It might seem laughable today, but Bob Stoffel, the head of UPS’ supply chain, wasn’t being arrogant last December when he said the company was forecasting oil to remain at $78 a barrel and remain steady for 2011.
He was following traditional budgeting and forecasting models. But no amount of scenario planning can foresee the impact of revolutions in Tunisia, Egypt, Libya and throughout the Middle East, along with the devastation in Japan.
Today, a barrel of crude sits at $113.87, creating a ripple effect on cost structure throughout the world. It is a prime example of how increasingly difficult it is for large companies to maintain centralized command-and-control approaches to management.
According to Bjarte Bogsnes, vice president of performance management development at Norwegian petrochemicals corporation Statoil, companies need a new set of management processes that reflect agile managing techniques when competing in turbulent and dynamic business environments.
Bogsnes, who spoke at the Beyond Budgeting Conference in Chicago on Friday, has been outspoken in his belief that organizations are too focused on cost management and processes and not enough on leadership.
At Statoil, Bogsnes oversaw the replacement of calendar-driven forecasts with dynamic forecasts, which are event-driven and not done at fixed frequencies or fixed time horizons. Rather, it accepts the unpredictable rhythms and uncertainties of the real world.
“The purpose of this was not to get rid of budgets,” says Bogsnes. “The purpose is to get rid of the budgeting mindset and its illusions of control. Events will drive frequencies and they will drive time horizons.”
Bogsnes says a budget is used for three purposes: as a forecast for what the future will hold in cash flows and capacity; as a target with a bottom-line number; and as a resource allocation mechanism. The problem isn’t with any of those elements, but by the fact that each element might be in direct conflict with the other.
Companies should be ambitious in their target-setting, for example, but they might be more conservative in their forecasting process. Statoil has separated all three of these elements, including a resource allocation process.
“We have this expression that the bank is open 12 months a year and not just for four weeks in October,” says Bogsnes.
As an example, Bogsnes cites Statoil’s efforts in reducing travel costs without a budget. Instead of instituting across-the-board cuts in T&E, the organization instituted a system which weighs travel costs that add value versus those that are less so.
First, Statoil upgraded its teleconference technology and adjusted the company travel standard from business class to flexible economy within Europe. It also launched a “meeting calculator” on its company website to help determine whether traveling to a physical meeting was necessary, estimating the cost in terms of time and resources.
“Within six months, we reduced travel costs by more than 25 percent, without having to reintroduce travel budgets,” says Bogsnes.
Budgets have traditionally involved handing out bags of money for large, discrete projects or for operational and administrative costs. The dogma is that this will somehow cap costs. That is foolishness, says Bogsnes.
“What ends up happening is that someone gets beat up for making a good forecast early that has bad news in it,” says Bogsnes. “He or she might have done a great job, but they get reprimanded.”
Eliminating budgets is easy compared with changing the mind-sets they reflect. The evolution takes time, he says.
“You can’t instruct people to change,” says Bogsnes. “We cannot abolish command-and-control by command-and-control. Everybody needs to recognize the limitations of the old way and come to terms with the new way on their own timetable.”