomes together with risks and opportunities.

If the forecast plus the actual reporting, including external activity such as competitor actions and environment changes, suggest a shift in the landscape vs when the strategy was set or last refreshed, then this emergent strategic change is assessed to see if the original strategy needs to be adjusted. This is done in flight by the multifunctional teams as part of the periodic performance review, and not just as an annual exercise.

Bogsnes says of the Statoil approach: "The dynamic forecasting we are introducing is different from rolling forecasting. A rolling forecast is done on a fixed frequency and on a fixed-time horizon across the company, often quarterly and five quarters ahead. We want forecasts to be updated when something happens."

This idea of a more real-time performance assessment that integrates various aspects of the corporate performance management activities drives more-responsive decision-making.

If you use a sales and operational planning (S&OP) mechanism, this should be an input to the forecast. They will never be equal, as they are for different purposes, and organisations that force these processes to match in the name of improving forecasting accuracy are, in fact, driving a lack of transparency and trust in the data.

The benefits of integration are summarised as follows:

  • strategic goals are top of the agenda
  • the forecast is an objective business-driver-based assessment
  • the S&OP informs the forecast rather than being tied to it
  • KPIs are based on business drivers rather than a list of financial metrics.
  • multifunctional assessment of broader, more timely datasets.

Bogsnes believes that using relative performance targets rather than fixed targets for motivating behaviour is the key to success, and, as such, a high degree of co-working between HR and finance is required. This is to shift the organisation from linear fixed-target performance assessment to an assessment of how well people and teams did relative to the circumstances faced; in other words, how good their real-time decision-making was.

By blending financial and non-financial data at a business-driver level, the organisation keeps the financial performance and the non-financial outcomes desired in the frame. By seeking external information, emergent strategy is uncovered on a timely basis, and risks and opportunities more quickly acted upon.

By forecasting a range of outcomes based on business drivers, the focus is on performance and actions, rather than non-value-added re-plan churning. Integrated planning and performance management improves business decisions and supports the kind of integrated reporting that Freestone is calling for.

According to Bogsnes: "To be successful it is not enough to integrate. The budget process itself must be radically re-engineered."

While I agree, I believe that integration is a good place to start in the journey towards more real-time and better business decision-making and performance management.

Adrian Ryan has more than 23 years’ experience in finance roles – up to FD level – and consulting and industry business-transformation roles. He is a regular speaker at CFO conferences and a contributor to the Institute of Chartered Accountants in England and Wales finance and management faculty thought leadership.
Bjarte Bogsnes has a long international career in the oil business, in finance and HR. As group controller for the petrochemicals company Borealis, he headed the abolishment of budgeting in this company in the mid-1990s and has been advocating the ‘beyond budgeting’ principles ever since.
Copyright @ Adrian Ryan Associates, 2014