T H E S T R AT E G Y E X E C U T I O N S O U R C E

Article Reprint No. B0909C

Dynamic Forecasting: A Planning Innovation

for Fast-Changing Times
By Bjarte Bogsnes
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 T H E S T R AT E G Y E X E C U T I O N S O U R C E

September 2009

Reflections on the Tenth Anniversary of Balanced Scorecard Report

A message from the creators of the Balanced Scorecard management system

Dear Balanced Scorecard Report Reader,

Ideas come and ideas go. A privileged few stay, grow, and prosper. The Balanced Scorecard is one
such idea. When we put pen to paper (or digits to keyboard) in 1999 for the first issue of Balanced
Scorecard Report (BSR), we had little idea that over the next ten years we would publish four books,
six Harvard Business Review articles, and dozens of articles for BSR. Why has this idea proven so
durable and valuable?
First, the Balanced Scorecard addresses a need—the need to measure intangible assets and other
drivers of shareholder value. Recognizing this need led us to invent strategy maps and a framework to
describe and measure strategy. Second, a large community of strategy execution professionals who
apply these ideas in their organizations has emerged. Through the pages of Balanced Scorecard Report
(as well as through other vehicles) we have been able to bring this community together and create a
shared learning experience for all. Finally, we have had the Balanced Scorecard Collaborative,
Palladium Group, and Harvard Business Publishing—organizations that have allowed us to work
as consultants, researchers, educators, and authors in the real world of organizational experience.
BSR has given us, Palladium, external experts, and innovative company managers the opportunity
to share new theory and practice ideas with the community of strategy execution professionals.
Readers of BSR during the past ten years were the first to learn about the principles and practices
of the Strategy-Focused Organization and, more recently, the Execution Premium conceptual frame-
works. They were the first to read articles on important new advances in our methodology, including:
• Strategy maps
• Strategic themes
• Strategic job families, and measuring the strategic readiness of intangible assets
• Using strategy maps and scorecards for:
> Support units (e.g., finance, HR, IT)
> Strategic alliances and customer relationships
> Boards of directors
> Nonprofits and the public sector
> National and regional economic planning

• Strategic Expenditures (StratEx) for strategic initiatives

• The Office of Strategy Management

Please turn the page

They also read unique articles that connected strategy maps and scorecards to many other
contemporary management concepts and tools, including:

• Leadership
• Total Quality Management, lean manufacturing, and Six Sigma
• Stakeholder theory
• Risk management
• Benchmarking
• Activity-based costing
• Customer relationship management
• Beyond Budgeting

And they read pioneering case studies and insightful articles from CEOs and other senior
executives explaining how and why they used the Balanced Scorecard in their organizations and
offering practical tips for effective implementation.
Beyond the important content contained in BSR’s pages, its readers were the first to know about
each new release in the family of BSR publications, from the annual Palladium Balanced Scorecard
Hall of Fame Reports and the BSC Hall of Fame Profiles to BSR Reader collections.

So we are happy and honored to be celebrating this important milestone for Balanced Scorecard
Report. As we look to the next ten years, we hesitate to predict what the impact of social network-
ing, globalization, and other macro changes will have on our ideas. We are certain, however, that the
journey will continue, that we will enjoy the ride, and that we will continue to share our experiences
and insights with our strategy execution community.

Robert S. Kaplan David P. Norton

Baker Foundation Professor, Harvard Founder and Director,
Business School; Chairman of Professional Palladium Group
Practice, Palladium Group
B A L A N C E
Dynamic Forecasting: Beyond Budgeting
Many companies throughout the
A Planning Innovation for world have abolished traditional
budgeting. The Beyond Budgeting
Fast-Changing Times movement emerged in the mid-
By Bjarte Bogsnes, Vice President, Performance Management 1990s, along with the Beyond
Development, Statoil Budgeting Roundtable, founded
O N

by Jeremy Hope and Robin Fraser

A pioneering strategy management professional, Bjarte (whose groundbreaking book,
Bogsnes holds the unique distinction of being the only person Beyond Budgeting, appeared in
to have “blown up the budget” at more than one company: at 2003).1 Beyond Budgeting compa-
his previous employer, the European plastics manufacturer nies recognize that a management
Borealis, and at his current one, Statoil, the Norwegian oil concept invented some 80 years
giant. Now he wants to blow up the calendar, too—calling ago is no longer the answer to
it an arbitrary (and anachronistic) basis for forecasting. A dedi- the challenges of operating in
cated champion of the Beyond Budgeting movement, Bogsnes today’s turbulent and dynamic
takes the concept of rolling forecasting—itself a relatively new business environment, where the
only thing we know for certain
approach—one big step further, with dynamic forecasting.
about the future is that we don’t
A finance guy once asked a internal performance management know what will happen. These
fisherman about the rhythm of processes? The finance function companies realize that centralized
his work. “Well,” the fisherman may have its roots in statutory command and control is both
replied, “I am at sea for five accounting, but performance unwieldy and undesirable because
months, and then I am home management is about so much it cripples organizations’ ability
for five months.” “So what do you more. It is about enabling and to respond quickly to a changing
do for the rest of the year?” the supporting company performance environment and to make fast
finance guy wondered. by helping people and teams do and effective decisions. These
their best. Traditional accounting companies fight the budgeting
Obviously, ten months do not mindset, not just the budget itself.
has little to do with this aim. For
a year make, so something is
the same reason that we at Statoil Underlying Beyond Budgeting
wrong with the answer.
have largely decoupled perfor- is a set of broader leadership
Or is it? From a business perspec- mance management from our and management principles that
tive, the calendar year is often statutory accounting—by abolish-
an artificial construct, having little ing traditional budgeting altogeth-
connection to the real rhythms er—we believe calendar-based Ambition to Action:
and patterns of business life. planning must also go. In today’s Key Principles
accelerated (and volatile) business
The global financial crisis has Performance is ultimately about
environment, it has become inflex- outperforming peers.
rendered our rigid, calendar-based
ible and increasingly irrelevant.
processes even more of an Do the right thing in the actual
The time is ripe for dynamic
anachronism. Who knows what situation, guided by Statoil’s
forecasting.
the rest of this year will look like, values and leadership principles,
let alone next year? Why should Dynamic forecasting, another Ambition to Action (our score-
we make annual plans when we step in Statoil’s Beyond Budgeting card), decision criteria and
can hardly see what’s around the journey, represents an attractive mandates, and sound business
next corner? alternative to calendar-based judgment.
planning (including rolling fore- Resources are available or
After blowing up the budget,
casting) that is characterized allocated on a case-by-case
isn’t it time to blow up the calen-
by a fixed time horizon and fre- basis.
dar year—at least for internal
quency. To understand why, let’s Business follow-up is forward
purposes? The taxman and Wall
first look at the views underlying looking and action oriented.
Street will probably still demand
the Beyond Budgeting move-
annual numbers, but why should Performance evaluation is a
ment—and Statoil’s own Balanced
they dictate the timing of almost holistic assessment of delivery
Scorecard–based approach to
every move we make in our and behavior.
performance management.

Copyright © 2009 by Harvard Business School Publishing Corporation. All rights reserved. 5
Dynamic Forecasting: A Planning Innovation for Fast-Changing Times (continued)
emphasizes transparency, flexibility,
local accountability, values and
relative goals as guideposts (vs.
rules), and leadership at every
level. Beyond Budgeting compa-
nies are decentralizing power and
authority to the front lines. They
are defining a new performance
language that is more relevant
than that of hitting the budget
numbers. And they are establish-
ing consistency between what
they say (in their value statements)
and what they do (in how they
practice management, from
everyday procedures to rewards
programs).
Ambition to Action, Statoil’s
Balanced Scorecard System
At Statoil we have also made
important changes in our perfor-
mance management process that
enable us to continue delivering
profitable and sustainable growth
(something many of our competi-
tors struggle with today).
Ambition to Action, initiated
in 1997, is our version of the
Balanced Scorecard management
system and the cornerstone of
our performance management
process. Today, we have 800
Ambitions to Action (BSCs)
across the organization.
What’s Different About
Ambition to Action?
First and foremost, we abolished
the budget in 2005. Scorecards
and budgets do not make a happy
marriage. They often provide
mixed signals to the organization,
and invariably the budget wins.
The divorce ended the mixed
signals and turbocharged our
scorecard. Testament to the results:
our induction into the Balanced
Scorecard Hall of Fame in 2007,
just two years later.
We constantly strive for an opti-
mal balance between sufficient
6 Balanced Scorecard Report September–October 2009
alignment and the right degree
of flexibility and ownership. If
we apply too much “glue” to
secure alignment, we lose the
ability to act fast when the unex-
pected occurs. We must enable
local teams to manage themselves
better in their own environment,
while still moving in the right
direction as defined by the overall
strategy.
Because key performance indica-
tors (KPIs) alone seldom provide
a reliable performance picture
(remember, the “I” stands for
“indicator”), we integrate strategic
objectives, initiatives, and KPIs in
an interactive one-page strategy
map for each team. In that way,
the measures are shown in con-
text. (Traditional strategy maps
don’t show KPIs; KPIs reside in
the BSC itself.)
In our perfor-
mance evalua-
tion process, we Mixing target setting, resource allocation,
complement KPI and forecasting is guaranteed to destroy
measurement
with a holistic the quality of your forecast, because
leadership evalu- target setting and resource allocation
ation, taking create systemic bias in forecasts.
into account the
entire Ambition
to Action, as well
as relevant hindsight information,
together with an evaluation of
how our values were practiced in
delivering business results. The
two (the what and the how) are
counted equally.
Unlike traditional budgeting and
planning, Ambition to Action is
more dynamic. Actions (initiatives,
projects) are established and
completed on an ongoing basis
as required, rather than annually.
Likewise, resource allocation is
dynamic and continuous. The
annual budget is gone; instead,
the “bank” is open year-round.
New projects are thus more rigor-
ously pressure-tested than before,
since all funding decisions are
no longer crammed into one bud-
geting period. Other costs are
managed by setting unit cost tar-
gets or overall cost boundaries,
with few or no details required.
Cost trends are monitored, and
intervention occurs only when
needed—that is, when an unac-
ceptable trend arises—and not
on an arbitrary annual date.
Another important feature of
Ambition to Action is the separa-
tion of budgeting’s different
purposes, namely target setting,
resource allocation, and forecast-
ing. Mixing the three is guaranteed
to destroy the quality of your
forecast because target setting
and resource allocation create
systemic bias in forecasts. Just ask
a sales manager about her best
sales forecast, and then mention
that this forecast will be next
year’s target. Or ask a manager
about his best cost or CapEx
forecast, quickly adding that this
number will also become next
year’s budget. Those forecasts
will all start to move, corrupted
by the introduction of secondary
purposes.
Using three separate processes to
accomplish these very different
purposes—allowing them to
yield three separate numbers,
not just “one” budget number—
has enabled us to significantly
improve the quality of each
process. Now we believe we have
found a way to further improve
Dynamic Forecasting: A Planning Innovation for Fast-Changing Times (continued)
the quality of our forecasting
process through what we call
dynamic forecasting.
Why Dynamic Forecasting?
As I’ve shown, Ambition to Action
is already somewhat dynamic, but
we believe it needs to be more so
to allow us to better adapt to the
real world. Our ultimate manage-
ment ambition is to make the
entire Ambition to Action process
continuous, dynamic, and calendar
independent. An essential step in
this direction is adopting dynamic
forecasting.
Many Beyond Budgeting compa-
nies use rolling five-quarter
forecasting. Rolling forecasting
is much better than short-term
forecasting, where the horizon
keeps shrinking because the fore-
cast stops at year-end. As a fixed
frequency (typically every quarter)
and fixed time horizon (perpetually
five quarters ahead) method, five-
quarter rolling forecasting still
has too many calendar limitations
for us. That’s why we are piloting
a different approach.
We should let forecasting data flow into our
systems according to their natural rhythms—
when, for example, a new competitor suddenly
appears, or when we postpone a scheduled
maintenance shutdown.
The whole purpose of forecasting
is to get issues on the radar screen
early enough that you can react
if you don’t like what you see.
Period. The radar screen must
have a size and a reach that cor-
responds to the ship’s size and
how long it takes to adjust course.
A supertanker needs a bigger and
better radar screen than a coastal
tanker. Differences in the lead
time needed for corrective action
are key. A supertanker needs a
Balanced Scorecard Report September–October 2009
much greater distance for turning
than a smaller vessel. A speedboat
hardly needs a radar screen at all
because it is lean and agile and
can adjust course quickly. Fore-
casting is actually a way of com-
pensating for lack of agility.
The Statoil “fleet” does not
consist of identically sized ships.
Although our main business is ori-
ented primarily to the long term—
exploring for, developing, produc-
ing, refining, and marketing oil
and gas—many of our units oper-
ate at a much faster pace. Our
crude-oil marketing people may
not know what the price of oil
will be tomorrow, but they do
know how much they have earned
or lost today. A month for them
constitutes a long time horizon,
and a year seems ages away. In
between the long- and short-lead-
time businesses are a range of dif-
ferent midsized vessels—that is,
medium-lead-time businesses.
So why equip all these different
vessels with identical radar sys-
tems, with identical reach and
resolution, all to be turned on
at the same time? Both the size
of the ship
and the type of
waters in which
it sails matter.
The forecasting
needs of a vessel
in the middle of
the Atlantic will
be different from
those of another
that’s 20 meters from port in
Rotterdam.
One way to look at forecasting
is as an “accounting of the future”
rather than on the past. The rigor
and level of detail are, of course,
dramatically different, but the
analogy is useful. In accounting,
inputs are made continuously.
Data—in the form of orders,
invoices, and payments—flow
continuously into our systems.
Few companies would let this
information pile up until the end
of the month or the quarter. Why
should we not approach forecast-
ing in the same way? We should
let forecasting data flow into our
systems according to their natural
rhythms—when, for example, a
new competitor suddenly appears,
or when we postpone a scheduled
maintenance shutdown, or when
we decide to update our market
view, or when a fire destroys
a production facility.
An Event-Based Approach
This year, Statoil has been explor-
ing dynamic (or event-based)
forecasting. It has no fixed time
frequency and no fixed horizons,
because we believe forecasts
should be updated when impor-
tant new information arises and
should have a time horizon
relevant for the event. (In “new
information” we include decisions
we ourselves make that might
affect our future performance.)
We are currently piloting dynamic
forecasting in three units, with
plans to go live throughout the
company in 2010. The pilot
programs span much of our value
chain: our Azerbaijan business,
parts of our Exploration and
Production unit in Norway, and a
Danish refinery. These units are
testing both process and system
changes. Our enterprise resource
planning (ERP) system has been
modified to handle this new, more
continuous process.
Although we believe other com-
panies must be using (or testing)
a similar type of dynamic forecast-
ing, we haven’t heard of
any specific ones yet taking this
step throughout their whole orga-
nization. Rolling forecasting
is becoming more commonplace,
but, as mentioned, it typically
involves fixed frequencies and
time horizons.2
7
Dynamic Forecasting: A Planning Innovation for Fast-Changing Times (continued)
Key Questions
What is an event? And who gets to
decide? When to update a forecast
and how far it should extend
cannot be a corporate decision;
it must be local. An event is
something that is big enough
on a local radar screen to justify
a local forecast update. A big blip
on a local radar screen might not
even register on a corporate-level
screen. A one-week delay or a
15% cost increase on a mainte-
nance shutdown on one of our
many offshore platforms might
be a significant event for that unit,
but it will hardly shake the corpo-
rate radar screen. Abiding by this
definition should ensure that for
corporate purposes we will always
have more than enough forecast
updates.
All updates are entered into our
common integrated ERP system,
which automatically consolidates
them—but still allows manage-
ment teams at every level to make
necessary portfolio adjustments.
We can be quite certain that
one of our platforms will have
some kind of operational prob-
lem, but we can’t know which
one, so these kinds of events can
be taken into account only at
an aggregated portfolio level.
A forecast update is documented
with a short description of the
event in a forecast log, available
for everyone to see in the system.
We hope the forecast log will
eliminate much of the need for
“reporting” upward on forecast
changes because the information
can be accessed by anyone need-
ing it.
How far ahead should a business
unit look? That depends on the
local entity’s needs—and on the
visibility. These needs should be
driven by the lead times required
for corrective actions, by the dead-
line for longer-term objectives and
8 Balanced Scorecard Report September–October 2009
targets, or simply by the expected
duration or extent of the effects we
are forecasting (e.g., the expected
sales effects of a new marketing
campaign). Low visibility may,
however, require us to create
more scenarios and ranges of
outcomes.
How often should we review our
forecasts? Forecast input data
will flow continuously into our
systems, whereas output or report-
ing will take place on a regular
schedule (as it does today), or
more frequently, if necessary.
Such ad hoc reporting must be
well communicated, enabling
those providing forecasts to
double-check the data.
Will dynamic forecasting increase
the workload? Does it mean more
forecasting? Not necessarily, and
in some cases it actually calls for
less. It means forecasting at the
right time, with the right time
horizon. It also means the end of
(or at least the vast simplification
of) the annual fall planning
process because the job will
essentially be done on a continu-
ous basis.
What about data quality? Are
all the numbers consistent and
reconciled? Not necessarily in an
accounting sense, but this, after
all, is not accounting. Forecasting
quality, as measured this way,
might generally be somewhat
lower than what we might reach
in the much more intensive fall
budgeting and planning period.
But we believe it is much better
to have something roughly right
all the time than something that
is precise only once a year.
Although it is a great moment for
corporate finance people when
all the numbers are consolidated,
negotiated, and reconciled, that
moment is fleeting. Three seconds
later, and well before the board’s
approval, something happens,
and we are once again out of
sync until next year’s budget and
planning period.
The coordination that annual bud-
geting and planning are designed
to accomplish is, however, vital—
and therefore far too important to
leave to an annual process where
everything is perfectly in sync and
reconciled only once a year. Coor-
dination must take place continu-
ously, with a frequency and a
time horizon driven by the specif-
ic information needs required for
that specific area of decision mak-
ing. Some teams need to confer
each day about the next day; oth-
ers, every week about the follow-
ing month; and still others, every
half-year about the two next
years.
Status Report
We still have a number of issues
to work out with dynamic fore-
casting. For example, we are still
discussing how the forecast log
can reduce the need for reporting
upward every time a forecast
changes. We’re wrestling with
how to execute the portfolio
adjustments that might be needed
at different organizational levels.
We’re also reviewing various ways
of filling the holes left by using
different forecasting horizons.
Another important question
we want dynamic forecasting
to answer (on our path to a
completely dynamic Ambition to
Action) is, What are appropriate
time horizons for our targets
(which are currently set in a
combination of annual and
three-year targets)?
We don’t yet have all the answers,
but we are convinced we will
sort out these remaining questions.
The pilot programs are going well,
and the 2009 fall planning process
may well be our last. We doubt
it will be missed, and we hope
we can soon share with you new
lessons learned from our Beyond
Dynamic Forecasting: A Planning Innovation for Fast-Changing Times (continued)

Budgeting journey, where the T O L E A R N M O R E

direction is clearer than the desti-
nation—if, indeed, there is one. n Statoil was profiled in BSR
1. J. Hope and R. Fraser, Beyond Budgeting January–February 2008 (“Statoil:
(Harvard Business Press, 2003). It’s also worth Scorecard Success—the Second
noting that the Swedish bank Handelsbanken had
been operating successfully without a traditional Time Around,” Reprint #B0801B),
budget since 1970. and was also written up in the
2. We have, however, learned a lot about forecasting 2008 BSR Hall of Fame Report
in general from Steve Morlidge, an ex-Unilever
“missionary” who is about to publish the forecast- (Product #2797), available at
ing book Future Ready together with Steve Player, www.harvardbusiness.org. For
head of the North America Beyond Budgeting
Roundtable. Visit the Beyond Budgeting Roundtable more on planning, budgeting, and
at bbrt.org. rolling forecasting, download the
Bogsnes is currently chairman of the Beyond BSR Index, available at the
Budgeting Roundtable in Europe and author Harvard website.
of Implementing Beyond Budgeting: Unlocking
the Performance Potential (John Wiley & Sons,
2008), with foreword by Robert S. Kaplan. He
is also winner of the 2008 Charles Horngren
Visionary Award. Bogsnes can be reached at
BJBO@Statoil.com.

Balanced Scorecard Report September–October 2009 9