Ulrich Gammelgaard: Transparency and Demand Response at Velux

Thank you, Anders, for inviting me to participate today and giving me an opportunity to share our experience in Velux with how we can manage the company without using budgets. Before I start on this, on the Velux case I will start with a few facts about me. My name is Ulrich Gammelgaard. I have been more than 13 years in Velux.

I'm the head of global financial management in Velux and that means that my responsibilities lies within financial management. Business partnering, planning and analysis, product costing, and business intelligence. So, I'm a finance guy, basically. I don't know anything about customers. I know something about corporate finance and some classical accounting stuff.

But I try to, to also learn new habits during the past years. And that's what we're going to talk about now. First of all, a few words about what Velux is. Velux is a company, many people around the world know our products, but not so many know exactly what the company is. What we do is basically roof windows for all kinds of buildings.

Velux is the world's market leader in roof windows. Velux was founded in 1942. and has grown all the years since 1942 based on the vision that we will bring light and fresh air through the roof in all kinds of buildings. And yeah, that has worked quite well. Sorry, I struggle to make this work.

We have 40 sales companies around the globe and we have production companies in 11 countries. So it is a global company. We employ around 10, 000 people just for you to have an idea about the size of the company. So it's from a local Danish view, a medium sized company, but of course not a very big global company.

But what characterizes Velux is that we have a lot of products. We sell around 200, 000 finished goods numbers in all our markets. And that's a really high number of products. And that means that our supply chain is very deep and it's very complex, because we produce almost everything by ourselves in the factories.

So when you think about Velux, I mean, it's not a complicated company to understand, but running it on a daily basis becomes quite complicated, because we have huge amounts of data, and we have a lot of complexity in the operations just to make it work every day. And that means something for the performance management

we have applied in Velux let's continue. There it was. Yeah. When we talk about the performance management framework we applied today in Velux it has basically been arrived during a finance transformation we started back in 2012. We asked ourselves the question, how can we in finance create more value for the business?

Back in 2012, we did see that we had increasing cost inside the finance operations in Velux . And if we asked the business they probably would not tell us that we created a lot of value. The focus was much about finalizing the accounts at year end or maybe during, during the month end closing.

If we didn't do the month end closing, we, we used our resources in analyzing. the budget deviations every month. I mean, it kept a lot of people busy every month. Yes, we did believe at that point in time that we could create more value for the business if we did it in another way.

And that's the reason why we started to talk about how can we create a performance management system in Velux. which allows for more accountability, which allows for more agility, and which allows for more transparency in the business. So we can find out where do we create value in the business, where do we destroy value, and who is actually accountable for doing what in the business.

That was a journey where we started to define a new global operating model for finance in Velux . Before the transition we had more than 50 separate finance functions in Velux , each of them being a part of a local sales or a production company, and each finance manager or local CFO referring directly to the local general manager.

In such an environment, it can be hard to optimize finance globally because, I mean, you have to agree voluntarily with all these different finance managers. If we want to make a change like removing our budgets or maybe just organise ourselves in another way, then we have to agree all around the globe and it's almost impossible to agree with so many people.

What we did to begin with was just to say, yes, we have more than 50 local finance functions in Velux we would like to turn it into being, sorry, that works. We would like to turn it into being just one big Velux global finance organisation where colleagues in one big department. Of course, still supporting all the local sales companies and all the local production companies, but we're just one big department.

Then we separated the Velux's Global Finance Organisation into three different areas. One area taking care of all the financial transactions, and one area taking care of what we call accounting and tax, all the financial compliance stuff we need to do in order to Comply with legislations all around the world.

And then the last area, which we call financial management, which is the area where I am responsible. Inside that area, we defined a new operating model based on inspiration, I can say, from the beyond budgeting idea or philosophy. But basically just asking ourselves, how can we maybe turn this, all our resources which we put into analyzing budgets, how can we free it up and then use it for more value adding activities in the future.

The first thing we did was to define what we call Velux performance model. And Velux performance model is a framework for financial optimization of Velux which basically sees Velux as being one big global company. It doesn't really matter whether you're a production company, sales company, but we all work in one company.

Velux performance model is then set up to illustrate exactly how we can optimize Velux financially. On the left side, in this model, we have the production companies. Each of the production companies produce a number of items. It can be insulation panes, it can be, wood frames for windows, it can be metal parts for windows, and then they trade these items among each other, and some of the companies are then specialized in assembling all these stuff to finish goods.

Once a year in this financial model, based on expectations for raw material prices, other production costs, and also based on expectations for The volume and the product mix we're going to sell to our customers. We ask production companies to calculate a production standard cost. Of course it will be the responsibility of finance people doing this.

So we have defined exactly how can we calculate this production standard cost. I won't go into that today because that can be a little bit complicated and will probably take some hours to explain. But it works quite fine. Just imagine that once a year we calculate a production standard cost. This production standard cost is then communicated to the sales companies, and based on local conditions, the sales company has the responsibility for defining sales prices, trade conditions, product mix, etc.

And based on also a logistic standard cost, which is a standard cost for how much does it cost to take this product from a factory into a customer site the responsibility of the sales companies is to Optimize contribution one or the contribution margins in that process, of course, the sales companies apply local marketing cost and they also apply the cost of sales for rent and sales reps, etc.

Basically they create a market contribution. Very simple. In Velux we have defined that the local Managers, the local management teams in sales companies are responsible for the size of the market contribution. We come back to exactly how we use it. In the middle of this model, we have what we call group cost.

Each Cost for discovery and development. It can be for group IT. It can be people like me who is placed in the group finance function. All kinds of cost and it's quite considerably. Cost in Velux this portion of cost. We allocate these costs based on a very simple APC methodology to all the markets.

It's visible in the P&L, but we are very strict telling that the local management team, the local general managers, is not responsible for the market EBIT. They are actually responsible only for the market contribution, because we believe they can affect the market contribution, but they cannot take any decisions about the market EBIT.

At least only indirectly. It will be the responsibility of the group management to size, the group functions, how big should they be, and how should it be allocated to the different markets. If we sum up all the local market EBITs, and we also add the group cost variances, and also the standard cost variances, which we can see in production.

Then we arrive at the group EBIT. The standard cost variances is of course a variance we can trace back to the definition of the standard cost, and then we realize the real cost, the difference, is a standard cost variance. That's very simple. But if we add these elements, we arrive at the group EBIT.

That's very easy to understand, and the good thing about this model, so to say, is that everybody can understand it. Also, people who is not within the finance area, can very easily understand this model. And that makes it very useful in the real life because people can see exactly how do they contribute to the group EBIT.

If you are in the production company you can either lower your standard cost or you can make a positive variance compared to standard cost. And then you will add to group EBIT. Or in the sales companies you can sell more, you can Increase the contributions margins, or you can maybe also lower the local cost of sales.

Everything will add up in the group EBIT and you can exactly see in this model how it's done. So, that was the first step. Defining this model so we could tell people exactly how do they contribute to the group EBIT in Velux . The next step then was that we said, based on this framework, we have decided that we will not, because it works, I mean, it works in the real life.

Everybody can see in their reports and IT systems exactly how do the figures in this model sum up to the group EBIT. Basically, when it works, we don't need budgets anymore. So everybody should be very clear, About exactly how can they contribute to the group EBIT. But if they do know, then we don't need the budgets anymore.

That was our that was our understanding. That was. So we decided to leave the traditional budgeting process behind us. And we decided to implement what we call Velux performance process. Where we separate the target setting from the forecasting. Which is again, is separated from the daily decisions we take regarding resources.

So traditional Beyond Budgeting philosophy, you can see. We communicated that to the Velux organisation that in the past we had the traditional budget process. We don't need it anymore because everyone is now clear on exactly what is their targets what is their contribution to the group EBIT in Velux .

Then we will, instead of having this global Budget process, we will apply target setting yearly, and we will have monthly forecasting. And then, of course, the decisions around costs we use in sales companies and production companies is something which is taken on a daily basis, based on, you can say, the local judgment, from the management teams in order to optimize Velux .

Yes. It doesn't, it's not that good to be honest.

There it was, the communication around this change. What that we would like to implement what we called a beat of the pulse in Velux . So we have a synchronized beat of the pulse for planning and follow up around this Velux performance model. We communicated that one of the reasons why we would like to have a separate target setting is that we would very much like to align our global targets with local targets.

And we would also like to have agility in the planning with possibility for monthly reviews. Sometimes, I mean, if you work in the traditional budget philosophy, then usually you make yearly budgets and I mean, it's a big process where you fix a lot of things of assumptions for your planning.

With this new model we would like to have the opportunity to actually revisit the assumptions every month if we would like to do it. And then of course trying to free up all the resources we put into backward looking analysis of budget deviations into forward looking follow up on target realization instead.

So that was the communication around this change. The Velux performance process was the headline of this new process and it can be understood in this way, that the first step of this process is to define a global target. We have said that in Velux the management team, the top management team, including the board of directors, have the responsibility for defining Velux global target once a year.

it is in this model, a financial target, but it could be any kind of target you actually apply. For instance if we would like to increase earnings, it can be defined in terms terms of this EBIT percentage, which I just showed you in the group performance model. But it could also be all other kinds of targets.

Mean, it's up to management to define what kind of target would you like to have in this model once the target is defined. We will break it down according to the Velux performance model. So if we, for instance, would like to have increased earnings in Velux we can do it by looking for opportunities in production companies, looking for more efficiency, but we could also look for opportunities for investing in sales activity and thereby boosting the top line.

We could also look at efficiencies in group systems. I mean, it can be anything, basically. The idea is Here, that we have a model where we can structure our decision making around a target for how to realize it in the coming period. And based on this model, we will cascade the target down to the different business units and the different operating units inside Velux, who then will be accountable for realizing these targets.

The next step in this process will then be that the local management teams It can be a sales company, it can be a production company, but it can also be a group IT function or maybe in product development. Then they have a responsibility to define a plan for how to reach this target. And as it is a financial model right now, we have developed a simulation tool and I will get a little bit back to how it works.

But in this simulation tool, the local management teams can work with financial simulations for how to reach the target. This simulation tool is then also used every month to produce a rolling forecast. And in this rolling forecast we can then monitor the progress towards the target or maybe away from the target.

Of course, depending on what the circumstances is. The idea is that we monitor every month based on rolling forecasting what is the gap between performance and the target which were defined for the business unit. It will then be up to the management teams, both locally and globally to define what activities should be put in place in order maybe to close the gap or maybe accept the gap that there is between target and

forecasted performance and it's an iterative process. So actually you can go in in all kinds of ways here. It's very simple to understand. And it's really nice to communicate this process because everybody seems to really understand it and accept it.

Again, we use this performance model in order to understand how can we optimize Velux . But based on this model, we have defined targets for group EBIT, target for market contribution in all markets, the target for production company, sorry, for production cost, and that is defined according to standard cost.

And then we also have a target for logistic standard cost and a target for the group cost in, in the group functions. It's only five KPIs. It's very simple to understand. The five KPIs are defined in this way. And by having these five simple KPIs, we are able to control Velux financially around the globe.

And yeah, it works quite fine.

It requires that to all the business units in Velux this new process requires that they actually step into having Another role compared to what they had in the past with the old budgets. We have asked all local management teams to be part of this beat of the pulse in Velux. They should locally adapt a process, a monthly process for updating the rolling forecast and work with the new simulation tool in a way so they actually can try to give their best view on expected performance in the future.

We have also defined dashboards for following up on the rolling forecasting versus targets. So the target realization or the expected performance in the future is very easy accessible in these dashboards for all the managers who should have access to this system. So transparency is, is a great part of this process.

Then we have defined all the finance managers in the organisation. as being experts in this process. So they were trained before we rolled it out. So they could actually support the local management teams in how to work with the new process and the tools that we have provided to all the yeah, local companies.

Basically every month we have a window it's around 14 days, which is open in the simulation tool. And in this window all the sales companies can go in, and then they can based on expectations for unit sales in the future, create a forecast for expected financial performance.

At the same time, they also create a forecast for, for the units they expect to sell in the future. Thereby we are creating expectations also for production companies. What kind of volume, what kind of mix should they produce? That's also derived based on this rolling forecasting system we have applied.

It works very fine. And it creates a lot of transparency now that we have only one forecast in Velux which is defined as our expected performance in the future. So, so we don't work with, you know, different forecast for production activity and different forecast for sales activity.

There's only one forecast in Velux today and that is arrived at by this process, monthly process where we try to look ahead and see what do we expect in the future.

The rolling forecasting we are doing it in a system which is based on BPC. SAP technology, and it allows real time simulation of the full P&L, which is based on statistical forecasting of units sold in each market. So a lot of reliability in the data behind the model, but still very easy to use seen from a local point of view.

It took some time to develop this tool to be honest because it becomes complex once you dig into all the data which is behind it. But our idea has been that the system should not just be a financial planning system, it should be a system which can support local decision making in sales and production companies.

Everything is visualized inside the system. In graphs and tables and things like that. So, it's actually possible to simulate different activities and different initiatives in local markets. So, the management teams actually can work with different scenarios for how to optimize future performance before they submit their expected rolling forecast which we need, of course for consolidation purposes.

And also one other thing maybe which is good to know here that we have this seamless integration from sales forecasting to production planning and again the transparency is very high due to the fact that we only have this forecast to work with in Velux and it's renewed every month based on all the expectations in the local markets and, and production companies.

So it's a very flexible system. Visibility for the rolling forecasting we have done in what we call dashboards. These dashboards are very easily accessible by a web browser, and in the dashboards we focus very much on the trends, the rolling 12 months KPIs for different kinds of activities, and thereby we, hopefully, is telling the story, so to say, about the Performance, actual performance and expected performance in each part of the group.

And we have also in this dashboard included what we call risk and initiatives in relation to expected performance. And I can give you a few screenshots on how this dashboard looks. You don't have to understand all the details of course, but, just to give you a look and feel about it, in this corner up here, we have very simply, this is a dashboard for a sales company.

They have a target at a certain percentage here, that is the percentage for the market contribution, and here in this case, the estimate shows that the expected performance will be below the target for the year, and for that reason, they have a red indication here. In these graphs down here, you can see the rolling 12 month development for selected KPIs, which is relevant.

And by clicking these buttons down here, you can go further into all the details of the different KPIs, if you want to have an overview of what is actually going on in this market. We also have asked the local management teams to come up with an executive summary for the forecast they submit. So we also have an idea about what kind of activities will they put in place in order to reach the estimated performance.

So it's not only numbers, it's also a little text but basically the idea is that we look at trends and also selected KVIs for, for understanding performance. Yeah, this is a chart showing the different initiatives in the market it's just an example. We ask all general man, all management teams in local markets to enter what are the most important initiatives in the market the plan right now in order to achieve the expected performance.

The Initiatives should be rated according to the impact on market contribution and what kind of effort it requires to, to carry it out. I will say that, that the dashboard has been a success in Velux . The risk and initiatives part is probably it's an experiment.

I'm, I'm still puzzling a little bit with whether it's a good idea or not. The dashboard has certainly proven to be a very big success due to the fact that it's very easy to understand. And it also recreates this transparency around forecasting and target realization which makes it a very, you can say, lively tool to use and to use for discussions in the management group.

And, Yeah, that's just a traditional P&L for a sales company. We don't work with the budgets anymore, so there's no budget columns here. It's just to show the performance in the month, year to date, and then for the whole year, including the rolling forecasting, and then by clicking at the different lines, the charts will move around.

It's used for an analysis of the submitted forecast for the different parts of the organisation.

Yeah. Basically. Just getting a little bit back to VLU's performance process. I think the process is very simple to understand. But what is maybe the most important takeaway from this model is that we have created a system which is very agile because we can actually redefine the global targets and the breakdown of the targets at the point in time where we would like to do it.

It's not something that we have to do, at a certain point in time every year, we can actually revisit every part of this planning process in every month of the year if we would like to do it. I think also for the, for the transparency it has meant a lot that we implemented this process. Because we now can see actual performance and future expected performance updated every month and then have this target to compare the expected performance against. At least for Velux , it has proven to be a very successful model to work against. So, yes. I think sometimes when I present this model People ask me, you say that you have removed the budgets in Velux already but you still work with yearly targets.

And that's, of course, some kind of a contradiction because targets can also be seen some, like budgets or at least it has some kind of the same functionality. But what we did in Velux was that we removed the very detailed yearly budgets and then we defined targets for certain KPIs. which were defined based on the performance model you just saw before.

So it's a very flexible system compared to what we had in the past. And my experience is that the target setting, seen from a top management point of view, and also seen from the board of directors point of view, is a very important process. I mean, it's their process. They would like to have the right to define targets, and as I work in Velux and would like to support the performance process. We run this target process and it creates a lot of value at the top management and also for the board of directors. But I don't think it will be possible to work with this global target setting in such a structured way unless we have defined this vehicle performance model before.

The definition of the performance models allows us to focus on very few selected KPIs for financial performance and that is really what I see is a prerequisite before you remove the budgets that you are quite sure exactly how does your company's work financially and be sure that you have the accountability in place before you start removing these budgets.

At least in Velux that was our experience. Okay that was a little bit about Velux. it could be interesting maybe for me to know how many of you are working with removing budgets in your organisations, or maybe you have already done it, I don't know. But it could be nice to hear a little bit about that.

So my question to you right now is, do you work with budgets in your organisation, or do you plan to remove them? Where are you on this Beyond Budgeting journey, so to say. So if you maybe two minutes and sharing experience at the tables and then we can. Here what you have.

Are there anyone who is going to share their experience with working with budgets or maybe removing budgets from local organisations? How about you with this table here? Are you working? Yeah,

Audience Member 1: I was just saying that we are we are here you know, taking our first steps. Yes. And so we are here to learn and we are you know, it's the time of the year when you should be making budget, but we are not. We are preparing for, you know, making this transformation over to removing the regular budget and going in the direction you've, you've followed for the last few years.

Ulrich: Okay. If we just take a look at, at all you people here, I mean Try to raise your hand if you have removed your budgets already by now, or if you're working with plans to do it.

That could, just to, for me to get an idea about where you are on this journey. A few people, okay. So I guess the most of you are here to get some inspiration for what have other companies done with respect to this. Okay.

Audience Member 2: I have one question. Yes, yes please. The question I have is I noticed if I was not mistaken that you have no, you do not have sales targets.

Ulrich: No.

Audience Member 2: Why is that?

Ulrich: We don't apply sales targets, at least from a, you can say corporate point of view because I believe sometimes that's at least, my personal philosophy, it's something that we debate inside Betos. I will say that. So, so it's, it's maybe not, you know. The single truth I'm presenting here, but seen from my point of view, if you are a sales company, you know exactly what you should do.

You should sell our products. I don't have to tell a local sales manager that he has to sell work windows and accessory products. But of course, I know that in the local sales companies, some of the general managers are applying local sales targets to their sales reps in the field. I haven't actually, you know, Try to, to change that because I think that will be a local thing.

They have to decide whether they will apply sales targets locally. But seen from a corporate point of view, no, we don't.

Host: We have just time for one more question.

Audience Member 4: Hi, you mentioned you've still got a target top down approach.

Ulrich: Yes.

Audience Member 4 Which is kind of a budget name. What's the penalty for missing your target, or is there no penalty? What's the, is it just simply a target that's a, an aspirational target? Is there any, what's the penalty for a penalty for missing your target? So that the order that you set the target, which you have, which tends to be a budget. But what happens if you missed your target? Is it just simply an aspirational goal?

Ulrich: You can say it's an ambition we put on the local management teams. And then of course it is intensivized by a bonus scheme also. So if you miss the target, you will get a smaller bonus. If you are very good at achieving the target, or maybe even performing much better than the target, then you will have a higher bonus. And I do know that it also will mean that there is some kind of you can say, yeah, budget behavior around how should you decide these targets.

That is something I work with right now to, to understand exactly how can we Still work with targets, but limit, you can say, the budget behavour around the target setting. But as I also said in such a big company like Velux at least there's, there's different views upon how can we have a performance management system which satisfy the different needs of the business.

And defining targets is right now at least something that we can use on the management level discussing ambitions for performance in the future. Setting

the targets is done in a very flexible way. It's only a very few selected KPIs where we put a target on. So it's not a bureaucratic process once a year then we have to invent Velux once again. No, it's actually a quite simple process. But again, yes, you can say the penalty is that you will get a smaller bonus if you don't reach the target.

Host: Unfortunately, we have to stop now, but just one thing to add to your presentation Ulrich is that from our perspective, or from the perspective of....

Ulrich: we think that addressing the budget issue and starting with the separation is a first great step. Not necessarily the end destination, but it's a great step to get going, because then it opens up for more discussions about what kind of targets should be set.

Do we really need targets? I mean, and, and this is unthinkable in a traditional view on budgeting, or sorry, in a traditional budget world. I mean, so this opens up for, for more intelligent discussions. And for me, this is the first step on our journey. And thanks for coming and sharing it with us.

Thanks a lot.