Master of Accounting

Question:

Write an essay about the Statoil Company.

Answer:

Statoil is the largest multinational energy company from Norway and it was established in 1972. The main focus of its business is exploration, development and production of oil and natural gas. Statoil has adopted a more dynamic performance management process and has abolished traditional budgeting since 2005. The management of Statoil has replaced the traditional model of budgeting with an innovative performance management system called “Ambition to Action”.  The Ambition to Action model is a unique combination of two management concepts beyond budgeting and balance score card system. (Abro, 2014) The main function of budget is forecasting but budgeting is a time based forecasting which is rigid and does not adapt to the changing condition. Statoil has replaced time based forecasting to dynamic event driven forecasting making thus the entire system of strategic planning, setting targets, planning actions and forecasting dynamic and reactive. The manager’s claim that they no longer prepare budget is correct and by this managers means that they have replaced traditional time based budgeting with event based dynamic “Ambition to Action” model. (Royset and Szechtman, 2013)

Budgeting is an important management process of forecasting income and expenditure for a future time period. Budgeting can also be defined as creating a plan for spending money.  The purpose of preparing a budget is:

To assist managers in the process of business planning by forecasting expenditures and incomes;

·      To provide managers appropriate financial framework that could assist them in decision making;

·    To compare actual performance with the forecasted performance so that it could enable managers in evaluating business performance. (Budget impact of increasing importance for payers, 2007)

The budgeting process has various advantages but it suffers from certain inherit limitations. As a result, various advanced forecasting model has been developed to overcome this budgeting limitations. (Dropkin, Halpin and La Touche, 2007) The management of Statoil used to prepare Traditional budgets but since 2005, they have decided to abandon budgeting. The main reasons for Statoil managers to abandon budgeting are:

·         The budgeting process provides same set of numbers for three distinct purposes of setting targets, forecasting and allocating resources. Budget fails to serve all three purpose as they are different things. (Anon, 2016)

·         Budgeting is prepared based on accounting cycle, which is not suitable for all line of business of Statoil.

·         In case of unpredictable events, budgeting prevents quick response.

·         The process of preparing budget is very expensive and time consuming for management.

·         Budgets are estimates that are based on few important assumptions. This assumption frequently changes making budgets obsolete after few months.

·         Budgeting is not particularly fit for high competitive environment.

·         New initiatives and innovations are not encouraged in budgeting process. (RIVLIN, 2012)

·         Budget has no relation with overall business strategy it is primarily based on functions and departments.

·         Budgeting provides all the powers to functional leaders so that they can micro manage the organization thus reinforcing the centralized command and control model of functioning. (Hakala-Ausperk, 2011)

·         It has been found that budget demotivates employees.

·         Budget sets targets that are required to be achieved at any cost thus it increases chances of unethical behavior among employees.

·         Budgeting requires managers to spend as lot of time analyzing pasty rather than giving attention to the future.

·         In budgeting primary assumption is that financial capital is the main restrain ignoring other important parts like human resources. (Qfinance, 2009)

The managers of Statoil were dissatisfied with the traditional budgeting model and hence implemented a new model of “Ambition to Action” System. The three purposes of traditional budgeting are setting targets, forecasting and allocation of resources. The managers of Statoil began the new process by separating these three functions as it became increasingly clear that all this purpose cannot be served in a single process with same set of numbers. This separation enabled the managers to significantly improve all the three activities. (BOONE, 2012)

Strategy and Target Setting

The first task is to set performance target and it is very important that the target should align with the overall strategy of the organization. The development of a strategy should be based on risk analysis; it should be driven by event and it should give ambition and direction to the organization. The process of developing strategic objective is dynamic but the objective itself is not dynamic as it is the long-term ambition of the organization. (Blumentritt, 2006)  The targets that are set against the strategic objectives are reflected in KPIs. The targets set by the manager are both relative and ambitious. As the set targets are, relative so it connects inputs with outputs and hence targets are easily comparable with other peer organizations. The introduction of the relative instead of absolute targets has positively motivated the employee and has improved the overall performance of the organization. (Caiden, 2009)

Forecasting

Then next task was to predict a future outcome, which is commonly known as forecasting or planning. The planning process starts after determining the objectives and targets.  It is helpful in detecting problems early and taking timely actions so that corrective actions could be taken and problems could be avoided. The management of Statoil has removed the bias created by gaming from setting targets and application of resources hence improving the quality of the forecasting significantly. The whole process of forecasting in Statoil is dynamic the changes are made as per requirement and not driven by calendar. (Finding funds for your film or TV project: the most effective strategies to use for different types of films and budgets, 2014)

Resource Allocation

In an organization, there are multiple ways in which resources can be allocated but it is important to determine the best method of allocating resources so the productivity of the organization could be improved. For allocation of resources, Statoil followed the principle of making available the resources whenever they are needed. As Statoil is a project driven organization so resources are not pre allocated on annual basis but given to local decision makers at project levels.  Statoil adopted a dynamic model for resource allocation which provided much flexibility and decision making authority to local teams. (Roza and Swartz, 2007) 

The strengths of the new system implemented by Statoil are:

·         It is more event driven than calendar driven;

·         The targets fixed are relative and not absolute;

·         The new system has successfully removed many of the implementation problems in balance score card system;

·         This system is more cost conscious but no unreasonable cost cutting is done;

·         This system has provided operating flexibility as more decision making powers are given to local teams;

·         In this system targets and achievements are easily comparable with other peer organizations;

There are mainly two limitations of the new system adopted by the Statoil. Firstly, as the system is new and no budget is prepared some managers are confused about the system. Secondly, there are certain groups within the organization that are against this new system as this challenges their old believe system In short they do not like the new system to be adopted.

In 2005, Statoil abandoned the traditional budgeting model and adopted more dynamic “Ambition to Action” management system. The Ambition to Action System is an exceptional and robust management model based on the concepts of balance scorecard system along with the combination of beyond budgeting principles. Beyond Budgeting is a management and leadership philosophy that provides an alternative way of budgeting, which should be adopted instead of traditional ways of budgeting. (Beyond Budgeting approach, 2016) The companies that has done away with traditional way of budgeting needs to adhere to twelve beyond budgeting principles:

Process Principles:

·         The goals that are set should be relative so that there is enough scope for continuous improvement.

·         Rewards should not be based on achieving fixed targets but based on relative performance

·         Planning should not be based on top down approach but it should be an inclusive and continuous process.

·         Coordination should not be based on annual plan but through continuous interaction with customers.

·         Resources should be made available as per requirement.

·         Controls should be based on effective governance and relative performance indicators and trends. (Heupel and Schmitz, 2015)

Leadership Principle

·         Governance should be based on principles and values and not on rules and budgets.

·         A high performance climate should be created within the organization based on relative success.

·         Self management should be encouraged by allowing to make decisions locally;

·         Organization should move from centralized functioning to more network based team functioning.

·         People should be made accountable for customer outcomes.

·         There should be one set of ethical principles throughout the organization.

The six process principles will ensure high level of adaption in the organization and the six principles of leadership will ensure decentralization within the organization. (Maddock, Uriarte and Brown, 2011)

The Ambition to Action model can be explained as a performance management process that translates the company’s strategy and aims into strategic objectives, targets, actions and individual performance goals. The Ambition to Action system implemented by Statoil mainly has three purposes:

·         To translates choices into objectives, targets and actions;

·         To provides flexibility for performance and action;

·         To encourage organizational values and principles of leadership

The process of “Ambition to Action” starts with a vision or ambition statement. These visions or ambitions statement are translated across the company with five viewpoints of organization & people; health, safety & Environment; operations; markets and finance. These are all balance scorecard concept only exception being health, safety and environment, which is particularly added under the Ambition to, Action model by the Statoil because of the nature of their business.  Under the Ambition to Action model all the planning function begins after the strategy has been formulated. The overall corporate strategy as it should be is not much dynamic but the strategy formulated at the group level is very much dynamic and is continuously evolving. Though the strategy at the group level is dynamic the objectives generally remains stable unless major shift are made in strategic directions. The next step of Ambition to Action model after strategy formulation is to convert these strategies into concrete KPI targets that reflect the vision and ambition of the higher management. (Bunce, Hope and Roosli, 2014) After the targets are finalized then the next step of the Ambition to Action model is to develop a proper plan. The planning function here includes two steps developing an action plan to achieve the strategic objectives and to forecast the expected results. However, it is not recommended under beyond budgeting concept but Statoil updates in planning phase the short term forecasts. The targets are also periodically reviewed so that targets could remain realistic and achievable.  Further at periodic intervals the predetermined forecast are compared to realistic forecast which shows that the entire Ambition to Action system is forward looking. (Beardsworth, 2011)

The main principles of the Ambition to Action models developed by the Statoil are:

·         There are no annual objectives, targets and forecasts but can be revised whenever necessary.

·         The changes, which are made, are based on events and not time.

·          The controls are made simple and local teams are given more authority to take decisions.

On comparing the Beyond Budgeting principles with the established “Ambition to Action” System of the Statoil it can be found that all the principles are included in the model but it is not a routine implementation of beyond budget principles. There are other additional feature of revising forecast is included in this model which are not recommended in the beyond budgeting principles.  Therefore, it can be concluded that all the principles of beyond budgeting along with some additional features are included in this model.

 Beyond budgeting, is a system that promotes flexibility, synchronization and responsiveness of an ideal budgeting system. The beyond budgeting models is suited for

·          Business that has rapidly changing business environment so targets should be flexible to the changes (Bogsnes, 2009)

·           Organizations that has adopted Total Quality Management as management method as continuous improvement will be necessary

·         If an organization is adopting radical changes through business process reengineering then under such circumstances traditional budget will fail to provide any result. (Hope and Fraser, 2003)

Although the technique of beyond budgeting has provided immense benefit to those organizations that has implemented this but the popularity of this system is seemed to be restricted in Europe. The Beyond budgeting method is popular in Europe because of the similarity in the leadership style. The qualities such as transparency, involvement, flexibility etc are deeply engrained in the European business culture, which are also important leadership principles in beyond budgeting system. (Lardner, 2001) 

Traditional budgeting process is not capable of adapting to the changing circumstances and situations, which often arise in the implementation of the organizational strategy in the complex business environment. The working environment is often not what the managers have hoped for and thus managers have to make numerous adjustments in the day to day to operations of the organization and this can only be possible with the help of flexible budgeting process which traditional budgeting process fails to provide. (Pietrzak, 2014) In case Statoil, the managers of the organization have also found it difficult time and time again to accommodate necessary changes. In the budget as the traditional budgeting process lacks necessary flexibility and this has hampered the progress of the organization in the past as the regular operations of the organization have been negatively influenced due to the inflexibility of the traditional budgeting process that the organization formerly used. Followings are the main reasons that the mangers have found the traditional budgeting process inappropriate for the organization and hence been unhappy with the said budgeting process:

·         Traditional budgeting process lacks flexibility, i.e. in case the working conditions changes from the expected lines based on which the traditional budgeting system has been used to draw the budget, then the budgeting system will lack necessary flexibility to address the changing needs of the organization, in this case Statoil. (Boone, 2012)

·         Complex business environment has made it almost impossible for the managers to estimate the future business environment correctly, i.e. it is not possible for the managers to expect that the business environment will remain in a particular way and hence, the traditional budgeting process would not be effective under the complex business environment. In case of Statoil the organization is involved in a business which is very sensitive and changes dramatically often and thus traditional budgeting is not the correct method for the organization.

·         Statoil is an organization, which is involved in a search and distribution of one of the essential natural resources. It is continuously evaporating at a speed higher than expected by the expert and since there has been a continuous tension among the major oil supplying nations across the world, which has resulted drastic changes in oil wealthy nations, have influenced the businesses of organizations involved in this business. Statoil is not an exception to this and hence, the managers had to be on their toe continuously and ready to make necessary decisions according to the changing situations for the betterment of the organization but traditional budgeting process has not been a tool to aid the mangers in this regard rather a barrier. Managers of Statoil have always found it difficult to cope with the changing needs of the oil wealthy nations with the traditional budgeting process that the organization used to follow in the past. (Traditional budgeting process and its disadvantages, 2016)

·         The necessity of oil around the world has made it essential for Governments across different nations from the world to come together, formulate, and draw necessary policies to conserve the oil for the future generations. This has influenced the businesses of the organizations like Statoil influence its business in the future, and these policies kept on changing according to the changing circumstances, which have made it compulsory for the organizations. It involved in the search and distribution of the natural resource, to make necessary changes and incorporate necessary measures to adhere to these policy requirement, which the organizations dealing with the natural resources have to follow. Traditional budgeting process has failed to support the managers of the Statoil in their endeavor to incorporate necessary changing according to the requirements of the oil wealthy nations and complex economical and financial environment around the world. (Dugdale and Lyne, 2010)

Traditional budgeting process is one in which the management of an organization formulate a strategy based on certain assumptions which are relevant to the operations of the organization concerned. Based on the strategy formulated in the traditional budgeting process the management runs the organization in the future. Under this method the management has to operate with various constraints since the traditional budgeting process restricts the modifications to the budgeting figures to minimum possible, the management often finds it impossible to adapt to the changing circumstances which provide different variables from those expected on the basis of which the budgets were prepared. On the other hand the Ambition to Action process formulated by the executive body of Statoil, the organization mentioned in the case study, allows the mangers at different levels to make necessary changes to the operational variables based on the changing requirements. (Peterson, n.d.) In other words the Ambition to Action process of the organization in question, Statoil, would allow the mangers to incorporate necessary changes in the budgeting figures according to the circumstances which will be prevailing in the market at the time of respective operations. Based on the above it is quite clear that there are basic distinction between the two budgeting process, i.e. the traditional budgeting process formerly used by the Statoil and Ambition to Action process developed by the mangers of Statoil recently to enhance the operational effectiveness of the organization. (Nussle, 2012) Still let us make the distinction between the two even more clearer for the readers of the document in the following lines:

·         Traditional budgeting process is inflexible where as Ambition to Action Process developed by the mangers of Statoil would allow the managers to incorporate necessary changing according to the changing circumstances in the future, thus it is ultra flexible. 

·         The assumptions used in the traditional budgeting process are one dimensional where as those used in the Ambition to Action process are multi dimensional. (Swain and Reed, 2010)

·         The work involved in the formulation of traditional budgeting process is relatively less compare to the hard work involved in the formulation of Ambition to Action process.  

·         The organization in question would be free to make necessary modifications and accordingly can operate under Ambition to Action process which the organization cannot do under traditional budgeting process.

Conclusion

Taking into consideration the above discussion it is clear that an organization would be benefitted from the expertise of its personnel and other resources provide they are used according to the circumstances and needs of the situation. Thus, it not to make any sense to follow an age of traditional budgeting process approach even in today has changed business and global work environment. The mangers of Statoil have correctly decided to abandon its age old traditional budgeting process and replace it with an effective alternative approach to budgeting to use its resources efficiently to achieve the organizational goals and objectives. The Ambition to Action process developed by the managers for achieving better operational results would help the organization in fulfilling its desire of achieving better operational results provided that the scheme is implemented properly after considering all the variables and assumptions relevant for the organization. Considering the business in which the organization is involved it is only apt that the managers of the organization should be empowered to take necessary decisions. According to the circumstances which the future may present in front of the organization and thus using traditional budgeting process would yield any positive results for the organization and hence it would be better for the management to use Ambition to Action process in the future as discussed in this document.    

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