BEYOND BEYOND BUDGETING

1. BEYOND BEYOND BUDGETING Can rolling forecasts improve the motivational effect of budgeting? Prof. Dr Frank Hartmann

2. The control challenge Finext - Rolling Forecast

3. The control challenge Finext - Rolling Forecast

4. The control challenge Finext - Rolling Forecast

5. The budgetary control challenge Purposes of budgeting Typical characteristics of budgets Expressed in monetary terms Typically one year Fixes managerial responsibility Approved by higher authority Typically fixed scenarios Typically complex • Planning • Coordination • Performance evaluation • Goal setting for motivation • Authorization • Communication Finext - Rolling Forecast

6. The budgetary control challenge Purposes of budgeting Typical characteristics of budgets Expressed in monetary terms Typically one year Fixes managerial responsibility Approved by higher authority Typically fixed scenarios Typically complex • Planning • Coordination • Performance evaluation • Goal setting for motivation • Authorization • Communication Finext - Rolling Forecast

7. What behaviors do we see? • Myopia • Using one-year budget forecast as main goal setting mechanism • Using one-year budget as source of KPI’s to determine rewards • Sandbagging (lying, cheating, filtering and all that) • Using budget goals for both motivation and performance evaluation goal setting effort performance goals performance measurement Finext - Rolling Forecast

8. Do we have technical solutions for these problems? • Value Based Management • Use KPI’s that measure ‘long term value creation’ • Balanced Scorecards • Use KPI’s that signal value creation on top of typical budgetary KPI’s • Change the budgetary process • Rolling forecasts Finext - Rolling Forecast

9. Value Based Management Finext - Rolling Forecast

10. Value Based Management • “At Enron, failure – even of the type that ends up on the front page of The Wall Street Journal – doesn’t necessarily sink a career” • “We have never seen Enron as just an energy company. We’re pretty good at creating new products and services around our high-tech trading and risk management skills.” • “If we’ve broken a paradigm, it’s the compensation paradigm. We pay people like entrepreneurs. A lot of companies talk about intrapreneurship and ask people to take risks, but if those people succeed they get nothing more than an small bonus and if they fail they get fired.” Finext - Rolling Forecast

11. Balanced Scorecards • Measure multiple aspect of performance share price company value created relevance to firm ‘return on investment’ unit profits unit costs work quality controllable by decentralized manager Finext - Rolling Forecast

12. Balanced Scorecards • Measure multiple aspect of performance hard to tell the effect on managers’ priorities negative effect on motivation share price company value created relevance to firm ‘return on investment’ unit profits unit costs work quality controllable by decentralized manager Finext - Rolling Forecast

13. What behaviors do we see? • Technical solutions often have not delivered on promise, since people are not just economical but also pychologicalcreatures • The real challenge is to have goals and targets which are motivational in the short run to enhance effort, direct effort and make effort persist... • ...but which are more than just KPI’s for future reward determination goal setting effort performance goals performance measurement Finext - Rolling Forecast

14. What behaviors do we see? • Targets become ‘reference points’: • SMART goals provide clearer reference points than do-your-best goals • Proximal goals provide clearer reference points than distal goals • Reference points split the performance horizon in ‘gain’ and ‘loss’ domains • These reference points have motivational value: • Effort increases as the reference point gets closer • Effort decreases above the reference point • People are more risk seeking when they are below their reference point • Rewards become less effective when people are above their reference poiny • Multiple reference points lead to unpredictable performance Finext - Rolling Forecast

15. What behaviors do we see? • Technical solutions often have not delivered on promise, since people are not just economical but also pychologicalcreatures • The real challenge is to have goals and targets which are motivational in the short run to enhance effort, direct effort and make effort persist... • ...but which are more than just KPI’s for future reward determination goal setting ‘reference point’ effort performance goals performance measurement Finext - Rolling Forecast

16. Rolling forecast Finext - Rolling Forecast

17. Rolling forecasting: beyondbeyondbudgeting “Budgeting is about goal setting and forecasting is goal seeking” Finext - Rolling Forecast

18. Traditional budgeting Goal setting: single reference point effort “Budgeting is about goal setting and forecasting is goal seeking” large effort gaps time Year t-1 Year t Year t+1 Finext - Rolling Forecast

19. Traditional budgeting Goal setting: single reference point effort “Budgeting is about goal setting and forecasting is goal seeking” large effort gaps time Year t-1 Year t Year t+1 Finext - Rolling Forecast

20. Rolling forecasts Multiple reference points: goal seeking effort “Budgeting is about goal setting and forecasting is goal seeking” small effort gaps time Year t-1 Year t Year t+1 Finext - Rolling Forecast

21. Rolling forecasts: beyond beyond budgeting Finext - Rolling Forecast

22. Rolling forecasts • Rolling forecasts is not just technique but a process based on principles: • Loosely coupling goal setting and performance evaluation • Loosely coupling of goal setting and yearly budgetary planning • Loosely coupling performance evaluation and yearly budgetary planning • ...but technical adequacy of system is crucial success factor • That means: • Moving from plain ‘measurement’ to ‘dialogue’ • Use KPQ’s instead of just KPI’s • Managing through financials (rather than ‘value’) • Managing through financials (rather than in BSC) Finext - Rolling Forecast

23. Q&A Finext - Rolling Forecast