Your Budgets are Undermining Your Values | AgileAmped Podcast
Once upon a time, budgets were a management innovation that improved business performance. This is something that Bjarte Bogsnes knows, just as well as he knows that the budget mindset that most businesses operate with today needs to evolve – if not be replaced completely.
Bogsnes champions the Beyond Budgeting movement, which might very well have been called “business agility” – because it is about so much more than just budgeting. It encompasses leadership and management, taking a holistic view of the organization and particularly casting a new light on the dysfunction of budgeting cycles.
The culprit is that budgeting concerns three entangled and yet very different concepts: sales targets, forecasts, and resource allocation. ““This is problematic because it stimulates behavior that is borderline unethical – the lowballing, the gaming, the internal negotiations.” The solution is simple, even if the implementation is not: untangle the three processes and give them each individual attention.
Accenture | SolutionsIQ’s Phil von Bentivegni hosts at the 2019 Business Agility Conference in Vienna, Austria.
Read the full transcript
PHIL VON BENTIVEGNI: Welcome to another edition of Agile Amped. I’m your host Phil von Bentivegni and we are podcasting from the Business Agility Conference in Vienna, Austria. Today my guest is Bjarte Bogsnes. Bjarte Bogsnes has over 25 years experience Beyond Budgeting experience. Working in both financing and HR, he’s the author of “Implementing Beyond Budgeting: Unlocking the Performance Potential,” and the chairman of Beyond Budgeting Roundtable. Again, thank you for joining us.
Now onto the conversation, Bjarte. Thank you so much for talking or taking time with me to record today for the session. Let’s start with a fundamental question in that. So what is for you Beyond Budgeting?
BJARTE BOGSNES: Beyond Budgeting is actually a somewhat misleading name because purpose of Beyond Budgeting is not necessarily to get rid of budgets. The purpose is to create organizations which are more adaptive, more flexible, more human, and in order to do that we need to change traditional management. What you find at the core of traditional management, you find the budgeting process and the budgeting mindset. So that’s where the name is coming from, but this is much, much broader. Beyond Budgeting is a model that covers both leadership and management processes in a coherent, consistent way. If we should have renamed this concept that actually came about in the late 90s, the name today maybe would have been business agility, because this is business agility in practice. Some people think business agility is new, but it’s not. We’ve been around for almost 25 years and, yeah, so that is Beyond Budgeting in a nutshell.
PHIL VON BENTIVEGNI: That’s really interesting. I was remembering one of your phrases out of your speech some minutes ago and it was referring to that a corporate planning is more or less a ritual rain dance. I really love that. If you really have in mind what you’ve said about Agile, finance, how to dance in the future, what is the fundamental aspects you have to keep in mind there?
BJARTE BOGSNES: First of all, I think we should remember that what we are criticizing today was actually management innovation. One, it was invented a long time ago. Take budgeting where the inventor actually was James O. McKinsey, the founder of McKinsey Consulting. You had the best of intentions back then a hundred years ago. The purpose was to help organizations perform better.
PHIL VON BENTIVEGNI: Perform better? That’s a good question. How do you perform and how do you really have this performance mindset which now everybody has in their mind to be changed? What is that? What is the next step what it can take?
BJARTE BOGSNES: If I can come back to that question because I’m just to finish the point that the traditional management did maybe or probably worked at some point in time, but things have changed and that is what we need to take the consequence of. So for people who struggle with leaving traditional management, we shouldn’t start by criticizing them. We should start with helping them understand that things have changed.
PHIL VON BENTIVEGNI: Absolutely. So changing and really helping the people where they are standing is fundamental to really understand where they are, to really understand where are their obstacles and starting from their specific point to bring into the next level, so really helping them to get more adaptable and fluid organization. The question from there is what is that. I have seen on your presentation that it was referring two-dimension perspective to really get that level up, which is more on the management, which is more on the other side of the process perspective. So if it’s not all bad but it was before very good, what is that what has to shift it?
BJARTE BOGSNES: Well, again, the two dimensions you’re talking about, leadership and management processes. Leadership, that reflects a positive view on people, a theory-Y views on people. It’s not enough to have these theory-Y leadership visions if you have theory-X management processes, and that is the case in a lot of organizations. So we need to not just say and write nice things about leadership. This must be … These words must be activated into our management processes. Secondly, we need to change these management processes to make them more robust against all the volatility, uncertainty, complexity, ambiguity out there, all the VUCA out there. I think this is something that makes budgeting somewhat, Beyond Budgeting, somewhat unique compared to a lot of other stuff out there, because there’s a lot of great stuff written on leadership. There’s a lot of great stuff on management processes, but they tend to, this stuff tends to address the topics in isolation without looking at the totality. This is what Beyond Budgeting is doing.
Second, if you think about differences, again, there’s a lot of great stuff out there and there’s a lot of great Agile transformations out there. I would argue that you will never succeed with an Agile transformation without also addressing the budgeting process and also the budgeting mindset. We are the only one doing that. There are no other concepts or communities or models out there addressing this and that’s not criticizing, it’s just an observation. So I think we are kind of filling a gap here, which nobody else is doing.
PHIL VON BENTIVEGNI: That’s really wonderful, because I also recognize that in the last couple of months really, that Beyond Budgeting and really that holistic view it was referring to is really that key thing which is differentiating or really helping organization to move forward. It was really starting to really have that relationship with Agile transformation and already stated that our Agile transformation cannot be successful without really having the mindset change also and all the supporting environments like HR financing and about that. We have seen there today also this connection from really this process about financing and HR, for instance QBR, which is, meaning quality business review meeting. What’s your feeling? Is such instrument helping also to make the change happen or is there other instruments you would recommend to start on?
BJARTE BOGSNES: Well, if your question is about how to get started on Beyond Budgeting journey, then I have worked with CEOs who understood it all and worked at it all from day one. The 12 Beyond Budgeting principles, six on leadership, six on management processes, they were ready for a revolution from day one, but that will always be the exception. So sometimes you need to find a less scary place to start, which can take you into these bigger issues and discussions later on. In Beyond Budgeting, and this might sound a bit finance technical, but in Beyond Budgeting, we recommend organizations to ask themselves: “Why do we budget? What’s the purpose of that budget?” Most organizations would end up with not just one reason but three different reasons. Budgets are used to set targets, financial targets, sales targets, production targets. At the same time, that budget is meant to be as a kind of forecast of what next year could look like in terms of cash flows, financial capacity. So then we’ve got two purposes: targets and forecasting. There is also a third purpose and that is resource allocation: managing cost, using the budget process to hand out extra money. It might seem very efficient to do three things in one process resulting in one number, but that is also the problem. Let me give you an example.
Let’s assume that an organization is on its way into a budget process, it’s autumn time. It’s important to understand cash flows and financial capacity moving forward. So people out there ask, “What’s your best sales number for next year?” Everybody knows that the sales number I’m sending upstairs now will come back to me as a sales target for next year and maybe there’s a sales bonus linked to hitting that sales number. We all know what’s happening with numbers sent up when people know that this is just not the forecasting process: “I’m negotiating my own pay here next year.” Or another example, if we move to the cost side, which we also must understand in order to understand net cash flows. We ask people, “What’s your best cost number or investment number for next year?” But Everybody knows that this is my only chance at getting access to resources for next year. I recall what happened last year. They cut my number with 30%. Well, then we know what happens with numbers being sent upwards. They are moving in a certain direction in order to create that, in order to negotiate them.
This is problematic not just because it destroys the quality of numbers, but even more problematic is that it is a process that stimulates behavior that is borderline unethical: the low balling, the gaming, the internal negotiations. So this is the problem with one process, one number where there are three different purposes playing out. The solution is fortunately very simple. We just separate these three purposes into three different processes. There is a target process, which is about a target is what we want to happen. A target is an aspiration. Then there is a forecasting process. A forecast is what we think will happen. It’s an expectation what we think will happen whether we like what we see or not. Brutally honest, not political. Last but not the least, it’s about resource allocation, how would we optimize scarce resources? By separating, we can start to improve each one in ways impossible when this was all bundled into one number, one process. How can we set targets that really inspire people that stretch people without feeling stretched? Some companies move on. They say, “Do we need all these targets?” Some companies skip targets, I think.
How can we have, again, an unbiased simple forecasting process where we know we can trust the numbers because we have taken the politics out of it? A forecast is now just the forecast. It’s not a bid into a target negotiation. It is not an application for resources – we have different processes for that. Last but not least, how can we have a more dynamic resource allocation where the bank is always open when you can always apply for funds without being limited to this happening in the autumn? That doesn’t mean that there’s always a yes. Those decisions should be tested against the qual… I mean, what’s the quality of that project, against the criteria we have. And do we have the capacity can we afford it as things looks today. This last part about dynamic resource allocation, that is our version of continuous delivery in Agile terms, because the budget is too big on an annual batch, too many decisions, at the same time too early.
So we talked about continuous delivery of decisions and resource allocation. The point is that when you move into these discussions, you are entering the Beyond Budgeting principles in way through the backdoor. You get these great discussions about what really targets that, what really motivates people, resource allocation. Do we need detailed travel budgets if we say we trust people? And so on. This is … It was a long story, but it’s a nice safe way of get things started that most CEOs and CFOs and finance people would understand and would be comfortable with it.
PHIL VON BENTIVEGNI: I really love the story. Really, I also have this challenge as really acknowledged that during the last months in terms of resource allocation cost. What normally we see is a project business typically most of the time and project allocation but really strict budgets, which is really fun in fiscal year or yearly based and therefore … You were talking about separating as a precondition with about targeting, having clear forecasts and the resources. Is there any first step? Is that really as you can imagine starting on a C-suite or can it be different way to separate a process?
BJARTE BOGSNES: Well, of course, you can run pilots and so on, but this way you’re starting is so … It doesn’t scare people. So it is something that you very often can do in a big bang for the entire organization and most people will get it, and again it is a way of getting started. The other thing that is important here with Agile transformations and Beyond Budgeting is that – or budget – is that if you do something radical with the budget process, it is this extremely strong signal to the organization that we are serious about this. Budgets hit every manager, out there, very few if any like it. So if you want something that’s really powerful in its messaging, then this is a great way to get started.
This is also why we are often asked, I mean, how come the adoption of Beyond Budgeting is somewhat slower than Agile has been and we are also sometimes compared to Lean. I don’t … This is not criticizing neither Agile or Lean, but I don’t think these concepts are comparable. One reason for the great success of Lean and Agile has to do with where these concepts were born. Agile was born in software development. Lean was born in manufacturing. What do you think they observed upstairs at the executive level in B companies? They observed faster project and lower cost. And who can be against that? It’s wonderful, so a big success. Then we start to scale – scaling agile, lean enterprise – and suddenly this starts to have implications for executives upstairs, threatening executive beliefs about how they should lead and manage. Then suddenly it isn’t that fun anymore. We in Beyond Budgeting, we have been going straight for the throat of those executive beliefs from day one, for 25 years, so that’s one reason why it takes longer.
I think another reason is that there are issues that Lean and Agile for natural reasons, given where they were born, are not addressing when it comes to corporate management. Beyond Budgeting has been addressing all that from day one. So we are a broader concept than Lean and Agile as such. Last but not least, I think the final reason is as to do a bit granularity. Beyond Budgeting is not a management recipe. If you look at the 12 principles, they provide guiding inspiration. But what they should mean in an organization depends on that organization’s business, culture, history. So you have to think for yourself. I don’t like management recipes because in a management recipe, somebody has done all the thinking for you. Your only job is to buy the books and read them by the way, hire the consultants, tick the boxes and you can buy thousands of books about Lean and Agile. You can hire thousands of consultants telling you exactly how to do it. That is not the case with Beyond Budgeting. Of course, it makes it more difficult when there isn’t the recipe to follow. You have to think for yourself.
PHIL VON BENTIVEGNI: Think for [that.] It’s really a good point to start on, because I believe – and I also see that on the conference today – that the combination of the different methods and different things, we see them all [and that] it’s really helping, because we also see that some Agile transformation really stuck on getting on a corporate management level. As you have said, that really is the background of Beyond Budgeting. And how can you combine this play field? Is that something you feel that is easy because it has more or less the same roots in a mindset perspective or how you really are combined Beyond Budgeting principles, ideas, reflection process for the management with Agile coaches, Agile transformation? Is there something out of your experience you could share about that?
BJARTE BOGSNES: First of all, I mean, this is happening right now. If you look at the extensive contact between the Agile community and Beyond Budgeting, that is great, great news. As I said in my speech today, we will be stronger together. The more we can join forces, the stronger we will be. I have a little word of warning to the Agile community and I think that was said today as well that it’s very hard to scale Agile using exactly the same framework and vocabulary that worked well in revolutionizing software development. So you need a different language when you shall address the executive level and Beyond Budgeting has that language. So we can offer a language the executives understand. They might not agree with us initially, but they understand what we are talking about.
I think Beyond Budgeting is the key to unlocking a lot of the stalled Agile transformations, because we are addressing those last areas that has to do with traditional management presented with the budgeting mindsets, the budgeting process and a lot more. We actually, we are starting to get the number of invitations from companies who have been on Agile transformations for quite a while and quite late on the journey realize that “We will never succeed unless we also addressed what Beyond Budgeting is addressing.” So it is starting to happen and that is great news.
PHIL VON BENTIVEGNI: It’s great news. I really find it really interesting, because language is one of the key things and therefore to be or have the language for the people you were talking about – about HR, finance, corporate management – I guess is really important and as I understood that is really also [transforming] more or less the same mindset and messages, I guess, therefore there should be a combination. The second thing is really interesting, which you have talked about, is about getting too late or late into the transformational process. What [would] be an ideal setup? You say okay or how should the work get started or is that something that you have in mind?
BJARTE BOGSNES: Well, again, this separation of budget purposes, when you start to have those discussions about better targets, better resource allocation as two examples, then you are into HR issues. There are target setting motivation, what really motivates people. Resource allocation, you’re talking about trust. Beyond Budgeting continues beyond the three addressing – giving advice straight into HR territory when it comes to performance evaluation and performance and rewards. So that we very often recommend finance and HR to work together to make this happen. If there is an Agile transformation team, you also can join hopefully at the same time. That’s dynamite.
By the way, you talked about language and words and I think that if we want change, sometimes we need to change the language as well. There is one word, one set of words or label that I don’t like and that is performance management. Two reasons for that. I find it quite negative. If we don’t manage your performance, there will be no performance. I don’t think that’s true. Second, this belief that performance can and must be managed, which I think carries a lot of illusions to it because I think our ability to manage performance whether we are executives or finance or HR people, that ability is somewhat limited compared to what we like to think. It’s not bad news because there is so much great stuff we can do that is not about managing performance. It’s about creating conditions for great performance to take place. It is about enabling performance instead of managing performance. So that is why we should leave performance management behind us as a label and talk more about enabling, developing performance.
Last but not least, it’s very important how we define performance. I think you touched upon that earlier. Performance can never be about hitting the number, hitting the budget number, case closed. We need a richer, broader and more intelligent definition of performance and evaluation of performance. We call it a holistic performance evaluation, looking going beyond measurement, looking at what measurement is not picking up, looking at values, behaviors, looking at hindsight, insight and so on to compliment and supplement that measurement.
PHIL VON BENTIVEGNI: I really love that, because performance measurement is really something which is crucial to really understand and do differently in the future. It’s really touching also all levels [starting] from the management to really up to all team members, so everybody will hopefully in the future feel the impact that we look after him to enable him and therefore I really appreciate your time that you have given us here today. I really thank you for that.
Thanks again for listening to this edition of Agile Amped. If you have learned something new, please tell a friend, coworker or client about this podcast and subscribe to hear more inspiring conversations. Again, thank you, Bjarte, really appreciate it.