Statoil began by separating the three traditional budget purposes of target setting, forecasting and resource allocation. This trio cannot be handled in one process resulting in one set of numbers. An ambitious sales target also cannot be an unbiased sales forecast. You rarely get a good cost forecast if the organisation believes this is their one shot at access to resources for the next year. So the separation enabled Statoil to significantly improve each of the three activities. The company introduced relative instead of absolute and decimal-loaded targets. Forecasting quality improved because Statoil took out the bias created by gaming from target-setting and resource applications. The company also introduced a more holistic performance evaluation, with hindsight insights as a key component and with its core values counting for 50%.
Last, but not least, Statoil introduced a dynamic resource allocation that provided much bigger and more flexible decision authorities to local teams. Imagine a bank informing its customers, “We have now changed our hours, so if you want to borrow money, we are now only open in October.” While it sounds ridiculous, isn’t this exactly what companies experience every year in the budget process?
The goal was to keep the ‘bank’ open 12 months a year. A funding request might still be refused, but why make all those decisions in the autumn, before they have to be made? Isn’t it better to make them as late as possible when better information is available – not only about the new project or activity but also about the company’s capacity to fund or staff it?
For managing other costs – operational or administrative – Statoil offers a menu of alternative mechanisms for the business to manage its own costs. These include unit cost targets (‘you can spend more if you produce more’), or benchmarked targets (for example, unit cost below average of peers), a profit target (‘spend so that you maximise your bottom line’) or simply no target at all (‘we’ll monitor and intervene only if trust is abused’).
Statoil does all of these in the ‘Ambition to Action’ model, the cornerstone of its new management process. While based on the balanced scorecard concept it is combined with the Beyond Budgeting principles (see the Beyond Budgeting Roundtable website at bbrt.org), solving many of the problems often seen in more conventional scorecard implementations. The company now has around 1,400 Ambition to Actions across the company, which are connected and aligned through translation (each team translating the Ambition to Action above) instead of cascading (i.e. corporate instructing). There is full transparency to help translation. With only a few exceptions, information on these 1,400 is open and available to all.
“We have a management model which is very well-suited to dealing with turbulence and rapid change,” said Statoil’s chief executive (CEO) Helge Lund. “It enables us to act and reprioritise quickly so that we can fend off threats or seize opportunities. This is much more difficult in a traditional budget world.”
In 2010, Statoil was ready for the next step: escaping the calendar straightjacket. The purpose was again to improve conditions for teams and business units to manage themselves and perform to their full potential.
The main principles in the new and fully dynamic process were:
- No annual versions of Ambition to Action: Strategic objectives, key performance indicators (KPIs), KPI targets and forecasts can be changed when deemed necessary by units themselves.
- Event-driven changes, external or internal. The definition of an event is ‘whatever is important for your unit’.
- Simple controls: Major changes approved one level above, smaller changes merely notified.
- Coordination: The unit initiating a change is responsible for informing affected units.
- Target and forecast horizons: These should reflect lead times, urgency, uncertainty and complexity in different businesses.
Note that dynamic doesn’t necessarily mean more often, but rather at the right time and with the right time horizon. While for some it could mean more, in other cases it could actually be less.
Statoil is still trying to find other companies that have taken similar steps. There has been only limited practice to learn from and even research literature is surprisingly thin.
The launch of the latest phase was in January 2011. Three years on it is still early days and many questions still remain. All of the situation that were so well-regulated and understood in the old process, now raise issues such as how should they be handled? How often? How far out? What is ‘big’ and what is not? All this uncertainty has, however, been well accepted by the organisation. People are enthusiastic about the learning and adjusting phase that Statoil is now entering.
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