I'm based in a Norwegian energy company called Equinor. We will come back to that in a minute. I'm in the corporate finance team, and it was not necessarily expected that I would be here today talking about beyond budgeting because my career started in a very different place.
I joined this company, which used to be called Statoil, back in 1983. I started in the corporate budget department and became the manager the following year. I have been in charge of more budget processes than I care to be reminded about, in that job and in other finance management positions across Europe. I have done many things I would now call mistakes, but that means I know what I’m talking about. I can criticize traditional budgeting with confidence because I have been there and done that.
What I want to share with you today is, first, the case for change—what is the problem? I’m not just talking about problems with budgeting; I’m talking about problems with traditional management, which run much deeper than many people realize. That’s where we’ll start. Then, we’ll discuss beyond budgeting, which is actually a somewhat misleading name. The goal of beyond budgeting is not necessarily to get rid of budgets. The real purpose is to create organizations that are more adaptive, flexible, dynamic, human—or, if you prefer, more agile. To do this, we need to change traditional management. At its core, traditional management is built not just around a budgeting process but also a budgeting mindset. That’s why it’s called beyond budgeting.
Every time I say "beyond budgeting," I want you to think "business agility" because that is what this is. However, when beyond budgeting was born more than 20 years ago, the term "business agility" did not exist.
Beyond budgeting can serve two purposes. It can be a complete transformation on its own, but if your organization is already on an agile transformation journey, beyond budgeting can be the missing link. No organization can achieve true business agility—no true agile transformation—without also addressing not just the budgeting process but also HR processes like appraisals and rewards. Beyond budgeting tackles both.
I will discuss the model itself, then share a few great cases before moving to today’s main case: Ambition to Action, our model at Equinor. We started this journey in 2005 and have been running it for 15 years with no plans to go back. Instead, our discussions are focused on how we can improve it even further.
One word comes up every time I talk about beyond budgeting: "control." Specifically, the fear of losing control. When I ask people what they mean by control—the thing they are so afraid of losing—many struggle to define it. After mentioning "cost control," many go silent. So, let’s take a look at what the Oxford Dictionary says about control. Their definition is "the power to influence or direct people’s behavior or the course of events."
What does this mean in business terms? It means controlling people and controlling the future. These two assumptions underpin almost everything in traditional management: (1) People can't be trusted, and (2) The future is predictable. We challenge both of these assumptions in beyond budgeting because they are illusions of control. Traditional management assumes that people must be managed. But if people are managed in stupid ways, they find their way around the system to get their jobs done. As for the future, the only thing we know for sure is that we don’t know what will happen.
Here’s an example related to trust. Before COVID, I traveled frequently and spent many nights in hotels. The first thing I always checked in a hotel room was the clothing hangers. There are two types. The one on top is the one we prefer—user-friendly, easy to use. I hate the one at the bottom. Why do some hotels use the one at the bottom? Because, at some point, a few guests stole hangers. The response? Put everyone in "jail" by switching to inconvenient hangers. This is exactly what happens in traditional management—we punish everyone because someone misbehaved.
Peter Drucker once said, "Most of what we call management is about making it difficult for people to do their job." I couldn’t agree more. Sometimes, the problem is that we manage too much. Russell Ackoff compared much of corporate planning to a rain dance. It has no effect on the weather, but those who engage in it think it does. I understand what he meant—I have done a lot of corporate rain dances in my life, and I’m not sure they really improved company performance.
Now, let’s imagine an organization that invented a fantastic machine 100 years ago. It was state-of-the-art and crucial to the company’s success. Fifty years ago, the machine started having problems. Today, it is completely broken. In real life, people would have fixed it long ago or invented a new machine. Innovation is something we all love. But while we embrace innovation in technology, products, and services, we fear innovation in management. Kicking out the budget? That’s seen as crazy.
The reality is that management innovation can provide just as much competitive advantage as technology innovation. Some companies openly admit that they have no competitive edge in what they produce, only in how they lead and manage. I will share some examples of this later.
Performance is another key topic. It is important to define performance in the right way. But before we do that, let’s return to budgets. Before moving forward, I’d like to share my budget problem list, which is quite long.
Budgeting is extremely time-consuming. When I talk about budgets, I don’t just mean cost budgets or project budgets. I mean company-wide budgets—revenue, investments, cash flow, everything. I once ran a workshop for a French car company. Their budget process started in March. It finished in March—the following year. Maybe that’s why we call it "the annual budget."
Budgets are built on assumptions that quickly become outdated. We see this clearly today—2020 budgets became irrelevant overnight due to COVID-19.
Budgeting encourages unethical behavior—lowballing, gaming, sandbagging, resource hoarding, internal negotiations. None of this benefits organizations.
Budgets also create an illusion of control. It feels comforting to describe next year in millions of details, but the only certainty is that those details will be wrong. If we don’t have control, it’s better to acknowledge that and act accordingly.
Budgets force premature decision-making. We make all key decisions in the autumn of the previous year—deciding what we will do and how much it will cost. In large companies, too many of these decisions are made too high up, often reducing quality rather than improving it.
Budgets also prevent necessary actions. "We should do this, but we can’t—it’s not in the budget." Conversely, budgets encourage unnecessary actions. "We shouldn’t do this, but it’s in the budget—spend it or lose it."
This is just a fraction of the problems with budgeting. I’ve shared this list with executives, finance teams, and managers worldwide for 25 years. Most agree. Yet, most organizations continue doing it anyway. Why? Because they see these issues as minor irritations rather than symptoms of a deeper systemic problem.
That systemic problem is traditional management itself. Budgeting was invented 100 years ago by James O. McKinsey, founder of McKinsey & Company. I never met him, but I doubt he was an evil man. I believe his intentions were good. Maybe budgeting worked 100 years ago, even 50 years ago. But today, it is more of a barrier than a support for high performance. If that’s not a big problem, I don’t know what is.
And that brings us back to performance—the reason we embarked on our beyond budgeting journey. We believed it would improve performance. Today, we know it does.
Thank you. I look forward to your questions.