Beyond Budgeting 101 | Business Agility Series


“Everybody knows going into the budget process that people make up the numbers because they know they’re going to get cut, they’re going to get manipulated, they’re negotiating for their bonuses, so it’s already a bad document to begin with,” says Nevine White. White and Mike De Luca from Beyond Budgeting Round Table of North America sat down with us for a deep dive into Beyond Budgeting, including a definition of what it is and some history. They also walk us through two real-world examples of implementing it.

De Luca says Beyond Budgeting requires a different philosophy around leadership: it needs to be very decentralized and is intended to drive decision making to the lowest appropriate level. He points out that the process of implementing Beyond Budgeting doesn’t really end since learning organizations must continue to refine and adapt. However, a lot of the heavy lifting can take anywhere from 6-18 months. Listen to find out what that entails, how to get started, how to measure and successfully transform financial planning in your organization.

Leslie Morse hosts in NYC at Business Agility 2018.

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Leslie Morse: Welcome to another edition of Agile Amped. I’m your host, Leslie Morse, and we’re podcasting live here at the Business Agility Conference 2018 in New York City. I’ve got two guests with me for this episode, Nevine White and Mike De Luca. They’re both with the Beyond Budgeting Roundtable of North America. I’m excited to learn about this topic today.

Nevine’s passion is to educate and enable business leaders in all aspects of strategy and deployment for best practice, enterprise-wide financial planning, forecasting and analysis. Her goal is to drive meaningful changes in planning processes and empowerment culture that will lead to improved performance.

Mike has got over 15 years of experience in finance, most recently, as the Executive Director of Finance at Group Health, where he led a department of 25 directors, managers and analysts that were responsible for budgeting; forecasting, business analysis and reporting on operating divisions with an annual spend of nearly $3 million.

Thank you guys so much for being … $3 billion. Glad you … I saw your face there, Mike, and I was like, “Wait, no I got that one wrong: $3 billion,” and that was the annual spend. Thank you guys both for being here with me today. I really appreciate it.

Nevine White: Thank you.

Mike De Luca: Thank you.

Leslie Morse: Have you enjoyed the Business Agility Conference so far?

Mike De Luca: Yeah, very much.

Nevine White: Yes.

Leslie Morse: Excellent. What brought you here this year?

Nevine White: I think, overall, was just a curiosity because it’s come up a few times now that there are connections between business agility and Beyond Budgeting and things that we’re passionate about relative to transformations in business, and so it’s been an interesting couple of days just learning about where some of those connections may be.

Leslie Morse: Excellent. What about you Mike?

Mike De Luca: From when I was working at Group Health, our IT organization – because we did a lot of our own app development for consumers as well as the implementations of other software – and so they used Agile. The organization had implemented lean across the organizations. When we, in finance, were working on implementing Lean, we worked closely with IT on a number of projects and said, “Okay. Well, we should try Agile as well, as the finance shop.”

There were things that worked really well and things that we learned from, and so as I’ve gotten more into working with finance organizations over time, this idea that having to be really rapid and adaptive in your cycling through learning and adjusting, is really a close connection. So I thought it be really helpful to learn a lot more about business agility more broadly than the very specific application that I saw within an IT shop.

Leslie Morse: Well, so I thought it was pretty interesting, one of the speakers the other said finance was the last frontier that Agile needed to conquer. What kind of reaction did that bring up for the two of you?

Mike De Luca: Well, I did talk to them right after and I said, “I know it’s so frustrating. If you think that finance is the last frontier and yet we can be among the first helpers and even help propel the change, then we shouldn’t be the last frontier.” That’s … There’s a big opportunity there, I think.

Leslie Morse: Excellent.

Nevine White: I mean, I think I had a pretty similar reaction. I was like, “It’s not necessary, though. We can fix that point.”

Leslie Morse: Beyond Budgeting, I’m guessing, is a critical piece of that fix that I’m guessing.

Nevine White: Yeah. It’s one philosophy around it. I mean, if they ask me frankly, Beyond Budgeting as a concept to celebrate its 20th anniversary this year.

Leslie Morse: Really?

Nevine White: Yeah, and so it’s really based on observing how world-class organizations who really excel at this idea of planning and managing dynamically – how they’re able to do this and set aside some of these old constructs that exists, that a lot of what create bureaucracy in organizations. That’s where it came from, but I definitely think that there’s a way for finance to be out on the forefront of that and not always be the ones that are holding on to the entrenched concepts of philosophies from the past.

Leslie Morse: As there no need for it to be laggard, it doesn’t have to be.

Nevine White: No, absolutely not. It’s just, historically, finance tends to be more the control point in an organization, so it’s hard to let go of some of those things that you, somehow, have talked yourself to believing were absolutely necessary.

Leslie Morse: Let’s just talk about, why is it called “Beyond Budgeting”? Because I’m not sure a ton of listeners really understand that.

Nevine White: I think it came from this idea that they were really looking at the planning aspect of organizations and the biggest construct within planning is budgeting in many organizations, and so it was the idea of propelling beyond that concept. Like I said, it’s a 20-year-old philosophy and a lot of the principles that underlie it have been updated over those 20 years to really keep current with where the focuses are these days. For example, there are concepts around customers, value streams and things like that that are just more in current vernacular – the current conversation than they were even 20 years ago.

But it is really about … It’s broader than just the budget; it’s not just about getting rid of the budget, it’s really about looking at your entire management system both the leadership style, the process side and how do you most effectively do that, because when you do pull that budget out of an organization, you break a lot of other things. You break your incentives, you break your resource allocation, you break a lot of other things, and so you have to figure out how you replace that one 100-year-old construct with state-of-the-art best-in-class-processes.

Leslie Morse: How did you guys find Beyond Budgeting as business professionals?

Mike De Luca: My organization had implemented lean, and from the leadership level down was really committed to continue with cycles of improvement, and that’s everything from strategy and strategy deployment all the way down to frontline, daily improvement methods and everything in-between. When that comes in conflict with a rigid annual financial planning cycle, where you’re trying, for a period of a couple of crazy months during the year, to figure out how you can shift or improve your cost or revenue for the next long period of time – and that comes into conflict with rapid process improvement and continuous process improvement and constantly looking at ideas for not just improving efficiency but improving your portfolio of services – improving what you develop to serve your customers with and your products – for us, it was potentially new clinics or new service lines, then the budget just becomes an annoyance and a constraint, and so our executive leadership team said, “We need a financial planning system that aligns better with an organization that’s moving more quickly,” and asked us to go out and do some research.

A few of us were familiar with the research on Beyond Budgeting, because like Nevine said, this isn’t an esoteric academic concept that was developed through some philosophical process. It was really gleaned over time through researching organizations that were getting great business results, really growing and being very competitive in their markets, and yet their planning processes and their philosophy around not just planning but around mentorship in general was completely different.

It started … I think one of the first companies that was observed doing this was in banking in Scandinavia. A regional bank in Sweden: Handelsbanken. They were not particularly growing in their market. The board brought in a new leader and that leader said, “You all come in and work at really …” It wasn’t necessarily a turnaround but really advancing the organization’s position and competitiveness, if … But I’m not willing to manage to a budget.” They were like, “Okay, fine. You can see what you can do.” He came in and really turned the organization into an incredibly competitive – and now they’ve expanded beyond Scandinavia; they’ve got branches in the United Kingdom, and it’s just an early success story.

When individuals started to observe their organizations, not just in banking but there are a couple of great examples in Petrochemical as well, who are doing really well, and interestingly enough, it didn’t have what we’re used to as a traditional annual budget – they said, “Well, how are they doing that?” Then, they learned that it’s not just about the tools that those companies use because there are great examples of tools that we can touch and feel and are very concrete like forecasts and the different types of reporting and indicators that are used, but it’s really a different philosophy around leadership. It’s very decentralized, it’s really intended to drive decision-making down the lowest appropriate level.

That was similar to the case in our organization: leaders wanted a financial planning model that aligned with that that really adaptive: the decentralized leadership, that empowerment of local teams to make decisions without constraints, but really around a shared vision. You mean, we know what the organization needs to achieve, everyone buys into that and is motivated by that. Let’s trusts that everyone can make the right decisions and the organization will move forward. That’s how our organization … That’s how I learned about it and then we implemented it.

Leslie Morse: Excellent. How long did that implementation take?

Mike De Luca: I don’t know that it ends. I mean, I think if you’re in a learning organization, you’re constantly learning.

Leslie Morse: Of course. But there’s got to be that first hurdle, right?

Mike De Luca: Yeah, exactly. A lot of the heavy-lifting can take anywhere from six to 18 months.

Leslie Morse: Okay.

Mike De Luca: I mean, I think it really depends on the organization. Our heavy-lifting was about six months of super heavy-lifting: the research that we’re learning about it, the de-constructing of the annual budget and beginning to replace it with other tools and processes, but then the work isn’t done, by any means. There’s work at both the leadership level and then engaging with finance and operations to communicate and say, “Well, now what are we using to measure? How are we making sure that, without overburdening ourselves, were still getting the results, or we’re getting better results than we were getting before? Then, I think that your experience was … Every organization’s experience is unique in terms of the time it takes. How about yours, Nevine?

Nevine White: Well, our implementation took about a year from the time when our CFO first said, “I need something different – a different way to really look at risks and opportunities.” For us, it was really about agility. We had to be able … Even back then, we used that word. It was really about being able to respond to the market we were in. It was telecommunications, we were a publicly held company, technology was moving way faster than we could figure out how to keep up, and we were one of the more nimble ones in that industry.

Really having a tool in place that wasn’t manufacture, it wasn’t negotiated where you knew going … I mean, everybody knows going into a bunch of process that people make up the numbers because they know they’re going to get cut, they’re going to get manipulated, they’re negotiating for their bonuses. It’s already a bad document to begin with and then you just build on top of that, and so he was just tired of the process and he said, “Figure out something else to do.”

It took us about a year to really launch the first part of just moving from having a budget to moving to something else. But to Mike’s point, then we spent the next nine years until the company was sold, really refining that process, and it’s because you’re constantly changing your business. Your business isn’t static so your model can’t be static or you fall behind again, and so you’re constantly tweaking, adjusting, figuring out ways to do things better.

Leslie Morse: Was it when you were doing that work that you became familiar with Beyond Budgeting the first time or had you been exposed to it before then?

Nevine White: No. We have a pretty dramatic little event in our CFO’s office where he literally threw the budget in trash can and said, “I can’t work with this. Figure out a better way to do this.”

Leslie Morse: Now was when you went and found it?

Nevine White: I was like, “Okay.” I went to my desk and I Googled, “What do you do when you don’t do budget?” And the Beyond Budget book had just been published – the original one – and so I bought it, read it and I was like, “Okay, some of this could probably work.” We came up with our own version of this because you have to.

Leslie Morse: Right.

Nevine White: There’s not a recipe in this book. It’s not a one-size-fits-all kind of thing. You have to figure out which of these principles really apply and which ones of them you may implement in a slightly different way, which ones are like, “This is never going to work for us,” and so we really we really molded it to be something that fit in our business … The way we culturally positioned. It was really read it, write a white paper for our executive team on it, convince them this was the right way to go and then go, and so that’s how we got there.

Leslie Morse: I’m guessing that, learning this for the first time, you’re deconstructing a lot of deeply ingrained mental models. The change management and adult development that has to go into that, to some extent, I think is probably even more challenging than some of these Agile transformations that we talk about. If you’re like, “Okay, this sounds like something we want to learn more about, how do even really get started?” Because it’s not just the business process changes, and Mike you alluded, we’ve got to shift that way we handle leadership. But the cognitive change that people have to go through in order to really think about this in a different way – how does one get started with that?

Nevine White: Well, I think part of it is having some kind sponsorship within your organization. For me, it was tremendous helpful to have a CFO that was visionary enough to understand that even though everything he’d ever learned in school, in his career, how he got to be a CFO – was all based around budgets and that that was currently his biggest obstacle.

You need to have somebody who’s willing to sponsor that out-of-the-box thinking. I think this is very difficult to do as a grassroots effort, from within the finance organization, for example. I think you really need that executive sponsorship. At least, critical mass on the executive team to pull the organization on because it does require your executives to be willing to give up some power. I mean, Beyond Budgeting advocates that you push your decision-making process as close to the frontline as you can. Well, that does require people to be willing to let go, trust and be transparent about not just how they make decisions but also around how they look at people and processes. You need transparency throughout your organization to be able to this kind of thing.

That’s a different mindset that when a lot of organizations have and, especially executives who have a long career and have done things a certain way the entire time, so it requires that willingness to be open, the willingness to really be sincere about a shift, and to challenge your cultural norms because they’re not all going to fit, and then yeah, there’s mindset shifts.

As were going into this, I knew one of things, in this organization, that we were really not very strong at was change management. We were … We learned this through some really ugly IT implementations. It was like, we had just hired somebody who was good at that, and so I brought him along, I said, “You need to help me with this” because I recognized I can’t … This isn’t a finance thing. This is an organizational thing, and so you need that organizational support – that change management – which has a finance person I knew nothing about to really to bring that skillset to the table of how do you get people to enroll in this because you can’t force this down somebody’s throat. It’s not going to stick, if you try to enforce this.

Mike De Luca: I agree that having the executive sponsorship is critical. If you don’t have clarity and alignment at the executive level that you’re going to run the organization differently and then you’re modeling that behavior at the executive level, you’re going to be really challenged.

Then, to get to your point, the adult learning challenge for us was, in some ways, really helped by a lot of what we learned from the research – is just deconstructing why it is you budget: well, why do we budget? And learning that you’re trying to accomplish a lot of things and then saying, “If we deconstruct that and then start to think about what would we do that’s more effective?”

One of the things that we’re doing with the budget is we’re trying to forecast: we look ahead, often, for a year; sometimes maybe in some organizations, we’ll look forward more than a year, but we’re looking forward for a calendar year or a fiscal year and saying, “We think this is what’s going to happen.” In some ways, it’s a forecast. Good, that’s one of the purposes it needs to serve. Now, what we would do differently that really effectively serves the purpose of forecasting?

One other thing that a budget, often, tries to do is to set a target, right? We need to be this profitable next year, or we need to generate this much revenue, we need to have our costs be this low in order to be profitable… Whatever it is, right? We’re setting targets as well. What can do now that if we peel this apart and deconstruct it, it really helps us effectively set targets?

We also need to be able to look at allocating both human capital as well as dollar capital whether it’s for a one-time capital purchase or even on-going operations and maintenance and running of the business. We need to be able to allocate those as well: how much human capital do we need for this particular line of business, this particular project and we need to be able to do that. We’re good, but how are we going to do that now in a really effective way that’s more dynamic, more adaptive, more real-time that’s responding to not just a response into the business but then proactive? Here’s how we want to position ourselves over the next month or the next quarter.

Then, last thing that a budget tries to do typically is to help us control. Now, we’re looking budget reports and saying, “Well, jeez, what are our variances?” Well, is that the most constructive way to gauge how we’re doing as an organization? Are there other measures, many of them, not financial that we can look at on a daily, weekly, monthly basis that result in those ending financial outcomes, but that are much more tangible for people who are actually running the business to manage, too?

Part of it, for us, was just the reality that you’re deconstructing something that has come together trying to serve many purposes over time, and then you can do each one of those in a much more, I would say, lean, less waste and more effective way, if you look at them individually. That’s part of … You asked about what’s, for an adult learner, how do you get your brain around this? It was that deconstructive process.

Leslie Morse: Yeah. I’m guessing there’s also an aspect of … Sometimes we go into organizations, and coming from agility coaching perspective, it’s like, “Well, why do you guys do this today?” Then, in some point, it was like, “We actually don’t even know; we’ve just always done it.”

Mike De Luca: Right.

Nevine White: Yeah.

Leslie Morse: One of my favorite questions to ask is, when is the last time you stopped doing something in order to improve because it’s so easy to just be additive with everything and I especially think about that with finance controls.

Mike De Luca: That’s true.

Nevine White: Yes.

Leslie Morse: A lot of times just adding more and more of them. What are – You, Mike, you mentioned some: your alternate metrics that can help us really track that performance because we use so many standard financial metrics – What are some of those other metrics that you find that organizations that go through this change are really starting to leverage?

Mike De Luca: Well, a number of … Let me think of some examples. What’s your time to delivery; how quickly can you deliver on a product? And is there a way to increase that? Is there a way to increase throughput or efficiency? I was talking earlier with another attendee at the conference about the amount of wait time in product development.

Leslie Morse: Now, which is so expensive?

Mike De Luca: Right, but it’s so invisible.

Leslie Morse: Yeah.

Mike De Luca: Right, it’s so invisible. We budget for a resource based on either what we can afford and, or what we spent in the past. But if we make visible, and then Nevine’s point is so important, this has to be done in a transparent way that’s not blameful. We don’t blame people for the waste that’s crept into our systems; we want to make it visible that to get their insight because they’re the ones that understand the business based on how to reduce and how to improve our outcomes – so can we just make that visible: how much wait time is there?

If I’m batching my work and you’re waiting for me to hand it off to you because I’m doing some early requirements identification on a whole bunch of different products – I mean, I’m making up an overly simple example – and you’re waiting now to move forward, if you’re in a business analyst role on customer requirements or something else, then what do you do in the meantime? I’m not saying that you’re not busy, but there is an inefficiency that’s invisible in a lot of what we do that drives not just our affordability but it drives how quickly we can deliver the amount our customers are asking us to deliver on.

That’s true, I would say, in so many different industries because I can even think about it from our healthcare delivery perspective, because my organization both delivered healthcare and provided insurance as well. The amount of time it takes just to get a clinic visit… well, what’s the amount of wait time for someone who needs to have some kind of a clinical encounter – procedure, operation and whatever it is? – what’s the amount of wait-time, if you look at that whole value stream? If we compressed all of that and actually took the amount of time when recreating value for that customer, then how much efficiency have we gained? How much quickly or more quickly are we delivering value? And that either increases the rapidity with which we’re getting revenue for the same amount of resources or something else?

Like I said before, all of these non-financial measures result in what we see ultimately as financial outcomes, but the folks who are the experts at running those businesses on day-to-day, week-to-week basis are managing not the dollars, they’re managing those actual processes. They’re managing the throughput of project development. They’re managing the effectiveness of scheduling clinic visits or an operating room or whatever that is.

Those are some examples of the types of measures that drive the financial outcomes. We’ll spend a lot of time talking to folks about – do you understand what drives your outcomes? What are you doing that’s resulting in these outcomes? And then how do we look at that with a thoughtful eye to what are some light-touch metrics that we can be looking or maybe you’re already looking at that we just want to focus on?

Leslie Morse: What would you say in that classic elevator pitch scenario? You get on the elevator with an executive, you’ve got that opportunity to explain to them beyond budgeting and why it’s, I’ll say, preferred or a better way of them approaching managing their business. What’s that elevator pitch sound like?

Nevine White: I think for the vast majority of them, it’s a simple question of “So what do you think of your budget process?” And usually people start twitching when you ask the question.

Leslie Morse: I agree. I was thinking earlier, I was like, “Oh my Gosh, doing this is such a gift for people in so many ways.”

Nevine White: Yeah. I think, logically, people get there really quickly, if you just ask them those simple questions, they can get there, from a logical perspective, very easily. The emotionally difficult part and the part that’s really hard is thinking through how you actually get there from an execution perspective.

It’s a difficult thing to do because you do impact and disrupt the culture in your organization because everybody is trained. We put people on autopilot with budgets. If it’s in the budget, you do it; if it’s not, you don’t. You done have to make a decision anymore. Once that budget is negotiated and approved, you’re done. Managing becomes really easy. But what we’re saying, “No, you need to be looking real-time at what’s going on in the organization in the environment with your customers, with your operations, with everything and make real-time management decisions,” and that’s hard.

Leslie Morse: It’s really a shift, almost, from management to real leadership in a lot of ways.

Nevine White: Yeah. Well, and its accountability. I mean, one of the biggest hurdles that I hit with our frontline management was … They’re all … Everybody was always screaming, “Well, I want to be empowered.” Like, “Okay, you’re empowered.” They’re like, “That comes with accountability, and now what?”

Well, just because you have the authority to make a decision, it doesn’t mean you have to make it in a vacuum.

Leslie Morse: Yeah.

Nevine White: You’re still allowed to go talk to your boss. You can call me and we can chat about this. We can run models. We can figure this out. But yeah, you actually have to manage now; you have to do your job. (Gasps) The concept!

Mike De Luca: I mean, one of the disadvantages to calling what we’re talking about “beyond budgeting” is it doesn’t really describe effectively what you’re moving beyond to.

Leslie Morse: Right.

Mike De Luca: I think that there’s a concern, and this is why your question around the elevator pitch is important, because we’re not just talking about getting rid of the budget, we’re talking about moving to a planning, control, leadership and management that’s more effective at getting better results.

We have to be really clear in that elevator pitch about where we’re replacing the budget with something that is more dynamic, more relevant for your organization and its markets that helps more effectively plan, control and support you’re getting results. Otherwise, folks are like, “I don’t have a budget now,” and now there’s no control; now, it’s out-of-control.

Nevine White: I mean, it’s similar to ‘O’. We’re Agile now; we don’t do planning – which is so not true.

Mike De Luca: Exactly.

Leslie Morse: Somebody is listening, they inspired, they want to get started, where do you go learn about this and what are some of the first one, two or three steps that an organization would want to take, if they wanted to initiate this journey?

Nevine White: Well, there’s certainly lots of literature out of there about it at this point, there are at least six books, I think, that have been written related to this, so if you wanted a very soft touch, to just inform yourself a little bit. We as Beyond Budgeting Roundtable of North America, obviously, are out there as a resource as well in terms of sharing and learning. We pride ourselves on a being a membership organization with cohort learning going on, and so we encourage people to learn from each other because, again, this isn’t a recipe, this isn’t just a toolkit you can just pull off the shelf. You really have to think through all these hard questions and figure out how they fit into your organization.

We can guide you terms of what the principle are, provide some basic training and education, connect you up with peers who have done this so you can experience some of the things that they’ve learned on their journey. We also have an annual conference that people can come to to learn more and network with other organizations on are on this journey with us. I mean, beyond that, you really have to put some work into this. This not easy-lifting; this requires effort, commitment and the passion to want to change.

Mike De Luca: I mean, like you said, Nevine, there are, there’s some great books out there. they can introduce you to the concepts: some great articles and white papers, and I think another of ways to get started are just, first of all, to ask yourself some of those really thoughtful questions, around, why do we budget and how is it serving us? Do we think we could be more adaptive, more flexible, if we thought differently about financial planning?

Then, maybe the next thoughtful step might be just to self-assessment against the principles that have been observed with the companies that do this really well. How might you self-assess? Because then that helps prioritize, right? We can’t do everything all at once, even if you’re going to look at what might you do in six months to a year, you have to find somewhere to focus and prioritize.
Is your first push, really needing to be at the leadership level because you need to develop the appetite for trust and transparency? Or do you really already have that in culture in organization and so you can move to saying, “Great, now let’s decentralized decision-making and create some very process specific tools that support – how would we do financial planning for persistence teams, for example”?

It’s really, but to Nevine’s point, you have to start with some organizational self-assessment, and then we have tools as part of the roundtable that really help guide you through that.

Leslie Morse: Excellent. Any final thoughts before we wrap up today’s conversation?

Nevine White: Well, I think I would encourage people who want to do this to really think about what the purpose is behind it and figure out a way to create the organizational capacity to do this because you can’t … This is not one of those things you can just pile on top of everything else your teams are already doing because …

Leslie Morse: Because it’s not additive.

Nevine White: You have to really, to your point earlier, you were saying about what are doing to stop doing to make some room for this? You really have to be deliberate about this because, otherwise, if you don’t dedicate some focus to this and resources, it’s just not going to go very far, and that’s going to be more frustrating than it’s really … It’s a disservice to this whole idea.

Leslie Morse: Absolutely. Mike, anything from you?

Mike De Luca: Yeah. I would just say, as an organization, think about what’s the problem you’re trying to solve? What’s your business case for changing the way you think about financial planning and financial management? Once you’re clear on the problem that you’re trying to solve, that will help you, then, give you context for digesting what you’d start to learn as you read through the books, come to meetings, workshops, etcetera.

Leslie Morse: Excellent. Well, Nevine, Mike, thank you so much for the chat today. I really appreciate it, and thank you all for …

Nevine White: My pleasure.

Mike De Luca: Thank you.

Leslie Morse: Thanks for listening today to this episode of Agile Amped. If you enjoyed it, we invite you to go over to iTunes and give us a rating and review.