Good without a budget

2 October 2008 15:25

(updated: 7 March 2016 20:26)

Good without a budget

Budget less management systems are effective - they allow employees to remain focused on their work and they enable management to foresee and make changes faster. NHH researchers will help StatoilHydro toss out its budgets.

Norwegian companies are steadily becoming multinational firms with headquarters located in Norway, and like the rest of Europe are moving more and more away from traditional budgets. Making the research program Beyond Budgeting, highly relevant.

Liberated employees

StatoilHydro is one of the first major international enterprises to implement new and budget lessmanagement systems throughout all of its global businesses; now the company is financing research on the implications.

"A part of the project is dedicated to studying how the new management system creates learning within the organization. Is the management system perceived as a tool to create learning or more as a new control system?" asks project head, Katarina Östergren of NHH.

The budget's function will still be present in the business. Economic control is assured by benchmarking against competitors and KPIs (Key Perfomance Indicators) internally. Some KPIs are determined by the board of directors, while units can, to a certain extent, customize other relevant indicators. These can be traditional financial targets or more subjective goals like, for example, an index of employee satisfaction.

Beyond Budgeting can also provide significant gains by liberating talented employees from the tyranny of a budget; capable professionals should dedicate their time to doing what they do well, not trying to get their plans to fit into an artificial budget plan.

"We have talked with very relieved engineers who think they are finally getting the opportunity to work with what they are good at," says Östergren.

It is, however, not certain that all cultures will receive the new management system in the same way.

"We want to understand how the implementation of budget less management systems will be received in different cultures," says Östergren. In a business like StatoilHydro, the effects of cultural differences must be considered when budgets are removed in 40 countries.

More effective leadership

Budgets are generally sent back and forth many times, units exaggerate costs or move income between budget periods in order to meet fixed goals. Without budgets many of the games that occur between management and the board of directors can be avoided, as well as along the entire management hierarchy.

"What we are trying to achieve is increased freedom for managers and employees, more dynamic processes, and less gaming around the key processes in the company," said President and CEO of StatoilHydro, Helge Lund, when he presented the research program earlier this autumn.

Traditional budgets which follow the fiscal year are time consuming, detail focused, and create centralized decision making structures. This hinders initiative and focuses too heavily on cost in relation to value creation.

Katarina Östergren believes that employees on the managerial level will notice the change well.

"Management will work continuously with what is really happening in their units rather than manipulating budget sizes that do not even exist," she says.