From calendar driven to business driven

Bjarte Bogsnes VP Performance Management Development

Chairman – Beyond Budgeting Round Table Europe 1 - Classification: Internal

2010-09-01

Statoil in brief • Turnover and market cap approx. 70 bn. USD

Arctic North Sea & Norwegian Sea

• 31.000 employees in 40 countries Canada

• World‟s largest offshore operator • Europe„s second largest gas supplier • The world‟s third largest crude oil seller • Consistent growth (avg 4%) since 2001

Russia

Caspian North Africa

US Gulf of Mexico

Middle East South America

West Africa

Current production of oil and gas

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Relative Statoil performance - 2009 Relative RoaCE

Total shareholder return

(4Q, 12 month average)

(2009, 12 month average)

P e t ro bra s

E xxo nM o bil S t a t o il

Luk o il

BG

A na da rk o

Target

P e t ro bra s

S t a t o il O c c ide nt a l

T o tal

R e ps o l Y P F

BP

BP C he v ro n

Target

E nc a na E nc a na BG O c c ide nt a l T o tal D e v o n E ne rgy

S he ll

E ni

E ni

R o ya l D ut c h S he ll

D e v o n E ne rgy

C o no c o P hillips

C he v ro n

R e ps o l Y P F

C o no c o P hillips

A na da rk o

E xxo nM o bil

-5%

3 - Classification: Internal

0%

2010-09-01

5%

10%

15%

20%

-20%

20%

60%

100%

Process improvements, - let us never forget the purpose! :

“A good deal of corporate planning is like a ritual rain dance….it has no effect on the weather that follows, but those who engage in it think it does. Moreover, much of the instruction related to corporate planning is directed at improving the dancing, not the weather”

Russel L. Ackoff

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The world has changed - what about the way we lead and manage?

Stable

Dynamic

Business environment

Traditional management

”Theory X”

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”Theory Y”

People

We must change both processes and leadership

Stable

Dynamic

Processes

Relative and directional goals

Dynamic planning, forecasting and resource allocation Holistic performance evaluation

Ambition to action

Rigid, detailed and annual

Values based

Rules-based micromanagement

Autonomy

Centralised command and control

Transparency

Internal motivation

Secrecy, sticks and carrots

”Theory X”

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”Theory Y”

Leadership

The Beyond Budgeting principles Change in leadership

Change in processes

1. Values - Govern through a few clear values, goals and boundaries, not detailed rules and budgets

7. Goals - Set relative goals for continuous improvement, don’t negotiate fixed performance contracts

2. Performance - Create a high performance climate based on relative success, not on meeting fixed targets

8. Rewards - Reward shared success based on relative performance, not on meeting fixed targets

3. Transparency - Promote open information for self management, don’t restrict it hierarchically

9. Planning - Make planning a continuous and inclusive process, not a top-down annual event

4. Organization - Organize as a network of lean, accountable teams, not around centralized functions

10. Coordination - Coordinate interactions dynamically, not through annual planning cycles

5. Autonomy - Give teams the freedom and capability to act; don’t micro-manage them

11. Resources - Make resources available as needed, not through annual budget allocations

6. Customers - Focus everyone on improving customer outcomes, not on hierarchical relationships

12. Controls - Base controls on relative indicators and trends, not on variances against plan

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What we say and what we do….

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Ambition to action - a process which… …is integrated - from strategy to people

…but provides sufficient freedom and flexibility …and activates our values and leadership principles

Strategic objectives Where are we going what does success look like? •Most important strategic change areas •Medium term horizon

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KPIs

Actions & forecasts

Strong performance Sustainable results

Individual goals

How do we measure progress?

How do we get there?

What is my contribution?

•Indicative measure of strategic delivery

•Concrete actions and expected delivery (forecast)

•My Performance Goals (MPG)

•10-12 KPI’s, annual/ longer term targets

•Clear deadlines and accountabilities

•Delivery •Behaviour

Ambition to action example

Where are we going?

”Strategic objectives”

How do we measure progress?

”Key Performance Indicators”

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2010-09-01

How do we get there? ”Actions”

More than 1100 ”Ambition to action” across the company

…..and more

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The different budget purposes Step 1 Traditional budget / plan

Step 2

Separate

Improve

•Front-loaded

Target

•Ambitious •Relative if possible

•Business driven not calendar driven

Budget / plan =

•Target

•Expected outcome – early warning

Forecast

•Forecast

•Frequency and time horizon – eventand not calendar driven •Limited detail

•Resource allocation

•Dynamic - no pre-allocation

Resource allocation “Same number – conflicting purposes”

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”Different numbers”

•Projects - decision gates & criteria •Operations - relative KPIs etc.

•Monitoring - intervention if needed only

We separate the three purposes in Ambition to action

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Towards a 100% dynamic Ambition to Action Degree of “dynamic”

Fully dynamic Ambition to action Dynamic strategic objectives & KPIs Dynamic Forecasting

Dynamic resource allocation

•No annual versions •No - or a very limited autumn planning process?

”You have an Ambition to action untill you have another one”

Dynamic actions

Calendar driven

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Business driven

2010-09-01

Dynamic resource allocation: A different mindset - cost conscious from the first penny Do I have a budget for this?

Is this the right thing to do? •Supports Ambition to action? •Within decision criteria & decision authority? •Can I justify this?

Budget

Not OK OK

OK? OK?

OK? OK? OK?

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2010-09-01

Dynamic resource allocation – the menu Relative KPIs

Absolute KPIs Traditional cost budget

Absolute cost KPI

Unit cost input/output

Unit cost vs peers

No KPIs Bottom line focus only

Strategic objectives or actions only

Xx Xx

EBIT

Xx Xx

ROCE

Xx Xx Xx

1000

(abs/rel)

”USD/bbl”

Xx

1000

”USD/customer”

”1. quartile”

”USD/employee”

”Above average”

”Cost effective and competitive operations” ”More video –less travel” ”Reduce consultancy spending”

Monitoring of actual development, intervention if needed only

Select based on what is right and works for your organisation

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Increasing freedom and flexibility

Increasing need for strong values and clear direction

Another reason for changing how we manage cost The budget can be an effective ceiling on cost….

….but it is also an effective floor

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2010-09-01

More holes in the ceiling than in the floor?

Giving back - or asking for more?

Traditional forecasting rhythm not logical Long term- rolling time horizon

Short term – forecasting ”against the wall” Year end Q1 Q2 Q3 Q4

2010 2011 2012

20XX

Is five quarter rolling forecasting the answer?

Not necessarily! 18 - Classification: Internal

2010-09-01

Remember the purpose of forecasting Get issues on the radar screen early enough…

…..to be able to take corrective actions

Forecasting - compensating for lack of agility

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2010-09-01

Should these all have the same radar screen? Same reach – same resolution?

Oil trading, M&A

Bus.Dev., Retail, GBS

Exploration, project development

We need a forecasting process which reflects the variation in business rhythms and lead times.

Does not mean more forecasting – but better; done at the right time with the right time horizon

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Dynamic Forecasting – the benefits …the expected benefits

What is new?

Frequency Event- and action driven (important

Quality

new information)

• earlier warning and less bias

Time horizon

• faster and better decisions

Efficiency

• more even work-load •less double work

Lead time and target horizon driven

*Important new information means: decisions, business opportunities, events and consequences of new info. be planned or unplanned and we can influence them or not.

21 relevant - Classification: Internal 2010-09-01 to your level. These outcomes can

Dynamic target setting - Strategic objectives & KPIs New principles • No calendar versions, changes triggered by external or internal events • Strategic objectives, KPIs and KPI targets changed when necessary – approved/informed about at Business Review meetings. Inform others as needed.

• Target horizons reflecting the lead time of what we aim to deliver • Definition of event; ”Big enough at your level” • Our MIS system keeps log of main changes

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We do not have all the answers

We are ”challenging accepted truth and entering unfamilar territory” We need to experiment, learn and adjust 23 - Classification: Internal

2010-09-01

Thank you for listening! Questions or comments – now or later? Bjarte Bogsnes [email protected] + 47 91613843

Beyond Budgeting Round Table

www.bbrt.org

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2010-09-01

Want to hear more? 1.

The problems with traditional management

2.

The Beyond Budgeting model

3.

The Borealis case

4.

The Statoil case

5.

Implementation advice

Out on Wiley(US) 2009 Available from Amazon.co.uk

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