Beyond Budgeting, Agile, and Business Agility

By Aki Namioka, Sr. Agile Consultant

In 1972, Jan Wallender the new CEO of Handelsbanken bank in Sweden, concluded that the annual budgeting model was not working for his company. Centralized control represented by the annual budget process was a hindrance to the banks’ growth. So, he got rid of it and introduced concepts of decentralization and relative goal setting, rather than absolute goals. His first goal for the company was to produce a higher return on equity than the average of their competitors (1).

By 2016, Handelsbanken was the fastest growing bank in the UK. They weathered the 1990s banking crisis in Sweden better than their competitors without budgeting or forecasting. Wallender also inspired a new movement in business management called Beyond Budgeting. The principles of Beyond Budgeting was born out of the realization that the classic budgeting process would not accommodate business agility. The annual budget had become an instrument of centralized control. It created a long lead time between good ideas and execution – sometimes years. Often times there was no clear correlation between the annual budget and goals for the organization. Jack Welch, famed General Electric CEO, called the annual budget “the bane of corporate America. It never should have existed”(2).

Businesses that are in well-established industries (e.g. banking and energy) and start-ups alike, have a desire to adopt practices that promote quick responses to changing business needs and align with organizational goals. Through the adoption of Beyond Budgeting principles, several companies in Europe, and now in the US, are healthy and profitable. For example, in January 2018, Cisco Systems published a newsletter article that promotes Beyond Budgeting: How Your Budget Process Blocks Digital Transformation”.

In addition to Cisco Systems and Handelsbanken, other companies around the world have joined them on their Beyond Budgeting journey: Toyota, Maersk, American Express, Gore (of GORE-TEX), Hilti, JR Simplot, Unilever, Volvo, Southwest Airlines, and Statoil (the largest company in Norway).

So what is Beyond Budgeting? From the Beyond Budgeting Roundtable website:

Beyond Budgeting is about rethinking how we manage organizations in a post-industrial world where innovative management models represent the only sustainable competitive advantage.

It is also about releasing people from the burdens of stifling bureaucracy and suffocating control systems, trusting them with information and giving them time to think, reflect, share, learn and improve.

The Agile revolution in IT, and the Beyond Budgeting movement came out of two different backgrounds – the former from software development, and the latter from economic research. However, their underlying principles are very similar.

Here are the Beyond Budgeting Principles (3). The ones that are highlighted are similar to the Agile Principles.

For comparison, the Agile Principles(4) are

Both sets of Principles underscore similar values:

  • Organize around clear business goals
  • Simplicity and lean – no waste
  • People are important – respect their ability to make the right decisions for the organization

The similarities between Agile and Beyond Budgeting have been noticed in recent years. – Bjarte Bogsnes, Vice President Performance Management Development at Statoil, was a Keynote Speaker at Agile 2016(5) and is implementing Beyond Budgeting for his company. He was also recently interviewed by Forbes Magazine(6) to discuss the subject of Agile organizations and Beyond Budgeting.

As with Agile, Beyond Budgeting is defined by a set of principles. For example, Scrum is a set of practices that embraces the Agile Principles. How can an organization apply Beyond Budgeting principles? A local example of applying Beyond Budgeting was presented by Mike De Luca of Torre Consulting at a BeyondAgile(7) meeting. He is the former Executive Director of Finance at Group Health (now part of Kaiser Permanente) and he applied Beyond Budgeting principles at Group Health to support Lean practices. De Luca pointed out that Beyond Budgeting supports Lean in the following ways:

  • Set relative targets – continuous incremental improvement
  • Forecast separate from target setting
  • Make resources available as needed
  • Principle-based: Facilitates translation and adaptation to diverse corporate cultures

Supported by, but not limited to these types of tools:

o Rolling forecasts
o Vertical linkages of metrics
o Root cause analysis
o Continuous improvement (sometimes called Kaizen)

Keeping these practices and principles in mind, Mike De Luca set front-line measurements for Group Health that addressed:

  • Pharmacy productivity
  • Clinical staff ration and mix
  • Operating room utilization/turnover
  • Lab test ordering
  • Defect reduction

Group Health linked these front-line measurements to enterprise goals and organized around these goals.

As Wallender illustrates in his book “Decentralisation – why and how to make it work: the Handelsbanken way (8)“, the biggest organizational shift isn’t getting rid of an annual budget, the biggest shift is decentralization. Central to the shift to decentralization is empowering people in an organization to do what is best for the organization and rewarding them accordingly.

As a consulting firm with a growing Agile Practice, we are often called upon to help organizations with their Agile adoption. According to the 2018 12th State of Agile Report(9) from VersionOne, 53% of the organizations that are adopting Agile cited “organizational culture at odds with agile values ” as a challenge to Agile adoption. If Agile is considered an IT only initiative, it’s effectiveness and adoption will be limited. Agile will thrive better in an organization that has embraced the principles of Beyond Budgeting from the top. Agile and Beyond Budgeting go hand-in-hand to bring business agility to the entire organization.

For more information on Beyond Budgeting and similar initiatives, review:

Work Cited