Most leaders are obsessed with planning and control. They have earned the right to be in charge. Launching a new plan or campaign is how they learn to drive people forward to the next profit milestone. Though this annual planning process absorbs large amounts of time and effort, it tells everyone what they must do for the period ahead. Its self-fulfilling purpose is to eliminate any surprises. But this approach is myopic. Surprises occur all the time. If they are seen as opportunities to be grasped rather than problems to be avoided, then organizational life will be more interesting and rewarding. But only by devolving strategic decision-making to front line people will the speed of response be sufficient to enable such opportunities to be taken. They need information and they need clarity of vision and purpose. This is much more than a destination. As Wheatley suggests, ''we should start by recognizing that in creating a vision, we are creating a power, not a place, an influence, not a destination'' (Margaret Wheatley, 1999). Such an approach to strategy development will build greater capability for responding to events as they happen for the following reasons: 2
4.How can this new model work in the Borealis companies all over the world? 5
Let us address the Scandinavia point first. We can only speculate, but there are four reasons why Scandinavia organizations adapt readily to a more market-responsive and devolved style of management. First, it's a closely-knit business community where imaginative ideas travel quickly. Secondly, Scandinavia has a high proportion of global companies relative to its size, and thus they have plenty of experience of uncertainty. Thirdly, financial budgeting conflicts with the nation of intellectual capital, an idea that also had its genesis in Scandinavia. And fourthly, Scandinavian companies are fortunate in having a predominance of well-educated people with the self-confidence to accept the high-levels of responsibility demanded by the new model. Whatever, we are sure it is not some peculiar culture phenomenon. Much the same question was asked at a conference, Thomas Boesen, of Borealis, replied that Scandinavians are quick to ask why? They are not afraid to ask senior executives why they want plans and information if they can't see the value in it themselves. (Cima, 2008) 5
As earlier movements such as quality and knowledge management have demonstrated, it is the consulting community that propagates the message and supports the change programs essential to success. They have an excellent record of adapting ideas to local cultures. The idea of breaking free from the performance contract has already permeated many organizations in a number of countries. Here are some examples for countries Borealis have production facilities. In the UK, organizations such as Bulmers, have adopted the ideas in a serious way, and large organizations such BP-Amoco have taken tentative steps. In Scandinavia, a number of large companies have adopted the principles of beyond budgeting. In continental Europe, Rhodia (France) and Philips (Holland) have embraced the ideas, and UBS (Switzerland) and Siemens (Germany) are on their way. (Cima, 2008) 5
5.Limitations 5
6.Conclusion 6
7.References 6
Introduction
Borealis is a chemical industry company, which belongs to the leading producers of polyolefins. The company was founded in 1994 through a merger of the petrochemical divisions of two Scandinavian companies. Characteristic attributes of the petrochemical industry are the high technology dependency and therefore also a high importance of allocation of resources. Besides the petrochemical industry is a very cyclical business, e.g. the input prices are highly volatile.
In the following sections we are going to analyse with the help of borealis' why traditional budgeting systems with an annual budget are not the best way to control and manage a company. Therefore we show different management tools - they are summarized under the item of "Beyond Budgeting" - , which are much more appropriate to manage a company in a dynamic environment. At the end there will also be demonstrated some limitations of the new management tools.
Failings of the traditional budgeting systems
Budgets have several functions in a company. They are used for planning, performance measurement and compensation, control, strategy formulation, motivation, communication and coordination.
A main criticism of the traditional budgeting systems is that these different functions create a conflict of interest. For example for planning function the budget should consist of realistic prognoses, whereas for the motivation function the expected numbers should be challenging. Because of this reason Bjarte Bogsnes, Vice President of Corporate Control of Borealis, rightly says, that forecasts and targets "should not be the same number". It will not be possible to get accurate and honest forecasts if bonuses and performance measurement are linked in some way with the forecasts.
Another criticism of the traditional budgeting systems is that the budgeting process is very time-consuming and resource-intensive. Some estimates arrive at the conclusion that controller spend up to 50 per cent of their work time for the planning of the budget. Furthermore due to the fact of the long time to prepare budgets are already at the time of realisation antiquated. They underlying assumptions are based on antiquated assumptions and therefore the budget becomes worthless.
In addition traditional budgets animate to gaming behaviour in the setting and the achievement of budget figures. Managers try to negotiate the lowest target numbers for themselves. For example they put cost buffers in their budgets.
These failings of the traditional budget systems were also observed at Borealis. The controller of Borealis assessed that the results of the budgeting process become worthless because of the changes of conditions and the different aims of the budget lead to conflicts of interest. Hence Borealis searched for new methods to find a better way to achieve the different mentioned aims of the budget.
Managing and Controlling without Budgets
Most leaders are obsessed with planning and control. They have earned the right to be in charge. Launching a new plan or campaign is how they learn to drive people forward to the next profit milestone. Though this annual planning process absorbs large amounts of time and effort, it tells everyone what they must do for the period ahead. Its self-fulfilling purpose is to eliminate any surprises. But this approach is myopic. Surprises occur all the time. If they are seen as opportunities to be grasped rather than problems to be avoided, then organizational life will be more interesting and rewarding. But only by devolving strategic decision-making to front line people will the speed of response be sufficient to enable such opportunities to be taken. They need information and they need clarity of vision and purpose. This is much more than a destination. As Wheatley suggests, ''we should start by recognizing that in creating a vision, we are creating a power, not a place, an influence, not a destination'' (Margaret Wheatley, 1999). Such an approach to strategy development will build greater capability for responding to events as they happen for the following reasons:
Customers are at the center of strategy: Moving from fixed annual plans to market-responsive strategies places the customer at the center of strategic management. Knowing their needs and satisfying them profitably is the new focus of attention unbridled by rigid plans agreed months earlier.
Everyone is potentially involved. Executive leaders do not have a monopoly of wisdom. Opening up strategy to a wide range of people who have different ideas can only enrich the process.
Strategic capabilities are extended. Devolving strategy to teams closer to the customer will enhance the strategic capability of the whole organization. (Jeremy Hope, Robin Fraser, 2003)
In place of budget-based controls Borealis will have more controls than ever before. For a start the company will see a huge improvement in the accuracy of forecasts. Because no one is fiddling with forecasts and trying to paint a rosier picture than the real numbers suggest, the distortions will largely disappear. Borealis will also see more trends, moving averages, and leading indicators. It means that Borealis will focus more on managing the future than the past, and this provides much earlier warning signals that tell us if performance is about to run off course, giving us more time to review strategy and make the right decisions. Moreover, fast information reaches different organization levels at the same time thus providing an interlocking set of controls that was never there in the line management system. There really is no place to hide in this organization. People are exposed and fully accountable for results. (Jeremy Hope, Robin Fraser, 2003)
Most organizations and Borealis declare that aim is to be customer focused or market responsive. But implementing a market-responsive strategy and then trying to coordinate plans centrally makes no sense at all. Business units need to coordinate their plans dynamically, as the market dictates. They need to see themselves as suppliers of products or services to either internal or external customers, as elements in a coherent value delivery system. In other words, instead of being directed to supply a particular product or service to another unit, business units are tied together with ad hoc agreements that are made according to the prevailing demand in the market. Of course some agreements need to cover, say, a quarterly or even an annual period, because central service facilities need time to increase or decrease their capacity. But the fundamental change is from central planning to dynamic supplier-customer relationships. This means that teams are accountable to bosses. Such an approach has a number of benefits:
The organization is seen as a whole system rather than a number of parts. The emphasis is on providing the external customer with an excellent service, not pleasing the next boss up the line.
There is less waste. Most traditional organizations de-couple their business processes and manage each part to optimum efficiency. However, this usually means they produce for stock rather than customers causing less quality and more waste in the system as a whole.
It recognizes the importance of teams. If organizations are a complex web human relationships rather than a machine, then recognizing the mutual responsibilities of teams is crucially important. (Jeremy Hope, Robin Fraser, 2003)
Rolling forecasts in the traditional company are aimed at helping managers to focus on meeting the current year's budget. They have no other strategy purpose. They are, more often than not, no more than a recompilation of the budget and lead to managers taking appropriate actions that enable them to meet their agreed targets. In beyond budgeting companies like Borealis, rolling forecasts have a different purpose. They principally help managers to break away from the annual budgeting cycle and take decisions based on a moving picture of information concerning the likely outcome of existing trends. This supports devolved management process by placing front line people more in control of their actions than would otherwise be the case. The important issue is that forecasts are separated from the line management system. Borealis achieves this by looking at forecasts from the perspective of legal entities within the group rather than from the perspective of business divisions. While the line management runs through the division, the legal entity view does not have anyone at its head with line responsibility. So flow and tax planning. The two purposes are different and do not overlap. There is, however, one major caveat with rolling forecasts. They will be of little or no value of they are seen by senior managers as a tool for questioning or reassessing performance targets. Nor they must be used to demand changes or improvements. If forecasts show a significant change and such a change has not been explained beforehand. Managers should be responsible for dealing with problems and reflecting any corrective actions they taken in their revised forecasts. (Jeremy Hope, Robin Fraser, 2003)
How can this new model work in the Borealis companies all over the world?
Let us address the Scandinavia point first. We can only speculate, but there are four reasons why Scandinavia organizations adapt readily to a more market-responsive and devolved style of management. First, it's a closely-knit business community where imaginative ideas travel quickly. Secondly, Scandinavia has a high proportion of global companies relative to its size, and thus they have plenty of experience of uncertainty. Thirdly, financial budgeting conflicts with the nation of intellectual capital, an idea that also had its genesis in Scandinavia. And fourthly, Scandinavian companies are fortunate in having a predominance of well-educated people with the self-confidence to accept the high-levels of responsibility demanded by the new model. Whatever, we are sure it is not some peculiar culture phenomenon. Much the same question was asked at a conference, Thomas Boesen, of Borealis, replied that Scandinavians are quick to ask why? They are not afraid to ask senior executives why they want plans and information if they can't see the value in it themselves. (Cima, 2008)
As earlier movements such as quality and knowledge management have demonstrated, it is the consulting community that propagates the message and supports the change programs essential to success. They have an excellent record of adapting ideas to local cultures. The idea of breaking free from the performance contract has already permeated many organizations in a number of countries. Here are some examples for countries Borealis have production facilities. In the UK, organizations such as Bulmers, have adopted the ideas in a serious way, and large organizations such BP-Amoco have taken tentative steps. In Scandinavia, a number of large companies have adopted the principles of beyond budgeting. In continental Europe, Rhodia (France) and Philips (Holland) have embraced the ideas, and UBS (Switzerland) and Siemens (Germany) are on their way. (Cima, 2008)
Limitations
For Borealis the abolishment of the traditional budget systems and especially the use of rolling forecasts and balance scorecard were a big success. The question is if this is also valid for other companies?
Because of the different critics of the traditional budget systems you can state that the traditional budget systems are not the best way to control and manage a company. However the way how Borealis solved the problems with the traditional budget systems is not adequate for every company. Different characteristics of companies and markets are crucial for the adoption of different management tools. Therefore there could be better instruments for other companies to set their targets instead of for example using the balance scorecard. Moreover the design of the balance scorecard, for example how many Key Performance Indicators should be used or how the Key Performance Indicators should look, depends from the company and the economical environment, in which a company operates.
A further limitation is that change from a traditional budget system to a coherent controlling model never ends. Companies have to search for better alternatives all the time and they have to react to changes in the environment of the companies.
Conclusion
In summary the change from the traditional budget system to a new way of controlling and managing was a big success for Borealis. In a complex economical environment the traditional budgeting systems are not sufficient. The new management tools helped borealis to become more flexible in managing the company and to overcome many limitations of the traditional budget systems. You also see at the case of Borealis that the change to a new system never ends. For example Borealis assesses in the year 2000 that they had include to many Key Performance Indicators in their balance Scorecard. Therefore they reduced the number of Key Performance Indicators and they gave the right to develop own site-specific indicators.
