BBRT Members’ Meeting and Ashby’s LORV

I thought I would start with the least appealing title for a blog post ever – so well done if you’ve got this far.  I’m about to apply the next filter- BBRT stands for Beyond Budgeting Round Table ! And finally, for the few of you who are still reading – LORV stands for the Law of Requisite Variety.  By this point I can probably say, thanks Mum for reading my blog entry and Happy Mother’s Day.

So this is my summary of the Beyond Budgeting Round Table Members’ meeting, which took place at the QEII centre on Wednesday 22nd March.  This is the first BBRT members’ meeting I have been to, and as it turns out, my great helm, chainmail armour and gauntlets weren’t really necessary.

My first observation was that although the event was held in London, there were only a small number of guests from the UK.  Only a single figure number of the 63 delegates were from organizations in the UK, discounting those from the Beyond Budgeting Institute itself.  Representatives from the Scandinavian countries made up about half of the audience and I have a theory for that, which I will espouse later.

There were six very interesting speakers on the day. First up was Yuri Van Geest. Yuri is the co-author of Exponential Organizations and the founder of SingularityU The Netherlands, which partners with the Singularity University to help prepare European society and companies for the impact of exponential technologies.

Exponential Organizations

The theme of Juri’s presentation was ‘Exponential organizations’. The gist of the presentation was that the world is changing exponentially, driven by technology and that old organizational models will not work. Therefore, organizations need to adapt.  He used the metaphor of a tsunami arriving (emphasized by video footage of the initial stages of the Tsunami forming off Thailand in 2004).

He gave examples of some of the most significant disruptors, particularly the advances of quantum computing, led by China, who, according to Yuri, are two years ahead of Silicon Valley in the field of computing.  Have you heard of Rose’s Law? In 2003 Geordie Rose predicted that ‘the number of qubits in a scalable quantum computing architecture should double every year’.  Ring any bells? I’ve seen it described as Moore’s Law on steroids!

Yuri described how advances such as the convergence of AI and quantum computing, Qi nanophotonics (interaction of light and nano scale stuff) and Qi biophotonics (use of light-based technologies in medicine and the life sciences) will lead to a fundamental transformation of the world. The term ‘exponential organizations’ I think is used to describe companies that are organized to leverage an assumption of abundance e.g. AirBnb leveraging the abundance of real estate, Uber leveraging the abundance of drivers and cars.  In his view the abundance of data and computational power is moving us towards an economy of abundance and traditional organizations structured for managing scarcity of resources will need to change.

Yuri’s vision of the future was a very positive one. Machines will be able to do most of the thinking for us but this will mean that emotional intelligence, feelings, creativity etc., things which computers will (probably!) never replicate, will become even more important.

This was an interesting presentation even if it felt a bit scary.

From the scary to the uplifting

The next speaker was Nicole Koster from Buurtzorg, a Dutch neighbourhood nursing organization. Most of you will probably recognize the name of the organization as they are one of the case studies in Frederick Laloux’s ‘Reinventing Organizations’.  For that reason and the fact that Tobias Mayer and Ash Sheik have recently done great presentations on Teal organisations at Meetups, I’m going to skip over most of the presentations except for a couple of points.

Although self-organisation is one of the significant things that Buurtzorg do differently, it was never a goal. It evolved that way because Buurtzorg recognized that their purpose was not just providing medical care, but to help people live meaningful, autonomous lives; self-organized teams were the best way to serve that purpose. Buurtzorg then grew because people wanted to work for them. They had no PR and no HR strategy but by default they attracted the sort of people who were comfortable working in that way.  In the Q&A at the end of the presentation, Nicole was asked how Buurtzorg trained people to work in this way and she said that they didn’t need to because it is the natural way for the people they attract.

Adaptive Organization

The next speaker was Carl Adam Rosenblad, the CEO of Consilium, who build safety and navigation products for the marine sector. He described Consilium as a ‘micro multinational’ company – they have 700 employees in 53 offices in 23 different countries.  Carl began the case study by describing the previous culture of Consilium where firemen were the heroes.  They produced over optimistic plans and when that led to poor outcomes, new over optimistic plans would be produced. Despite this, the company did well when the shipping market was good.  However, with the 2008 global financial crisis, shipping orders crashed and the marine business crashed with it.

Their reflex reaction was to centralize decisions to the top. Any decision on spending had to go up the hierarchy a few more levels. Process was given more importance and departments were set up as internal customers to each other. This led to paralysis and a loss of clarity on who the customer really was and the company fell into crisis.

In 2010, Consilium realised a new start was needed and they set out to build an ‘adaptive organization’. The first 30 days was first aid but aligned to some key concepts (these are the ones I remember):

  • Simplify
  • Be guided by customer value
  • Take decisions where the knowledge is
  • Organise to maximize customer value
  • Trust people to think on their own

Once they were through the first-aid period they organised a whole day workshop for everybody. They shut down the company for a full day and took it out to the teams and asked what they could do.  Key to this was transparent and visual communication. Carl described this as the Obeya strategy from Toyota Production System. Whereas previously, the default status for information was confidential, this principle was turned upside down and the policy became that everything was transparent unless there was a specific reason for it not to be.  The 50-page confidential business plan was reduced to one page and made public.

They made key metrics such as Cash Flow visible and focussed more on trends and moving averages instead of specific targets. Teams followed their own KPIs and scoreboards were used, not as a policing exercise but more for gamification and to get teams focussing on actions to improve.

The annual budgeting process consumed time.  It involved C level people flying around the world for 4 weeks consecutively,  which consumed about 10% of management time and at the end all they knew was that it was wrong. So, they moved to rolling forecasts done four times a year. They simplified the number of KPIs and replaced comparison KPIs with comparing every unit against itself (the analogy was trying to improve your handicap in golf). Carl produced some compelling data on how Consilium has turned itself around to be a very successful adaptive organization.

The key take aways for me were: –

  • There is no template for doing this.
  • You can’t do it by yourself. Work with the believers and the others will follow.
  • Complexity and bureaucracy grows exponentially.
  • Resist the temptation to control people.
  • Gamify measurements. Make it fun.
  • Be patient. It takes a long time but the upside is bigger than the downside.

Beyond Budgeting is a framework that facilitates self-organisation

So, we were at lunch at the Beyond Budgeting (BB) conference and there had been no mention of spreadsheets, financial plans, targets, costs, Opex, Capex, resourcing etc.  Was I at the right conference?  And that is the point – “Beyond Budgeting” is a terrible name for what is in fact a management system.  It is a management system characterized by flexible financial management processes and a devolved organisational structure. It enables businesses to adapt to the changing environment more effectively than those with traditional fixed budgets and functional hierarchies.

And this leads me to my theory of why most of the attendees were from Scandinavian countries. BB is a framework that facilitates self-organisation. It encourages accountability and teams are trusted with decision making rather than being told what to do. My theory is that maybe Scandinavian culture is more egalitarian than the UK culture and therefore the principles of Beyond Budgeting fit more naturally in that culture. This also reflects in the history of the BBRT which was founded in the UK in 1988 (yes, it is nearly 30 years old!)  but then companies in Scandinavia such as Handelsbanken, Statoil and Borealis were early case studies as the principles of Beyond Budgeting matched the practices that these organizations were already following.

Law of Requisite Variety

Anyway, into the afternoon and some freebies.  First, a brief book, “The Little Book of Beyond Budgeting” by Steve Mortlege.  This is an excellent little book and quick to read and despite the brevity there is still room for a sciency bit – that is Ashby’s Law of Requisite Variety (LORV).

Ashby’s LORV explains:

how complex, purposeful systems, such as businesses or organisms – interact with their environment

Although Ashby’s LORV can’t be used to precisely design a system, it is important to consciously balance the regulatory, environmental and goal varieties when designing organisational processes. Budgets are prescriptive so have low variety. The budget also defines the targets -this is the Goal variety and has low variety.  That means therefore that where there is low regulatory variety and low Goal variety, the environment must be predictable (low variety) for Ashby’s law to apply.   If the environment is not predictable then the variety equation does not balance and something must give. If you can’t reduce the variety of the environment then to balance the equation you could a) increase the variety of the Goal by ignoring or missing some targets b) increase the variety of the regulator by changing, ignoring, bending or breaking the rules.

What is important according to Steve, is that the variety equation should be balanced by design and that problems start when it is balanced by accident.

Steve’s book is called “The Little Book of Beyond Budgeting” and is available from Amazon.

The next speaker was Julian Birkinshaw of the London Business School, professor and author of numerous books including “Reinventing Management: Smarter Choices for Getting Work Done”. He gave away copies of his latest book “Fast/Forward: Make Your Company Fit for the Future” which was hot off the press last week and isn’t even available on Amazon yet.

Julian’s theme was that although we dedicate a lot of time to innovating around products and technologies, we spend relatively little time innovating our business or management models. There are some innovative models such as those described below but mostly the assumption appears to be that we have no choice in how we manage.

Morning Star and  W.L. Gore No managers, no hierarchy
Zappos Holacracy
Spotify Engineering culture
Valve A gaming company in Seattle with “no bosses, no middle management and no bureaucracy

He explained how in the transformation from the Industrial Age to the Information Age, in order to manage the complexity we created bureaucracy where coordination was through rules and procedures and superiority over each other was conveyed in hierarchical structures. These organizations could get bogged down in bureaucracy and become unable to make rapid decisions. Currently, at least in the private sector, meritocracy is more commonplace, where knowledge and expertise carry more weight than position.

However, in Julian’s view, that has its own problems and meritocracy can be slow and inward looking. If neither of these worked well in an ‘Agile Age’ then there is a third organising model, Adhocracy, where action is prioritised ahead of knowledge or position. This is the organisational model of many Lean Startups. In an adhocracy, action can drive thinking. In Julian’s view, the key to an adhocracy is creating ‘psychological safety’ where it is safe to fail. How do you do that?  He cited the example from the pharmaceuticals sector where they are experimenting all the time and failure is needed to develop new drugs; he told the story of Roche Pharma who have monthly meetings that include a failure review that demonstrates that failure is expected to have happened.

I need to sit down and read Julian’s book “Fast Forward” to explore this further.

Dynamic Management Journey

The final session was a case study given by Sigurd Aune of Sparebank1 which is an alliance of savings banks that collectively make up Norway’s second largest bank.  Unfortunately, in the break immediately before Sigurd’s presentation, it was clear that something untoward was happening in Parliament Square directly opposite the building we were in.  Shortly into his presentation, one of the organizers interrupted to advise that the hotel was in a locked down area and as many delegates had flights to catch, some had to leave the conference at that point.

However, we were given the ok to continue and Sigurd described Sparebank1’s nine-year transformation journey or Dynamic Management journey as he called it, which I thought was a much better name for Beyond Budgeting.  Sparebank1 were inspired by Handelsbanken and their journey coincided with the financial crisis of 2008 because in Sigurd’s words “that wasn’t in our budget”.  Although it was a bold step, Sigurd explained that if it didn’t work then they always had a ‘medicine bottle’ and just because they were trying a new way, it didn’t mean that they had forgotten how to do traditional budgeting if they needed to go back. They recognised that the traditional budget was not a good benchmark for performance and started by decoupling the components of the traditional budget; goals, forecasts and resources.

I think the principles that they followed, as described by Sigurd, are the six process principles and six leadership principles of Beyond Budgeting, which I have replicated below.

Techniques they used included rolling forecasts, balanced scorecards, benchmarking and trend reporting. Rolling forecasts were described as “a tool for better decision making”. They weren’t applications for resources or targets so didn’t have to be met.  The aim was to identify gaps between ambition and forecast and, in his words, for rolling forecasts to work, everybody must be “brutally honest”.

Success was redefined as doing better than their competitors rather than outperforming a budget and so they introduced benchmarking with their competitors. Sigurd drew a comparison with football league tables where teams do not plan to score and concede a specific number of goals but describe their goals relative to others e.g. finish in the top 6.

They cut all their bonus and incentive programs and replaced it with a companywide profit sharing scheme. In the Q&A, Sigurd was asked whether they had lost any key people by removing bonuses and the answer was an emphatic “no”.

The other key message I took from Sigurd’s presentation was the need to get HR on board and avoid the transformation becoming a project owned by finance.

The very informative conference ended quite surreally as we were led out of a side exit of the QEII building and followed the police cordon out of the area.  The next members’ conference is in London in October and if the speakers are as good as this conference then I shall look forward to attending.

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