Beyond Budgeting - Strategic and Operative …

1 File: Hovarth&Partner - 115. Stuttgarter Controller-Forum, Sep. 18, 2001 Beyond Budgeting - Strategic and Operative planning at BorealisByThomas BoesenContact Information:Borealis A/SLyngby Hovedgade 96DK - 2800 Kongens LyngbyDENMARKP hone: +45 4596 6000E-mail: Hovarth&Partner - 215. Stuttgarter Controller-Forum, Sep. 18, 2001 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.

2 Main competitors: Dow, ExxonMobil, Basell (Shell & BASF), Equistar, BP, Du Pont, and AtoFinaFor more information, visit us more information, visit us : Hovarth&Partner - 315. Stuttgarter Controller-Forum, Sep. 18, 2001 The Products Can Be Found in Thousands of Everyday Products Like Diapers, Food Packaging andHousewares to Cars, Trucks, Pipes and Power CablesFile: Hovarth&Partner - 415. Stuttgarter Controller-Forum, Sep. 18, 2001 Borealis in EuropeHead OfficeProductionSalesWilmslowGenevaParis BarcelonaPragueD sseldorfWarsawTallinnPorvooStenungsundR nningenLisbonIstanbulMoscowBeringenAntwe rpCublizeCopenhagenKalloLinzMonzaSchwech atBurghausenSinesBudapestMunichOutside EuropeJoint ventures:Borouge (Abu Dhabi), Borealis-OPP (Brazil), Nova-Borealis (USA)Sales:Singapore, Hong Kongand ChinaKey figures (2000) Turnover EUR 3,7 billion 5,200 employeesM&A activity Summer 98 the ownership changed to Statoil(50%), OMV (25%) and IPIC (25%) Acquisition of PCD Polymereon Sept.

3 1, : Hovarth&Partner - 515. Stuttgarter Controller-Forum, Sep. 18, 2001 Dilbert Logic on Budgeting and StrategyFile: Hovarth&Partner - 615. Stuttgarter Controller-Forum, Sep. 18, 2001 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 processFile: Hovarth&Partner - 715. Stuttgarter Controller-Forum, Sep. 18, 2001 Traditional Budgeting Has Many 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 File: Hovarth&Partner - 815.

4 Stuttgarter Controller-Forum, Sep. 18, 2001 Petrochemical Industry Profitability Index in W Europe0100200300400500600198419861988199 019921994199619982000 Index(1Q 84 = 100)Source:ChemSystemsFile: Hovarth&Partner - 915. Stuttgarter Controller-Forum, Sep. 18, 2001We Achieved What the Budget Did in a Simpler WayThe budget was used for: High level financial and tax planning Target-setting Controlling fixed costs Prioritising and allocatinginvestment/project resources Delegation of authority9 Rolling financial forecasts 9 Balanced Scorecard9 Trend reporting9 Cost targets where and when needed9 Activity approach9 Small projects - trend reporting9 Medium - Varying hurdle rates9 Major Strategic projects - Case by case, the budget was never a tool.

5 9 Use existing mandates/authority schedules We achieve the same through:File: Hovarth&Partner - 1015. Stuttgarter Controller-Forum, Sep. 18, 2001We Have Separated Performance Measurement From Financial ForecastingBroader Performance Measurement+Balanced ScorecardBalanced Scorecard--Financial KPI sFinancial KPI s--NonNon--financial KPI sfinancial KPI sRolling Financial Rolling Financial ForecastForecast--Rolling 5 quartersRolling 5 quarters--High level, fewHigh level, fewdetailsdetailsFinancial BudgetingFinancial BudgetingToBetter forecasting with less resourcesFromFile: Hovarth&Partner - 1115. Stuttgarter Controller-Forum, Sep.

6 18, 2001 The New Tools Cover What the Budget Did,but Also a Lot MoreControlling fixed costs Controlling fixed costs --Activity accounting andActivity accounting andproduct costingproduct costing--Improved cost understandingImproved cost understanding--Product and customer costingProduct and customer costing- Annual outlookBalanced scorecardBalanced scorecard--NonNon--financial targetsfinancial targets& measurements& measurements--Link to strategyLink to strategy--Financial targets relative to Financial targets relative to marketmarket--Financial targetsFinancial targets& measurement& measurement--Limited costLimited costunderstandingunderstanding- Annual planBUDGETBUDGETR

7 Olling Financial ForecastRolling Financial Forecast--Quarterly updateQuarterly update--Rolling 5 quarters outlookRolling 5 quarters outlook--Annual outlookAnnual outlookInvestment managementInvestment management--Trend reporting & 5 quarterTrend reporting & 5 quarteroutlookoutlook--Decentralised decisionsDecentralised decisions--Frames if neededFrames if neededFile: Hovarth&Partner - 1215. Stuttgarter Controller-Forum, Sep. 18, 2001 Rolling Financial Forecast and Trend ReportingBalanced Balanced ScorecardScorecardRolling financialRolling financialforecasts andforecasts andtrend reportingtrend reportingDecentralisedDecentralisedinves tment investment managementmanagementControllingControlli ngfixed costsfixed costsFile: Hovarth&Partner - 1315.

8 Stuttgarter Controller-Forum, Sep. 18, 2001 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 9 Continuously looking one year ahead9 Always incorporates latest external and internal assumptions9No conflict between forecasting and target-settingFile: Hovarth&Partner - 1415. Stuttgarter Controller-Forum, Sep. 18, 2001 The Rolling Financial Forecast ProcessCorp. planning :PricesGroup Finance:Exchange rates, inflation, and changes in loansSites: Investments, fixed costs and depreciationBusiness Units: Volumes per plantPolyolefin model:Calculation of turnover and sales margins Other:Investment RFFC onsolidation modelGroupIncome StatementGroupBalance SheetGroupCash FlowAccounting & TaxFile: Hovarth&Partner - 1515.

9 Stuttgarter Controller-Forum, Sep. 18, 2001In Practice, This Is How We Do It! (1) Market price developments Price Drivers:Industry stock buildingGeneral market consumptionCapacity developmentsTrade between Asia, Europe and the USData built up from product groups Source:Corporate Strategic PlanningMarket Analysts in Business Units PE & PPMarket volume developments Volume Drivers:Sales activitiesIndustry stock buildingGeneral market consumption Capacity developmentsPlanned maintenance jobsAlternative market channelsData built up from assets Source:BU Operations Planners File: Hovarth&Partner - 1615. Stuttgarter Controller-Forum, Sep.

10 18, 2001In Practice, This Is How We Do It! (2)Fixed costs, depreciation and investments Fixed costs drivers:Site Development Program (more for less)On-going projectsGeneral activity levelHead countInvestments are handled separately Source:Site controllersExchange rates, inflation and loans Source:Group Finance forecasts the developments in exchange rates and inflation based on the economic in loans are based on the current loan agreements. Financial needs are calculated based on the difference between cash flow from operations and financial obligations. File: Hovarth&Partner - 1715. Stuttgarter Controller-Forum, Sep. 18, 2001 The Forecasts Include Full P&L and Balance SheetCONSOLIDATED P&LTurnoverSales marginFixed costsOperating marginDepreciationOperating profitProfit of ass.