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Beyond Budgeting -
Strategic and Operative Planning at Borealis
By
Thomas Boesen
Contact Information:
Borealis A/S
Lyngby Hovedgade 96
DK - 2800 Kongens Lyngby
DENMARK
Phone: +45 4596 6000
E-mail: thomas.boesen@borealisgroup.com
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 1
Borealis in Brief
Established in 1994 by a merger of Statoil’s (Norway) and Neste’s (Finland)
petrochemical divisions
A polyolefins company with integrated cracker and polymer production
Producer of environmentally superior polyolefin plastics polyethylene and
polypropylene
The world's fourth largest polyolefins producer
In addition to products, Borealis offers its proprietary technology to the
polyethylene and polypropylene industries under the trademark Borstar.
Main competitors: Dow, ExxonMobil, Basell (Shell & BASF), Equistar, BP, Du
Pont, and AtoFina
For more information, visit us at:
For more information, visit us at:
www.borealisgroup.com
www.borealisgroup.com
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 2
The Products Can Be Found in Thousands of
Everyday Products Like Diapers, Food Packaging and
Housewares to Cars, Trucks, Pipes and Power Cables
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 3
Borealis in Europe Key figures (2000)
• Turnover EUR 3,7 billion
• 5,200 employees
Head Office
M&A activity
Production
• Summer ‘98 the ownership
Sales changed to Statoil(50%),
Porvoo
Rønningen OMV (25%) and IPIC (25%)
Tallinn
• Acquisition of PCD Polymere
Stenungsund
on Sept. 1, 1998.
Copenhagen Moscow
Wilmslow
Antwerp Beringen Warsaw
Düsseldorf
Kallo
Paris
Munich Prague
Burghausen
Outside Europe Linz Schwechat
Geneva
Budapest
Cublize
Joint ventures: Monza
Borouge (Abu Dhabi), Lisbon Barcelona
Sines
Borealis-OPP (Brazil), Istanbul
Nova-Borealis (USA)
Sales:
Singapore, Hong Kong
and China
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 4
Dilbert Logic on Budgeting and Strategy
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 5
Why Did We Abolish Traditional Budgeting?
We wanted to:
Improve our financial management and performance measurement
Decentralise authority and decisions
Simplify the budgeting process
Reduce the resources used in the process
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 6
Traditional Budgeting Has Many Weaknesses....
Conflicting purposes - target setting versus financial forecasting
Not only a ceiling - also a floor for costs
Promotes centralisation of decisions and responsibility
Inflexible to changes in planning assumptions
Absorbs significant resources across the organisation
Tends to make financial control an annual autumn event
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 7
Petrochemical Industry Profitability Index in W Europe
Index
(1Q 84 = 100)
600
500
400
300
200
100
0
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Chem Systems
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 8
We Achieved What the Budget Did in a Simpler Way
The budget was used for: We achieve the same through:
• High level financial and tax planning Rolling financial forecasts
• Target-setting Balanced Scorecard
• Controlling fixed costs Trend reporting
Cost targets where and when needed
Activity approach
• Prioritising and allocating Small projects - trend reporting
investment/project resources Medium - Varying hurdle rates
Major strategic projects - Case by case,
the budget was never a tool ....
• Delegation of authority Use existing mandates/authority schedules
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 9
We Have Separated Performance Measurement
From Financial Forecasting
Broader Performance Measurement
Balanced Scorecard
- Financial KPI’s
- Non-financial KPI’s
From Financial Budgeting To
+
Rolling Financial
Forecast
- Rolling 5 quarters
- High level, few
details
Better forecasting with less resources
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 10
The New Tools Cover What the Budget Did,
but Also a Lot More
Rolling Financial Forecast Balanced scorecard
- Quarterly update Non-
- Non-financial targets
- Rolling 5 quarters outlook & measurements
- Link to strategy
- Financial targets relative to
market
- Annual outlook - Financial targets
& measurement
BUDGET
- Limited cost - Annual plan
understanding - Annual outlook
Controlling fixed costs Investment management
- Activity accounting and - Trend reporting & 5 quarter
product costing outlook
- Improved cost understanding - Decentralised decisions
- Product and customer costing - Frames if needed
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 11
Rolling Financial Forecast and Trend Reporting
Rolling financial
forecasts and Balanced
trend reporting Scorecard
Controlling Decentralised
fixed costs investment
management
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 12
Rolling Financial Forecast
For financial and tax planning at Group level and main legal entities
No element of target-setting - only most likely outcome
Updated quarterly , covering next 5 quarters
Minimal resource use focusing on less details
Higher accuracy than budgets
Benefits
Continuously looking one year ahead
Always incorporates latest external and internal assumptions
No conflict between forecasting and target-setting
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 13
The Rolling Financial Forecast Process
Other: Consolidation
model
Corp. planning: Polyolefin Group
Prices model: Income Statement
Calculation of
turnover and Group
sales margins Balance Sheet
Business Units:
Volumes per
plant Group
Cash Flow
Investment
Sites: database.
Investments,
fixed costs and
depreciation
Local RFF
Group Finance:
Exchange Accounting & Tax
rates, inflation,
and changes in
loans
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 14
In Practice, This Is How We Do It! (1)
Market price developments Market volume developments
Price Drivers: Volume Drivers:
Industry stock building Sales activities
General market consumption Industry stock building
Capacity developments General market consumption
Trade between Asia, Europe and the US Capacity developments
Data built up from product groups Planned maintenance jobs
Alternative market channels
Source: Data built up from assets
Corporate Strategic Planning
Market Analysts in Business Units PE & PP Source:
BU Operations Planners
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 15
In Practice, This Is How We Do It! (2)
Fixed costs, depreciation and Exchange rates, inflation and loans
investments
Source:
Fixed costs drivers: Group Finance forecasts the developments
Site Development Program (more for less) in exchange rates and inflation based on
On-going projects the economic climate.
General activity level Changes in loans are based on the current
Head count loan agreements.
Financial needs are calculated based on
Investments are handled separately the difference between cash flow from
operations and financial obligations.
Source:
Site controllers
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 16
The Forecasts Include Full P&L and Balance Sheet
CONSOLIDATED P&L CONSOLIDATED BALANCE SHEET
Turnover ASSETS LIABILITIES
Sales margin Trade payables
Short term int. bearing debt
Fixed costs Cash / deposits Dividends to be paid
Operating margin Other liabilities
Trade receivables Short term liabilities
Depreciation
Other receivables Long term liabilities i)
Operating profit
Inventories Badwill
Profit of ass. comp / sale of ass.
Other provisions
Financial income
Current assets Provisions
Financial expenses
Net finance Subordinated loan
Net extraordinary items Minority interest
Profit before taxation Tangible fixed assets Share capital
Income tax provision Premium on issue
Financial fixed assets Profit for the year
Profit after taxes Retained earnings
Fixed assets Shareholders' equity
Total assets Total liabilities
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 17
Updated View on Group Level, Quarterly
DEM/T KT/Q KT/Yr
Market Prices Polyolefin Sales Volumes
1.400 Forecast 600 Forecast 2.320
2.300
580
1.200 2.280
560 2.260
1.000
540 2.240
800 PE PP Feedstock Integrated Margin 2.220
520
2.200
600
500 2.180
400 480 2.160
2.140
200 460
2.120
0 440 2.100
97q1 97q3 98q1 98q3 99q1 99q3 Year 97 Year 99 97q1 97q3 98q1 98q3 99q1 99q3 Year 97 Year 99
MDKK/Q MDKK/Yr
Operating Profit Return On Capital Employed
1.000 Forecast 3500 25
900 Forecast
3000
800 20
700 2500
600 15
Percent
2000
500
400 1500 10
300 1000
5
200
500
100 0
0 0 97q1 97q3 98q1 98q3 99q1 99q3 Year 97 Year 99
97q1 97q3 98q1 98q3 99q1 99q3 Year 97 Year 99
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 18
Balanced Scorecard
HALL OF FAME
Balanced
Rolling financial Scorecard
forecasts and
trend reporting
Controlling Decentralised
fixed costs investment
management
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 19
The Balanced Scorecard Approach Provides More
Than Traditional Budget Measures
What is new ?
More focus on non-financial performance
(‘balance’ between financial/non-financial)
Use strategy more systematically as guidance for selecting KPI’s
How can we use it ?
Use scorecard for target-setting and reporting progress
Addresses the drivers behind the financial figures
Use the scorecard to communicate the strategy
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 20
The Starting Point for the Balanced Scorecard Is Our
Strategic Direction “One of top 4 globally -
but more focused”
Grow “The global leader in
Performance Products”
Win Develop Borstar
Through “A technology leader
into a commercial, through Borstar”
Our successful
People technology
“A European leader in
Improve overall competitive HSE, Customer
position Satisfaction and Cost”
Shareholder Value Creation 12 - 15% p.a.
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 21
Key Performance Indicators Are Being Derived From
Our Strategic Direction
Strategy Perspectives Objectives Measures
– Outperform
– Outperform – Relative Opr. Profit
Competition
Shareholder Competition – – Relative Opr. Profit
Sales Volume
Value Financial – Business Growth
– – Sales Volume
Financial – Business Growth
– Leading Cost
Fixed Costs
Creation – Leading Cost – – Fixed Costs T
Cash Costs /
Position – Cash Costs / T
Position
– Leading Customer
Leading – Leading Customer
Satisfaction
– Claims Frequency
Customer Customer Satisfaction – – Claims Frequency
Market Related
Customer – Borstar Customer
– Borstar Customer
– Market Related
Production Loss
Satisfaction Acceptance Production Loss
Acceptance
– Leader in Operational
Improving – Leader in Operational
Performance – Quality Loss
Internal Performance
Overall Internal – Industry Leader in – – Quality Loss
TRI Frequency
Competitive Business – Industry Leader in – – TRI Frequency
Business HSE&Q
HSE&Q
Borstar Project
– Borstar Project
Position Process – Leading Competitive Milestones
Process – Leading Competitive Milestones
Position For Borstar
Position For Borstar
Internal – Develop A Winning
Win Through Internal – Develop A Winning
Culture – Human Capital Index
Our People Learning Culture
– Build Capability Training Capital
– – Human Days Index
Learning – Build Capability – Training Days
& Growth
& Growth Platform
Platform
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 22
Corporate Strategic Objectives
Grow Develop Borstar
Grow Develop Borstar
Improve overall Outperform into a commercial,
Financial Improve overall Outperform into a commercial,
competitive position Competition successful technology
Perspective competitive position Competition successful technology
Leading
Leading
Cost Position
Cost Position
Business Growth
Business Growth
Customer
Perspective
Borstar
Borstar
Leading in Customer Acceptance
Leading in Customer Acceptance
customer satisfaction
customer satisfaction
Internal Business
Process Perspective
Leader in Leading
Leader in Leading
Operational Performance competitive position for
Operational Performance competitive position for
Borstar PE & PP
Borstar PE & PP
Industry Leader
Industry Leader
in HSE
in HSE
Internal Learning and
Growth Perspective
Develop A
Develop A Build Capability Platform
Winning Culture Build Capability Platform
Winning Culture
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 23
Direction Set on Group Level, but Each Unit Owns
Their Balanced Scorecard value for owners
Focus on
Group
Balanced Scorecard
Business Business
Manuf. Div. Perf. Prod. PO & Chem.
Development Support
Balanced Scorecard Balanced Scorecard Balanced Scorecard
BSC BSC
Austria Wire & Cable Polyethylene
R&D Financial
Balanced Scorecard Balanced Scorecard Balanced Scorecard
Belgium
Balanced Scorecard
Porvoo, FI Pipe Polypropylene
Balanced Scorecard Corporate Control
Balanced Scorecard Balanced Scorecard
Rönningen, NO
Balanced Scorecard
Sines, PT
Balanced Scorecard Eng. Appl Olefins, P&A IT&S
Balanced Scorecard Balanced Scorecard
Stenungsund, SE
Balanced Scorecard
Focus producing the Focus on ‘value Focus on high volume, Focus on Focus on defined
right products at the added’ products. and low costs. competitive quality level
right time and quality. Differentiation Economies of scale advantage and low cost
High safety focus
Low cost focus
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 24
Controlling Fixed Costs
Rolling financial Balanced
forecasts and Scorecard
trend reporting
Controlling Decentralised
investment
fixed costs management
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 25
Means of Controlling Fixed Cost
Competition sets the standard
Performance is determined through benchmarking, e.g. in
– Manufacturing
– Sales
– Support functions (e.g. Finance and HR)
The relative performance concept includes fixed costs as an element
As a lump sum, fixed cost most often is a target on the Balanced Scorecard
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 26
In Phase I, Activity Based Management Was Used to
Understand and Manage Resources (Fixed Costs) Better
Activities create a common language for describing costs and supporting
benchmarking
Activities help understand consequences of cost reductions
ABM allows us to follow true project costs across the company
ABC provides better information to manage customer and product profitability (true
profitability)
Experience Gained (Phase II):
– After successful stand-alone solutions for ABM, the solutions were implemented in SAP
only with limited success.
– January 99: Decision taken to remove the ABM model from SAP to simplify the ‘CO’
environment.
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 27
Investment Management Based on Trend Reporting,
Strategic Fit and Varying Hurdle Rates
Rolling financial Balanced
forecasts and Scorecard
trend reporting
Controlling Decentralised
fixed costs
investment
management
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 28
Investment Management Without Budgets
Small investments sites/functions (below 10 MDKK)
Trend reporting, frames if required
Medium (between 10 and 50 MDKK)
Varying profitability requirement (hurdle rate)
depending on investment capacity Medium Small
in Rolling Financial Forecast
Strategic fit
Strategic
Strategic (above 50 MDKK)
Executive Board decides case by case
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 29
Controlling the Level of Medium Projects (10 - 50
MDKK); We Use the Hurdle Rate More Actively
Investment level
The required hurdle rate will depend on
desired investment levels and the group
cash flow situation
We have the option to distinguish
between risk categories; lower hurdle
rates for cost reduction projects than
e.g. margin increase based projects
Hurdle
rate %
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 30
Our Forecasting of Projects ‘in the Pipeline’ Has
Improved
Available cash flow
Approved In the
pipeline
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 31
5 Years Later the Model Still Stands
BOREALIS IS A NON BUDGETING COMPANY!
Rolling Financial Forecast Balanced scorecard We have changed some of our tools:
- Quarterly update - Non-financial targets
- Rolling 5 quarters outlook & measurements
- Link to strategy External benchmarking in 1997 triggered tough
- Financial targets relative to
market
cost targets across the company. The targets
- Annual outlook - Financial targets are long-term (1998-2000) and on total costs
& measurement
only.
BUDGET
- Limited cost - Annual plan
understanding - Annual outlook ABM partly taken out of SAP, system not
Controlling fixed costs Investment management flexible enough
- Benchmarking - Trend reporting & 5 quarter
- Activity accounting and outlook Rolling financial forecast process improved
product costing - Decentralised decisions
- Frames if needed
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 32
Setting the Agenda - Focus on Objectives
Focus on measures: Focus on objectives:
During implementation of the Balanced Same measures used Specific measures
Scorecard the mistake was made to focus throughout the selected for each unit
too much on measures. organisation to support objectives
Measures were selected at group level,
and these measures were cascaded to the
Place in Organisation
organisation.
Learning:
Everyone in the organisation can relate to
the corporate objectives, but relevant
measures and targets have to be selected
in each part of the organisation.
Number of Measures
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 33
Target Setting Process Too
optimistic?
We can
When the Budget was replaced by the
Balanced Scorecard for performance do it!
management, people welcomed it and set
very ambitious and stretched targets.
With the introduction of an incentive
program based on the Balanced
Scorecard, stretched targets were
replaced by internal negotiation.
Learning:
Keep the Balanced Scorecard, but base
the targets on relative performance, e.g. to
the industry or to peer groups.
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 34
Heavy Investments Combined With an Industry
Downturn Required a More Central Process for
Remaining Funds
The simplified 5 quarter rolling forecast
gives the updated view on cash flow and
capital spending.
A co-ordination committee consisting of
VP’s from business, manufacturing and
functions quarterly manages investment
approvals.
This ensures flexible and reactive decision
making allowing to tighten or free up funds
during the year.
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 35
How Does the Manager’s Job Change ?
High degree of freedom in how to
Increased responsibility and
achieve challenging relative targets decision-
decision-making
pre-
No detailed pre-approval of costs
through a budget
Cost reports focusing on trends,
projects and total cost levels. Less focus More relevant cost information
on the calendar year as reporting period
non-
Increased measurement of non-financial
indicators supporting our strategy Better but also tougher
performance measurement
No heavy budget process in the autumn,
but more focus on costs and performance
throughout the year Better use of your time !
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 36
If you want to know more...
CAM-I Beyond Budgeting Round Table
www.cam-i.org/bb.html
Try the Beyond Budgeting wizard
www.project.bbrt.org
‘Creating Budget-less Organizations with the Balanced Scorecard’
The Balanced Scorecard Report
Harvard Business School Publishing, November-December 2000
15. Stuttgarter Controller-Forum, Sep. 18, 2001 File: Hovarth&Partner 010918.ppt - 37
