Jan Wallender, in 1972, as the new CEO of Handelsbanken, concluded that the budgeting model was not effective, at least not for the bank he led.
He adopted a concept called Beyond Budgeting, which enabled his bank to achieve its fastest growth ever.
In order to do budgeting, it was necessary to make decisions so far in advance that the information needed to make reliable forecasts was never available. When the context changed-always-the budget remained the same; that’s why he stopped using it.
And back in the 1990s it had weathered the banking crisis better than its Swedish competitors, without spending time, money and human resources to create budgets that never matched reality.
The effectiveness of this innovative approach is highlighted in the book “Implementing beyond budgeting: unlocking the performance potential” by Bjarte Bogsnes, president of the Beyond Budgeting Institute.
In his book, Bogsnes highlights the limitations of using budgets as a strategic tool. Here are the main problems and how OKRs can help overcome them:
- Misalignment with corporate strategy: budgets often do not reflect strategic goals because they are developed separately. OKRs ensure that everyone is working toward common goals, aligning resources with strategy.
- Time-consuming and wasteful process: creating and managing a budget takes a lot of time and energy. With OKRs, planning becomes more streamlined and focused, freeing up time for high-value activities.
- Unethical behavior: budgets can incentivize questionable practices, such as inflating resource requests. OKRs promote transparency and accountability, reducing such behaviors.
- Rapidly outdated forecasts: budget assumptions often turn out to be wrong. OKRs are flexible and allow for rapid adaptation to changes.
- Illusion of control: budgets can give a false sense of control without really managing uncertainties. OKRs offer real monitoring through measurable objectives and key outcomes.
- Premature decisions: important choices are made too early and with incomplete information. OKRs facilitate more informed and timely decisions through more frequent review cycles.
- Centralization of decisions: lack of autonomy concentrates decisions at the top. OKRs hold all levels accountable, encouraging effective decisions in the field.
- Operational blocks: budgets can prevent the best decisions from being made because resources are rigid. With OKRs, resources can be flexibly reallocated to achieve goals.
- Waste of resources: there is a tendency to spend unnecessarily so as not to lose unused funds. OKRs avoid this by focusing on results rather than spending.
- Short-term vision: annual budget cycle creates management myopia. OKRs encourage continuous planning that is adaptable to real market rhythms.
- Inadequate performance evaluation: measuring only budget adherence does not reflect true performance. OKRs provide meaningful metrics based on achievement of key objectives.
OKRs and budgets can operate in sync and support each other if we update the traditional mindset to allow rapid allocation of resources to the activities needed to achieve OKR goals.
Not surprisingly, the book itself points out how the benefits of Beyond Budgeting are similar to those achieved with OKRs:
- Trust and transparency: the OKRs promote an open culture where goals are clear to all.
- Cost Management: not having a strict budget does not mean ignoring expenses. On the contrary, cost management can become a Key Result within objectives by monitoring expenses more dynamically.
- Control in strategy execution: OKRs provide a system for tracking progress toward strategic goals.
- Goal setting: with OKRs, goals are clear and shared, facilitating the alignment of the entire organization.
- Performance evaluation: OKRs allow more accurate performance measurement based on tangible results.
- Bonuses and rewards: incentives can be linked to the achievement of OKRs, motivating the team more effectively.
- Pace: frequent review of OKRs helps the company adapt quickly to changes, improving the quality of work.
- Efficiency: by focusing on clear objectives, OKRs improve operational efficiency.
How to Integrate Budgeting and OKR
Here are some practical tips for integrating OKRs with budgeting:
- Spend more time on OKRs: Shift 20% of the time you normally spend on budgeting to planning OKRs. This will help you focus on strategic goals.
- Incorporate cost control into OKRs: Reducing time spent on budgeting does not mean losing control of expenses. Incorporate cost management goals into your OKRs, aligning them with productivity.
- Move from budget to forecast: instead of setting rigid budgets, use dynamic financial forecasts. OKRs help you collect data and identify performance patterns, allowing you to forecast outcomes more accurately and allocate resources when needed.
- Give teams autonomy in the use of resources: reduce bureaucracy and enable people to manage time, talent and money flexibly. This speeds up decisions and increases efficiency.
- View financial resources as dynamic: check and realign financial resources frequently with team needs. Check numbers regularly (weekly, monthly, quarterly) based on the pace of growth.
- Refine forecasts with OKRs: measure progress toward goals and analyze deviations. This improves processes and makes traditional budgeting less necessary.
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From previous Strategy Notes
№86 How to make Sales Objectives and OKRs coexist?
To align sales targets with OKRs without creating confusion or undue pressure, it is useful to adopt the “Committed First” approach. This method allows the sales target to be set as a safe minimum goal, leaving room for more ambitious performance that will help the organization grow, while maintaining security for bonuses tied to the minimum results set.
№91 The budget that is coming .
Costs are predictable and under control, while revenues are uncertain and out of our sphere of decision making. To improve planning, it is more useful to focus on concrete metrics related to actions that we can control, rather than making unrealistic revenue forecasts. We need to focus on strategy execution, rather than on estimates that are difficult to maintain, incentivizing the right actions and making continuous adjustments.
№158 B.U.D.G.E.T.
Traditional budgeting can be inefficient, too rigid and cost-focused, rather than conducive to innovation and growth. To be truly useful, it should be dynamic, allowing resources to be reallocated quickly based on results. In addition, the budget should reflect corporate strategy: if there is no funding for strategic initiatives, those words are empty.
