The author himself designed and preached the gospel of traditional performance management for years before accumulated experience as a manager made me question my own messages. This questioning followed a steady loss of faith in most tenets of such management – such as traditional budgets, individual incentives, key performance indicators (KPIs) and targets as the answer to any business or organisational issue, as well as the calendar year as the standard cycle for running it all.
My journey towards a different approach started nearly 20 years ago with the abolition of traditional budgets at Borealis, Europe’s largest petrochemicals company back in the Nineties. This was followed by a similar effort at Scandinavia’s largest company Statoil – a journey which is still on-going. Self-regulation has become an increasingly important aspect of this journey, not as a goal in itself but as a necessary and great way of getting even better performance in an organisation.
With VUCA, more self-regulation is essential. It might feel uncomfortable, even scary to ‘let go’, but there is no alternative if the company wants to remain in business. We need to shift our thinking from managing performance to creating conditions that are conducive to great performance. We need to revisit our definition of control and get rid of all the illusions of control. Perhaps even a new label for performance management is appropriate.
How, then, can we make our management models more self-regulating? The ‘Beyond Budgeting’ philosophy provides help and guidance. Beyond Budgeting emerged as a coherent, comprehensive and tested model 10 years ago. The name is actually misleading; the purpose is not necessarily to get rid of budgets but to create more agile and human organisations. That requires significant change in traditional management, where the budget sits as a cornerstone.
Six Steps to Self-Regulation
Self-regulation is a key theme in Beyond Budgeting. Just as with traffic systems, self-regulation seldom works well without a strong, values-based culture. The stronger the values, the fewer rules and regulations are actually required, and vice versa.
Management process change can drive cultural and behavioural change. In addition to abolishing the annual, detailed traditional budget, here are six tangible recommendations for moving your management model towards more self-regulation.:
- Abolish the traditional budget. It takes too long, drives low-balling and resource hoarding, prevents agility and can block value-adding business decisions. It is no guarantee for an optimal use of resource and is seldom a good yardstick for performance. Abolish the traditional budget by separating the three budget purposes of target setting, forecasting and resource allocation and then design better ways of doing each one.
- Leave the calendar year behind. January to December is an artificial construct from a pure business point of view. Run performance activities such as target setting, forecasting and resource allocation as separate processes and on natural frequencies and time horizons, driven by business rhythms and events. Introduce dynamic forecasting instead of rolling forecasting.
- Introduce relative KPIs. Use more unit cost targets; you can spend more if you produce more/sell more/do more and vice versa. Benchmark against internal or external peers where possible. Use relative targets, or simply drop targets and let peer pressure do the job.
- Introduce more transparency.Transparency is a great social control mechanism. When Swiss pharmaceuticals giant Roche piloted full transparency on travel, cost went down compared to the rest of the company’s expenses.
- Align through translation, not cascading. Don’t cascade and micromanage. Let local teams translate direction and ambitions from above into what this should mean for them. The result is common understanding, ownership and commitment – all invaluable for motivation and performance, but often killed in mechanical and detailed top-down cascading. Create transparency on local goals and intervene only when needed.
- Introduce a holistic performance evaluation. Don’t tie performance to a narrow number set in stone. Make evaluations more holistic, fair and robust. Those employees who reach further but don’t fully make it should be praised, not punished.
Scary? Yes, probably. Risky? No. The old way can be readopted as quickly as tomorrow should the new way not work as nobody will have forgotten it. Compare that negligible downside risk with the upside potential if – or when – it works, as it has done in almost every organisation embarking on a Beyond Budgeting journey.
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