Discover how Norwegian company Statoil are moving towards innovative management models in this article by Bjarte Bogsnes, Statoil’s Beyond Budgeting Institute Senior Advisor Performance Framework. Bjarte is travelling to Australia in March 2018 to share his experience at The Deep Dive, and to offer an exclusive one-day workshop in Melbourne.
This article was awarded a Harvard Business Review/McKinsey Management Innovation Award.
In 2005 Statoil started on a journey of radically changing our management processes, which included abolishing traditional budgeting. In 2010 we also decided to “kick out the calendar”. These were both key steps towards a more dynamic, flexible and self-regulating management model.
Statoil is a Norwegian oil and gas company with activities in 34 countries, 20,000 employees and a turnover of around US $90 billion. The company is listed in New York and Oslo. On Fortune 500, it ranks #67 on size but #1 on Social Responsibility and #7 on Innovation.
During years of growth since Statoil’s foundation in 1972, traditional management processes were introduced brick by brick, causing increasing bureaucracy and rigidity. The gap widened between what we said in our leadership principles and what we did in our management processes.This is poison in any organisation, making the leadership message hollow because the process message is always stronger. What we do always weighs so much more than what we say. “You are all great and the company would be nothing without you, but we still need to control you through detailed budgets, rules and regulations”. It does not help to have Theory Y leadership visions if you have Theory X management processes.
We wanted to close such gaps. We also wanted to find our way back to the agility and flexibility we had as a smaller company. The growth journey of companies shares many similarities with the aging process of humanity. As we grow older, we lose more and more of what we took for granted in our younger days; the agility, flexibility and spontaneity of youth. Having passed fifty, I am starting to get some personal experience! As age takes its toll, some also get weary of life and lose their spirit and that twinkle in the eye. This development in the human body and mind is irreversible; we have no choice.
Companies, however, have a choice. Companies are not destined to become slow and sad places to work because they grow and become older. Most of what causes this are decisions that companies make themselves, and cannot be blamed on destiny or on any aging process.
For humankind, older normally also means wiser. For companies, this is not necessarily the case, as they struggle to capitalise on a mountain of collective wisdom and experience acquired during the growth journey. The solution is often another new process, “Knowledge Management”. Many employees experience instead a “Dumbing Down” trend, as they observe more and more strange decisions made further and further away from their own reality.
Of course, one cannot manage a big company exactly like the small company it used to be. But could there be alternatives? Could there be other ways, ways which better balance the benefits of being big – which of course are real and important – with the benefits of being small?
The big question for any large organisation should be: “How can we revitalise the agility of the past without having to go back and start all over again? How can we be small and big at the same time, young and old, brave and wise?”
The budget and the whole mindset behind it might be a good place to start.
Challenges and Solutions
Real and sustainable change requires a solid case for change. While almost everybody complains about the budgeting process, fewer understand that their problems are only symptoms of a much bigger and more serious problem, rooted in the entire management model.
So we started out with something more tangible and logical and also less threatening. We simply asked: “Why do we budget?”
Most companies make budgets for three very different reasons: target setting, forecasting and resource allocation. Those budget numbers represent a set of targets, a forecast of what the future might look like, and an allocation of resources for next year. But these are all different things. The three purposes can’t meaningfully be handled in one process resulting in one set of numbers. A target is what we want to happen. A forecast is what we think will happen, whether we like what we see or not. And resource allocation is about trying to use our resources in the most optimal and efficient way.
An ambitious sales target can’t at the same time also be an unbiased sales forecast. And you rarely get a good cost forecast if the organisation believes this is their one shot at access to resources for the next year.
Our solution to this serious problem was dead simple. We separated the three purposes, which made it possible to optimise each one in much more tailored processes.
The separation was a catalyst for all those bigger issues that we need to address. It led us into important discussions, whether we wanted it or not. How can we find targets that really inspire and stretch without feeling stretched, while avoiding all the gaming and negotiation that adds no value at all? How can we make simple and unbiased forecasts, free of all the hidden agendas? How can we make people spend money as if it came from their own pocket? How can we move towards a management model which works more with and less against human nature? How can we be big and small at the same time? How can we take reality seriously? These are important questions for any large company. We have absolutely not solved them all, but we have definitely started.
Where possible, we try to use relative instead of absolute and decimal-loaded targets. Relative targets redefine performance. They address how we are doing compared to others, internally or externally, instead of a myopic focus on fixed and decimal-oriented numbers.
The power of comparison is fascinating. I have yet to hear a team coming out low (given they find the benchmarking fair and relevant) announce that they have no ambitions about climbing on the ranking. This is a much more self-regulating approach compared to the traditional budget game which stimulates the very opposite mindset, the one that drives managers to negotiate for the easiest achievable number. As Michelangelo put it: “Our problem is not that we aim too high and miss, but that we aim too low and hit”.
Statoil’s main financial targets are set against a peer group of fifteen other oil and gas companies. We aim to be in the first quartile on Return on Capital Employed, above average on Shareholder Return, and in first quartile on Unit Production Cost. These are the kind of financial targets our Board approve. They do not approve a budget. The two first metrics are also key in our common bonus scheme. Everybody in the same boat; us against the competition.
We also introduced a dynamic resource allocation which provides much bigger and more flexible decision authorities to local teams, and a much more dynamic rhythm.
We have no cost targets at all, but we discuss cost all the time. We try to make decisions at the right time and at the right level. Being a capital intensive and value-chain organised company, every single decision can’t be made at each platform or plant. But given this industrial setting, we try to make decisions as far out in the organisation as possible.
Our CFO Torgrim Reitan said: “We could easily put in place a cost program instructing all business areas to reduce costs by a given number. I believe this would work against our intention of building a cost-conscious culture. If we want to become more fit, a crash diet does not work. It takes a change of lifestyle. I believe Statoil is made up of competent, responsible and commercially oriented people who will make the right cost decisions. This means always working hard to reduce bad cost, while protecting good cost. You know better than me what these are and where they are”.
The question we want everybody to ask when making cost decisions is not “do I have a budget for this?” but:
- Is this really necessary?
- What is good enough?
- How is this creating value?
- Is this within my execution framework?
In addition, we must always consider capacity, both financial and human. As things look today, can we afford it, and do we have the people to do it? This information would typically come from our latest forecasts.
Last, but not least, we have introduced a more holistic performance evaluation, with hindsight insights as a key component, and with how we have achieved our business results counting 50%. How can we claim to be a values-based organisation (as we do) if our values and people and leadership principles are completely absent in target setting and performance evaluation?
We also “pressure-test” measured business result. KPIs are indicators only; they often struggle with telling us the full truth. As Albert Einstein put it: “Not everything that counts can be counted, and not everything that can be counted counts”. We therefore use hindsight insights – the wealth of information unavailable for us at target setting time. We ask, for instance, have we really moved towards our longer term objectives? Was there significant tailwind or headwind that should be taken into account? Are results sustainable; will they stand the test of time?
These evaluation principles are examples of how we try to address the entire process, not just the “finance” part. I am based in finance, but we have worked closely with HR to make it all hang well together. This is not always the case. Both finance and HR would claim to work with “performance management” (an expression I dislike), but in many companies they don’t talk well together. The two are much to blame for gaps between what is said and done. Both need to climb out of their silos and start talking with each other and not just about each other.
Introducing ‘Ambition to Action’
We do all of what you have read above in “Ambition to Action” – our management process which runs all the way from strategy to people, ending up in what we call “People@Statoil“. Ambition to Action is based on the Balanced Scorecard concept, but combined with the Beyond Budgeting principles it becomes a much more unique and robust management model, solving many of the problems often seen in more conventional Balanced Scorecard implementations.
Beyond Budgeting is a coherent set of leadership and management principles. The name is actually misleading; it is about so much more than budgets, it is about taking reality seriously.
But changing how we think about management and leadership also requires a radical overhaul of the budgeting process, because it sits at the core of traditional management. You have actually been introduced to many of the principles already. (Take a look at bbrt.org for more information about this great model, which has inspired and guided so much of the Statoil journey.)
Ambition to Action has three purposes:
- Translate strategic choices into more concrete objectives, KPIs and actions
- Secure flexibility and room to act and perform
- Activate our values, our people and leadership principles
An Ambition to Action starts with an ambition statement, a higher purpose. Call it a vision, call it a mission. We don’t care, as long as it ignites and inspires. The Statoil ambition is to be “Globally competitive – an exceptional place to perform and develop”. This is translated into different versions across the company. One of our technology teams chose for instance “Execution for today, solutions for the future”. In our team, we “challenge traditional management thinking”.
Ambitions and strategies are translated across five perspectives:
- People and organisation
- Health, safety and environment (HSE)
- Finance (or Results)
You might recognise these from the Balanced Scorecard concept. We have added HSE because of the business we are in. In addition we have switched the order (“Finance” is typically on top), because we know what happens in business review meetings when the agenda is tight and time is limited. “Let us come back to people and organisation next time…” Those are not the signals to send if we claim to be a people-focused organisation. So now “People and organisation” sits at the top. Another small gap closed between what we say and what we do.
Today, we have around 1200 Ambition to Actions across the company. We try to connect and align all these through translation (each team translating relevant Ambition to Actions, typically the one above) instead of cascading (corporate instructing). What should our Ambition to Action look like in order to support the Ambition to Action(s) above? What kind of objectives, KPIs and actions do we need? Can we use those above, or do we need something sharper because we are one step closer to the front line?
There are of course situations where instructions and cascading from above is necessary. But this should be the exception and not the rule, which makes it more acceptable when it happens. We are starting to find the right balance between the two, even if some managers still rely too much on cascading.
In short, we want Ambition to Action to be something that helps local teams to manage themselves and perform to their full potential, while we at the same time secure sufficient alignment. The main purpose should not be centralised command-and-control.
The years following our 2005 decision were a period of experimenting and learning. We have used some simple implementation principles:
- Design to 80% and jump. Not everything can be planned or fully designed upfront. Get started, experiment, learn and improve.
- Make sure the case for change and the problems with the old way are well understood before talking about the new way.
- Go for pull, not push. We have no detailed roll-out schedule; we never even used the word. So many are fed up with being on the receiving end of corporate ”roll-outs”, again and again. Instead, we focus on teams that invite us. Not once did we put our foot in the door because “this is decided”. It takes longer, it looks messier, but change becomes real and sustainable.
- We are however present in most of Statoil’s leadership programs and also in all introduction programs for new employees.
Kicking out the calendar
In 2010 we were ready for the next step; escaping the calendar straightjacket. The purpose was to make Ambition to Action even more useful and relevant for all our business teams.
In April we went to the Executive Committee with our proposal to kick out the calendar. We got a strong and clear green light.
January-December is an artificial construct from a business point of view. Imagine a finance guy meeting a fisherman, asking him about the rhythm of his work. “Well,” the fisherman replies, “I am at sea for five months, and then I am home for five months.” “So what do you do then the rest of the year?” the finance guy wonders. Something is wrong, right? Absolutely, but maybe more in the head of the finance guy than in the working rhythm of the fisherman.
Our statutory accounting and our communication with external parties and the capital markets will of course still need to be calendar-oriented, but our internal processes could have more natural rhythms. We want to free ourselves from the artificial, annual “stop/start/stop/start”. We want to give our teams the opportunity to run their business more continuously, with update frequencies, time horizons and evaluation points driven by their own business flow.
The main principles in our new and fully dynamic process are as follows:
- No annual versions of Ambition to Action. Strategic objectives, KPIs, KPI targets and forecasts can be changed when deemed necessary by teams themselves.
- Event-driven changes, not calendar-driven. Events can be external or internal, and the definition is simple: “Whatever is important for your team”.
- Simple change and coordination controls. Big changes should be approved one level above, with smaller changes simply communicated. Big or small, always inform other affected units if necessary. Teams sort out between themselves what is big and what is small.
- Target and forecast horizons should reflect lead times, urgency, uncertainty and complexity in the different businesses.
What has triggered most questions is the possibility to change targets at any point in time. A target should motivate and inspire. It is not a goal in itself, but one way of achieving the ultimate goal of the best possible performance, given the circumstances. Targets set by teams themselves typically do this job much better than those coming as instructions from above.
The dynamic forecasting we are introducing is different from what is often called rolling forecasting. “Dynamic” doesn’t necessarily mean more often – it means at the right time. A rolling forecast is done on a fixed frequency and on a fixed time horizon across the company, often quarterly and five quarters ahead. We want forecasts to be updated when something happens, and as far ahead as relevant for each unit. Why should all teams be forced to look ten years ahead because aggregated this is a relevant time horizon for an oil company? For our oil trading people, anything beyond three weeks can be quite foggy, while three years is very much on the short side for those bringing new oil and gas discoveries into production.
Benefits & Metrics
Kick-off on this latest step was in January 2011. It is still early days and we still have many questions. How should previously well-regulated and understood situations now be handled? How often? How far out? What is “big” and what is not? All this uncertainty has however been well accepted. People are enthusiastic about the learning and adjusting phase we now are in. They would rather be part of finding out than just being told.
There are other exciting things happening. Our IT colleagues actually started out on their own, inspired by the great Lean and Agile thinking which is now transforming how system development projects are run. One such approach, “Scrum”, was introduced in Statoil several years ago. We stay in close contact because there is so much common ground, both in what we rebel against and what we are trying to do instead. They also realise that a company can never be fully successful with Agile software development unless Agile also becomes the way the whole organisation is run.
Our new and more dynamic principles are in no way easier than those we are trying to leave. Here are some of our key messages:
- You have more autonomy and flexibility, but also higher accountability for results
- Use your autonomy; don’t delegate upwards – and let it pass on to your teams
- Don’t give up when trust is abused, but react firmly to those who do
Our discussions are not about going back, they are about how to make it all work even better. Of course we have our dark days, when we hear words or observe behaviours echoing the past that we are trying to leave. We have however an effective medicine for those days. We just think back on where we were five or ten years ago. That always helps. And if we make similar advances over the next five years, then…
This is an edited version of Bjarte’s original article, which can be found here.