Thank you and I hope you do that afterwards as well, when Im finished! [laughter]
It's wonderful to see all of you here coming from many different places in Europe. I would like to say especially welcome to all our friends from Iceland. And in case you count them, we've got nine people from Iceland there. Small country of 330,000 people. Something is brewing in Iceland and I'm not meaning the volcanoes! [laughter] Some of you will have heard what I'm talking about before. My apologies for that, but most of you I think would not have heard it, and you are my target. My apologies for the rest of you and in order to get through this on time, I will apply the same tactics as Julian did. I will talk loud and fast, but I will try to pose some questions as well.
Back when I joined Statoil, I'll come back to the company in a minute, it was back in the early 80s and it was a smaller company than what it is today and most small companies, they want to grow. They want to become big and many succeed in becoming big. But they discover that we have not only become big, we have become bureaucratic, we have lost a lot of the flexibility, agility we had as a small organisation. Some cases we have become sad places to work and there's actually a kind of a parallel here to the ageing process of man because as we grow older, we do lose a bit of the agility, flexibility we have as teenagers. I have passed 50, so I have some personal experience here, and when it comes to men, we have no choice. I mean this is the way it goes, whether we like it or not. But when it comes to organisations, they have a choice because it's written nowhere that because we are big, we should be slow, inflexible and sad places to work. So. So a big issue for us has been, how can we find a way back to what we had as a smaller organisation without losing the benefits of being big? So don't misunderstand me, there are many benefits of being big. How can we be small and big at the same time?
I think it's the big issue for big organisations. I think the question for small organisations is if they want to grow and avoid kind of adopting all the stupid things that the big company seems to do, all kind of management processes that will take you to the to the wrong places. What I would like to share with you today is first a little bit around the problems with traditional management. There are many ways of kind of positioning this. I'd like us to, and we have talked about problems earlier, I’d like us to talk a little bit more because if we don't kind of agree on what these problems are, it is harder to kind of find the way out of the misery.
Few slides from Beyond Budgeting, but not much because Anders, and Handel have covered a lot of this. I will spend most of the time talking about how we are trying to do this stuff in Statoil. And I'm saying trying because we started out in 2005 and everything I would talk about is decided, it is written into what we call the Statoil Book, so that's not the issue, but I would not stand here and argue that we are kind of perfect, fantastic, that all of this has reached every head and every corner of Statoil. That is not the case. We still have sceptics. We still have people who long back to the old, comfortable model. We still make mistakes. We still stumble. We still have detours, and we still have setbacks, but this is what real change is about. Real change is never a straight line from A to B. Real change is actually quite messy, and it is never a quick fix. So if you don't have challenges and problems, then you are not into real change. I’m going to make the commercial here very, very short. This is totally in a nutshell, in which an oil and gas company with significant international activities listed in New York and Oslo and yeah, some data on the company. But let's not spend more time on Statoil.
Let's move to some problems. I'm going to be a bit philosophical around problems, but I want to start out with being a bit concrete and specific and on this we were showing you a list of problems earlier and these are just other words on the same problems. I have met very few managers over the last 15 to 20 years disagreeing that these are problems with the budgeting process. So the big majority agrees these are problems, at the same time, the majority continue to budget. I find that fascinating. I've been thinking a lot about it and I think there can only be two answers. I mean, one reason can be that, well, we know it's a flawed process, but we don't know what we should do instead. What’s the alternative? Well, this is where Beyond Budgeting is coming in, because this Beyond Budgeting represents an alternative. But it could also be that. People who manage to say that well, yes, we know about these problems, but they are not big enough to justify any big change. These are more kind of irritating itches, but not the symptoms of any serious disease. I would disagree. I would argue that these are much more than irritating itches and the big disease here is about the fact that this process, that was meant to support and enhance performance in organisations, actually is doing the opposite. And if that is the case then this is more of a barrier than a support for good performance, we have a serious problem. So performance here is for me a key. A key word. I would like us to reflect a little bit on performance for a few minutes, but in a slightly different setting than business.
I would like us to move into traffic. Because in traffic we would also like to see good performance when we are driving to work in the morning, and how would we define good performance in traffic? What does good performance in traffic look like? Anyone?
(from the floor) Flow
We got flow. Right. And a safe flow. So safe and good flow of traffic is a definition of good performance in traffic, and traffic authorities are also trying to do this stuff, performance management, in order to make that happen and is what we need in traffic crossings put up by the traffic authorities to achieve a safe and good flow with the traffic light. Two questions, who was actually managing here and based on which information? Who is managing here? But, you know, this is old fashioned - there's no high tech, there's no sensors, no nothing. So who is managing? What time? Well, somebody programmed that time, right? So the, guy programming this light, that is the one managing. Which information would that management be based on?
(from the floor) History.
So. Historical trends, maybe some forecast about the future, but the bus is standing there waiting for that green light. Will this be entirely fresh information? No, it wouldn't, for obvious reasons.
Now. This is one way of managing, with a good purpose, but with some weaknesses. It's not an alternative to the traffic light. The roundabout. Same questions very different answers. Who is managing? The drivers, we are. Based on which information? Current information. What we see here see right now, real time information. So since we arrived at two very different answers, it could be interesting to compare a bit. These two. These two ways of managing, first of all, which of these two is normally most efficient? It's the roundabout. It's actually been proven that the roundabout is more efficient, and maybe it has something to do with what we just talked about – information. Access to fresh information. Well, of course. I mean you have access to fresh information here as well. You can see what's happening. And what is it that you don't have, that you have in the roundabout? You have the authority to act on that information, right? I would argue that there was one more thing that needs to be in place for this to be more efficient. I'll come back to that in a minute. Which of these two is most difficult to drive in? It's the roundabout. And I would argue that everything we are trying to leave behind in Statoil, is, from a leadership point of view, in a way much easier than what you're trying to do instead. That’s why we have some resistance because some long, long back to what was easier. We are trying to simplify our processes from a management point of view, but from a leadership point of view, it is more difficult, more challenging. But leadership is not meant to be easy!
Last but not least, before we leave traffic, is it relevant to talk about values in this setting of traffic? We often talk about ‘values-based management’ and the opposite of values-based management is rules-based management. And the traffic lights is one example of a very simple rules-based management model. Red is stop and green is drive and we can always discuss yellow! And if we have the mindsets among some drivers waiting for that green light, is about me first, I don't care about the rest. Normally not a big problem here, overruled by that red light, In the roundabout, that mindset is actually a big problem because in the roundabout we are much more dependent on having this positive common purpose of wanting this to flow well. Here we have to be more considerate. We have to interpret each other’s intentions. We have to interact with people in a very different way than is what is needed here so it's not enough with fresh information or authority. You also need that positive value set. And again, managing performance well, that is what authorities are doing here. This is more about creating conditions for great performance to take place. A big, big difference. What you see on the right-hand side is a more self-regulating management model than what you have on the left-hand side and I would argue that in today's realities we need more self regulating management models and we need it for at least two reasons.
The first reason has to do with the world out there, which has a lot more today of what they call in the military, VUCA. You might have heard that expression? VUCA: volatility uncertainty, complexity, ambiguity. And if we take that VUCA seriously, it has significant implications for how we design our management models. The other reality we need to take seriously is not external, it's internal, has to do with people. And asking ourselves what kind of people do we have in our organization? The language we chose for that discussion was. Theory X and Theory Y introduced by Douglas McGregor back in 1962, opposing views about what motivates and drives people. X Theory acts very much the negative people view, the view that most people in an organisation is a bunch of potential thieves and crooks, which all must be managed tightly. And if we don't do that, you know what would happen? They will all run away, do a lot of stupid things and spend money like drunken sailors. Well, that's the popular version McGregor. He was a bit more academic and polite, but I think that's what he meant [laughter] I think so. Then you have Theory Y - very much the opposite view, that most people in an organisation is, you know, being I mean well educated, competent are actually responsible, as understood earlier, actually responsible. People want to do a good job, want to perform, want to be involved, want to be listened to, want to be treated as adults. And again, without so far having a view on what is right X or Y, I do have but independent of that, your choice must kind of have implications for how you design your management models. If we combine these two realities, we need to take seriously then it might look like this and you recognise the two dimensions and I would argue that traditional management is in this lower left hand corner, consciously or unconsciously.
Before I define traditional management, a few more words on X&Y because this is not about being naive. Every time I talk about X&Y, there are some faces popping up in my head. I can see those guys right now, Those faces belong to colleagues of mine at Statoil that I definitely would put on this side. I think you need to keep a close eye with those guys. There might be some faces popping up in your heads as well. Well, no, I don't know. But my point is that. Those people typically exist in any organisation. That's not the issue. The issue is do they constitute a minority or a majority? Because if they exist like they're doing stuff all, but if they constitute a minority, then we cannot base the design of our management models on minorities. We need to start with our majority view. If we if we believe that this here we need to start with this view and then we need to find other ways of dealing with these guys. It's just like in a free society, we are not putting everybody in goal because someone someday will do something wrong or has done something wrong, right? We are all free citizens within certain boundaries.
Now. In order to get out of this, we need to address both leadership and management processes and what we need to get out of is something that's very rigid, detailed and very rules-based and all the stuff that you've heard a lot about today. I recall when I made this slide, then I said to myself that Bjarte, now you're being a bit too hard on traditional management, don't overdo it! But I've been sharing this slide with so many, so many events with so many years, and I've seen so many nodding faces that I don't think I was too hard on the issue. There might have been a time where this was the right place to be. I'm not arguing that there might still be places around where this is the right place to be, but for us in Statoil, that is a completely uninteresting discussion because we know that our business environment is up there and not down here. And we believe that most people are here. Which means that we can't be here. We need to move up in the upper right-hand corner by addressing both dimensions and the way out of that goes on the leadership side. It goes from being rules-based to more values-based.
That doesn't mean no rules. It generally means that the more values-based you are, the less rules you typically need. We need more autonomy. In this world, there isn't always time to run 9 floors up to get that decision. Then it might be too late and also it wasn't always that decisions become better because they are moved up to the 9th floor. We need more transparency, and this is good news for all those managers who are so afraid of leaving this comfortable corner because they are afraid of losing control. And I can understand that fear, that fear is real. Although a lot of the control, they are afraid of losing, it's nothing but an illusion of control. But here's some good news. Transparency can be a great control mechanism. It's social control mechanism. There is the reason why thieves and crooks operate at night, right? Because then it's dark. There's no transparency. You might have heard this wonderful story from a Swiss pharmaceutical company called Roche. Quite big, probably - well, I think - traditionally managed, but they did a very interesting experiment recently with travel cost. We can all relate to travel cost, right? On travel costs in a pilot they kicked out the budget. They kicked out most travel rules and regulations. What they implemented instead, full transparency. So with a few exceptions, everybody could see everything. If you travelled, to where you fly, eat and sleep. Cheap or expensive, open for your colleague to see and vice versa. What do you think happened with travel costs in that pilot, versus travel cost in the rest of the company?
[From the floor] Went down
That will be one of my many leading questions in this session here. [Laughter] So I hope we agree. A very simple self-regulating control mechanism. This was about tearing out pages in that rule book instead of adding even more pages.
Last but not least, we must get hold of that intrinsic motivation in people that can move mountains if you can get hold of it, and unfortunately, a lot of the stuff practiced in organisations to motivate falls in the category of extrinsic motivation, and I'll leave it for yourself to reflect on individual bonuses as a motivation mechanism where that falls. I could have spent the two next hours talking about individual bonuses, but let me just make it very short, it is not only budgets I have lost my belief in when it comes to ways of managing.
Now. At Statoil we have always tried to be a values-based, people-oriented organisation since we hit the ground running in Norway in 1972. And, by the way, that was just when Handelsbanken started their Beyond Budgeting journey, that was the point where we were born as a company. So our challenge, I'm not saying that we are perfect here, by no means, but maybe our biggest challenge was that we had management processes that had a different message and it doesn't help to have these Theory Y leadership visions, if you have Theory X management processes, so a lot of our journey has been about doing things on the process side to reflect not just a VUCA environment, but also a people view, kind of based on, or processes based on this kind of people view. And here are some examples of what you typically need to do. Yes, you typically need to do something with the budgeting process because that's in a way that represents so much what is down here, but again, I have been in organisations with budgets that are more Beyond Budgeting than other companies which technically have kicked out the budgets, but they have just found other ways of doing these things. So let's not fool ourselves. This is not just about budgets, right? We need to think differently around how we set goals and targets, and we need less of what I call ‘29.2 targets’ in a dynamic world with these kind of people on board, we need to think more relative. We need to think more around values, how do we achieve those results? When you shall evaluate performance, we need to take into account hindsight, insights, all the things we know afterwards that we didn't know upfront. We call this a holistic performance evaluation.
And last but not least, we need more dynamics into our processes. We need to organise the stuff we do based on rhythms of the business more than rhythms of the calendar because January to December is generally an artificial construct from a business point of view, not from an accounting point of view, not from a tax point of view, but that's not the stuff we are talking about here. And for me this is what Beyond Budgeting is about. Trying to move up in that right hand corner by addressing both dimensions in a consistent way, and that's what showing a number of companies on this journey. We've heard about Handelsbanken. I could have talked for hours about all the great examples and let me just pull up a recent example. This is a Norwegian IT company called Miles. And of course, they have no budgets, but also they have no hard targets at all. Their only target is to earn more money than the competition. Their main process is recruitment. They say if we get the recruitment right the rest follows. They are extremely people focused and, in that company, I mean their employees can buy whatever piece that they want. They can take any training they want, spend a month in the US if they want. The only thing the company requires is that they post the cost of what they are doing on the Internet. Of course, they're not exploding their company. They are earning money in buckets. Very fascinating. I won't spend time on the Beyond Budgeting principles beyond just again highlighting the need for coherence between the leadership side and the management process side. And let me illustrate that with a few examples of the opposite that we very often find in organisations.
Lack of coherence - because it doesn't help that we on this side talk loud and warm about how fantastic people we have on board and we will be nothing without you, and we trust you so much…. But not that much, of course, we need to manage through detailed travel budgets. If not, we know what will happen, right? One message here, another message here. Guess which one is strongest.
Another example, it doesn't help that we on this side talk equally loud and warm about ‘we’ and ‘us’ and ‘together’ and ‘team’, if everything we do on the incentive side principally is around individual incentives, right? One message on the left-hand side and another on the right-hand side. Those gaps between what we say and do are poison in organisations. Now, when we started out, (we started out 2005) we were a bit careful showing these principles because we were a bit afraid of scaring people. And this is big stuff, right? And some managers get scared, and we don't want to scare people because then you risk not getting started. So, we started out in a slightly different place, more logical, more related to the budget. Less scary, but a great way to get started so you later can get into many of these discussions. And it has to do with asking you a very simple question- one we don't ask enough, the question of why? And that question was posed to the budget. Why do we budget? What's the purpose of a budget in an organisation? The set of numbers we make? And I would like to pose that number to you guys as well. Why do companies make budgets? What's the purpose of those numbers? Anyone? There must be some very good reasons, because most companies out there still make budgets.
[From the floor] Forecast
They want to, yes, they want to predict which is 1 purpose they want to kind of understand what the future might look like in terms of cash flows and financial capacity. And they also want to control, yes. So you use the budget as a resource allocation mechanism, handing out bags for money right to the organisation and make sure that nobody spends more. So that's two purposes. The forecast or what the future might look like and on the cost side, resource allocation to manage cost. After one additional purpose…
[From the floor] Targets
Targets, absolutely. We use the budget to set financial targets or production targets or whatever. Now here we have 3 different purposes and one by one they do not necessarily get to set the problem as long as they are done in the right way. The problem comes when we combine these three things in one process, resulting in one set of numbers. Because we all know what happens if we if prediction is important for us, we want to understand the future, financial Capacity cash flows, we ask our sales people what's the best sales forecast for next year, but everybody knows that this is not just the forecasting process that number that I don't give that will come back back to me as a sales target and there's a sales bonus linked to hitting that sales target. We all know what might happen to that sales forecast. It might start to shrink, right? I wouldn't blame the sales guy thinking like that. They would blame our management model putting this guy in a difficult position. Moving to the cost side, asking the same people, other people, what is your best cost forecast or investment forecast for next year? But everybody knows that that number would also become my budget for next year and this is my only access to resources for next year and whatever number I'm coming up with, somebody is going to cut this with 30%. What might happen to that potentially good cost forecast that we were just about to get? What we know the game. And we tend to laugh a bit. But I think this is actually quite a serious problem, not just because it destroys the quality of our numbers, maybe even more because this is a process that stimulates behaviour that is on the borderline of unethical. The gaming, the Lowballing, the internal negotiations that is not the kind of behaviours we would like to see in our organisations, at least not in Statoil I can promise you. Fortunately, there was a very simple solution. We still do all this stuff, but in three different processes because these are different things, it can be different numbers down at different times. The target is what we want to happen. The forecast is what we think will happen, whether we like what we see or not brutally honest, expected outcome. And resource allocation is about finding better ways of managing costs than the outdated technology of sitting in the autumn and deciding everything in detail to the last penny. Again, technology invented 100 years ago, probably. Worked well 100 years ago, maybe 50 years ago. Not anymore. With all that VUCA and with these people on board. And once you have separated, you can start on these great improvement decisions within each of these processes. How can we set targets that are robust against the VUCA and that really inspires and motivates people? How can we have a lean, simple forecasting process where we quickly get on the table and set of unbiased numbers that we know we can trust? It doesn't have to mean million details, but we know we can trust the numbers because we have removed the reasons for gaining these numbers. And last but not least, how can we find alternatives for managing costs that are more intelligent, more effective than that detailed pre allocation in the autumn, the year before. And how can we do all of this on a more event driven rythmn instead of everything circulating around the calendar.
Let me give you a few examples of how this might work in practice, and I won't spend much time on this because you will see that this is basically stealing what Handelsbanken did. These are our main 2 main financial KPIs. They certainly have their weaknesses. That's not the point here, but the point is that we are thinking in relative terms. These are our competitors, and the definition of performance is to do well against these guys. These two metrics, like Handelsbanken, drives the common bonus scheme we have in Statoil. Again, we've stolen that from Handelsbanken with pride.[Laughter] Most of our relative KPIs are internal, not external. Comparing internal units where it makes sense to compare, you can't do that all places, but when it makes sense, it is a very simple way of combining 2 important things. Driving performance in a very gentle, subtle way. Nobody likes to be laggards, but more importantly stimulate learning right? Get the guys down there to call the guys up there and find out what you guys are doing. The original purpose of benchmarking, stimulating learning.
Two slides on what our managers struggled the most with, and that is to manage cost without the traditional budget and in order to do that, it starts with cultural mindset. The cost-conscious mindset, meaning asking different questions. The main question should not be when you should do something. Do I have a budget for this? If I have, it's OK, if not, it's not OK. By the way, when I'm talking budgets here, I'm talking about the annual budgets, the detailed annual budgets. We're not necessarily talking about project budgets. We do have project budgets; they make less damage than the other type of budgets. I'm not saying that they're there without damage, but they make less damage and so we want to hear more of these kind of questions on the right-hand side. Is this really necessary? What is good enough? How is this creating value? Is this within my execution framework? Now these are questions we should ask all the time for every penny we spend. And not just towards the end of the year when you can see the bottom of the budget bag and suddenly, hey guys, we have to be cost-conscious because I mean, there's almost no money left on the budget.
One reflection on this line, by the way, if you have, if you operate like this in your organisation, with those budget lines drawn, this is how much you can spend and not more. It works by all means it works, but that is just half the story. It does keep down the cost, but those budgets also spent, right? So that ceiling is just as effective as the floor. And there is a very good reason for that, because it's rational management behaviour to spend your budget. You shouldn't overspend because then you're beaten up but don't underspend either, because then you are beaten up a little bit. Why did you ask for more money than you really needed? And of course you risk getting less next year, so rational management behaviour, spend your budget not more and not less. And that happens across the board, everybody hit their budgets. What is Handel saying at the end of the year when they can see that we are coming in on budget across the board, what is Handel finally saying? Well done. What? Great control. We have fantastic control in this company. [General laughter] Well, that's another example of an illusion of control, because the only thing we know was yes, we hit those budgets, but that is no guarantee that this was the optimal use of resources. Maybe some should have spent more, maybe some should have spent less. This mindset is necessary but not sufficient. We do need something more. We have something more. The more force in two categories, managing distinct projects and managing more operating costs. Let me start with the projects. So very simple concept. The bank is open 12 months a year. You can always forward the project for approval.
Right. But cost is important. We shall be just as good in saying no as yes. And when we say no, when we say yes, then we are making decisions, right? And what do we need in order to make good decisions?
[From the floor] Good information.
Good information and at which point in time do we have the best information? Not just about the project we shall have a view on yes or no, but also our capacity. Do we have the money to do this? Do we have the people to do this? Would that be in the autumn, the year before? Or would it be as close as possible to project startup? That was another leading question [laughter] I hope we agree the later we can make decisions giving lead times the better decision we can make
So again, bank is open 12 months a year. When it comes to other costs, it is somewhat more challenging, definitely. We have a menu that is trying to help us here. On that menu we are trying to leave the detailed annual budget bag of money 1003.4 lot of smaller bags inside, salary, overtime, consultants travel. All these cost accounts and very often divided into 12 monthly, a lot of mental baggaging going on in a budget process. This is a problem for the reasons I've talked about. This is an alternative. You could call that a frame or a burn rate guide, the kind of guide of what kind of activity level should you operate on until something else is decided, you could look upon this as making sure that people are not completely in the dark. This doesn't have to be an annual amount, and by the way, it's just in the range of 1000, it doesn't say 1003.4 and it doesn't have to be an annual number. This could be a 12-month average. It could stand until something else is decided and within that there's a lot of freedom to do what you do to be flexible and optimise. But sometimes this is not the right answer. Then we might move to what you call a relative KPI's and a relative in the first round here means thinking unit cost. Right. We spend a lot of money on exploring for oil and gas in Statoil and it's around three and a half billion US dollars a year. And the main targets they have are unit cost targets. It could, for instance, be not more than $5 per barrel. If they then spend more, well, that might be OK. Well, actually it is OK as long as we have the financial capacity. If they find less, we expect them to spend less so a more self-regulating mechanism unit cost target rather than absolute targets. We might make this even more relative. We might say that no, your target is not $5 per barrel. Your target is to be competitive. So, better than the average or in first quarter or whatever, even more self regulating. So if we end up spending $6 per barrel, is that good or bad? Well, it depends. If the other guy is spending 7 or 8, I would say 6 is pretty good. If it's the other way around it is not very good. So achieving 2 things - both a more dynamic allocation of resources, but also a more intelligent language for addressing performance.
If you have a true profit centre, that is the way you're managing costs, you cannot run away and spend more than like a drunken sailor, unless what you spend is good cost as and as we're talking about. And of course, Handelsbanken is lucky. I envy Handelsbanken because they have so many profit natural profit centres through all the branches. We don't have that in Statoil. I wish sometimes we had it because this part would be so much easier. And last but not least, it's no alternative or nothing at all. From time to time, this is where we are as a corporate staff. The corporate staff are based in no budget, no target, just monitor actual cost, discussing cost all the time. If you should make a big decision, we have a talk with our CFO. It might be, yes, might be a no. And again, it was much easier in the olden days when we got this detailed bag of money. Now then here the monkey is back on the shoulder where it should be, right, and cost does not explode. Right now, the entire oil industry is in the face of consolidation and reducing activity levels because it becomes more, I mean, all the new research we are looking for are found in more remote, more deeper, more colder places and so cost is a big issue and we need to reduce activity levels. So we are using more of this now, compared to before, in combination with these other things, the important thing is not that we are here as long as we know, fall back into this one. So this is the menu that you must use actively depending on what kind of challenge you have. For many years we mainly operated here.
Let me then finish off with talking a bit about Ambition to Action, the process where they're kind of tying this together, our management process. Three purposes; Translate strategy, secure this flexibility and last but not least activate the words in this book about people and values and leadership, because if nice words are left like nice words, they are worth nothing. Ambition to Action is actually based on originally based on the balanced scorecard concept, so here you will see that our model is very different from Handelsbanken’s because we had different starting points. Statoil introduced balanced scorecards already in the late 90s. So we had that in place when we decided to abolish budgeting in 2005. And let me say you already know I have a very ambivalent view on balanced score costs because on one hand, if you like traditional management, centralised command and control and all that stuff at corporate level, it can be a wonderful tool to achieve exactly that. You have all this big menu of KPIs and so on that you can use to instruct and control and micromanage. And unfortunately, that is the case in many organisations. We also have here people in Statoil that would like to use, and try to use, Ambition to Action like that. But we are trying to use this in a different way and I will try to get that across in the rest of my session.
Translate the strategy. It flows like this, and you might have something similar in your organisation, but the way we do this might be different. Strategy here. Trying to translate strategy into more concrete strategic objectives. What does success look like on a medium-term time horizon? Then we are trying to find KPIs that can measure that we are moving towards these objectives. The only problem with measurements is that measurement alone moves nothing. Nothing happens just because we measure. You don't lose weight simply by weighing yourself. Which I've tried by the way, and it didn't work [laughter] and when it didn't work then my wife, she told me that, Bjarte, maybe you didn't stand there long enough and that might be the case. But and that would be some kind of action, but it's not those kinds of actions we are after. But we know that nothing happens before we do something, and we also try to understand the consequences of what we do through forecasts. Finally, there was a translation or all of this into, well, what does this mean for you and me and the teams we are based in? And here so here we are straight into the HR process moving from strategy via finance into HR. And here's an example of activating values. The first rules in the starter book. The very first words are the following, “At Statoil, the way we deliver is as important as what we deliver.” And when we talk about the way we deliver, we talk about the values in this book and behaviour. This decision came from our CEO, and to make sure that everybody understood that he was serious about this, he put the weighting between the two. The what and the how, all have consequences for your career, base pay, individual bonus if you're on that system, he put waiting to 50/50. Now you must say that that is a was a brave decision because not too many companies have done that. Some have, but not too many. But on the other hand, it was an obvious decision, because how can we say that we are trying to be a values-based organisation if everything around values is completely absent in setting priorities and goals and evaluating and consequences? That would have been a very big gap between what we said and what we did. By all means, it's difficult to set good behaviour words. It's difficult to evaluate, but again, are we guiding star cannot be to go for what's easy, but we have to go for the stuff that's good for performance.
This, I mention this as it is partly based on the balanced scorecard process and some additional potential bad news around that is that all our competitors, they also use balanced scorecards in some form of shape. So if we want to get competitive advantage, we need to do this in a different and better way. So I want to share with you now towards the end, a few areas where we try to be distinctive. The big difference- combining Beyond Budgeting balanced scorecards makes a big difference. But let me be a bit more specific. One difference is KPI’s. Looking at many of our competitors, their scorecard is mainly about KPIs, very little on the left-hand side, very little on the right hand side and that is a problem. Because of ‘I’. I stands for ‘Indicator’ and why is that the problem? It is a problem to kind of base your entire management on these indicators, because they are indicators, they are not necessarily telling the full truth, right? So it is a very narrow mechanical way of talking about performance and the KPI they need help in this job we give them of being a place where we express targets, and we should measure that we are moving towards these targets. We need something on the left-hand side on the right-hand side to create a broader, richer performance language, and we also need what we call a holistic performance separation. When we evaluate performance, we need to take off the measurement glasses and look at the stuff that measurement and KPIs did not pick up before we conclude. I’ll come back to that.
And Albert Einstein, you probably know his quote. “Not everything that counts can be counted. Not everything that can be counted counts” highly relevant here. Measurement can be a good servant. As a master it can be a disaster. Let me share with you an example of an Ambition to Action just to make this a little bit more concrete. This is actually a screenshot from the system where we keep this and this is actually a Statoil Ambition to Action, and if you're familiar with the balance scorecard, you will recognise that we have these different perspectives down here. We expressed what we are trying to achieve. These are the two relative KPIs I showed earlier and everything above is the stuff we need to be good at in order to make that happen. HSE, by the way, health safety and the environment is extremely important in our business. Today we have around 1400 of these in the organisation and let me use this slide to illustrate a few other areas where we try to be different. The first has to do with creating alignments. Getting this to hang reasonably well together. There's an easy way of doing it, it's called cascading. If you read a balanced scorecard book, they talk over and over again about cascading sitting at corporate level and instructing all the way down the content here. When that happens, numbers are cascaded down, and finance can then afterwards add everything together. All targets can be added together, and it matches the corporate number like the finance have said that yes, we're going to hit this corporate target because all the local targets kind of match the corporate one. Another illusion of control, because if that cascading has destroyed everything around involvement, commitment, motivation, if your own Ambition to Action only becomes a landing ground for instruction from above, then you lose all those good things that you need, and we do have managers and people at Statoil who would like to use Ambition to Action in that way. and we are fighting it every day. One approach we have taken here is to say that it is not mandatory to have an Ambition to Action. That is something that teams choose for themselves and that means that a lot of teams ask us, well should we have an Ambition to Action in our team? And we would say that we think this can be pretty good, but your main motivation for having an Ambition to Action in your team should be that this is something that you and your team perceive as a meaningful value-adding, sensible thing to do in order for you to manage yourself. That should be the main motivation and not that this is imposed from above and it's just another part of the big control system. At the same time, we need alignment. This can’t be anarchy. There is an alternative way to achieve that, we call it translation instead of cascading. And translation means that when this team makes an Ambition to Action, they would look at other relevant ambitious actions, one above, maybe a bit further off, maybe all the way up a bit left and right. If they have relations this way and that team needs a big, long discussion about what does our Ambition to Action need to look like in order to reflect direction and ambition levels of those that we have a relation to. If such a translation should go wrong, which is almost a non-issue, then of course the level above should intervene and do what they are paid for, that is not a problem. One reason maybe for this not being a problem is transparency. All of these Ambition to Actions are open for everybody. There is some information that we need to close because it's share sensitive.
On top of that, unfortunately, I see some managers closing additional information, but the principle is open for everybody and that creates the control mechanism. It's harder to kind of hide away with a stupid Ambition to Action if everybody can see it. The other reason we need transparency is that, how can you translate unless there is transparency? Translation does not mean that we never instruct from above. There are situations when that is the right thing to do, but it should be more the exception than the rule, and that it's also more accepted when it happens. The last issue around this one before we move towards the end has to do with time. We used to have annual versions of Ambition to Action. Not anymore. So, every year we made a new one in the autumn. Not anymore. Now all these teams can change whatever they want on their own Ambition to Action when there is a need for it. Typically, that doesn't mean changing all of it. It means adjusting parts and so on. You can change that team objectives if strategy changes, you can change KPIs if these objectives change, or if you simply find better KPIs. You can even change these KPI targets if they have lost their meaning, and lost their meaning can mean two things; either this target is impossible to achieve, everybody laughs about it. Those targets don't work. They don't inspire them or motivate. They've only one purpose left. That's punishment. That's not that motivating, OK. Or it could be the other way around that this target is a piece of cake. The only control mechanism that we have put around this is to say that if you want to change something that's big, you still need to seek approval at one level up, but you can do that at any time. If you want to change something that's small, you only inform the level above. Big or small, make sure that you inform those affected next to you, so this is the coordination part of it. And then we have left to the organisation to decide for themselves what is big and what is small, because when we introduced this, some said that, well, this is nice, but you have to tell us, make a corporate instruction about what is big and what is small for all these Teams. Impossible. So we didn't do that. It's decided more locally. And that means that someone over here might end up with a different definition of being small and somebody over here and that is OK, as long as this works in both places. So back to self-regulation and the traffic metaphor, we would like to make this process as self-regulating as possible. Is this difficult? Yes, for some people. The calendar year is hardwired, so even if we have a load for this, some people continue to work in annual cycles. In some areas you are forced to it by kind of external actors but we are kind of slowly seeing that people are starting to use more and more of this this opportunity.
Targets and forecasts horizons, time horizons and time. We want targets to have natural time horizons. Why should all targets have a deadline of end of December? Is that just because of the link to pay and is that a good enough reason? No, it isn't. So targets should have natural time horizons, from short if there is urgency and it's possible to deliver in three months, some targets might be longer. If it's more complex then you need more time. We haven't banned, I mean, end of December targets that might make sense in some places, but we're trying to get either to set natural target horizons. That does not mean that we can't sit down like we still do once a year and talk about and discuss the value of performance in performance dialogues. We still have an annual cycle on that, although we have started that discussion as well. But then you can, I mean in those discussions, some would look back on an Ambition to Action that's been quite dynamic, other areas? Nothing, nothing much has happened, so there's no problem combining dynamic and this fixed rhythm of evaluation. And by the way, dynamic here does not necessarily mean more often it means at the right time. A lot of people think it's kind of always more often - it means at the right time.
Last but not least – Forecasting. For the financial people in the room, You will be familiar with rolling forecasting, which is much better than traditional forecasting, typically updating your forecast every quarter looking five quarters ahead. We chose not to do that because we were about to do it, but then we realised that there was quite a lot of variety in the business rhythms across the board here, so why should we force everybody into a forecasting rhythm with the same frequency at the same time horizons for everybody. So we instead introduced what we call dynamic forecasting. So here teams update the forecast when stuff happens and after as far as relevant in their business reality. If that is too short for somebody up there, we ask the guys after to fill generically that hole instead of forcing everybody to. Kind of accounting position to do it from bottom up.
Let me finish with a holistic performance evaluation. I've touched upon that a few times and holistic means two things. First of all, not just looking at business delivery, but also behaviours defined by their own values, counting 50/50. But holistic also means when we assess Ambition to Action and delivery, it's not just the question or looking at those KPIs and then concluding red or green, because if that is what performance evaluation is about, just reading the colours of these KPIs, then the only qualification you need as a manager to do that job at least is that you are not colour blind. And I think we should have some higher requirements for all managers. So we do measure, we do, but then we take off the measurement glasses and then we pressure test management through some very simple questions before we conclude, have you really moved towards those objectives? How ambitious were those targets? Should we punish teams who stretched and didn't make it compared to those who lowballed and made it? Very often, those things are more visible afterwards than before. Has there been significant changes in assumptions, tailwind, headwind of such a nature that should be taken into account? We should take everything into account, but big issues should be taken into account both ways, and it's only when we have concluded these questions that we can have a view on performance here. There was a 3 on delivery, a 4 on behaviour, and that outcome rating is the basis for development plans for all employees and also rewards, meaning base salary adjustments for everybody outside the regulated area and individual bonuses for those on individual bonus. So we do have individual bonuses in Statoil, quite modest compared to our competitors. But I think the important thing is that we have this holistic evaluation in between, so it's not a straight mathematical line between this is your KPI performance and this is your bonus. Very very dangerous.
So to close off, going back to the metaphor, I hope you've seen that the stuff that we are trying to do is very much about trying to move the sentiment of how we manage towards this, where you're managing into something more self regulating, whether it comes to cost or risk or translation or thinking relative KPIs or transparency. This is an attempt to simplify, but the simplification, if you think back to the management process I mentioned the leadership dimension, the simplification is very much in the management process side. On the leadership side, I mean, a lot of leaders would perceive this as more challenging and the old model as more simple. But again, our guiding star cannot be to go for the stuff that's simple because it's simple. We have to go for the stuff that's good for performance, and on the leadership side, that is sometimes a bit more difficult.
Let me close here. I don't need to make it commercial for the round table here, but then if anybody wants to follow me on Twitter that's highly appreciated. I only tweet about Beyond Budgeting and Sanders? was alluding to earlier, this is the short version and the long version is in this book, which I wrote, not just about Statoil, but also what we did way back in 1995.
[Question from the floor]
How do you start an organisation …[inaudible]
BB: Right. It's a highly relevant and good question, and, I mean, well, you know. Going back to my introduction, I mean most small companies, they aren't born Beyond Budgeting, they become something else as they grow. And our case was that we had become something else by growing and adopting a lot of traditional management processes. So how do you, and it's much harder to kind of change that than to start out and kind of stick to it. Yeah. If you recall, when we started off this talk, I said the 12 Beyond Budgeting principles are a bit big, a bit scary. So we didn't start off there in the beginning. We started with this separation of the budget purposes saying that here are these three different purposes. We want to separate it because there are some problems with combining this. And that doesn't scare anyone. It's pure logic, right? So, but once you have separated, once you move into those improvement discussions, then very often, you indirectly come into to these bigger issues of how can we set targets that are robust againstt the dynamic world, what sort of resource allocation mechanism do we need if we say in our values that we really trust people, so we've seen it over and over again that you're coming into this bigger issues in a less scary way. So I mean, I've been in companies and seeing CEO's who have understood all of this and what it is from day one. It's a wonderful situation to be in. There was a Norwegian bank, for instance, that was in that situation. But that unfortunately so far is more the exception than the rule. Then, if that's not the case, I recommend we'll start with separating these three purposes, target setting, forecasting, resource allocation and try to move on with good discussions about how that can be, taking the reality seriously and very often you'll find yourself started. And of course, the little bit dangerous thing with that is that some are getting stuck at this point. They introduce some rolling forecasts and maybe they just separate targets, but it's all targets just like before and resource allocation is more or less like before. And then they think they've gone Beyond Budgeting. So that's of course the risk. And I also seeing companies starting out only doing what they said, we want to do Beyond Budgeting and isn’t it all about rolling forecasts? We’re gonna do rolling forecasts, that's a great thing. And they do that without the thought about well, how will we then do resource allocation and target setting? Well, they have thought about it, of course we will do it in the rolling forecast process! And if they do that, the only thing they have done is to implement rolling budgets, right? 4 times a year they have solved so much of the budget problems. So that's the danger of kind of getting stuck in the separation and not moving into the improvement phase. But that is one way of getting started. In general, beyond that, I always recommend people considering this journey spend quality time upfront discussing together what kind of problems are we trying to solve. Because nobody is happy. But what people are unhappy about might vary so, unless you align the kind of case for change your implementation will be messy. And beyond that, very often they start on the financial side, for, you know, for maybe some obvious reasons, but the more finance can join forces with HR the better, the stronger you become. In the bank I talked about, they started off in finance. They now moved the responsibility for coordinating this to HR because they've seen that the issues are not around relative KPS and rolling forecast. That's not the challenge. It's all about people and culture. Finally, don't decide to do 100%. I mean decide to 80% on these new processes and then you jump, and then you sort out the rest afterwards. We've seen it over and over again that I mean, yes, there will be issues that you hadn't thought about and so on. So start out, experiment a bit and get started instead of planning too much. And talk to other companies. Join the BBRT, Read my book and the other great books!
Questions from the floor:
You said you have 1400 Ambition to Action plans at Statoil and I wanted to be able to get further into the alignment process because there has to be some consistency of those plans. So either it comes from the Top that's what you call cascade, and that's what you don't do. You mentioned translation. Even though there is no starting point and everyone is picking up their own target ambitions. It can go in very different directions and there is no wrong directions as in the first place there was no general direction. So how does the translation process work? How do you end up with some consistencies?
BB: Yeah, I think what you’re after is kind of reasonable consistency, but not kind of mathematical alignment. And one mechanism is transparency- simply that you make it open so that people can see. But you know this is quite organic. We've just had an shock now because as I mentioned, there's been a big reorientation in the oil business, from volume and growth into value and more cost focus, which I think is good because we've been too volume and growth driven. and that kind of quality strategic reorientation has kind of syphoned through these ambition directions in a very inorganic way. None of us at corporate has kind of been sitting on top and checking all the way down at these objectives at what is now changed and so on,
I surf a lot around in Ambition to Action, looking at different Ambition to Actions and I can see the focus shifting. I can see revised strategic objectives. I can see different KPIs. I can see different axioms reflecting these messages from the top about yes, we need to change the focus here. So, And of course, nobody has, 1400 is, well, it's a big number, but nobody has a relationship to all 1400. You have a relationship to your own to the one above, maybe a few above further up, some left and right. And of course, if you have teams reporting to you, you have a relationship to those. So in a way because self regulating because if everybody makes sure that the ones around me are kind of reasonably aligned and that happens at all levels, it kind of falls in place in a good enough way. Is it mathematical consistency? No, Is it a sufficient point in the same direction? Yes.
Question from the floor:
In Norway in the media we read a lot about ….[indistinct]
BB: It's a good question and what the media writes is partly true, partly wrong. It's wrong when it comes to, I mean, we are hammered because people are saying that we are kind of reducing significantly our investment levels, which is not true, we are investing around 20 billion US dollars a year. That's where we will end up this year. We’ve never invested that much money, but it is true that we had forecasts not that long ago that showed us that if we didn't do anything, we were heading towards a much higher level and we knew that this is not sustainable. We don't have the money. We don't have the people to do this and so on. So compared to that, yes, we are reducing from that level, but anything else would have been irresponsible. In addition to that, we are also reducing some other costs. It is coming through benchmarking. We are doing a lot of benchmarking. We did some years ago around support services and through HACKETTS. If you know that organisation and the conclusion was that we are, quality wise, we were doing great cost wise we were quite expensive compared to some competitors. One reason was that we have decided to keep most of our employees in Norway and Scandinavia or in other kind of high-cost places, we were re not doing that much outsourcing. So we have done somewhat more outsourcing now and we are also reducing some cost.
I mean Beyond Budgeting never kind of allowed for reducing activities, reducing cost. It will not be a sustainable model. If you think back to the menu I was showing about different ways of managing cost, that option to the left is what kicks in. The starter book says a little bit about it which I wanted to share with you. [Reads from book] “Cost targets are established if and when necessary. These are primarily set using reality targets. Absolute cost targets may be set if a significant change in activity and cost level is required but these must be set at the overall rather than the detail level to secure the necessary flexibility”. So I think the issue for us is less, do we have more of those in the range of 1000 KPIs that is not the main issue. The main issue is how do we avoid kind of falling even further to the left that those are converted into something that looks like detailed budgets. So but it it's a relevant question of and of course there are people that say that What if? Why couldn't we just go back to traditional budgeting that will make all of this so much easier? and I agree, it would have been easier, but I don't think it would be better.