Beyond Budgeting: Transforming Traditional Financial Practices

Sohrab Salimi (00:02.637)

Hello everyone and welcome to another episode of our Agile Insights in Conversations. Today I'm hosting Bjarte Bogsnes whom I've known now for quite some time, although we've never met in person, but you've been a guest on our show at Agile 100 almost three years ago. And then you and I talked about your book, Beyond Budgeting, and I actually became the translator of the German version, which is now also available. So Bjarte is super happy to have you back with us.

Welcome to the show.

Bjarte Bogsnes (00:34.21)

Thank you.

Sohrab Salimi (00:35.797)

Now, Bjarte, as usual, I would start with asking you to briefly introduce yourself, because probably some of the people listening to this show haven't met you before, and I believe you've had a fantastic career so far. So share with us a bit where you come from, what kind of steps you've taken throughout your career, and how you moved into this whole topic of Beyond Budgeting.

Bjarte Bogsnes (01:02.554)

I'd like to start with a quote from Douglas Adams. He once wrote that, I might not have gone where I intended to go, but I think I ended up where I needed to be. And those words resonate with me because that is very much the story of my life, because it was in no way given that we should.

sit here today and talk about Beyond Budgeting because my career started in a very different place. After graduating from Business Studies, I joined a company that used to be called Statoil, no Ekinor, one of Scandinavia's largest companies. And my first management job in this company the year after was head of the Corporate Budget Department. So I've been heading up more budget processes in my career in that job, in other finance manager jobs in this company.

more budgeting rounds than I want to be reminded about. Looking back, I've done a lot of stupid things, but I have changed my mind about this stuff many years ago. It actually happened already back in 1995, when we got the chance to kick out the budget in a company partly owned by Statoil called Boialis. There was nothing called Beyond Budgeting back then, so it was actually a bit scary, but that worked.

very well. Cost came down as one example and that company actually became one of the inspirations for the Beyond Budgeting model that was actually formulated or designed some years later based on what had happened in a number of companies including a very famous case, Swedish Handelsbanken. Then I returned back to Statoil and

Then I got a chance to do this once again in that company, a much bigger company. We are talking 2005 and that also worked very well. Since that project started out, I have been working full-time on Beyond Budgeting in that company with further development of the model which we call Ambition to Action.

Bjarte Bogsnes (03:25.414)

I still say we, even if I actually left the company two years ago with a heavy heart to be able to work full-time with Beyond Budgeting. And all the time I've been doing external work, so keynotes, some consulting workshops on behalf of Retinor, but now I'm able to do this full-time.

I'm also the chairman of the Beyond Budgeting roundtable, which is an international network of organizations and individuals interested in beyond budgeting.

So that's basically me.

Sohrab Salimi (04:07.573)

basically it. All right, we can end the interview. Jokes aside, I love that quote that you just started out with. Being a medical doctor myself and then doing this kind of work that I do, I can also say I might have gone where, not have gone where I intended to go, but I ended up where I needed to be. Now, let me walk me through this, Bjarte. 1995.

Bjarte Bogsnes (04:20.558)

Thank you.

Sohrab Salimi (04:35.329)

This is way beyond the Agile Manifesto, which was written in 2001. It was actually more or less the time where the first scrum teams got started, according to Jeff Sutherland and Ken Schwaber. But the whole Agile movement or what we hear today, the humanocracy movement initiated by Gary Hamill and Michaela Zanini and all the other things that we're hearing about new ways to think. You can see the book from Roger Martin behind me. None of that.

Bjarte Bogsnes (05:03.589)

Yeah.

Sohrab Salimi (05:04.801)

None of that was going on. And Borgerales, to my understanding, in 1995 was not a small company. Correct me if I'm wrong, right?

Bjarte Bogsnes (05:13.89)

That's correct. We had around 30 plants across Europe, 5,000 employees.

Sohrab Salimi (05:19.305)

Yes, and it was also you mentioned 30 plans. So it was not like a software company doing cool stuff in the internet It was like really hard business What got you and your team? To get like you mentioned kick the budget out, right? What was the initiator of that? What was driving that initiative?

Bjarte Bogsnes (05:41.07)

That's actually quite a funny story because this company started operations in March 1994 and it didn't take long before people came to us and said, where is the budget for 1994? We can't operate without the budget. And as finance people, we agreed of course we have to make a budget. So we started making that on top of everything else you have to do.

when you're establishing a new company, right? Recruiting people, now setting up the organization, installing systems, moving to Copenhagen with my family and buying a house and you name it. I mean, that was busy times. But sometimes in June, we actually had a budget ready and everybody's in it, now we are back in control. I think it took two days before people came and said, that's fine, but what about the budget for 1995 next year?

We are late, it's already summer. And we agreed, of course we need to start to work on that, which we did. And this budget was then finished sometimes in the autumn. And by then we were completely exhausted, just knackered. So the only energy we had left, we spent at the hotel outside of Copenhagen, gathered key finance people from across Europe. And one of the main purposes of that day

was to improve the budgeting process in Borealis. And I recall that day as if it was yesterday because we spent this day discussing peanut issues, completely unimportant issues. Shall we move this column from here to here in order to simplify? Shall we stop asking for this number in order to simplify? Peanut issues. And then towards the end of this day, as we were about to move another column, budget column.

We suddenly heard from a guy down in the corner. Normally quite an active guy, but he had been very quiet this day and we had more or less left him alone. And suddenly we heard from this guy. What if we don't budget at all? And the room became dead silent. Everybody turned around, looked at the guy, nobody said anything, but I think we were all thinking the same. That guy probably needs a vacation. And that was it.

Bjarte Bogsnes (08:00.906)

But that comment from that guy became a kind of defining moment, number one, on this journey. Because then moving into next year, everybody in the company realized that the synergies that we had gotten out of this merger, it was a merger between the petrochemical business of Statoil and Finnish Nesta. And that wasn't enough. I mean, it's a very competitive business. I know what the deficit is.

and I know what losing money is. And so everybody agreed that we needed something more. And what was big in the 90s was business process re-engineering. A lot of consentless have earned a lot of money on doing that. But in one way, it's only common sense. Turn every stone and look for a better way. And I was asked to head up a part of this work called management effectiveness.

I did not invent that label, so I went to the CFO that I reported to and I asked him what do you mean and also what do you expect? And the CFO, he just smiled and then he looked at me and he said, Bjarte, I expect the unexpected. That was the mandate we got and I went back to my team and shared this with them and it didn't take long before...

that comment from that guy in the corner came back to us. I mean, we were not stupid. We knew that this process we were running, it wasn't the smartest in the world, but kind of kicking out the budgets have been unthinkable up to now. Absolutely, so we went back to the CFO and we told him we want to kick out the budget. And he smiled again and he said, well, that sounds interesting, but what shall we then do instead?

Sohrab Salimi (09:43.774)

It's the unexpected.

Bjarte Bogsnes (09:57.438)

And we had to admit we don't have a clue. Maybe you should go and find out, was his message to us. And that is what we did. We started to search for an alternative to traditional budgeting and search back then, 1995, that was not Google, right? That was reading, going to the library and calling people, discussing. And that's what we did week after week and we couldn't find anything.

Then suddenly there was a little glimmer of hope because we heard or we read an interview with Jack Welch, the former CEO of GE. I think it was in Fortune magazine where he was interviewed and he said that it was very critical to budgeting. He called it the bane of corporate America. Then we thought, well, if this guy can say something like this, we must be onto something.

A little sidestep on this story by the way, because many years later, after Bojadis had implemented Beyond Budgeting, and I had returned to Statoil, I was actually invited over to GE. Jeff Immelt was then the new CEO, and they have every year a legendary executive gathering, top executives, a couple of days in Boca Raton.

So if you're someone in GE, then you are invited to that session. And I went over and I did my presentation. And afterwards, a lot of these executives, they came over to me and said that, you know what Jack said, that was for the outside world. Inside GE was still that kind of budget terror regime. So anyway, back to Copenhagen, continue to search and we couldn't find anything. And we were this close to go back to the CEO.

to tell him that there is no alternative to budgeting. Then came a defining moment, number two. There was a guy on the team suddenly asking, why do we budget? What's the purpose of a budget? And we looked at the guy and we thought, what kind of question is that? But it turned out to be a great question that cracked it all. And from 1996, Buoyalis was operating without traditional budgets and actually,

Bjarte Bogsnes (12:25.222)

Again, it was wonderful. Cost came down as one example. So that's what it all started.

Sohrab Salimi (12:33.223)

Now, let me jump in there, Biarte, because the question of why do we budget was exactly where I also wanted to go, right? So, and rewinding back, you all figure out, man, this budgeting process that we have, it's killing us, right? That's one. Then you try to optimize it, and you do these micro-optimizations, moving one column here and one column there, and maybe rethinking how you model

in Excel, and then this one guy comes out of nowhere in the meeting says, maybe you should kick out the budget. Now, the interesting piece is for me, the CEO or CFO to whomever you go, who wanted you to find the unexpected, actually embraces the unexpected and doesn't say, yeah, I didn't mean that extreme, but he also challenges you to actually replace it with something.

Because it's not like, oh, we just get rid of the budget and everything will be fine. There's a reason why budgeting is in place, right? Just this morning, I was invited to a client and we were talking prior to this interview. And for them, I was giving a session about like agile leadership, a brief one, one hour introductory session. And I named it, Don't Get Out of the Way. Because in the agile space, you've probably heard that too. A lot of people just say, oh, we don't need formal leaders. We just...

they just should get out of the way, right? Everything else will be fine, which both of us know that's not gonna be the case. So if you don't need micromanagement, we can agree on this, but what do you need instead? And I think the same applies to budgeting. Now, why do we budget? What is the intention?

Bjarte Bogsnes (14:16.13)

I will come back to that question in a minute. But first I want to say that when this started out in Boialis, it was more finance and budget oriented. And this has been another part of my journey because when we later implemented Beyond Budgeting in Statoil or Eqvinoor, then it had become much broader. It was about changing the way we were leading and managing.

And one reason for why it had become broader for me was that after heading up finance in Ektinor, I spent four years heading up human resources in the same company. And that period was a kind of wake-up call for me when it comes to the leadership of Beyond Budgeting, the leadership side of Beyond Budgeting, which we will come back to. So, but again, back to why did we budget? And then I think we should, for our listeners,

define what we mean with a budget because many might think about that just as cost budgets, project budgets, but the finest definition is broader. It is about profit and loss budgets, cash flow budgets, balance sheets, it's the kind of the full definition here. And I have asked a lot of people over the years this question and almost everybody comes up with the same answer.

What people say is that, well, budgets are used, first of all, to set targets, financial targets, sales targets, production targets. So target setting is one purpose. But at the same time, this budget shall also give a prediction, a forecast of what next year's profit or results might look like cash flow. So it's also a kind of forecast of what next year will look like. And...

So that's two purposes. Target setting, forecasting. The third purpose is resource allocation. So the budget is used to hand out bags of money to the organization on operating costs, the investments. So those are three purposes. And there are also some sub purposes related to target setting, namely performance evaluation and rewards.

Bjarte Bogsnes (16:43.746)

which is then done towards targets. But back to these three purposes, target setting, forecasting, resource allocation. It might seem very efficient to solve all three in one process and one set of numbers, but that is also the problem. Because what happens when we move into a budget process and upstairs, let's assume that finance wants to understand what next year's...

Bjarte Bogsnes (17:12.534)

results might look like. So they start on the revenue side and ask people responsible here what are your best numbers for next year. But everybody knows that the numbers on revenue that I'm sending off still now, they will come back to me as a target for next year and often with a bonus attached to them. And I think we all know what that insight can do to numbers submitted. And those numbers will start to move and we all know that is done.

Moving to the cost side, we asked the same people, other people, what are your best numbers for next year? But everybody knows that this is my only shot at getting access to resources for next year. And maybe some remember then 20% cuts from last year. And that memory and that insight, that might also do something to the level of numbers submitted and this time they will go the other way. And I can see that you're laughing and but this is actually...

It's not funny, even if it is funny, but I mean it's actually quite sad because it not just destroys the quality of numbers, but it also stimulates this behaviour that is borderline, I would almost call it borderline unethical. The lowballing, the gaming, the sandbagging, the resource hoarding, I mean these are not the kind of behaviours we would like to see between colleagues. At the same time, I'm not blaming anyone.

behaving like that because they are just responding to the system we have designed for them to operate with it. So as we all know if we want to change behaviors it's not about fixing people it's about fixing systems and that is what Beyond Budgeting does. So three purposes.

Sohrab Salimi (18:58.317)

So those are the three purposes. Now, you mentioned if we try to address all three purposes with the same approach or with the same tool, it becomes quite complicated. Now, for the sake of this interview, I mean, I translated your book, right? But for the sake of this interview, I pretend to not be a, I mean, I'm not an expert on this topic anyway the way you are, but to not know the topic, even in the depth that I already know it.

Does that mean that with Beyond Budgeting, you try to address those three different purposes with different ways and not to put everything in the same tool or method or whatever?

Bjarte Bogsnes (19:40.866)

That is the beautiful and simple solution to this problem. We have to separate these into three different processes, because these are different things. The target, that's an aspiration. It's what we want to happen. What the forecast, that is an expectation, what we think will happen, whether we like what we see or not. And you can't force that into the same number. That's meaningless.

And last but not least, resource allocation is about optimizing what is often scarce resources, money, in the best possible way. And when you have separated, then you can then improve each of these in ways impossible when it's all bundled in one process and one set of numbers. So now we can have, I mean, now we can be creative around how can we set better targets that really inspire and

How can we get the politics and the gaming out of forecasting so that we know we can trust the numbers? And one way of doing that, by the way, is by separating, because in this model, the forecast is just the forecast. It's not a bid into a target negotiation. It's not an application for resources because we've got different processes for that. And last but not least, we can design more intelligent and effective ways of managing costs than what a certain

Mr. James O. McKinsey developed a hundred years ago when he invented budgeting. It's pretty old management technology we are talking about and we need again more intelligent, more effective ways of doing it and we have got loads of kind of practical recommendations on how to improve each of the three targets. I think forecasting, resource allocation, we might come back to some of those. On the target side then

Some companies after having been on the journey for a while, they continue asking, do we need targets at all? And actually some of the most successful beyond budgeting companies do not operate with targets. And when I left Equinor two years ago, the last discussion we had was exactly that one. We have spent then 15 years greatly improving how we set targets.

Bjarte Bogsnes (22:05.974)

But now we were ready for that next discussion, do we need all these targets? And the conclusion, what I left was that, no, we don't need targets on everything we measure. So when we measure something, it might have a target or it might not have a target. And then we'll see if this leads to something even more radical further down the road. But again, an example that implementing beyond budget is more of a journey than a project where you get braver along the way.

Sohrab Salimi (22:35.149)

Yeah, this is really cool. Now, when we were talking about this, breaking up these three, the one tool that tries to serve all three purposes, breaking that up, I had to think about two analogies, and maybe you believe that they are correct or not. One is in the world of software, what we've realized in order to develop software better is to move away from a big monolith to multiple microservices.

Then you can change those things without necessarily always going to the big thing But those things are connected to each other via interfaces API's etc, right? But also in the world of medicine, we don't aspire to have one drug that addresses all health issues But for every single diagnosis, right? We have a different set of drugs that can help you become better and sometimes you have to take a combination of those depending on

what you're suffering. And sometimes you just take one and sometimes you take none of them. But in the case of budgeting, I think still like either targets, forecasts or resource allocation at least will to some extent always happen. The other thing that I was thinking while you were speaking is you mentioned the history of budgeting that started out if I got the number correct 1970 with James 17, with James Oscar McKinsey.

And my question to you as also a historian probably on this topic is, was he back then trying to serve the same three purposes? Or was budgeting initially invented with just serving one or maybe two of these purposes, and then more and more were added over time, which overcomplicated the overall budgeting approach?

Bjarte Bogsnes (24:23.498)

I think that even if those purposes wasn't specifically mentioned in the book he wrote at the time called Budgetary Control, then implicit the three purposes were there at the time already. And also, coordination was also key for him. This was meant to help...

larger organizations kind of coordinate themselves. But I think, you know, I never met Mr. McKinsey, but I don't think he was an evil man. I mean, he had no evil intentions. He had best intentions. He wanted to help companies perform better. This was management innovation 100 years ago. And I'm sure it worked reasonably well 100 years ago, and maybe even 50 years ago. But today...

This way of thinking, this way of leading, this way of managing is doing exactly the opposite. It has become more of a barrier than a support for getting out the best possible performance in organizations. Because things have changed in two dimensions, the world around us, our business environments, and people in new organizations, their capabilities, their competences. And if you look back to traditional management,

including budgeting, is actually built on two assumptions around those realities. Number one, the future is predictable and planable. And number two, you can't trust people. So that is kind of the foundation of traditional management. And that is what we are challenging in Beyond Budgeting because this is no longer true. Things have changed. And that means that our management models and management thinking has to change as well.

Sohrab Salimi (26:15.825)

a third assumption. So you mentioned that one assumption is that the world around us is predictable. And 100 years ago, it was definitely more predictable than it is today with all the things that are going on. The second one was you mentioned you can't trust people. And I once read a quote from Henry Ford written by in the book, Team of Teams, General Stanley McChrystal. He

Sohrab Salimi (26:42.825)

And he mentions that Ford was operating under the assumption, or he was actually quoted saying, it's a pity that when you need a pair of hands, they come with a brain attached. Now that also shows you, I mean, I also don't think that probably Ford was an evil person because he wanted to get the best out of his organization and make automotives affordable to everyone. And by God, did he succeed, right? Driving down the cost.

from $900 to $300. It's a huge thing to do that, right? We don't see that many companies doing that kind of stuff today. But if you look at organizations today, we barely need the people's hands. We actually need the brain, right? This is where we need more and more knowledge worker, the creative geniuses, all of that kind of stuff. So with that change in ambition, with that change in terms of

motivating and recruiting the types of resources, in this case, people that we need, we probably also need to make a lot of changes in terms of how we manage, how we lead the organization, and in that case, how we budget. Now, let's dive into this, Biarte, because you mentioned these three intentions, these three purposes that traditional budgeting tries to address, and not all of them probably have to be addressed at all. You mentioned it, Etinor, they're now thinking about

not setting targets, but let's assume we want to do all three. We want to have an aspiration, we want to have an expectation, and ultimately we want to allocate our resources accordingly. What kind of alternative approaches can we use to traditional budgeting?

Bjarte Bogsnes (28:28.387)

Let me give you a few examples. The list is long on all three but let me give you some examples. And let's start with targets. We actually think that we can learn a bit from football. I have yet to meet the football team saying that the ambition for next season is to score 45 goals and get 49 points. No football team would think like that because for them it's all about...

performing well against peers, competition, and hopefully better than everyone else. Thinking league tables as we call it in Europe. And that relative way of thinking can actually be relevant also for organizations, both externally, so how are we doing versus competition, and also internally, how are comparable units doing, and what is...

And then if you do this internally, then well, it's partly of course about driving performance because nobody likes to be laggards, but it's just as much about learning. Right. So, so those struggling can see who are doing better than us. Who can we learn from? Who should be contact? Right. And for that to happen, you need help from the reward system because everything is connected. And if, if it's all about individual bonus.

and the high performing units have nothing to benefit from kind of helping others. On the contrary, then that learning will often not happen. So that is why, again, you need to think about coherence and totality in a management model. And that is why Beyond Budgeting on the incentive side recommends common bonus schemes, for instance, driven by how is the company doing versus other companies. That gives everybody a reason.

to help others who are struggling. So that is one way of doing it. Of course, it's not possible to have relative targets in all settings because sometimes it's not, you can't find anyone to compare with. So you don't depend on league tables to go beyond budgeting. It just makes things a bit easier. If you have more of what we call absolute targets, like for instance, 29.2.

Bjarte Bogsnes (30:51.686)

So it's not relative, it's an absolute. The more absolute your targets are, the more important it is that you have a holistic performance evaluation. Again, you need to see the totality of the model. So that holistic performance evaluation means that when you evaluate performance, you are not blindly comparing actual versus a target. You are looking at changes in assumptions, headwind, tailwind, all the information that we have afterwards that we didn't have upfront.

In Equinor, part of that evaluation is also about how did you achieve your targets? And here, how was defined by the values in the company and the weighting between the two, what you have delivered, how you delivered is in all consequences for your career, for your pay, that weighting is 50-50. So you can't kind of walk over dead bodies to hit your targets, right? So that is why targets that they must be seen in connection with performance evaluation and rewards.

Sohrab Salimi (31:39.907)

Yeah.

Bjarte Bogsnes (31:51.918)

Moving to forecasting, then what is quite common is to reduce the granularity. The forecast is looking at the future, there's uncertainty. That is very different from looking at the past through accounting, where the decimals and the details, I mean, not just sometimes make more sense, but also often are required. But when we turn to the future, we can't bring with us the accounting mindset.

of precision and certainty and decimals and details. Then we need to accept and embrace ambiguity, uncertainty, and be comfortable with not knowing in many cases, or have kind of some rough figures or maybe some scenario. So you have a different granularity level. Many also do something with the rhythm. It is quite common to operate with what you call rolling forecasts. And a rolling forecast is a forecast that you...

update for instance every quarter and many then look always five quarters ahead. Right, so rolling every quarter and time horizon of five quarters ahead all the time. Traditional forecasting is forecasting against end of December and you get less and less interested in the future the closer you get to December before it's budget time that suddenly you get interested in.

in all of next year. It's this kind of accordion forecasting horizon, which doesn't make sense. Equinor actually went for a slightly different solution because there is quite a variety in the business rhythms in that company. For some years, I was the finance manager of the oil trading business. And for those traders, anything beyond three weeks is quite foggy. But I also worked in

and explore, you build and building pipelines or platforms. I mean, then three years can be on the short side. And then we have a lot of activities in between when it comes to rhythm. So why should you force everybody onto the same frequency, the same time horizon? So Equinox answer became dynamic forecasting, where there's no predefined frequency, where you need simply update the forecast when stuff happens.

Bjarte Bogsnes (34:13.226)

in their own business reality that they think justify a forecast update. So they are not doing this for corporate, they do it for themselves in order to manage their own business. But that information goes into a common database. There's a global SAP solution. So corporate can at any time tap into the latest version of these forecasting information when they have a need for it ahead of a major acquisition or major investment investment.

Sohrab Salimi (34:40.633)

Hmm?

Bjarte Bogsnes (34:40.926)

And there's no right or wrong here. If you have relatively kind of similar business activities in your portfolio, then rolling might make sense. If not, dynamic might make sense. But both are within the general recommendation of the Beyond Budget team. And what is also important to get this to work is leadership behavior when it comes to the questions asked. I mean, when the leader is presented

we call a good forecast with bad news, then the typical budget response, what would that be? That would be come back with better numbers and you can't use that response in this setting because now your response would have to be okay but what do you intend to do with it? And also you can never talk about delivering on a forecast, that is meaningless. What we want to

and you use forecasts to help you deliver on those targets by understanding are we kind of on track or off track. So leadership behavior is also important here.

Sohrab Salimi (35:51.829)

Now, before we go to resource allocation, I have a few questions. Now let's stick with forecasts for a moment. Forecasts are also used especially for publicly listed companies to on a regular basis report basically to the traders, to Wall Street, whatever, right? Now help me understand because I don't recall that Equinor or Statoil or Borealis, any of them publicly listed?

I think so, right?

Bjarte Bogsnes (36:22.877)

at Eurovirus listed in New York and Oslo.

Sohrab Salimi (36:26.162)

So even as a publicly listed company, they decided to do either the rolling forecasting or the dynamic forecasting where some teams, only if certain things happened, made an update to the global SAP. But other than that, those were just the numbers that were in there. And with those numbers, basically, Wall Street was updated. And that, of course, had effects on the stock price. But that's how you operate it. So it is possible.

to do that even in the context of a publicly listed company.

Bjarte Bogsnes (36:57.482)

Absolutely. Most of the companies that have gone beyond budgeting are actually listed companies. And this is a question we often get, what about the market investments? But this is actually, if you do guiding to the market, that's a discussion in itself, the kind of the wisdom of that. But if you do it or if you have to do it, then if your guiding has to be based

Bjarte Bogsnes (37:27.522)

but you never know which purpose has pulled the numbers in this direction or that direction. Then that can be an issue because you don't have very good quality as a basis for that guiding. When you have done this separation, then the forecasting numbers are numbers that you can trust much more. Whether you decide to guide on exactly the same numbers or not, that's a different story, but you have a kind of a basis for that guiding which you can trust.

And some people also said that, well, the banks, they want budgets. The banks ask for budgets because they never thought that there was anything else to ask for. If you show a bank your expected outcome forecast and also your targets, they will be more than happy. Right. So these are kind of external excuses people use. But those are not the real barriers. All the barriers.

And there are issues and challenges by all means, but they are all internal and they're all sitting up here. Because beyond budgeting, the most challenging thing is that it requires that we change how we think. There is no rocket science in the changes we do in processes and so on beyond budgeting. That is quite simple. The big thing is to change how we think.

especially around these two assumptions about the business environment and about employees. And that's the long and painful journey, at least painful for some. But again, the other beauty with that separation is that when people say that it's impossible to operate without the budget, then I always tell them by separating, we are still doing what that budget tried to do for us.

But because we've separated and improved, we can do each one in so much better ways. I mean, how scary is that? Right. So, and the other thing is that, you know, we haven't talked about the 12 Beyond Budgeting Principles and the full model yet, but for those who have seen it, some, at least when they see it for the first time, they find it a bit scary, a bit big. And if that is the case, then this separation is a nice, tested.

Bjarte Bogsnes (39:52.546)

logical place to get started that later can take you into the bigger discussions when you start the improvement discussions like target setting what really motivates people resource allocation do we need detailed travel budgets if we say we trust people and so on and so on so it's a very nice organic backdoor into bigger discussions.

Sohrab Salimi (40:15.597)

into bigger discussions. Now hold that thought of how to get started for a moment. I want to cover the resource allocation alternatives first, and then we can talk about that. But before we even get to resource allocation, I also had a question around the setting targets and connecting that, because you initially mentioned the intent, one of the intentions of budgeting is setting targets and sub-targets or sub-intentions of that are performance evaluations and then rewards. Now...

Bjarte Bogsnes (40:23.659)

Yeah.

Sohrab Salimi (40:43.829)

we talk a lot about separation, or you've been talking a lot about separation of the different intentions. I've also seen organizations go and separate target setting from performance evaluation. Why? Because if those two things are connected to each other, the same thing happens, as you mentioned before. If I have to set a target based on which I will be evaluated, I probably will set that target a bit lower.

Now, how does beyond budgeting or do we have any beyond budgeting principles that also address this? So for example, in objectives and key results, OKRs, we separate the setting of OKRs from the performance evaluation if we do it right. I know many organizations don't, but how do you look at this, Bioten?

Bjarte Bogsnes (41:28.928)

Well, first of all, I mean, don't forget our recommendation to go for common bonus schemes and not individual bonus schemes. And then you are not kind of ending in the same trap because that is the individual bonus that triggers this behavior, not common bonus schemes. But you're also back to the holistic performance evolution. I mean, one question we recommend that should be in there is how ambitious were your targets?

Sohrab Salimi (41:34.145)

Yep.

Bjarte Bogsnes (41:56.142)

Should we punish somebody that really stretched themselves, set themselves an ambitious target and didn't make it, and do the opposite with somebody who lowballed and gained and made it? And who lowballed and who didn't? I mean, very often that becomes much more visible afterwards than upfront. So I think the key to this can, I mean, are found in our recommendations, both on performance evaluation.

holistic and in rewards common bonus gifts.

Sohrab Salimi (42:29.817)

Okay, okay. Now, let's jump into some alternatives to traditional resource allocation, which is done by budgeting. Now, when we separate those things, how do we do that? And then dive into the question, where to get started, especially for organizations that have had this traditional way of setting budgets for decades, sometimes, not centuries, because it was invented 100 years ago, but let's say decades.

Bjarte Bogsnes (42:58.338)

This is where we get most of the questions, how to manage cost without the budget. And that I fully understand, but we have many, many very concrete recommendations about what can be done here. So let me give you a few examples. Let's start with investments. And again, back to Equinor. Equinor does not have a traditional detailed annual investment budget, where you sit in the autumn every year and you decide

exactly how much to invest, exactly the split of these projects, and then each project gets its bag of money as next year's project money. Instead, there is a process actually inspired by how we think about money in a private setting, because it's quite interesting how we think about these when we are citizens compared to employees or managers.

And imagine that it's April and your car broke down and you have to buy a new one. You go to a bank and ask to borrow money. And the bank then politely says that, sorry, we are only open for lending in October. And the rest of the year that activity is closed. And of course, no bank would think like that. But that is what the budget process is. So what Acton North says is the bank is always open.

So any business unit can always forward a project for approval at any time. How high up you need to go is regulated by a mandate structure to make sure that not everything ends up in the executive committee. And whether you get the yes or no depends on two things. How good is your project against the criteria the company has, financial, non-financial, strategic, sustainability, and so on. And also do we have the capacity?

financially organization to undertake this as things look today. And when it comes to financial capacity, that information is coming off of the, um, the dynamic forecasting. So it's not that difficult when it comes to projects. It is a bit more challenging when it comes to operating costs, um, uh, admin costs, travel costs. Um, but we have recommendations for that as well. And let me know, share with you what you call a menu of different tools, uh, which are kind of, um,

Bjarte Bogsnes (45:23.182)

getting more kind of radical along the way. The first what we want to get out of is that detailed annual budget which is often as detailed as the accounting itself kind of salary and overtime and consultants and steel and power and then yeah very detailed and hopefully divided into monthly budgets and also a lot of decimals. That we need to leave behind for the reasons we just talked about, decided too early too detailed

One alternative is what we call the burn rate guiding. In this version or in this alternative, there was still a number, right? In the range of one million, 10 million, 100, and within that, full autonomy to do the right thing. So no micromanagement, but there are constraints, but you optimize within that constraint. But we can make this even more self-regulating. We can move from thinking absolute constraints to relative constraints.

So there might be a constraint that your production cost should not exceed X euro per unit. You can spend more if you produce more and vice versa. We might make it even more self-regulating by saying that there is no X euro per unit constraint, but your euro per unit should be competitive either against internal peers or external peers. So if you kind of spend more, well, that might be okay.

The others have even higher unit cost and vice versa. So even more self-regulating. Then of course, if you have internal business units that are true profit centers, they fully control their own revenue side, their own cost side. Well, if these units have a tough bottom line target, that is also where you're managing cost. These guys can not run away and spend money like drunken sailors, but it might be okay.

to spend more if what you spend is what we call good cost. The good cost is not a problem. As long as we have the financial capacity, then we actually want as much good cost as possible because they create value. It's the bad cost we want to get rid of. And when this distinction was introduced at Equinor, of course, the question came to our CFO and that's fine, but what is good cost and what's bad cost? And his response, you guys out there.

Sohrab Salimi (47:24.886)

Exactly.

Bjarte Bogsnes (47:50.162)

know even better than me what is good cost and what's bad cost in this company. Generally, people know. The last alternative here is the most radical, which we might call nothing at all. No budgets, no constraints. The only numbers we have in this alternative are actual cost numbers and this we monitor through trend reporting. We might use something called control charts.

or moving total averages and so on. So we monitor cost and if it looks okay, we do nothing. If it looks a bit strange, then we take a look at it. And there might be a perfectly good reason for a cost increase, a dose of good cost, for instance. But, and this is important, we might through that monitoring, we might come across teams, managers who consciously or unconsciously

abuse the trust that lies in this model. And the only thing you know if you show trust in an organization is that someone will abuse it. In Equinor it has happened, it will happen again. That is not the issue. The issue is how do we respond when it happens. Because the wrong but simple response is to punish everybody because somebody did something wrong. To put everybody in jail because somebody did something wrong. That's the wrong.

Sohrab Salimi (49:04.461)

Exactly.

Bjarte Bogsnes (49:16.698)

response. The right response is to take that very firm talk with those involved and let it have the necessary consequences. This is not about being soft evasive but it's not about it's about not punishing everybody because somebody did something wrong. In addition to this

Sohrab Salimi (49:36.872)

Sometimes it is easier to punish everyone because you want to avoid that difficult conversation with those three others. Exactly. That's what I would say.

Bjarte Bogsnes (49:42.794)

Absolutely. Which means that you're back to leadership, right? Absolutely. Because I mean, punishing everybody you can do by just issuing that mail. In the right alternative, you need to have that talk. So it takes more leadership. So everything in beyond budgeting is in a way more challenging from a leadership point of view. I mean, it's...

You know, if for take a manager who dislikes making decisions, then having a detailed budget is wonderful. The more detailed that budget is, the more decisions are made for you. And you even have someone to blame if some of these are unpopular decisions. Right. So, and also when it comes to uncertainty, a lot of managers don't like uncertainty. And

through those detailed budgets, they are able to delegate uncertainty upstairs to the next level. And this goes kind of further and further up all the way to the top of the company. Then uncertainty has been delegated to a level where you have often the least insights into what is the right decisions to take under uncertainty. And also you have no place to

an executive committee have no place to further delegate that uncertainty. So those guys are stuck. They have taken the uncertainty of all units and all managers on their shoulders, which is not...

Sohrab Salimi (51:19.605)

And what you see might happen is then in those executive committees, because of the uncertainty, because of them also not being the experts on those individual things, they just don't make that decision. It would be great if they made a decision and then you test and you see, oh, we're in the wrong direction, so let's adapt. It happens so often, they just don't make that decision. And then you're like, oh, man, right, we're not making any progress because we're not taking those decisions to move forward.

Now, I wanted to share something while you were mentioning this. A few years ago, I was serving on a board of directors. And one thing that board always wanted to do, and I never understood why until at one point I got it, was that to clearly define the budget of the organization, which included all three aspects, the target, the expectation basically, the forecast, and then the resource allocation, in order to measure the CEO's performance

hitting that budget, right? And I always said, I was like, why do we want to do this? He's like, yeah, how should we otherwise have that then conversation, whether this CEO was doing a good job or not? And I was like, we are all in the market out there. We will see whether this organization is going in the right direction. It's all about then having that conversation, but many felt uncomfortable not having concrete numbers tied to it. So they thought...

that through that budgeting process, they would get that certainty and they could avoid the more difficult conversation.

Bjarte Bogsnes (52:55.918)

Yeah, and we are back to this issue of target setting because I mean think about it, I mean when we are making annual targets like for the CEO, we are actually trying to describe what does good performance look like 12 months down the road, right? And then there's a lot of uncertainty, so how do we know should that number be 30 or 28? And then we have to conclude and let's assume the number becomes 29.2.

and that becomes the truth that everything shall be measured against. But if, because this is one of the purposes of a target, it shall be used for performance evaluation. But if that is the target, at which point do we know best what good performance looks like? Is that upfront in the autumn, when we are guessing?

Or is it afterwards when all the fog is gone, all the uncertainty is gone? We know what happened, right? With energy prices and exchange rates and wars and whatever. So if the purpose is performance evaluation, well, you can have that discussion afterwards. And the message to the CEO should be you perform as good as possible. But given the circumstances, because that I mean, that is actually

Because a target is not the target. What we really want is the best possible performance given circumstances, given the situation, right? And setting targets is one way of achieving that, but it's a way with a lot of issues and problems. So that is why, that's one reason for skipping target setting. That's why we say that while you need targets to create direction, to motivate, well, there are many ways of creating motivation and direction.

without having to spell out 29.2.

Sohrab Salimi (54:51.009)

Absolutely. Now, being conscious of time, I want to get into the final question, Biarte. Where do we start? How do we start? Especially, and I mean, the good thing is you are not someone who has done this in a bunch of Silicon Valley startups. You have done this in a bunch of longer lasting organizations that are doing like chemicals and oil and all of that. But where do we get started? Right? What can we do? And by the way,

I like that you always talk about recommendations and not best practices. Because I'm sick and tired of consultants coming and talking about best practices. There's always something better. Recommendations is such a good term. Now walk us through your recommendations of how to get started.

Bjarte Bogsnes (55:23.662)

I'm going to go to bed.

Bjarte Bogsnes (55:36.67)

Well, first I want to say that a startup is actually, or small companies are actually born beyond budgeting. They become something else when they are growing, because everybody wants to grow and become big and some succeed. And those who succeed, they discover that we have not only become big, we have become slow, rigid, bureaucratic and often sad places to work. So I think the...

I often compare this to the aging process of man. As we get older, we do lose a bit of that agility we had as teenagers, especially on the physical side and maybe a bit up here as well. And when it comes to man, we don't have a choice. In the end, age takes us all, but organizations have a choice. It's written nowhere that because you are big, you should be slow, rigid and all the things that we don't want to be. So the big question for big companies, how can we find our way back to what we had as a small organization?

without losing the benefit of being big. So how can we be small and big at the same time? For small companies, then it is possible to grow without ending up in the same misery. If you're conscious about it every single day. And we have some great examples and cases in our community of small companies that have grown and been extremely conscious about this and have been able to maintain their agility, even if they were growing. But back to your question.

Independent of what kind of business you run, what kind of organization you are, we have a few general recommendations. And one is to establish a strong case for change. There has to be a common, deep understanding of why are we doing this? What are the problems we are trying to fix? And what do we want to move towards? The better job companies do on creating that aligned case for change.

the easier everything is during implementation, for instance, during design. When you're in doubt, shall we go for this or for this? Then look at which of these alternatives would best solve the problems we have identified. Then we also recommend to start with this budget purpose separation because it is simple, logical, tested, and it is... I've helped close to 40 companies

Bjarte Bogsnes (58:02.662)

getting started over the years in addition to the two we talked about and with the majority this is where we started out and What we in addition can do today, which we couldn't do 15 20 years ago is to point to all the companies that have embarked on this journey that It's not my kind of Favorite starting point, but if nothing else works creating some peer pressure can be quite useful and we are seeing that in the

pharmaceuticals business now with Roche leading the way and a number of other companies, including many in Germany, are moving in the same direction. So obviously some kind of peer pressure. And what also has happened just over the two last years is that almost all the big consulting firms have gotten seriously interested in Beyond Budgeting.

because the clients are asking for it. And we have been approached by most of them, they want to work with us in some form or shape. And we are not naive. I mean, these guys, we have their agendas and we come from different places. But we have actually concluded after long discussions about going for a yes. We would rather help these firms and especially their clients succeed with beyond

instead of standing on the outside and watching them fail. And two of these consulting firms have done surveys among clients and others about what kind of benefits are you seeing from Beyond Budgeting. Boston Consulting Group, BCG, did one quite recently. And that was quite a long list of very tangible benefits that companies saw in implementing Beyond Budgeting.

And the most profound effect was actually a strong increase in sales revenue beyond former budget targets. Bain and company, they had a slightly different angle. They have defined what they call leading companies in financial planning. So a group of companies being leading and they looked at to what extent do these leading companies apply the beyond budgeting principles compared to the rest.

Bjarte Bogsnes (01:00:25.958)

And again, quite a striking picture, a clear link between applying beyond budgeting principles and being defined as leading. And I'm mentioning this because some executives, that is what they need to hear from the big consulting firms, that this is something we are fascinated by, this is something we believe is good. Again, not my preferred kind of lever or

Sohrab Salimi (01:00:35.159)

Mm.

Bjarte Bogsnes (01:00:55.882)

and showing those two often have some interesting effects.

Sohrab Salimi (01:01:00.405)

Yeah, absolutely. No, and I agree. I mean, you mentioned earlier, right? James Oscar McKinsey probably was not an evil person. Now recently there was a, there was a very well-made video about how McKinsey today, or at least certain groups within McKinsey today operate again, doesn't mean that the whole company is evil. And I think having partners in that sense or promoters of this idea. And it's the same with the agile thing out there, right?

When these big organizations, these big consultancies get involved, it also takes this conversation to the right level needed within organizations. I mean, someone like you with your seniority, with your also presence, you get into the boardrooms of the world, right? I've had the privilege to be invited into a lot of these senior executive levels and talk to the CEOs directly. Not many people have that chance.

the partners at the big consulting companies are constantly in conversations with the decision makers. And if we can get them interested about this so that they support the agenda of ultimately creating more inspiring workplaces where people build better products in a better way, then I mean, then we have succeeded. Doesn't matter whether we have done the work or others have done the work and whether others have also made money on that work.

It's about ultimately getting out there and changing the world for the better. And I think you've done already tremendous job with your also fellow colleagues of the Beyond Budgeting round table. It's I think important to mention that it's not you out there, although you've been the author of the books, so have done a lot of the work, but it takes more than one person to drive something like this forward. And yeah.

Bjarte Bogsnes (01:02:51.047)

And there are more books as well, by all means.

Sohrab Salimi (01:02:54.833)

Yeah, absolutely, absolutely. So, Bjarte, as we've come to the end of our time box, I usually try to keep these things for one hour long. I'm sure you and I will have another conversation on these topics because we're just getting started with, okay, so what are the bits and pieces of implementing this into an organization? But at this point, I want to take a moment and really say thank you. Thank you for taking the time today. Thank you for taking the time in the past.

Thank you for allowing me to translate your book into the German language. And I really hope that we can get these messages and your wisdom out there as far as possible and have more and more people get interested in this topic and then embark on the journey of not kicking the budget out, but replacing it by something smarter.

Bjarte Bogsnes (01:03:45.326)

That is something that I look forward to. And since we talk about books, maybe I can mention that I have another book that you can translate if you want. My latest book is called, This is Beyond Budgeting. And it's actually a thinner one than the ones you translated. And that was on purpose because the guys we talked about that we need to reach are busy people, but limited time to read. So that's why it's a thinner book, also out as an audio book.

and it has a foreword by Gary Hamel. So I really hope that, I'm very happy that he said yes to write that great foreword. So yeah, fantastic.

Sohrab Salimi (01:04:24.641)

Gary is great. Gary is great. Fantastic. All right, we are to thank you so much and talk very soon

Bjarte Bogsnes (01:04:33.782)

Look forward to that. Thank you.