Category Archives: Metrics & Reporting

Proper Scaling of Scrum and Dynamic Financial Forecasting


The purpose of this post is to summarize two very important and independent topics and then integrate them together, into a joint discussion.  The topics are:

  1. Moving from rigid annual budgets to rolling forecasts (super important! in agile/adaptive product development environments)
  2. Quality of scaling in agile product development, specifically Scrum

…and tying effective scaling of Scrum to dynamic financial forecasting.


Rigid Annual Budgets vs. Dynamic/Rolling-Wave Forecasting

Challenges presented by rigid annual budgets have been known for a long time.  For people that are new to the topic, a great way to stay on top of most recent research and publications, is to follow what is going at BBRT.org (Beyond Budgeting Round Table).  One of BBRT’s core team members – Bjarte Bogsnes, in his book “Implementing Beyond Budgeting: Unlocking the Performance Potential” (please, refer to the book’s highlights here),  clearly summarizes the problems with conventional, end-of-year rigid budgets. They are as follows:

  1. Budgets represent a retrospective look at past situation and conditions that may not be applicable in a future
  2. Assumptions made as a part of a budgeting process, even if somewhere accurate at the beginning, get quickly outdated
  3. Budgeting, in general, is very time-consuming process, and it adds additional, financial overhead to organizations
  4. Rigid budgets, can prevent important, value adding-activities, and often lead to fear of experimenting, researching and innovating (crucial for incremental development)
  5. Budget reports are frequently based on subjective metrics, as they take on the form of RAG statuses, with the latter, introducing additional errors and omissions (for details, please refer to Red, Yellow, Green or RYG/RAG Reports: How They Hide the Truth, by M. Levison and The Fallacy of Red, Amber, Green Reporting, by G. Gendel)
  6. Budgets, when used as a yardstick to assess individual performance, often lead to unethical behaviors (e.g. “churning & burning cash”at year-end to get as much or more next year) or other system-gaming activities

…The list of adverse effects caused by traditional budgeting is long…

On contrary, a rolling-wave forecast, respects the fact that environmental conditions are almost never static, and recognizes that if too much reliance is placed on prior years’ financial situation, it may lead to miscalculations.  Rolling-wave forecasts are based on frequent reassessment of a small handful of strong KPIs, as oppose to large number of weak KPIs, as frequently done in conventional budgeting..  The more frequently forecasts are being made, the higher chance that most relevant/reliable information will be used in assessments.  One good way to decide on cadence of rolling forecasts is to align them with meaningful business-driven events (e.g. merchandise shipments, production code deployments, etc.).  It is natural to assume that for incremental/iterative product development (e.g. Scrum), when production deployments are made frequently and in small batches, rolling-wave forecasting could be a concurrent financial process.  Short cycle time of market feedback could provide good guidance to future funding decisions.

It is worth noting that one of the key challenges that Scrum teams face today, is the “iron triangle” of conventional project management, with all three of its corners (time, scope, budget) being rigidly locked. And while the most common approach in Scrum is to make scope flexible, ‘clipping’ the budget corner brings additional advantage to teams.  Above all other benefits, rolling-wave forecasts address the problem described in #4 above, as they provide safety to those teams that want to innovate and experiment.

But what if there not one but many Scrum teams, each working on their own initiatives, running under different cadences (asynchronized sprints) and servicing different customers?  How many independent rolling-wave forecasts can one organization or department adopt before things become too complicated?  What is too much and where to draw a line?

Before we try to answer this question, let’s review what is frequently seen, when organizations attempt to scale scrum.

 

Proper Scaling vs. “Copy-Paste” Scaling

Let’s look at the following two situations: (1) more than one Scrum team, independently, doing their own Scrum and (2) more than one Scrum team, working synchronously, on the same product, for the same customer, sharing the same product backlog and domain knowledge.  The former case, is referred to as “Copy-Paste” Scrum, clearly described by Cesario Ramos. The latter case can be seen in skillful Large Scale Scrum (LeSS) adoptions. Here are some of the most classic characteristics of both scaling approaches:

(1) – “Copy-Paste” Scrum (2) – Large Scale Scrum (LeSS) 
  • Product definition is weak. Applications and components that don’t have strong customer alignment are treated as products
  • “Doing Scrum” efforts are often a result of trying to meet goals of agile transformation (some annual % goals must be met), set at enterprise level
  • Tight subsystem code ownership
  • Top-down, “command & control” governance, with little autonomy and self-management at team level
  • Importance of Scrum dynamics and its roles are viewed as secondary to existing organizational structure blueprints
  • Too many single-specialty experts and very few T-shaped workers
  • No meaningful HR changes to support Scrum team design
  • Simplified organizational design. Reduction of: silos, handovers, translation layers and  bureaucracy
  • Scrum is implemented by coordinated, feature-centric teams, working on  widely defined Product, for the same PO.
  •  Local Optimization by single specialists is eradicated
  • Scrum is a building block of IT organizational structure
  • Teams are collocated Multi-site development is used for multiple locations
  • Strong reliance of technical Mentoring and Communities of Practice
  • No subsystem code ownership
  • Reduction of “undone” work and “undone department”
  • Focus on Customer values
  • Strong support by Senior Leadership & intimate involvement of HR

Note: Please refer to Scaling Organizational Adaptiveness (a.k.a. “Agility”) with Large Scale Scrum (LeSS) for additional graphic illustration.

Based on the above, the following also becomes apparent:

In “copy-paste” Scrum, development efforts, marketing strategies and sales (ROI) are not treated as constituents of the same unified ecosystem.  In this scenario, it is almost impossible to fund teams by means of funding real, customer-centric products.  Why?  There are too many independent ad-hoc activities that take place and artifacts that are created.  There is no uniformed understanding of work size and complexity that is shared by all teams.  Estimation and forecasting made by each individual team is not understood by other teams.  Team stability (and subsequently, cost-per-team member) is low, as individuals are moved around from project to project and shared across many projects.  Further, with multiple teams reporting into different lines of management, there is a much higher chance of internal competition for budget.  By the same token, there is a low chance that a real paying customer would be able to step in and influence funding decisions for any given team: too many independent and competing requests are going on at the same time.

In organizations, where “copy-paste” Scrum is seen (and is often, mistakenly taken for scaled scrum, due to lack of education and expert-leadership), there is still strong preference for fake programs and fake portfolio management.  Under such conditions, unrelated activities and, subsequently, data/metrics (often fudged and RAG-ed) are collected from all over the organization and “stapled” together.   All this information rolls up to senior leadership, customers and sponsors.  Subsequently, what rolls down, is not dynamic funding of well-defined customer-centric, revenue-generating products, but rather rigid budgets for large portfolios and programs that are composed of loosely coupled working initiatives, performed by unrelated Scrum teams (secondary, to conventional departmental budgeting).  As rigid budgets cascade down from top, onto individual teams, they further solidify the “iron triangle” of conventional project management and hinder teams’ ability to do research, experimentation and adaptive planning.

On the other hand, in Large Scale Scrum, things are different:

  • When up-to-eight LeSS teams work synchronously, together (side-by-side), on the same widely-defined product (real), their shared understanding of work type and complexity (having certain scrum events together really helps!) is significantly better. As a result, when it comes to forecasting a completion of certain work (features), eight LeSS teams will do a better job than eight loosely coupled teams that work completely independently, on unrelated initiatives.
  • Since all LeSS teams work for the same customer (Product Owner), there is a much higher chance that they will develop a shared understanding of product vision and strategy, since they are getting it from an authentic source – and therefore will be able to do planning more effectively.
  • Having more direct correlation between development efforts LeSS teams (output, in the form of shared PSPI) and business impact (outcome, in the form of overall ROI), makes strategic decisions about funding much more thoughtful.  When real customers can directly sponsor product-centric development efforts, by getting real-time feedback from a market place and deciding on future strategy, they (customers) become much more interested in dynamic forecasting, as it allows them to invest into what makes most sense.  Dynamic forecasting of LeSS, allows to increase/decrease number of scrum teams involved in product development flexibly, by responding to increased/decreased market demands and/or product expansion/contraction.

Noteworthy that in LeSS Huge cases, when product breadth has outgrown capacity of a single Product Owner and requires work by more than eight teams, dynamic forecasting can still be a great approach for Product (overall) Owner and Area Product owners (APO): they can strategize funding of different product areas and make necessary timely adjustments to each area size/grown, as market conditions change.


Conclusion:

All of the above, as described in LeSS scenario, will decrease organizational dependency on fixed budgets, as there will be less interest in outdated financial information, in favor of flexibility, provided by rolling-wave forecasting that brings much closer together “the concept” (where value is built – teams) and “cash” (where, value is consumed – customers).

Addressing Problems, Caused by AMMS


Nowadays, for too many organizations, Agile Maturity Metrics (AMM) have become a trusted way to measure improvements of agility at personal (individuals), team and organizational level.

However, it is not always apparent to everyone that AMMs are different from Agile Check-Lists (e.g. classic example of Scrum Check list by H. Kniberg) and this can often lead to problems and dysfunctions:

Check-Lists are just a set of attributes that are usually viewed on-par with one another; they are not bucketed into states of maturity (other logical grouping could be applied though)

On contrary, AMMs place attributes in buckets that represent different states of maturity, with one state, following another, sequentially.

With very rare exceptions (favorably designed organizational ecosystems), there are three potential challenges that companies face, when relying on bucketed AMMs:

1 – System Gaming: If achieving a higher degree of agile maturity is coupled with monetary incentives/perks or other political gains (for many companies that are driven by scorecards and metrics, this is the case), there is will be always attempts by individuals/teams to claim successes/achievements by ‘playing the system’, in pursuit of recognition and a prize.

2 – Attribute-to-Maturity Level relationship is conditional, at most: Placing agile attributes in maturity buckets implies that attributes in higher-maturity buckets have more weight than attributes in lower-maturity buckets. However, this is not always a fair assumption: weight/importance that every organization/team places on any given attribute, while defining its own maturity, is unique to that organization/teamFor example, for one team, “…being fully co-located and cross-functional…” could be much more important than “…having Product Owner collocated with a team…” For another team, it could be the other way around.

3 – Correlation between attributes is not linear, at system-level: Regardless of buckets they are placed in, many agile attributes are interrelated systemically and impact one another in ways that is not apparent, to a naked eye.  For example, placing “Scrum Master is effective in resolving impediments”attribute in a maturity bucket that comes before the maturity bucket with “…Organization provides strong support, recognition and career path to Scrum Master role…” attribute, dismisses the real cause-and-effect relationship between these two variables, misleads and sets false expectations.

To avoid the issues described above, it would be more advisable to treat every identified agile attribute as a system variable, that is on-par with other system variables, while assuming that it has upstream and downstream relationship.  In many situations, instead of spending a lot time and resources on trying to improve a downstream variable (e.g.  trying to understand why it is so difficult to prioritize a backlog) it is more practical to fix an upstream variable that has much deeper systemic roots (e.g. finding an empowered and engaged product owner who has as the right to set priorities).

Below, is the list of agile attributes (a.k.a. system variables) that are logically grouped (check-list) but are not pre-assigned to levels of maturity (all flat).   Some examples  of suggested system-level correlation between different attributes are provided (cells are pre-populated).

Please, click on the image to download the matrix to your desktop, amend the list of attributes if you feel that your situation calls for modification, and then use “Dependency on Other Attributes?” column to better visualize system-level correlation between the attributes are of interest to you and other related attributes (some examples are provided).

What Should Agile Leadership Care About?


Agile frameworks (e.g. Scrum, Kanban, XP), individuals’ roles & responsibilities, processes & tools, metrics & reporting, burn-up charts, estimation techniques, backlog prioritization, agile engineering practices, agile maturity models etc. – all of them are important attributes of a typical agile transformation.  However, NONE of them are first-degree-of-importance system variables that are responsible for transformation success.  Most of them, are good superficial lagging indicators of agility but they are all corollary (secondary and tertiary) to another much more important system variable.

What is the most important system variable that defines a company’s agility?  It is Organizational Design –  the most deeply rooted element of organizational ecosystem that defines most of system dynamics.

When organizational leadership decides to take an organization through an agile transformation journey (it could take years, sometimes), it [leadership] needs to acknowledge that real, sustainable agile changes are only possible if deep, systemic organizational improvements are being made.  For that, leadership needs to be prepared to provide to its organization much more than just support in spirit, accompanied organizational messages of encouragement and statements of vision.  Leadership must be prepared to intimately engage with the rest of an organization, by doing a lot of real “gemba” (genchi genbutsu (現地現物)) and change/challenge things that for decades, and sometimes for centuries, have been treated as de-facto.

What does it really mean for leadership to engage at System Level?  First, it is important to identify what a system is: what are a system’s outer boundaries?  For example, one of the most commonly seen mistakes that companies make when they decide on “scope of agile transformation” is limiting its efforts to a stand-alone organizational vertical, e.g. Technology – and just focusing there.  Although this could bring a lot of local (to IT) success, it may also create unforeseen and undesirable friction between the part of an organization that has decided to change (IT) and the part of an organization that decided to remain ‘as is’ (e.g. Operations, Marketing).  For example, if Scrum teams successfully adopt CI/CD, TDD or other effective engineering practices that enable them deliver PSPI at the end of every sprint, but business is not able to keep up with consumption of deliverables (too many approvals, sign offs, red tape) then the whole purpose of delivering early and often gets defeated.  Then, instead of delivering to customers soon, in exchange for timely feedback, teams end up delivering in large batches and too far apart on a time scale.

A successful Agile Leader must treat an organization, that is expected to transform, as a sushi roll.  Just like seaweed alone does not provide a full spectrum of flavors and does not represent a complete, healthy meal, one single department (e.g. IT) is not sufficient enough to participate in agile transformation efforts.  Other organizational layers need to be included as well, when identifying a slice for agile transformation experiment.  A slice does not have be too thick. In fact, if organizational slice is too thick, it might be too big to “swallow and digest”.  But still, even when sliced thinly, an organization must include enough layers, to be considered as a ‘complete meal’.

Note: A great example of treating an organization as a sushi role, while making it more agile, is Large Scale Scrum (LeSS) adoption.

So, what are some key focus areas that every Agile Leader must keep in mind, while setting an organization on agile transformation course?

  • Location strategies. Geographic locations.
  • HR policies (e.g. career growth opportunities, compensation, promotions)
  • Budgeting & Finance
  • Intra-departmental internal boundaries and spheres of influence
  • Organizational Leadership Style
  • And some other areas that historically have been considered as …untouchable

All the above listed areas are defined by Organizational Design and can be better understood through self-assessment, done by organizational leaders at all levels.

Diagnosing Challenges in Scrum

When people go to the doctor’s office, they often complain of superficial manifestations of a problem (i.e., “chief complaints”) that don’t present any serious concerns, but in reality, are indicators of a much more serious systemic illness.

I’ve come to the conclusion that we in the Scrum field are also dealing with a similar type of scenario.

For those of us who have been coaching for a while, it’s probably a common experience to have a team member or a manager come to us with what appears to them as a “key problem,” but in reality, turns out to be a symptom of a much more serious underlying dysfunction.

On June 1, 2015…(read more from the original post)

August 30-31st: The 1st Large Scale Scrum Conference in Amsterdam

The first ever Large Scale Scrum (LeSS) Conference took place on August 30th -31st of 2016.  Budgeted to accommodate around 150 people, it was oversubscribed (around 180).

The event took place in the beautiful city of Amsterdam, in the cathedral style audience hall Rode Hoed.

What you will find summarized below, are the topics that were that were most interesting to me (Gene) personally.   But also, my friend and colleague Vicky Morgan made a thorough recap of the entire event at the bottom of this page.  So, please, spend some time reviewing as well.

Also, please check out:


But first, a few entertaining Kodak moments (hover over images to see who got caught in scope):…

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Large Scale Scrum Communities Discussion

There was very high interest from many conference attendees in local LeSS communities.  People wanted to learn how the can ensure continuity of learning LeSS, once they leave the conference and return home.   Since NYC LeSS community is the oldest and the biggest at this moment, I (Gene) was called upon share my experiences of creating and supporting the community.   I covered the following aspects of NYC LeSS community:  Birth/Life Span, Count/Composition/Growth/, Venue/Frequency/ RSVP vs. Attendance statistics, Format, benefits for Local Community, potentials of Global Networking, Communications/Announcements, Public vs. Intra-company communities (pros & cons).

Among many other people that attended to the discussion, the folks from Germany/Berlin, UK/London, Italy/Rome and Finland/Helsinki  seemed to have more interest.  As a an immediate result of that, Berlin LeSS Community was born:

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LeSS Bazaar

At the beginning of the conference, all participants were split in multiple teams, with each team working throughout the conference to produce something “shippable”. It could be an idea, a concept, a tool…anything.  At the end of the second day, there was LeSS Bazaar, facilitated by Craig Larman, where each team had to present its product to others.  Each conference member was asked to used “LeSS money” to vote for what they felt was the best product.

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Event Summary by Vicky Morgan

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Self Designing Teams Workshop, by Ahmad Fahmy

  • Forming Communities – Facilitation Techniques – Constellations
  • Discussion vs. Dialogue  – Peter Sengue

Story of LeSS, by Bas Vodde

  • We can go really fast un the wrong direction or slowly in the right direction;

LeSS is about focusing on going in the right direction

  • Shu – ha – ri
    • The original books were written at the ha-ri level
    • New book is at the shu level
  • Framework Prescriptiveness
    • add prescription around the points that create transparency – Scrum does this well
    • LeSS is prescriptive on organizational structure as structure has to be changed in order to have an effective transformation
  • LeSS
    • Basic rules – LeSS rules
    • Guides clarify how you adopt the rules
    • LeSS complete picture
    • LeSS principles are retrospectively added
  • More with LeSS
    • Build your method up – don’t tailor it down
    • LeSS is about how you do scrum with multiple teams vs. one of the product teams doing scrum

Port Of Rotterdam, by Rutger Van Dijk

  • Business value – what’s important and how do you measure it?
  • Simple visual reporting to upper management; do not try to force “agile” reporting onto upper management
  • Exploring user stories
    • Analyzing users and their behaviours
    • Gemba – go see
    • Users visit the team
  • Obtaining Management buy-in
    • Stop building features for management, build for customers / end users; PO has biased assumptions
    • Physically delete stories – indicate symbolically that you cannot build everything
  • Distributed team
    • Team bonding activities
  • Culture
    • How are consultants/freelances treated? Are they “resources” / a pair of hands or valued team members?
  • Hire for mindset
    • Learn while doing
    • Lunch sessions with online courses (plurosite)
    • Pair-programming (with expert)
    • Special code camps
  • This worked:
    • Build what you know will be needed, not what you think will be needed
    • People need to be around to explain why something is needed. If not around then do not build or cancel the sprint
  • This did not work:
    • Every team member working on their own stories
      • Less motivated
      • Less productive
      • No project hygiene
      • Complete disarray
    • Reduced involvement of management (and you definitely need them)
  • The Wave
    • There is no sea without waves
    • Everything is changing all the time
    • Experimentation and learning

 

Owning (versus Renting) Your System, by Craig Larman 

  • We need to own our ideas
    • Employees should be involved with the decisions themselves – leads to employee engagement
    • When you give a person an idea, they are renting the idea and thereby do not own the idea
  • 2014 study: 5 keys to a successful Google team
    • Psychological safety was far & away the most important of the 5 dynamics unearthed
    • The foundation of psychological safety is that team are empowered to ask “why” enabling them to understand “why”, thus enabling teams to own ideas
  • Meaningfulness
    • Connection with real customers
    • Involved In the whole rather than the part (degree that employees are involved in end-to-end
  • Why Feature teams vs. Component teams
    • In LeSS feature teams work directly with real customers
      • This intentionally translates into teams owning the ideas and improving the system
      • In addition to reducing coordination and hand-off waste
  • Local thinking vs. system thinking
    • System Optimizing Goal
      • Although there are many system optimizing goals, what is really important is that the group decides what the system optimizing goal is. This is a very important question
      • Is the current system / team optimized for this goal?
      • What is the behaviour of the organization/system?
    • Why would employees care about the system optimizing goal?
      • Are the team involved in strategy?
      • Are the team directly engaged in owning the idea of the product?
      • Are the team directly engaged with the customer?
      • Are the team just ditch diggers?
  • Owning the answer
    • Why is there 1 and only 1 backlog in LeSS?
      • Team should find the answer themselves

 

Technical Practices In Less. Why Are They So Important And So Hard?  by Terry Yin

  • Organizational agility is constrained by technical agility
  • Technical agility = people problem
  • Organization
    • Self-leading teams instead of maximizing resource utilization
      • Resource utilization – utilization of what people already know – known-known
        • Delivery culture
        • Prevents learning from happening
      • Focus on known-unknown instead of known-known
  • Education
    • Help people to overcome the CS cliff
    • Be the village
  • Model
    • Adopt the craftsmanship metaphor
      • Craftsman model
        • Apprentice
        • Journeyman
        • Master
    • Don’t cheat too much
  • Technical Excellence
    • Iterations: product > feedback > improve
    • Practice & More Practice
    • If the organization doesn’t promote practicing then you cannot have technical excellence

 

Impact Mapping with Innovation Games, by Gojko Adzic

  • Squirrel-driven product management
    • Agile at scale – BBC – 75M  spent with no clear definition of benefits
    • Large scale failure – FBI Case delivery system $450M spent before discovering something was wrong
    • Status report was green and occassionally amber for years
    • Analysis: 10000 inefficiencies in the system. Nobody was following any process. The only reporting was reporting on delivered activity
  • Scrum reporting focuses on delivery activity – delivered user stories/ features / burn-up & burn-down charts / velocity / story points
    • velocity reporting = this many people working this many days of the week.
    • Story points = how much money you have spent
  • Underpants gnomes progress reporting (story points)
    • Phase 1: Collect underpants
    • Phase 2: ?
    • Phase 3: profit (lagging indicator)
  • Study: 1/3 of initiatives delivered expected results. 1/3 no visible business impact, 1/3 = damaged the organization
  • Can we find something to report on that is indicative of success? Anton Zadorozhniy.
  • Successful initiatives tend to change somebody’s way of working.
  • Doug Howard – “How to Measure Anything”
    • People measure what they think is easy to measure
  • Impact map  = visualization of the plan.
    • Helps visualize what you are doing and why you are doing it
    • Helps solve underpants gnomes reporting problem – report on achievements instead of delivery reporting
    • Helps with business analysis in general (business analysis often fails as you analyze an option that someone else had already chosen [Tim Brown])
  • Innovation Games: Impact Trump Cards
    • A lot more options to analyze behavioural changes
  • Open Impact Mapping

August 23 – LeSS Talks: Agile Budgeting & Finances: unveiling conventional management mistakes


Last night’s meetup produced an exceptional turn-out of people. There were some guests from the UK: friends and colleagues.

The following key points were covered:

  • Triple Constraint Triangle of Conventional Management
  • Why Agile Community understands Budgeting better than some finance people?
  • Why Management Area is so “untapped” in terms of improvements?
  • Why did Borealis abolish traditional budgeting?
  • Decomposing Budget into: Forecasts, Targets and Resource Allocation
  • Forecasts vs. Targets
  • “Rolling” Forecasts vs. Dynamic Forecasts
  • KPIs: good, bad
  • Balances Scorecards against Budgets – what usually wins?
  • Splitting a bag of cash
  • Does Meeting a Budget Drive Individual Performance?
  • What do Monetary Incentives to do People?
  • Why do we need Partnership between HR and Finance?
  • Frequently ignored scientific evidence
  • How to overcome resistance?
  • Evolution vs. Revolution: what is better?
  • Who is doing “this”
  • Agile budgeting for scaling

Note: a number of folks approached, asking to share the materials presented. Please, use the form at the bottom of this page, to receive the materials.

Some Kodak moments captured:

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Quotes from: Implementing Beyond Budgeting: Unlocking the Performance Potential, by Bjarte Bogsnes



Bjarte Bogsnes 
(left) has a long international career, both in Finance and HR. He is currently heading up the Beyond Budgeting implementation at Statoil, Scandinavia’s largest company with operations in 36 countries and a turnover of 130 bn USD. On Fortune 500, the company was recently ranked #1 on Social responsibility and #7 on Innovation. Transparency International has named Statoil the most transparent listed company globally.
Implementing Beyond Budgeting: Unlocking the Performance Potential by [Bogsnes, Bjarte]Bjarte is a popular international business speaker and winner of a Harvard Business Review/McKinsey Management Innovation award. He is the author of “Implementing Beyond Budgeting – Unlocking the Performance Potential”, where he writes about his implementation experiences. Statoil realized that traditional leadership and management practices no longer work in today’s competence organizations operating in business environments more complex, dynamic and unpredictable than ever.


The summary below (selected quotes from “Implementing Beyond Budgeting: Unlocking the Performance Potential”) has been prepared for Senior Leaders, Finance and HR people that are still have to “do budgets” the old way, by combining Targets, Forecasts and Resource Management in one KPI number.  They are highly recommended to read the entire book to draw their own conclusions.

  • Today, however, we are in very different times. Not only have our business environments become much more dynamic and unpredictable, but they are just as much about people: the birth of the knowledge worker and the demise of organizations as obedient machines. In this environment, budgeting has become more of a barrier than a support for great performance, something that instead prevents organizations from performing to their full potential.
  • Today, there is so much more VUCA out there: Volatility, Uncertainty, Complexity, and Ambiguity.
  • Traditional management has more in common with how the Soviet Union was run than with the principles and beliefs of a true democracy.
  • Much of the internal communication would also benefit greatly both in trustworthiness and usefulness by turning down somewhat the one-way “aren’t we great” messages. The result is often the opposite— cynical employees laughing about all those polished corporate messages. Instead, we need much more employee-driven discussions and information exchange. Why are there, for instance, so few internal company blogs when the external world is full of them? We need more horizontal communication: sharing, challenging, and learning. But there seems to be a fear of people using these forums to speak up, voicing critical viewpoints that might fit badly with the image companies try to paint of themselves. Again, the parallel to totalitarian regimes is disturbing. It’s mushroom management; keep them in the dark and feed them shit.
  • Traditional management fears transparency because it threatens control. But as Jeremy Hope, cofounder of the Beyond Budgeting Roundtable, put it, “Transparency is the new control system.” There is a reason why thieves and crooks prefer to operate at night (although in some businesses it seems to happen during daytime, too).
  • One of the most stubborn myths in traditional management is that the only way to manage cost is through detailed annual cost budgets, with a tight follow-up to ensure that no more is spent than is handed out. The many problems this practice creates are not necessarily among the most serious ones, but I have chosen to address them early as the consequences of removing the cost budget are definitely what worries managers the most when considering Beyond Budgeting.
  • Great performance! What is the problem? It works; managers did not spend more than they were given. We have cost under control, right? Unfortunately, this is just half the story. That ceiling works just as well and often better as a floor for the same costs. Cost budgets tend to be spent, even when the initial budget assumptions changed (which they almost always do). Managers do not necessarily behave like this to cheat; they do it because the system encourages them to do so.
  • The problem gets bigger because not only one bag is handed out. There are a lot of smaller bags inside: “Of course, we cannot just give you one big bag of money!” We are talking about a huge mountain of bags, labeled salary, overtime, travel, consultants, and so on, often split further into even smaller monthly bags.
  • Great performance! What is the problem? It works; managers did not spend more than they were given. We have cost under control, right? Unfortunately, this is just half the story. That ceiling works just as well and often better as a floor for the same costs. Cost budgets tend to be spent, even when the initial budget assumptions changed (which they almost always do). Managers do not necessarily behave like this to cheat; they do it because the system encourages them to do so.
  • The problem gets bigger because not only one bag is handed out. There are a lot of smaller bags inside: “Of course, we cannot just give you one big bag of money!” We are talking about a huge mountain of bags, labeled salary, overtime, travel, consultants, and so on, often split further into even smaller monthly bags.
  • There is a lot of work involved in negotiating the right size of all of these bags, which often stimulates behaviors bordering on the unethical. As the budget-approving manager, this is a game you are bound to lose. You will always have less information than those below you about the real need for resources, status on ongoing activities and projects, and the quality of new projects.
  • To make sure that money is spent from the right bag, there is also the detailed monthly follow-up of actual costs against the year-to-date budget (the one we were trusted to make ourselves). Variances are spotted with accounting accuracy. Never mind the fact that our monthly reference point becomes more and more obsolete and irrelevant as months go by, assumptions change, and the real world moves on.
  • Another mantra is low costs. Costs should be as low as possible and cutting the budget is an effective way of achieving that. What we want, however, is not necessarily the lowest possible cost level. What we want is the optimal level, the one that maximizes value creation. How
  • In an increasing number of businesses, however, this resource is no longer the main constraint, at least not all the time. Instead, human capital is often taking this role. Our processes struggle with this shift. Finance has spent decades developing and perfecting the financial language and process: common charts of accounts; international financial reporting standards; and systems for data capture, reporting, and audit. HR, however, is still in the very early days of trying to do something similar with human capital.
  • “What if you are in a business where margins are wafer-thin? What if the financial situation is so bad that tight cost management is a question of life or death?”
  • Again, Beyond Budgeting is not about ignoring the need for good cost management. On the contrary, it is about better cost management, better optimization of scarce resources than what the traditional budget offers.
  • Control is an important word in the management vocabulary. Some Finance people are even called Controllers. I recall the first time I got that title. I felt pretty good about myself! When managers are asked about their biggest concern in abandoning traditional management practices, including budgeting, invariably the answer is “losing control.”
  • Transparency, as already discussed, is a great example of a good control mechanism. So is a strong, values-based culture. There are, however, two other types of control that we want much less of. The first one is too much controlling of what people shall and shall not do, through detailed budgets, tight mandates, detailed job descriptions, rigid organizational structures, smartly constructed bonus schemes, and all other Theory X– driven control mechanisms. Some of these controls might seem real and effective, but are often nothing but illusions of control. People are smart, and any system can be gamed if people want to. The second type of control we need less of is maybe an even bigger illusion. It is the perceived control of the future, the one we think we get if we only have enough details in our plans and forecasts.
  • The budget variance analysis is another classical example of control illusion. Detailed explanations of the difference between actual and budgeted numbers might provide a comforting feeling that the past is both understood and well explained.
  • There are more illusions: “If we don’t manage performance, there will be no performance. If we don’t develop people, there will be no development.” Many Finance and HR functions seem to be built on such assumptions. Admitting.
  • When managers are setting goals for their employees, it is useful to understand their full performance potential. I don’t think I will know mine before the day I pass away. Key Performance Indicators (KPIs) are often used to set targets. As we will discuss later, we must remember what the I stands for. KPIs are trying to indicate if we are moving toward where we want to be, but they are not always able to reveal the full truth. They are not called KPTs, Key Performance Truths!
  • Precision does not always equal relevance. The more accounting oriented we are in our performance thinking, the more we tend to emphasize precision and sacrifice relevance.
  • Let us not lose track of what performance management is meant to be about. Remember Albert Einstein’s wise words: “Not everything that can be counted counts, and not everything that counts can be counted.” I recommend using the SMART principles with caution. Here is some advice to ensure they actually help and not hinder the ultimate goal, which is the best possible performance given the circumstances:
    • Specific— but not a straitjacket
    • Measurable— but do not forget words
    • Achievable— but do not forget Michelangelo (see below)
    • Relevant— do not forget strategy
    • Time bound— but do not leave it all for year-end
  • Someone once added ethical and reasonable to the acronym to make it SMARTER. Nice! A target can easily create the same ceiling/ floor situation we discussed on cost. After managers have negotiated and low-balled, they might strive to hit their targets, but they have normally few reasons to go beyond, especially if
  • How targets are set is also important. There is a big difference between targets that you set for yourself, compared to those set for you.
  • Most Finance people believe that all target numbers must add up exactly to the corporate target, and that this can be achieved only through top-down cascading. The fact that such cascading often destroys ownership, commitment, and motivation is ignored: “That is HR stuff, we work in Finance.”
  • In my own private life I have set very few targets, if any. I certainly have had my dreams and aspirations, and I know quite well what good looks like. When I many years ago was diagnosed with diabetes, I knew I had to lose weight. I never set any targets about how much and by when. But I changed my lifestyle, and I measured frequently that things were moving in the right direction, both weight and blood sugar.
  • First, let it be clear that performance can be evaluated even if no targets are set. We normally know what good looks like when we see it, and there are always strategic direction and performance standards to relate to.
  • These purposes are: Feedback and development, Reward, Legal documentation
  • If instead the reward purpose dominates, it easily pulls the dialogue in the opposite direction. The rational employee might instead focus on “I’m so great” successes, and avoid anything that can taint the polished performance picture he or she is trying to paint.
  • The legal documentation purpose isn’t very motivating, either. It is about the employer needing to have the paperwork in case there should be a need for drastic action. The purpose is seldom the opposite: a legal justification needed for praise, promotion, or pay increase.
  • The development purpose requires no rating at all. The best appraisal dialogues I have experienced have been rating-free, with managers providing open, honest, and constructive feedback, focused more on my strengths than on my weaknesses. Rating can actually “dumb down” the dialogue because the number easily replaces or shortens the much more important words.
  • First, we need to remember that performance is not the same as results. A result is a measured outcome. Performance is the behavior and effort behind.
  • We need a broader and more intelligent performance language than the old one of “within budget” or “green KPI.”
  • True objectivity is therefore wishful thinking. There will always be subjectivity when targets are set.
  • I am no big fan of performance ratings, but when rating is also used in a forced ranking of employees we are entering the realm of stupidity. A number of companies are now abandoning this hopeless management practice. According to Washington Post, 10 percent of the Fortune 500 companies have now abolished the traditional annual performance appraisal, including Microsoft, Accenture, Deloitte, and Expedia. Even GE is experimenting with alternatives.
  • When presenting Beyond Budgeting in Europe, the first question I normally get is how cost can be managed without a budget? In the United States, the first question typically is, “What drives bonus if there is no budget?” The smallest problem with bonuses is that they often are tied to delivery of budget numbers, which as we have discussed is a language quite ill-suited for performance evaluation. A much more serious problem is the negative effect on motivation and performance, which this section is about. I have totally lost my belief in individual bonus systems. I am convinced they do much more harm than good.
  • The employer– employee relationship becomes a “principal– agent” contract, where the main focus for both parties is to maximize their own gain and benefit.
  • I believe that one day the idea of individual bonus will be driven out of town, shamed and undressed. But we need more little boys (or corporate rebels) raising their hand, shouting what everyone in the crowd also can see: This emperor has no clothes on. Let me explain why he is naked.
  • If it has to be money, does it have to be individual bonus? Why can’t a collective system be an alternative? Can sign-on fees sometimes be an alternative?
  • When Australian Atlassian decided to abandon their sales bonus system, they knew they would lose some of their salespeople. They did, but those they really wanted to keep stayed on.
  • In 2013, the pharmaceutical company GSK (GlaxoSmithKline) announced a new compensation program abolishing individual targets within sales.
  • Individual bonus can be a very effective motivational mechanism for simple work where there is little motivation in the job itself, where the link between individual efforts and outcomes is easy to measure, and where quantity is more important than quality. So for picking fruit, catching rats, and similar simple, repetitive work, individual bonus definitely works. But when moving to more complex tasks, where more cognitive skills and teamwork are required, research shows that individual bonus loses its power.
  • But for more complex tasks, external motivation typically has either no effect or a negative one, reducing the internal motivation. It is called the “crowding out” effect.
  • Giving blood is a great thing to do. Experiments have shown that when hospitals have introduced financial rewards in order to get people to give more blood, the effect has often been the opposite. Donors feel that it reduces the noble act of giving blood to something closer to “selling body liquids.” Hundreds of studies on individual bonus arrive at similar results, across borders and cultures. There is probably no other area where there is a bigger gap between what research says and business does. How come? Is it lack of knowledge or pure ignorance? Or is it simply laziness? Dangling a financial carrot in front of people is undoubtedly much simpler and easier than motivating through great leadership. Money is so much simpler. But again, that old craft called leadership is not meant to be easy.
  • Journalist and author David Sirota sees it like this: ”The main question for management is not how to motivate, but rather how management can be deterred from diminishing or even destroying motivation.” Bonus systems can definitely be one way of destroying motivation, although there are probably those who find satisfaction and motivation in cheating the system.
  • Even executives realize that something is wrong. Here is John Cryan, co-CEO at Deutsche Bank: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.” There are, however, a few camps in psychology that see things differently. The behaviorism theory of the American psychologist B.F. Skinner strongly advocates extrinsic motivation. The only small problem is that most of Skinner’s supporting studies and experiments were conducted on mice, rats, and pigeons. The studies were about simple, mechanical, and repetitive tasks where individual results are easily measured— not exactly what life in today’s knowledge organizations is about.
  • Team or collective bonuses are very different, as they are designed with a different purpose: hindsight reward for shared success. This is an important distinction. Individual bonus is intended to provide both up-front motivation and hindsight feedback. Collective bonuses are often criticized for not delivering that up-front motivation. But they are not meant to. Collective bonuses are meant to create a positive feeling around common efforts and shared success being rewarded in a fair way. Creating such positive vibrations has, of course, a positive indirect motivational effect.
  • We have discussed two different reasons why companies have bonus systems— market and motivation. There is actually a third— affordability. It can be a cheaper way of paying people, because bonus is variable, not fixed.
  • Fortunately, there is management innovation taking place also here. Companies like Google, HCL, and Zappos are experimenting with peer-to-peer bonuses or non-financial rewards. The thinking behind is that colleagues and people you work with often have a better view of your performance than your manager.
  • “most merit or performance-based pay plans share two attributes; they absorb vast amounts of management time and resources, and they make everybody unhappy.” Kohn recommends a simple way out of the misery: “Pay people fairly, and then do whatever possible to make them forget everything related to pay and money.”
  • There is more we do not like in the real world. Projects and activities that run past year-end also mess things up. An approved project stretching over several years must be reapproved every autumn. We need control!
  • There is an accordion rhythm to this way of forecasting, which seems to assume that the world ends December 31. One solution is rolling forecasting.
  • This is not an attack on coordination in general, only on the annual coordination stint. We need a coordination that is continuous and customized, where those who need to should communicate as they choose themselves, on a schedule and time horizon relevant for their business relation.
  • Budgets are used for setting targets, mostly financial. At the same time, those budget numbers shall also reflect an expectation of what next year might look like. Finally, cost and investment budgets are a pre-allocation of required resources. We therefore want three different things from this process: Good targets, Reliable forecasts, An effective resource allocation
  • As we will discuss later, it is hard to achieve any real quality improvement in target setting, forecasting, or resource allocation without first separating the three. A two-step approach is needed: separate and then improve. The Borealis and Statoil chapters will discuss in depth what this can mean in practice.
  • Why do we spend so much time and energy on budgets and budget reporting? One reason is the illusion of control that we discussed earlier. The more details and decimal places we churn out in our plans and budgets, the more control we believe we have, and the safer it feels to set sail in those treacherous business waters.
  • To conclude, performance is managed by someone who is not present in the situation, and decisions are not based on entirely fresh information. It is a simple, rules-based system.
  • What about the police officer in the middle of the crossing, whistling, waving, shouting, and pointing? Doesn’t that person also make local decisions based on fresh information about the actual situation on the ground? Absolutely, but who really needs that middle manager and his command and control when a self-regulating system can do the job just as well and much cheaper?
  • “Skaters work out things for themselves, and it works wonderfully well. I am not an anarchist, but I don’t like rules which are ineffective.”
  • On the management process side, the traditional budget typically needs to go or at least be radically changed. Relative targets should replace absolute targets where possible and where it makes sense.
  • This is what Beyond Budgeting is about: changing both leadership behaviors and management processes in a coherent and consistent way, with the aim of becoming more agile and more human
  • …we were approached by Société Générale, Airbus, Michelin, Danone, and GDF Suez (now Engie).
  • …budget problem was just one part of a larger systemic problem. The solution could not be found just in new tools and processes that could do the budget job in a better and more effective way. A set of leadership principles was also needed.
  • Leadership Principles:
    • Purpose— Engage and inspire people around bold and noble causes, not around short-term financial targets.
    • Values— Govern through shared values and sound judgment, not through detailed rules and regulations.
    • Transparency— Make information open for self-regulation, innovation, learning, and control; don’t restrict it. Organization— Cultivate a strong sense of belonging and organize around agile and accountable teams; avoid hierarchical controls and bureaucracy.
    • Autonomy— Trust people with freedom to act; don’t punish everyone if someone should abuse it.
    • Customers— Connect everyone’s work with customer needs; avoid conflicts of interest.
  • Management Processes:
    • Rhythm— Organize management processes dynamically around business rhythms and events, not around the calendar year only.
    • Targets— Set directional, ambitious, and relative goals; avoid fixed and cascaded targets.
    • Plans and forecasts— Make planning and forecasting lean and unbiased processes, not rigid and political exercises. Resource allocation— Foster a cost-conscious mindset and make resources available as needed, not through detailed annual budget allocations.
    • Performance evaluation— Evaluate performance holistically and with peer feedback for learning and development, not based on measurement only and not for rewards only.
    • Rewards— Reward shared success against competition, not against fixed performance contracts.
  • We are often asked about what kind of organizational structure Beyond Budgeting recommends. There is no single, simple answer. The principles do advocate agile and accountable teams with a strong customer focus, but this can be achieved in many different ways. The organization chart seldom tells the full story.
  • The most famous Beyond Budgeting case has long been Handelsbanken, a Swedish bank that today operates almost 900 branches in 24 European countries and is the fastest growing bank in the UK. What makes their story so fascinating is not just the fact that the bank decided to kick out the budget as part of a radical transformation of their management model back in 1970. It is equally fascinating to observe how the bank has performed since then:
  • More profitable than the average of its competitors, every year since 1972
  • Among the most cost-efficient universal banks in Europe
  • Never needed a bailout from the authorities because they messed it up
  • The strongest bank in Europe and one of the strongest in the world, according to financial information provider Bloomberg
  • Wallander’s bold steps included:
    • Much greater branch authority—“ the branch is the bank”
    • A flat structure with only a few layers
    • A focus on customers instead of products
    • Transparent performance data
    • No individual bonuses, only a collective profit-sharing system
    • A strong values-based culture
    • No budgets
  • Beyond having no budgets, it sets no targets and does very little of traditional planning.
  • All bonuses are collective, driven by how Handelsbanken is performing against other banks, which gives everybody a very good reason to share knowledge and best practices.
  • Stimulating internal knowledge sharing is not the only reason why Handelsbanken is shying away from individual bonuses. It is also very much about the customer. They want to make sure there is absolutely nothing that can create a conflict of interest when branch employees advise their customers.
  • Miles has been growing by double digits almost every year. Growth was never a goal, however, just a consequence of doing well and being attractive.
  • Miles does not operate with individual bonuses, but employees get a share in two different ways. There is a provision system where the employee gets a cut of the revenue he or she generates. They can choose the risk profile that best fits their private situation: high fixed or high variable. In addition, if the annual profit margin for their unit exceeds 10 percent, all employees with partners/ spouses are invited for a weekend trip abroad. This
  • Reitan hates bureaucracy: “I don’t want processes, I want decisions and execution, and the distance between the two as short as possible,” he says. He is no big fan of rules, either, but loves transparency. “Rules limit creativity, motivation, and enthusiasm. Transparency creates understanding and accountability.” Their marketing slogan “Simple is often best” (“ Det enkle er ofte det beste”) has become legendary.
  • There are no budgets. “Many companies have big departments only doing budgeting, sending numbers up and down the organization, before they are presented to the board to give them something to talk about. A waste of time and energy! A forecast, however, is something very different. It gives us a picture of how things might develop. If we don’t like what we see, it forces us to do something!” Reitan says.
  • Now, there is a lean four-quarter rolling forecast process, combined with an annual three-year forecast. When needed, the quarterly forecast is updated more frequently.
  • It creates all those local “profit centers” that allow for autonomy, benchmarking, and self-regulation, just as we saw in Handelsbanken.
  • Bogsnes, Bjarte. Implementing Beyond Budgeting: Unlocking the Performance Potential (Kindle Locations 1896-1897). Wiley. Kindle Edition.
  • “Why do we budget? What is the purpose of those budget numbers?” We simply had not thought about it from that angle before. It was another magic moment. Just like pushing a button, answers came pouring out: target setting, forecasting, cost/ investment management, and delegation of authority. It soon became clear that many of these purposes were not that closely related.
  • We got out of this simply by limiting our financial target setting to improving “return on average capital employed” (RoACE).
  • The solution we developed was the relative RoACE. This was not RoACE benchmarking between Borealis and competitors, or between Borealis business units. Instead, we calculated the historical relationship between market conditions and RoACE both for the company and for each of the business units.
  • Even if everyone knew that costs had to come down, the budget negotiation always included a number of convincing arguments for the opposite. The result was often higher budgets instead of lower ones. You know the game. But as soon as we started reporting against the new budget, things looked okay.
  • What were the drivers and purposes behind the costs we incurred? We found the answer in activity accounting. Activity accounting is about understanding the purpose of costs, not just the type of costs (accounts or cost items) and where they occur (cost centers).
  • “Every action has a purpose and every cost can consequently be attributed to an objective,”
  • The rolling financial forecast gave us a continuous and updated view of our shorter-term financial capacity while a longer-term forecast was made annually. The investment forecast was a combination of approved projects and projects in the pipeline. When the forecast signaled capacity constraints, the actual and planned investment level was reduced by delaying or turning down projects.
  • KPIs dominated, in target setting, follow-up, evaluation, and rewards, causing many of the negative side effects we discussed earlier.
  • Handelsbanken has of course been going since 1970 and seems to have a rock-solid foundation. Still, if something similar had happened in the bank after seven years, perhaps things would have looked quite different today. Fortunately, Handelsbanken has a policy of recruiting top management from within, which makes a big difference.
  • Today, nimblicity is one of the Borealis values. The company even has it copyrighted. Wonderful!
  • The Statoil journey actually made me understand the Borealis journey better:
  • Management Information in Statoil (MIS): Most scorecard implementations start at the top and are cascaded out into the organization. They are mainly about translating and communicating group strategies.
  • Compared to its sister unit responsible for the Norwegian continental shelf, INT operated in an even more dynamic and unpredictable environment. This provided us with a wealth of great examples and evidence of why traditional budgeting and planning is a flawed process.
  • But the process allowed for only one number to represent both an ambitious target and a realistic expected outcome. It was simply impossible. Not surprisingly, the result was a negotiated compromise, an “in-between number” that nobody was very happy about.
  • Another favorite of mine was the exploration budget. Exploration is about finding new oil and gas reserves. Before I share this story, I want to underline that I am not criticizing the Exploration management team. They were (and are) great people, and I highly respect the job they do. I am criticizing the system we asked them to operate under. They did not invent it; we did.
  • The scorecard was also connected to the bonus system: the greener the KPIs, the higher the bonus. It was not difficult to understand why the exploration budget had not been spent. It was not necessarily bonus driven.
  • Our proposal was twofold: First separate and improve the different budget purposes, as we had done in Borealis. In addition, we would let the scorecards introduced from 2000 to 2004 become the new cornerstone in the management process, under the name Ambition to Action. The latter definitely created comfort and helped to secure a yes. There would not be a big black hole where the budget had been. The proposal would also solve another problem, the conflict between scorecards and budgets. As we will discuss in Chapter 6, there are often conflicting signals coming from the two. Almost always, the budget wins, undermining the importance of the scorecard.
  • We identified a long list of budget problems: weak links to strategy, a time-consuming process, unethical behaviors, outdated assumptions, illusions of control, decisions made too early and too high up, budgeting as if the world ends December 31, and budgets ill-suited for performance evaluation.
  • The first wall in the larger room is the Statoil Book, a booklet given to everyone in the company.
  • The second wall is each unit’s Ambition to Action, which provides more concrete guidance and direction through strategic objectives, KPIs, and actions.
  • The third wall consists of a set of both financial and non-financial decision criteria, combined with a set of decision authorities stating how big an individual decision a manager can make before having to go one level up. This wall has been there all the time. What is new is that we no longer have “double decision making” with regard to also approving, for instance, annual investment budgets.
  • The fourth wall is sound judgment. The power of common sense should never be underestimated. I mistrust any model lacking this important component.
  • For instance, having a balanced scorecard is not unique at all. The way it is implemented and operated, however, makes a big difference. A scorecard can protect and reinforce a command-and-control regime, or it can do the opposite. Too many companies are in the first category. We aim to be in the second.
  • In earlier chapters we discussed the different purposes of a budget— target setting, forecasting, and resource allocation— and why combining the three causes serious problems. Let us quickly recap. One by one these do not represent a problem as long as each one is done in a meaningful way. The problem emerges when the three are combined in one process allowing for only one set of numbers, the budget numbers.
  • A target is an aspiration, what we want to happen. A forecast is an expectation, what we think will happen. A good sales forecast can’t also function as an ambitious sales target. Forecasts that also are applications for resources tend to carry a systematic “too high” bias, as managers hoard and secure room to negotiate before the axe comes out.
  • Here is one way of separating target setting and forecasting: Do target setting first, based on an outside-in perspective of what is possible. What have others been able to do? What does great look like?
  • The separation also calms the scared. There will always be managers who are frightened by the idea of abolishing budgets. By separating and then improving, we can assure these managers that we will continue doing what the budget tried to do for us, but in much better ways. That doesn’t sound too scary, does it?
  • Ambition to Action has three purposes: Translating strategy from ambitions to actions Securing flexibility— room to act and perform Activating values and leadership principles
  • There is then the vertical translation between organizational levels.
  • It is not mandatory to have an Ambition to Action. Managers often ask us if their team should have one. We absolutely recommend trying it out, but we advise yes only if the team itself experience this as a sensible and value-adding way of managing themselves. If not, they are better off without.
  • Some managers still believe they have to have one, often with low ownership as the result. The best indication of missing ownership is when Ambition to Action is updated only before business review meetings with the level above. We
  • The importance of tone and language used when formulating objectives is often underestimated. Strategic messages can easily be lost in too many words where “correct and precise” win over “makes people tick.” The consulting language is full of words to be avoided, because they do not reach people the way we think they do. Take the popular Excellence, for example. It is a worn-out term that I believe turns more people off than on. World class may be in a similar category. Actually, many would probably be much more fired up by “Let’s beat the s*** out of the competition!” Whatever language used, aim for the simple and natural, but paint big pictures that engage and that people can relate to and believe in.
  • BBI Core Team member Dag Larsson puts it like this: “Speed can never replace direction.”
  • I can sometimes be stubborn, and my hunt for those perfect KPIs continued for many years. Today, I have given up, simply because they do not exist. Again, they are not called KPTs – Key Performance Truths. This does not mean they are not useful. We just have to remember their limitations. Earlier, we discussed some of the characteristics of a good KPI. Here is the checklist we use:
    • Do they measure progress toward strategic objectives?
    • Do they measure real performance?
    • Is there a good mix of leading and lagging indicators?
    • Do they address areas where we want change or improvement (or is monitoring sufficient)?
    • Are the KPIs perceived as meaningful at the level they are used?
    • Can data be collected easily?
  • As already discussed, relative KPIs can be very effective. There are two types of relative KPIs. The first is about input/ output relations, focusing for instance on unit cost instead of absolute cost; the second is about benchmarking and comparing with others. The two can also be combined.
  • One solution is “indirect benchmarking”: comparing how well each unit improves their own performance.
  • The majority of our KPIs are actually in the “absolute” category. We simply try to use relative KPIs where it is possible and where it makes sense, but again, a Beyond Budgeting journey does not depend on these. If absolute KPIs and targets are used, ranges or rounded numbers are normally better than the decimal-loaded numbers. The more absolute KPIs and targets are used, the more important it is to also apply a holistic performance evaluation, where we also look at what measurement isn’t picking up. More about this later.
  • The more ambitious a target is, the less it must be perceived as imposed from above. Without ownership and commitment, ambitious targets become nothing but a numbers game.
  • A final reflection on targets. As discussed, a target is actually not the target or the goal. What we really want is the best possible performance, given the circumstances. Setting targets is one way of achieving this, but it is a medicine that often comes with a number of negative side effects. These include lowballing, negotiations and hidden (or not-so-hidden) agendas, and even more of it if a bonus is linked to target achievement. The rational (or cynical) manager has no reason whatsoever to set ambitious targets. On the contrary, it only reduces the chance of hitting the number and getting the reward. What if we could find other ways of getting people to do their best without these side effects? Relative benchmarking KPIs without targets is one alternative.
  • Which actions do we need to take in order to deliver on strategic objectives and KPI targets?
  • What are the expected consequences of these actions, expressed as a forecast, either against KPI targets or in other financial or operational areas where we need to understand what lies ahead (e.g., financial capacity)?
  • It is quite natural to have gaps between ambitious targets and realistic forecasts. The goal is of course to close such gaps, as deadlines and delivery time are approaching. A gap is not necessarily something negative; it just shows that we are aiming high while at the same time having a realistic view on where we believe we will end up as things look today.
  • Although our forecasting principles are simple, the practice of them is not necessarily so for several reasons. The first has to do with our heritage from the budget days, which are not that far behind us. In the old process, there was “one number” only. This was optimized depending on the main purpose: a “high” number if the main purpose was to ask for money and a “low” number if the main purpose was target negotiation.
  • A forecast is not a promise, not something to deliver on. People using that expression have not understood the difference between a forecast and a target. Again, a forecast is what we think will happen, an expectation; a target is what we want to happen, an aspiration. Sometimes we definitely don’t want to hit our forecasts.
  • Leadership behaviors are often to blame for good forecasts becoming bad ones.
  • Let us stay at sea. A supertanker needs a huge radar screen. It takes a long time to turn, so it is important to be able to discover dangers and obstacles early. A speedboat, however, hardly needs a radar screen. It can react and turn the very second something is observed. The speedboat is much more agile than the supertanker, which uses forecasting to compensate for its lack of agility. Maybe companies should put less effort into becoming better at forecasting, and more into becoming more agile? Dynamic forecasting and dynamic resource allocation are closely related. What is the point of having the world’s largest radar screen and the ability to sense and respond instantly, if there is no dynamic resource allocation ensuring that the necessary resources also can be instantly accessed or reallocated, instead of being locked up in a detailed annual budget?
  • Measuring forecasting accuracy is normally only relevant for external forecasting where we can’t influence the outcome (oil prices, exchange rates, etc.).
  • Here are a few simple but important forecasting principles. Forecasting should primarily be something you do for yourself to help you manage your own business. If a lot of your forecasting is triggered by requests from above, asking for data you otherwise would not have bothered with in order to manage your own business, then something is wrong. Why do others need this information if you do not? Local ownership is key for getting good data quality. There is always better quality if those making the forecast depend on the quality themselves. A forecast should also be actionable. If the information cannot be used to trigger any action, why do we forecast?
  • Cost budgets are definitely much easier, if that is the goal. But it isn’t! The goal is an optimal use of scarce resources, and we need something much more effective than the annual, preallocated, and detailed cost budget.
  • The mindset we need to move away from is the one expressed by “Do I have a budget for this?” as the main and sometimes the only question asked when a decision with cost implications shall be made. The answer is typically yes if there is budget money available; otherwise, it is no. I know that decision-making in a budget regime is somewhat more sophisticated, but there is still a big core of truth in this observation. Instead we want people to ask, “Is this the right thing to do? What is good enough? How is this creating value? Is this within my execution framework?”
  • What we want is a dynamic allocation of resources that is as self-regulating as possible. What we don’t want is the detailed budget preallocation, where all units are given a bag of money divided into detailed cost items: salary, overtime, travel, consultants, and all the other cost types in the chart of accounts, often further divided into monthly budgets. This is what creates the millions of preallocated bags in big organizations.
  • -The “1,000” doesn’t have to be an annual number; it can also be a 12-month average target, valid until there is a need to change it, up or down.
  • -This can be solved by moving from absolute to relative KPIs. A unit cost target is more flexible than an absolute target.
  • -Unit cost benchmarking is even more self-regulating.
  • -It is also possible to operate without cost KPIs at all, and instead rely on the self-regulating effect of a challenging bottom-line target on such as operating profit or RoACE, absolute or relative.
  • -Finally, it is possible to manage costs with no targets at all. Instead, we rely on the two other dimensions in Ambition to Action. Strategic objectives can, for instance, express what kind of cost mentality we want, such as “We spend company money as if it was our own.”
  • The model is based on trust, on the belief that the majority of people are mature and can be trusted to spend money wisely. The only thing we know for certain when trust is shown is that someone will abuse it.
  • If we can’t be trusted to manage our own travel cost, how can we be trusted when we advise and recommend on million- and billion-dollar projects?
  • Absolute cost targets may be set if a significant change in activity and cost levels is required, but must be set at the overall rather than the detailed level to secure the necessary flexibility. Even if no cost targets are set, both actual and foretasted cost trends are monitored and corrective measures taken as required. All entities should continuously challenge their own efficiency, level of activity and resource use.
  • The conflict between targets, forecasts, and resource allocation is present also in projects. Therefore, we no longer have only one single “budget” number approved. Instead, we have separated, and operate with three numbers also here:
  • The project estimate (e.g. 1,000) is the expected cost estimate used in the profitability analysis of the project. Being merely a forecast, this number will continue to live throughout the project.
  • The more ambitious target cost (e.g. 900) is the cost level the project team aims for.
  • The resource allocation estimate (e.g. 1,100) or the mandate to spend is set higher than the 50/ 50 project estimate, to avoid on average every second project having to come back and ask for more money.
  • As a consequence, the phrase “project budget” is no longer very meaningful and is slowly (but very slowly) disappearing from our vocabulary.
  • Beyond Budgeting does not mean that cost is not important, and that the constraints introduced are set at very high level. Some also needed a reminder that Beyond Budgeting is about so much more than cost management. There are actually 11 other principles!
  • A key principle in our business follow-up is “forward looking and action oriented.” The KPI status (red/ yellow/ green) is therefore set by comparing forecasts with targets, instead of actual versus budget or target year to date. “Green” means forecast better than target, and “Red” the opposite. The purpose is to shift the focus forward, away from the past and from explaining historical variances. This does not mean that we do not focus on our actual figures. It is the comparison to an increasingly outdated year-to-date reference point we have skipped. This focus triggers one of two questions: If the KPI is green, which risks can jeopardize what looks okay, and how are these risks addressed? If the KPI is red, which actions must be initiated to get back on track? I must admit I am ambivalent to the use of KPI colors. It works well in teams which mainly see them as a simple way of sharing status with each other. It works less well when perceived as part of a top-down control-and-reward regime, sometimes triggering gaming and unethical behaviors to change reds to greens. We are back to leadership again. The colors themselves are probably not to be blamed.
  • Five questions to test measured KPI results:
  • Did delivered results contribute toward the strategic objectives? If we consider what the KPI was unable to pick up, how does it look? There is normally a lot of hindsight information available. The answer might confirm what the KPI indicated, or reveal a more positive or negative picture.
  • How ambitious were the targets? Imagine two teams. One stretched and set themselves an ambitious target, but just missed. The other lowballed and negotiated and was able to get away with a much lower target, which they hit. We shouldn’t punish the first team and reward the second.
  • Are there changes in assumptions that should be taken into account? Was there significant tailwind or headwind that had nothing to do with performance? Was there an earthquake in Japan, making it all more difficult? Was there a competitor going bankrupt, making that sales target a piece of cake?
  • Were agreed or necessary actions taken? Were actions continuously established and executed as needed?
  • Are the results sustainable?
  • Or have there been sub-optimization or shortcuts in order to hit the target? The intention with these questions is not to create a long list of excuses for not delivering. The purpose is to understand relevant background information and then conclude on how much of this should be taken into account. It works both ways; it can just as well downgrade measured results.
  • The holistic evaluation is about using measured results as a starting point for revealing the true underlying performance. As we also discussed earlier, combining development, reward, and legal documentation in one process is problematic due to the conflicting purposes, especially between the two first ones.
  • Feedback and development should not be an annual stunt and could be more peer-based. Colleagues have often a better picture of a person’s performance than the manager has. Annual bonuses could be replaced or supplemented with spot bonuses, which are not dangling “do this/ get that” carrots. Base pay adjustments could still be an annual exercise but decoupled from feedback and development.
  • It is, however, important to remember that we have neutralized some of the negative bonus effects. We have broken the fixed performance contract, the mechanical link between target and reward, by using relative KPIs where possible and by introducing the holistic performance evaluation. There is also the collective bonus scheme for all employees, based on how the company is performing against competition. The maximum bonus potential here is 10 percent. In addition, there is a very popular share savings program, where all employees can buy shares for up to 5 percent of their base salary each year and receive one free share for each one bought. Shares must be kept for a minimum of two years.
  • First, there is the definition uncertainty: How well do the chosen KPIs describe performance?
  • What we proposed was to introduce Dynamic Forecasting and also abandon annual versions of Ambition to Action in favor of a more dynamic and event-driven process.
  • “The world stops December 31.” One consequence is “forecasting against the wall,” or accordion forecasting as it deserves to be called.
  • Many companies going Beyond Budgeting solve this inconsistency by introducing rolling forecasting. The forecast is typically updated every quarter, and always with the same time horizon of, for instance, five or six quarters. This is definitely much better than accordion forecasting.
  • The solution became Dynamic Forecasting, with no fixed and predefined frequency or time horizon. Units update their forecasts when events occur or new information becomes available that they deem important enough to justify an update (external forecasting).
  • Dynamic forecasting does not necessarily mean more often; it means at the right time. For some, it could actually mean less often. Another benefit is a more even workload, although rolling forecasting also would have helped.
  • But why should we force all those with much shorter horizons to fill those outer buckets with forecasting data when they have no need whatsoever for that information themselves? We therefore encourage the levels that need the longer horizon to fill the gap themselves with more generic numbers, using their own knowledge of the business.
  • “What if we organized ourselves around business cycles instead of calendar cycles in the rest of the Ambition to Action process as well, not only in forecasting?
  • Our strategy process was already quite continuous and issue driven. Strategic objectives can now be updated as needed, when strategy changes so much that new or revised objectives are required.
  • KPIs can be replaced at any time if strategic objectives change, or if we simply find better ones.
  • Even KPI targets can be changed if they have lost their meaning by becoming impossible to reach. Such targets don’t work. They don’t motivate and inspire. They have only one function left: punishment. It could also be the other way around; the target has become too low with no stretch whatsoever. We already had the “target review”; this was about strengthening this mechanism.
  • The target horizon can vary, depending on the type of business and what we aim to achieve. We want more natural target deadlines, driven by urgency and complexity. The more relative targets we use, the less need there will be for annual targets. “First quarter,” “above average,” and similar targets do not need to be reset every year. Actions were already meant to be continuously updated, but more dynamic strategic objectives and KPIs now make this even more obvious and natural.
  • Forecasting is more continuous and event driven, as described above.
  • Performance evaluation in People@ Statoil is still done on an annual cycle, but it is now easier to change team and individual goals, as described later.

July 7-8: Certified Scrum Product Owner Course with ScrumInc

On July 7th and 8th, in New York, there was Certified Scrum Product Owner Course delivered by two co-trainers:  Avi Schenier, representing Jeff Sutherland’s company ScrumInc  and Robin Dymon, CST from Innovel.

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The class (size of about two scrum teams) was engaged in heated discussions, practical exercises and games.   I had the honor of attending and participating in the course and was able to make a series of observations.  Below, is the list of points that either very strongly resonated with me because they are already in-line with my personal views or are going to be leveraged to  enrich my personal training methods and coaching techniques:

  • The Scrum Guide: Scrum Values (courage, commitment, focus, respect, openness) – the latest, very important Scrum Guide amendment
  • Management-Leadership: emphasis on management acting in Servant-Leadership, not Command-Control capacity.  Exposing  most common problems with mid- and first-line management
  • Finding a good Product Owner: common challenges and good vs. bad candidates
  • Brooks law: fallacy beliefs about how to return late projects back on track
    • N(N -1)/2 formula
    • Communication saturation and “Heat of Commutation” gone wild
  • Story Mapping: purpose, techniques, strategic advantages
    • Story Slicing
    • Story dependency discovery
  • “What to build first?”: Value vs. Effort conversation
  • Sprint Interrupts and Emergency Procedures: how to deal with sub-optimal Scrum situations
    • Use of Buffers for Emerging Requirements and Bugs and Customer Feedback
    • Individual/Team Capacity Management
  • Scrumming the Scrum: continuous, relentless improvement of Scrum itself
  • Definition of Ready vs. Definition of Done: importance of understanding and agreeing to what is being delivered (and what is not!)
  • Hardy-Weinberg Principle of task switching impact on productivity and Throughput: a great practical in-class game
  • “Team Happiness is a Leading Indicator of Performance”
    • Measuring Individual/Team Happiness Factor vs. Velocity
    • Using Happiness Metrics as an Analytic Tool
  • Agile Strategy Objectives: Convergent & Divergent design vs. Process Predictability & Adaptability
  • Making story discovery real with Customer Personas
  • “Why is it important for Product Owner to understand principles of Story Sizing and Estimation?”
  • Importance of Business Value estimation in strategic planning (frequently forgotten by POs concept)
  • Creating Executive Action Team – provide support and remove impediments
  • Breaking the Iron Triangle of conventional Project Management
  • Release Management: burn-up/down charts as means of communicating status
  • Agile Metrics/Dashboards – why is it important for Senior Management to rely on empirical data produced by teams to measure progress
  • Three Common Approaches to Release Planning: Deadline-based, Regular-Departure, Value-Based

It was also a great experience to observe (and participate) in a daily scrum call, held by ScumInc folks during the lunch breaks.  Jeff Sutherland and his entire team practice what they preach: every day, around the same time (noon), they meet virtually, from multiple locations, to debrief each other on progress of their sprint-in-flight. Below, is the illustration (collage of different locations) of how they do it (from Avi’s laptop):

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My Kodak moment with Avi (center) and Robin (right) :avi_robin_gene

 

Additional Kodak moments from the course:cspo_7

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