Statoil is a Norwegian oil and gas company with activities in 34 countries, 20000 employees and a turnover of around USD 90bn. The company is listed in New York and Oslo. On Fortune 500, it ranks #67 on size but #1 on Social Responsibility and #7 on Innovation.
At Statoil, we try to take reality seriously, not just a dynamic and unpredictable business environment, but also all the competent and responsible people in the company. It sounds obvious, but requires fundamental changes in how we lead and manage. In 2005 we started on a journey of radically changing our management processes, which included abolishing traditional budgeting. In 2010 we also decided to “kick out the calendar”. These were both key steps towards a more dynamic, flexible and self-regulating management model.
Statoil has always been a values-based and people-oriented organization. But during years of growth since its foundation in 1972, traditional management processes were introduced brick by brick, causing increasing bureaucracy and rigidity. The gap widened between what we said in our leadership principles and what we did in our management processes.This is poison in any organization, making the leadership message hollow because the process message is always stronger. What we do always weigh so much more than what we say. “You are all great and the company would be nothing without you, but we still need to control you through detailed budgets, rules and regulations”. It does not help to have Theory Y leadership visions if you have Theory X management processes.
We wanted to close such gaps. We also wanted to find our way back to the agility and flexibility we had as a smaller company. The growth journey of companies shares many similarities with the aging process of man. As we grow older, we lose more and more of what we took for granted in our younger days; the agility, flexibility and spontaneity of youth. Having passed fifty, I am starting to get some personal experience! As age takes its toll, some also get weary of life and lose their spirit and that twinkle in the eye. This development in the human body and mind is unavoidable and irreversible, at least the physical part. It can be delayed through a healthy lifestyle or through other “interventions”, but in the end it takes us all. We have no choice.
Companies, however, have a choice. Companies are not destined to become slow and sad places to work because they grow and become older. Most of what causes this are decisions that companies make themselves, and cannot be blamed on destiny or on any aging process.
For man, older normally also means wiser. For companies, this is not necessarily the case, as they struggle to capitalize on a mountain of collective wisdom and experience acquired during the growth journey. The solution is often another new process, “Knowledge Management”. Many employees experience instead a “Dumbing Down” trend, as they observe more and more strange decisions made further and further away from their own reality.
Of course, one cannot manage a big company exactly like the small company it used to be. But could there be alternatives? Could there be other ways, ways which better balance the benefits of being big—which of course are both real and important - with the benefits of being small?
The big question for any large organization should be: "How can we revitalise the agility of the past without having to go back and start all over again? How can we be small and big at the same time, young and old, brave and wise?"
The budget and the whole mindset behind it might be a good place to start. So, in 2005 we introduced "Ambition to Action", abolishing traditional budgeting. And in 2010 we left the calendar rhythm.
Real and sustainable change requires a solid case for change. While almost everybody complain about the budgeting process, fewer understand that their problems are only symptoms of a much bigger and more serious problem, rooted in the entire management model. Some complain about all the work involved, some worry about the gaming and the sub-optimisation, some about the budget being a meaningless yardstick for performance, and some about how it prevents them from responding fast on value adding opportunities. But these and many other problems are all connected. These are all consequences of a traditional management approach that ignores reality, both inside and outside our organizations, both what motivates the “knowledge worker” and what the implications of a dynamic and unpredictable business environment really are.
But these are big and hairy issues, and for many hard to grasp or address. So we started out with something more tangible and logical and also less threatening. We simply asked, "Why do we budget?"
Most companies make budgets for three very different reasons; target setting, forecasting and resource allocation. Those budget numbers represents a set of targets, a forecast of what the future might look like, and an allocation of resources for next year. But these are all different things. The three purposes can’t meaningfully be handled in one process resulting in one set of numbers. A target is what we want to happen. A forecast is what we think will happen, whether we like what we see or not. And resource allocation is about trying to use our resources in the most optimal and efficient way.
An ambitious sales target can’t at the same time also be an unbiased sales forecast. And you rarely get a good cost forecast if the organization believes this is their one shot at access to resources for the next year.
Our solution to this serious problem was dead simple. We separated the three purposes, which made it possible to optimise each one in much more tailored processes. This allowed for instance for different numbers, updated on different frequencies and time horizons in each of the three processes.
But more importantly, the separation was a catalyst for all those bigger issues that we need to address. It leads us into important discussions, whether we want it or not. How can we find targets that really inspire and stretch without feeling stretched, while avoiding all the gaming and negotiation that adds no value at all? How can we make simple and unbiased forecasts, free of all the hidden agendas? How can we make people spend money as if it came from their own pocket? How can we move towards a management model which works more with and less against human nature? How can we be big and small at the same time? How can we take reality seriously? These are important questions for any large company. We have absolutely not solved them all, but we have definitely started.
Where possible, we try to use relative instead of absolute and decimal-loaded targets. Relative targets redefine performance. They address how we are doing compared to others, internally or externally, instead of a myopic focus on fixed and decimal oriented numbers.
The power of comparison is fascinating. I have yet to hear a team coming out low (given they find the benchmarking fair and relevant) announce that they have no ambitions about climbing on the ranking. This is a much more self-regulating approach compared to the traditional budget game which stimulates the very opposite mindset, the one that drives managers to negotiate for the easiest achievable number. As Michelangelo put it: "Our problem is not that we aim too high and miss, but that we aim too low and hit".
Benchmarking is of course nothing new, with its purpose of learning from each other. This should still be the main purpose. But we believe we actually get more learning by combining the two, by increasing the focus on those comparisons through also using them more directly to gently stimulate performance.
Statoil’s main financial targets are set against a peer group of fifteen other oil and gas companies. We aim to be in the first quartile on Return on Capital Employed, above average on Shareholder Return, and in first quartile on Unit Production Cost. These are the kind of financial targets our Board approve. They do not approve a budget. The two first metrics are also key in our common bonus scheme. Everybody in the same boat; us against the competition.
The quality of our forecasting has also improved because we have taken out much of the gaming bias that came from target setting or resource allocation. Our forecasting process is now leaner and with much less detail, although there is room for even more simplification. Some still believe that their cost forecast is their "budget application" for resources. Some also mix target and forecast, and believe they need to “deliver” on their forecast. What we want to deliver on is our targets, and forecasts are there to help us. They might for instance show that we are heading in the wrong direction, towards places that we absolutely don't want to go.
We also introduced a dynamic resource allocation which provides much bigger and more flexible decision authorities to local teams, and a much more dynamic rhythm. Imagine a bank informing its customers, “We have now changed our hours, so if you want to borrow money, we are now only open in October”. It sounds ridiculous - but isn’t this exactly what people in companies experience every year in the budget process?
We want the bank to be open 12 months a year. A funding request might still be refused; we should be just as good in saying no as yes. Cost is of course still very important for us. But why should we make all our cost decisions in the autumn, before we have to? Isn’t it better to make them as late as possible, when we have better information - not only about the new project or activity up for decision - but also about our capacity to fund it or staff it?
For operational or administrative cost, with less discrete decision points than projects, we offer a menu of alternative mechanisms for the business to manage its own costs. These include a "burn rate" guidance ("operate within this approximate activity level"), unit cost targets ("you can spend more if you produce more”), benchmarked targets (“e.g. unit cost below average of peers"), profit targets ("spend so that you maximise your bottom line) or simply no target at all ("we’ll monitor cost trends and intervene only if necessary").
In the corporate staff I am based in we have no cost targets at all, but we discuss cost all the time. There is no travel budget, but a colleague of mine just spent days considering if he should send two of his team members on a business trip from Norway to Houston. With an eye on the team's cost trend, he ended up saying yes, because of a strong plea for help from the Houston office. Next time, it might be a no. Pre-approval of travel cost is by the way only required for intercontinental flights.
In short, we try to make decisions at the right time and at the right level. Being a capital intensive and value-chain organized company, every single decision can't be made at each platform or plant. But given this industrial setting, we try to make decisions as far out in the organization as possible. In many other businesses decision authorities can be delegated even further out.
Here is our CFO Torgrim Reitan:
We could easily put in place a cost program instructing all business areas to reduce costs by a given number. I believe this would work against our intention of building a cost-conscious culture. If we want to become more fit, a crash diet does not work. It takes a change of lifestyle. I believe Statoil is made up of competent, responsible and commercially oriented people who will make the right cost decisions. This means always working hard to reduce bad cost, while protecting good cost. You know better than me what these are and where they are.
The question we want everybody to ask when making cost decisions is not “Do I have a budget for this?” but
Is this really necessary? What is good enough?How is this creating value?Is this within my execution framework? In addition, we must always consider capacity, both financial and human. As things look today, can we afford it, and do we have the people to do it? This information would typically come from our latest forecasts.
Last, but not least, we have introduced a more holistic performance evaluation, with hindsight insights as a key component, and with how we have achieved our business results counting 50%. How can we claim to be a values-based organization (as we do) if our values and people and leadership principles are completely absent in target setting and performance evaluation?
We also "pressure-test" measured business result. KPIs are indicators only; they often struggle with telling us the full truth. As Albert Einstein put it; “Not everything that counts can be counted, and not everything that can be counted counts”. We therefore use hindsight insights - the wealth of information unavailable for us at target setting time. We ask for instance, have we really moved towards our longer term objectives? Was there significant tailwind or headwind that should be taken into account? Are results sustainable, will they stand the test of time?
These evaluation principles are examples of how we try to address the entire process, not just the "finance" part. I am based in Finance, but we have worked closely with HR to make it all hang well together. This is not always the case. Both Finance and HR would claim to work with "performance management", but in many companies they don't talk well together. The two are much to blame for gaps between what is said and done. Finance is pushing management while HR is preaching leadership. Both need to climb out of their silos and start talking with each other and not just about each other.
I actually don't like the expression "performance management". Put yourself on the receiving end. How does it feel if someone wants to "manage" your performance? Most people feel overmanaged and underled, and for good reasons. Also, our ability to manage performance in today's business realities is actually quite limited. Fortunately, there is a lot of other great things we can do, but this has more to do with creating conditions for high performance to take place. This requires however a very different mindset, both from managers and from their finance and HR people.
We do all of what you heard about above in “Ambition to Action”, our management process which runs all the way from strategy to people, ending up in what we call "People@Statoil". Ambition to Action is based on the Balanced Scorecard concept, but combined with the Beyond Budgeting principles it becomes a much more unique and robust management model, solving many of the problems often seen in more conventional Balanced Scorecard implementations.
Beyond Budgeting is a coherent set of leadership and management principles. The name is actually misleading; it is about so much more than budgets, it is about taking reality seriously. But changing how we think about management and leadership also requires a radical overhaul of the budgeting process, because it sits at the core of traditional management. You have actually been introduced to many of the principles already. Take a look at bbrt.org for more information about this great model, which has inspired and guided so much of the Statoil journey.
Ambition to Action has three purposes:
Translate strategic choices into more concrete objectives, KPIs and actionsSecure flexibility and room to act and performActivate our values and our people and leadership principlesAlmost all our competitors have management systems which in some form or shape aim to meet the first purpose; creating strategic alignment. But so many ignore or forget the other two purposes, and lose what is key for success; autonomy and agility, trust and transparency, ownership and commitment. If your own Ambition to Action becomes nothing but a landing ground for instructions from above, both ownership and quality tend to walk out the door.
An Ambition to Action starts with an ambition statement, a higher purpose. Call it a vision, call it a mission. We don’t care, as long as it ignites and inspires. The Statoil ambition is to be “Globally competitive - an exceptional place to perform and develop”. This is translated into different versions across the company. One of our technology teams chose for instance “Execution for today, solutions for the future”. In our team, we "...challenge traditional management thinking".
- Ambitions and strategies are translated across five perspectives:
- People and organization
- Health, safety and environment (HSE)
- Finance (or Results)
You might recognize these from the Balanced Scorecard concept. We have added HSE because of the business we are in. In addition we have switched the order ("Finance" is typically on top), because we know what happens in business review meetings when the agenda is tight and time is limited. "Let us come back to people and organization next time…" Those are not the signals to send if we claim to be a people focused organization. So now “People and organization” sits at the top. Another small gap closed between what we say and what we do.
Today, we have around 1200 Ambition to Actions across the company. We try to connect and align all these through translation (each team translating relevant Ambition to Actions, typically the one above) instead of cascading (corporate instructing) . What should our Ambition to Action look like in order to support the Ambition to Action(s) above? What kind of objectives, KPIs and actions do we need? Can we use those above, or do we need something sharper because we are one step closer to the front line?
There are of course situations where instructions and cascading from above is necessary.But this should be the exception and not the rule, which makes it more acceptable when it happens. We are starting to find the right balance between the two, even if some managers still rely too much on cascading. If a translation should go "wrong", which seldom happens, this is of course addressed.
Used in the right way, the Balanced Scorecard can be a great tool for supporting performance and help teams to manage themselves. Unfortunately, many scorecard implementations seem to be about reinforcing centralized command-and-control. It is both tempting and easy to abuse that much bigger menu of management levers for Theory X driven micro-management, actually much easier than if you only have a financially oriented budget available to do that job. Many managers (and finance people) also bring an accounting mindset with them into these important issues. Alignment is not about target numbers adding up on the decimal, it is about creating inspiring clarity about which mountain to climb. Never forget the power of words in making this happen, even if it is so much easier to only let the numbers do the job.
To help the translation, there is full transparency around all 1200 Ambition to Actions. With a few exceptions of share price sensitive information, everything is open for all. In most ERP systems, transparency seems to be reserved for the top. They boast about fancy drill-down functionality, allowing senior executives to monitor the smallest local detail. But why should these guys spend time investigating travel and entertainment cost in every local team? What we need is much less of such drill-down, and much more of drill-across (what are those guys doing?) and drill-up (what was that strategy again?)
In short, we want Ambition to Action to be something that helps local teams to manage themselves and perform to their full potential, while we at the same time secure sufficient alignment. This means using a different type of glue, and smaller doses; translation instead of cascading. The main purpose should not be centralized command-and-control.
Here is our CEO Helge Lund:
We have a management model which is very well-suited to dealing with turbulence and rapid change. It enables us to act and reprioritise quickly so that we can fend off threats or seize opportunities. This is much more difficult in a traditional «budget world » One of the main principles in Ambition to Action is that Statoil consist of mature, responsible and able people who both can and want to accept responsibility.
The years following our 2005 decision were a period of experimenting and learning. We have had some simple implementation principles:
- Design to 80 % and jump. Not everything can be planned or fully designed upfront. Get started, experiment, learn and improve.
- Make sure the case for change and the problems with the old way is well understood before talking about the new way.
- Go for pull, not push. We have no detailed roll-out schedule; we never even used the word. So many are fed up with being on the receiving end of corporate ”roll-outs”, again and again. Instead, we focus on teams that invite us. Not once did we put our foot in the door because “this is decided”. It takes longer, it looks messier, but change becomes real and sustainable.
- We are however present in most of Statoil’s leadership programs and also in all introduction programs for new employees.
We continuously experiment with and improve Ambition to Action, on content, on process and on the IT system behind it. In 2007 we merged with a competitor (Hydro). It was a very successful merger and we are absolutely a stronger company today, but it meant starting almost over again. Still, the number of Ambition to Actions kept increasing, despite not being mandatory. This was a conscious decision, driven by our obsession with making Ambition to Action something that primarily helps teams to help themselves. You can’t make that mandatory.
Of course there are sceptics. They come in two groups. The first is the biggest, but also the one that concerns us the least. These are managers who simply are confused. They probably learnt very much the opposite during their business studies, and they might have honed these practices over many years. It can be painful to change old ways and your belief system, and we need to respect this. These guys just need time, and we give them time. Being confused is part of real change. We are challenging accepted truth and entering unfamiliar territory, which actually is one of the Statoil values, and my favourite!
The second group is smaller, and this is where we find the real sceptics. They are not confused. They fully understand what this is all about, and they don’t like it. This is so much against everything they believe in. Some may also pay lip service to the new principles, so you can’t even engage in a discussion. This group still exist, but is getting smaller and smaller. Some leave, some retire, and every day that passes makes it more difficult for those still with us to abort the journey.
On the contrary, we are moving on. In 2010 we were ready for the next step; escaping the calendar straightjacket. The purpose was to make Ambition to Action even more useful and relevant for all our business teams.
In April we went to the Executive Committee with our proposal to kick out the calendar. We got a strong and clear green light. On our way out of the meeting, one of the Executive VPs whispered to us: “Closer to a standing ovation you will not come in this room”. It was a good day, but only the start of another mountain to climb!
January-December is an artificial construct from a business point of view. For some it is too short, for others too long. Even when a business has seasonal rhythms, the winter season is cut in two because we pass “year-end”. Imagine a finance guy meeting a fisherman, asking him about the rhythm of his work. “Well,” the fisherman replies, “I am at sea for five months, and then I am home for five months.” “So what do you do then the rest of the year?” the finance guy wonders. Something is wrong, right? Absolutely, but maybe more in the head of the finance guy than in the working rhythm of the fisherman.
Our statutory accounting and our communication with external parties and the capital markets will of course still need to be calendar oriented, but our internal processes could still have more natural rhythms. We want to free ourselves from the artificial, annual "stop/start/stop/start". We want to give our teams the opportunity to run their business more continuously, with update frequencies, time horizons and evaluation points driven by their own business flow.
We have however an industry-specific challenge. A licence to explore and produce oil and gas in a certain area is for risk sharing and learning purposes typically awarded to a joint venture of companies. One of them act as the "Operator", who according to industry standards has to provide the other partners with a traditional, annual budget. We have been able to make this process somewhat less rigid than before, but we envy companies who don't have to operate in such a set-up. It is a complication, but not a showstopper. So everything you read about here is how we try to manage internally, despite such external requirements.
The main principles in our new and fully dynamic process are as follows:
- No annual versions of Ambition to Action. Strategic objectives, KPIs, KPI targets and forecasts can be changed when deemed necessary by teams themselves.
- Event-driven changes, not calendar-driven. Events can be external or internal, and the definition is simple: “Whatever is important for your team”.
- Simple change and coordination controls; Big changes should be approved one level above, smaller changes only informed about to. Big or small, always inform other affected units if necessary. Teams sort out between themselves what is big and what is small.
- Target and forecast horizons should reflect lead times, urgency, uncertainty and complexity in the different businesses.
What have triggered most questions is the possibility to change targets at any point in time, because something happened and they lost their meaning. That could either mean "impossible to achieve" or "a piece of cake", or also "not relevant anymore". A target should motivate and inspire. It is not a goal in itself, but one way of achieving the ultimate goal of the best possible performance, given the circumstances. Targets set by teams themselves typically do this job much better than those coming as instructions from above.
Some have concerns about this freedom being abused. There is just one way to find out, and that is to try it out. We have provided some help and guidance. First, there is full transparency, it won't happen in darkness. Second, you still need approval for big changes. And third, we remind people about the fairness of the holistic performance evaluation, where changes in assumptions can be taken into account. You don't need to change your target every time assumptions change. A relative target is by the way much more robust and self-regulating in this respect. If conditions change, they typically do so for your peers as well. We also ask teams to look at their track-record of changing targets. If it always is about reducing ambition levels and never the oppsite, that is an issue the team should reflect on.
It is still early days and we don't yet have enough cases to learn from. What we do know is that there will be incidents which might smell of "abuse". Those should be firmly dealt with, but is no evidence of failure requiring a return to the old way.
The dynamic forecasting we are introducing is different from what is often called rolling forecasting. A rolling forecast is done on a fixed frequency and on a fixed time horizon across the company, often quarterly and five quarters ahead. We want forecasts to be updated when something happens, and as far ahead as relevant for each unit. For some that could be short, for others long. If a unit one level up needs a forecast with a longer time horizon, it is their responsibility to “fill the hole” with a “good enough” forecast. Why should all teams be forced to look ten years ahead because aggregated this is a relevant time horizon for an oil company? For our oil trading people, anything beyond three weeks can be quite foggy, while three years is very much on the short side for those bringing new oil and gas discoveries into production.
Also targets can have shorter or longer time horizons, from months to years, again driven by lead times and complexity. Note that "dynamic" doesn’t necessarily mean more often. It means at the right time. For some it could actually mean less often.
Performance against Ambition to Action is reviewed monthly or quarterly in business review meetings. An individual performance evaluation will still take place at year-end. Some would then look back on a very dynamic Ambition to Action, others on the opposite. A log in Ambition to Action (which actually is an internally developed web interface sitting on top of a global SAP solution) keeps an overview of changes made.
Some have however questioned this review frequency. Why is once a year in January always the natural point for evaluating performance? Is it only because of the link to pay? Is that a good enough reason? Are there alternatives, again driven by more natural business milestones?
We hope our new and more dynamic process also will make the current autumn planning much leaner and one day even obsolete. This planning work, which is not about budgets but about action planning and understanding the consequences of actions through unbiased and expected outcome forecasts, is still too time consuming. Our goal is a more of a “living” forecast where those needing forecast information can tap into the latest information available. This can be done both regularly and ad-hoc.
We have tried to find other companies who have taken similar steps of radically challenging the calendar rhythm. We are convinced there is someone out there, but we are still searching. Many have introduced rolling forecasting, but we are aiming for a much more fundamental break with the calendar year.
Kick-off on this latest step was in January 2011. It is still early days and we still have many questions. All those situations which were so well regulated and understood in the old process, how should they now be handled? How often? How far out? What is “big” and what is not? All this uncertainty has however been well accepted. People are enthusiastic about the learning and adjusting phase we now are in. They would rather be part of finding out than just being told. There was actually more anxiety back in 2005 when we abolished traditional budgeting, even if a number of companies already had taken that step before we did.
Getting out of the calendar year will undoubtedly take time. Many are still cautious about utilising these new opportunities. The calendar is not just “hard wired” into our brains, it is also still highly present in a number of other processes in the company, which we now also are addressing. Some of these will need to continue on an annual cycle, with our statutory accounting as the obvious example. But again, this is not a showstopper.
There are other exciting things happening. Our IT colleagues actually started out on their own, inspired by the great lean and agile thinking which now is transforming how system development projects are run. One such approach, “Scrum” was introduced in Statoil several years ago. We stay in close contact because there is so much common ground, both in what we rebel against and what we are trying to do instead. They also realise that a company can never be fully successful with agile software development unless agile also becomes the way the whole organization is run.
Our new and more dynamic principles are in no way easier than those we are trying to leave. We have spent countless hours in management teams and on leadership training, helping Statoil managers to refect on the leadership implications, not just from leaving the calendar year but from all the other steps taken on this journey.
Here are some of our key messages:
- You have more autonomy and flexibility, but also higher accountability for results.
- Use your autonomy; don’t delegate upwards – and let it pass on to your teams.
- Don’t give up when trust is abused, but react firmly to those who do.
Some managers struggle with their new freedom. If you don’t like to make decisions, then a detailed, annual budget and tiny decisions authorities is actually a great thing. Decisions are made for you, both what to do and how much it should cost. While the vast majority of Statoil managers highly appreciate the new and bigger room to act and perform, some struggle with passing it all on to teams in their own organization. “I can of course be trusted, but… “. We can’t instruct them to do so; at least we shouldn’t start there. They need to find out themselves why passing it on is a good idea. Eventually, most do even if it can take some time. For some, the excuse for not letting go can be incidents they have experienced which they believe prove that “this trust thing doesn’t work”. This is the wrong conclusion. We should deal resolutely with those who abuse trust, but should not take the tempting and easy option of retreating to the old way. In a free society, we are not sending everybody to jail because someone violates the rules of the game.
It is still early days for measuring sustainable results, even if we are convinced that there are positive performance effects. But it might not be a coincidence that we are Norway’s most popular employer among technology and finance graduates. Or that we did pretty well on Fortune 500. Or that we perform pretty well against the peer group of fifteen other oil and gas companies that we set our targets against. We have actually performed better than the average of them for several years, except when we had our big merger in 2007.
Everything you have heard about here is decided and described in our “Statoil Book”, a small booklet given to all employees (on these kind of important issues we believe in the physical paper format, but it is of course also available on our intranet). But as you have heard, decided and described does not mean that everything yet has reached every corner and every head in Statoil. These are major changes. They will and they shall take time.
Our discussions are not about going back, they are about how to make it all work even better. Of course we have our dark days, when we hear words or observe behaviours echoing the past that we are trying to leave. We have however an effective medicine for those days. We just think back on where we were five or ten years ago. That always helps. And if we make similar advances over the next five years, then…
I am proud to work for a company where we are encouraged to challenge accepted truth and enter unfamiliar territory. We are on an exciting journey, which is in no way over and where the direction is clearer than the destination, if there really is one.
Welcome on board!
P.S. What you just have read is the short version of the Statoil story. If you are interested in the long version, or another story about how we kicked out the budget in Borealis in the mid-nineties, or more about the problems with traditional management, you might want to check out my book "Implementing Beyond Budgeting". See links below, also for related books which I highly recommend.