How Beyond Budgeting pushes cultural change towards entrepreneurship – a case study of the Retail division of Swiss Post

By Stefan Spiegel, CFO SBB Cargo AG, former Head Controlling of Retail Division of Swiss Post 2017

Abstract

In the period from 2001 to 2006, the Retail division of Swiss Post transformed itself from a public service company into a business driven sales organization. Crucial drivers of change were, on the one hand, the adaptation of the steering systems up to the final implementation of a "Beyond Budgeting" philosophy and, on the other hand, a humanistic attitude of management and finance department against all employees. The success was amazing: The division succeeded in increasing the sales of new retail products from 0 to over 400 million CHF, optimizing the bottom line by more than 100 million CHF or more than 5 percentage points and becoming the first state-owned company in Switzerland to win the EFQM- Award for Business Excellence.

1. Introduction

In 2000 the Retail division of Swiss Post was responsible for the management of approximately 3’000 post offices in Switzerland, which physically offered classic postal services such as letters, parcels, cash payments and withdrawals. In total, more than 15’000 employees were working in this area and the total cost volume was around 2 billion CHF.

Originally the employees were civil servants, the value of the work was "being here", that is the delivery of a “service public”. The employees were there to wait for a citizen to enter the office for being served. Work tasks were ordered from the top, a very hierarchical thinking prevailed. There was hardly any self-responsibility, and there was time credit for everything they did. The most important thing was to report the hours needed for any work that had to be done in the offices because the value of the work was measured by hours. The thinking was determined by the effort done in each office. This resulted in a steering system, which captured all the activities of a post office in great detail and calculated the sum of hours required for carrying out these tasks. From this sum, the number of employees was calculated who were allowed to be employed. In conclusion, all the discussions turned around the seconds needed for the specific work individually in each office, even in negotiations with the trade unions.
Financial budgets were made, but only top-down and without effective cascading down to the offices. The remuneration system was also based on the above-described time system, the compliance with or the achievement of budget values had no direct influence on the wages of the post office managers.

In the years 2000/2001, the management of the division decided, within the framework of a new strategy, to completely renew the culture and to transform itself from a service public company into an entrepreneurial retailer with improved profitability. The cornerstones were that the good locations of the offices were to be used for the distribution of additional products, which included the kiosk, paper shop and other retail products suitable for small-areas, but also advice-intensive products such as mobile phones / subscriptions or even banking products as mortgages. The formats should also be scalable for third parties, who could distribute these products on behalf of the division.
At the same time, the decision was taken to develop result-oriented steering systems and, in general, to give more responsibility to managers and employees on the offices.

2. Development of the steering system

Parallel to the strategic decision of the management, the steering systems were continually developed from 2001 to 2006 to push and support the strategy. The key steps in this process were the following milestones:

  1. Development of a strategically consistent, result-oriented measurement system that could be cascaded in a comprehensive way down to every office. Special emphasis was placed on useful incentives with regard to internal allocations.
  2. Integration of employees, managers and trade unions in the development of the measurement system to support, anchor and train the cultural change.
  3. Definition of the needed self-responsibility for the entrepreneurial management of the offices. Adjustment of the corresponding job profiles for the employees. Development and offering of training to promote and support employees in the direction of the new skills required.
  4. Integration of the offices within the budget process, switch from top-down to bottom-up budgeting.
  5. Replacement of the old time-based steering system with top-down ordered resource allocations through the new result-oriented measurement system with the delegation of the resource responsibility to the office managers. Establishing a direct link between achieving results and remuneration.
  6. Starting a consistent clustering and benchmarking between outlets
  7. Removing budget process through Beyond Budgeting philosophy

Step 1: Definition of result-oriented measurement system

The basis for the result-oriented measurement system was the classic profit and loss statement with the EBIT-margin as relative profit indicator. The EBIT for each office could be calculated using product sales, gross margins, and corresponding costs.

The handling of the internal cost allocations was more difficult. Up until now, for example, the employees were able to report training days, which were then deducted from the cost burden of the offices. In the new setting, the training of employees became part of the normal duties of an office and thus charged the EBIT margin. The office managers had now to decide on their own responsibility when to take the appropriate training for themselves and for their staff.

However, if one post office temporarily borrowed employees to another office, then the system ensured that the issuing office was relieved, the receiving one correspondingly burdened.

These "little things" were crucial discussion points with the employees and key elements for the entrepreneurial orientation.

Step 3: Cultural Change

The cultural change was enormous. Along the old time-system, an employee was rewarded, if he could prove as much time as possible for any activity, whether it was directly related to the sale of a service or not.
Now, the post office staff had to redirect their efforts to determine how much sales and margin they generated by selling their products. They were no longer rewarded by the fact that they were able to write down a lot of time but were able to do their work as effectively as possible in a short time. Pure expenses on an office without any sales, for example all administrative activities, were suddenly “worthless” and only burdened the costs.

We were able to overcome the fears and resistances of this change by the fact not to demand certain fix defined EBIT margin targets, but simply to start from the actual situation with the goal to continuously optimize the existing EBIT margin.

Step 4: Switch from top-down to bottom-up Budgeting

In order to become familiar with the methodology, it was crucial that the offices had to budget their own revenues, costs and thus EBIT development for an initial period. They were forced to deal with the mechanisms and to put forward measures to achieve their optimization goals.
To reduce the fears of dealing with a budget system, it was important to use absolutely simple and comprehensible instruments. We were based on simple Excel files with built-in Visual-Basic programming. With the Excel interface, the office managers were familiar. we were able to design the input fields so that they were absolutely logical to enter data there.
Visual Basic programming, in turn, ensured that we always knew centrally who had already entered data and who not, and by means of an export button it was ensured that we were able to consolidate the data centrally.

Step 6: Clustering and Benchmarking between offices

In order to ensure that we compare only offices which are effectively similar and could be compared, we divided them into 15 clusters according to the sales volume and the customer value measured by the sum of sales per purchase:

Within the clusters, we were able to compare the offices. The idea was that we take as benchmark level the average value of the EBIT margin of all offices in the upper third. The gap of the effective EBIT margin to this mean value showed the optimization potential of each office.

With this potential calculation, one can follow the development of individual offices as also of market areas and clearly compare management effectiveness. The assumption is that all offices can still optimize, that the optimization steps, however, get smaller the better an office already is. In a focused management, the margins of bad and good offices should, therefore, have to be adjusted, thus reducing the spread. In other words, the potential would have to decrease. A glance at the various geographic market regions of the Retail Division showed the following figures with regard to the quarterly potential development:

The graphic shows a very interesting picture with regard to the steering. By far, the market region 4 appears to be the best-managed region. Not only the spread decreases, but the optimization potential is already being exploited to a good extent compared to the other regions. Most critical is the market region 2, which not only has the highest potential for optimization, but also an increasing spread.

Step 7: Beyond Budgeting

With the described measurement system and benchmarking shown above, it was now easy to take the final step into a Beyond Budgeting philosophy. Instead of rigid budgets, they were replaced by the following relative and yearly stable targets:

  • EBIT margin improvement compared to previous year
  • EBIT margin above the average EBIT-margin of all offices within the associated market region
  • EBIT margin above the average EBIT-margin of all offices in Switzerland

And with the change of this logic, the following was achieved:

  • Elimination of time spent on budgeting
  • Gaining knowledge of existing optimization potentials
  • Elimination of discussions about deviations, but starting debates about how potentials can be exhausted
  • Result effectiveness of individual managers gets measurable

Success factors of Beyond Budgeting

The following points were decisive for the introduction of Beyond Budgeting:

  • The number of comparable offices was high
  • Possibilities existed to give entrepreneurial responsibility to managers
  • The business itself was relatively stable without huge jumps or cyclically needed huge investments, where an early planning is indispensable.
  • The enthusiasm of management and finance, to break new ground, especially as the time savings were felt very quickly.

And even if in a business the above factors are not always given, Beyond Budgeting could be applied in some sub-areas and help to promote entrepreneurial thinking.

3. Attitude of management towards employees

Implementing steering systems is one thing, but the success of a company is still made by people, so the attitude of management towards employees stays a crucial success factor. In the following should be explained, from the perspective of the author, the preferred attitude for such a change.

Change processes of employees

In order to achieve a cultural change within an organization, changes are required to the individual employees. Thus the change process of an individual employee is of fundamental importance.

We distinguish 4 forms of change processes:

  1. Development: Makes change through maturity and through active use of facilities to build complex abilities.
  2. Learning: Makes the change by acquiring knowledge, skills, and attitudes for daily life.
  3. Rehabilitation: Causes change in the recovery of abilities and independence after illness or accident.
  4. Adaptation: Causes change by empowering a person to react appropriately to the demands of daily life and to improve and stabilize its own well-being.

Often the mistake is made of asking for a cultural change purely through "learning", ie by means of training, lectures and other occasions, where the employees are told how they should behave differently in the future. Without changing the work environment, however, the learned knowledge will remain on a theoretical level, since everyday life has not really changed. For this reason, the process of adaptation is the central approach to a cultural change - for example in the direction of entrepreneurship: "Adaptation causes change by empowering a person to respond adequately to the requirements of the work environment and to improve and stabilize its own well-being."

The main assumptions for the adaptation process are:

Adaptation process Transmission to work environment
The ability to react adaptively to changing circumstances in life is necessary for life satisfaction and well-being. The ability to react adaptively to the new strategy, the new steering system and the new form of budgeting is necessary for the well-being and satisfaction of employees.
Adaptation depends on the ability to perceive and respond to environmental stimuli and to learn new reactions as needed. Adaptation depends on the ability to perceive and respond to the new inputs from the work environment (new steering system, the new method of budgeting) and to learn new behavior when necessary.
A person can be empowered to react more appropriately by promoting perceptual skills, giving feedback on reactions, promoting successful participation in relevant activities, developing problem-solving and planning skills, adapting tasks and environment to promote performance.

An employee can be empowered to act more entrepreneurially by

  • Promotion of perceptions (in this case, controlling must build up suitable information systems so that the employee can recognize the consequences of his / her actions)
  • feedback on his actions (the controlling must be able to provide adequate feedback)
  • Promoting successful participation in budgeting and steering processes
  • Development of business planning skills (content of budget process)
  • Adaptation of tasks and work environment to promote performance, for example through the transfer of more self-responsibility

In the graphic below, the adaptation model is presented in the overview:

If a cultural change is to be made, it is crucial that not only the new desired behaviors are taught theoretically, but that the effective working environment, with all its necessary tools, in particular steering and incentive systems, is adapted accordingly.

Behavior of Controlling

Within the Controlling department, one has to clarify, how the employees should be approached. That is, the relationship between Controlling and line employees/managers.

The following reference frames exist:

  • Behaviorism: The model assumes that the human being develops a certain behavior through appropriate amplification. Typical terminologies in this context are conditioning, extinguishing, rewarding, punishment, target planning. Under this frame, the controlling team would work out precise training plans for the employees and steering the training process.
  • Cognitive-behavior oriented: The model assumes that thoughts, mental processes, feelings are very closely linked to the behavior. From the interpretation of the individual perception the behavior emerges. Under this frame, the employees get homework assignments, where they would have to assess and reflect certain business challenges, which they could then discuss with the Controlling department.
  • Analytical: The model assumes that the behavior is controlled by unconscious instincts and past experiences and emotions. In a work environment such a framework can be rejected.
  • Humanistic: Here the employee is expected to be able to act independently and finds ways to develop into the entrepreneur. Controlling is only a facilitator, by providing support, by discussing ideas and by commenting on and reviewing the results of the actions.

If the individual employees are to become self-responsible entrepreneurs, the humanistic approach is preferred. The relationship between Controlling and Business line looks as follows:

The basic assumptions behind this model have already been outlined by Baitsch (1993, "what moves organizations") a few years ago and are, in my view, even more important in view of the changing needs of the younger generations:

Ensuring motivating tasks

Social interaction: Employees need tasks that imply cooperation with others.

Holism: Employees must recognize importance and significance of their work.

Autonomy: Employees need tasks with planning and decision-making possibilities

Diversity of requirements: Employees need tasks with planning, executing and controlling elements, that is different requirements for body functions and sense organs.

Learning and development possibilities: Employees need tasks where they have to acquire new skills or develop existing ones.

As a checklist to support the corresponding cultural change, the controlling department should ensure the following points:

  • Developing tasks and responsibilities, at which employees can show the desired behavior directly.
  • Ensure that there is sufficient support and a structure of work tasks according to the humanistic approach.
  • Adapting the material aspects of work organization in such a way that the desired behavior becomes a logical consequence.
  • Ensuring that the employees can directly perceive the consequences of their behavior.
  • Observing whether the desired behavior arises automatically. If the effects are insufficient, the tasks and material aspects of the organization have to be further developed.

It is precisely at this point that executives play a central role in a work organization. Their role model, or what the managers do and demand, is crucial for the attitude of the employees.
Any change in behavior is related to the behavior of the managers!

4. Results and conclusion

With the delegation of responsibility to the offices, with the parallel implementation of appropriate steering systems and with the appropriate attitude of management and finance department, the Retail division of Swiss Post was able not only to increase its bottom line by more than 100 million CHF or 5 percentage points, but also to grow new retail business up to more than 400 million CHF of sales. In addition, the company won the EFQM Award for Business Excellence and managed to reduce the number of employees and thus the efficiency of the company by several thousand FTE’s, using purely natural fluctuation and decentralized decisions. And this without great discussions among the public, the trade unions or the staff itself and without the elaboration of comprehensive social plans.

Beyond Budgeting is therefore not only a tool to reduce any annoying planning effort, it is a concrete method that helps to sustainably improve the cultural attitude and behavior of executives and employees in a company and to increase competitiveness.