beyond budgeting: leading with flexible targets. 2-day seminar

Niels Pflaeging BBTN & MetaManagement Group Seminar with Uni Strategic, Kuala Lumpur 01./02.12.2008

> beyond budgeting transformation network.

Beyond Budgeting: Leading with flexible targets.

How to beat the competition – without fixed targets and with no annual planning whatsoever!

Make it real!

© BBTN – All rights reserved Seminar – Beyond Budgeting 2

Some introductory words…

•  English as a foreign language…

•  Opening hearts and minds for two days…

•  Everyone´s a CEO. •  Dialogue, not monologue. •  The material has changed! •  Excercises •  Cultural differences: We have to deal with that!


Industry, USA

What is it that these organizations have in common? Exceptional companies that do almost everything differently!

•  Innovators: A crises within their industries or firms caused them to change radically

•  Exoten: Exceptional leadership models •  Performer: Superior competetive success

It´s the coherence of the leadership model that matters!

Airline, USA

Banking, Sweden

Retail, Germany

Retail, Sweden

Industry, Japan

Services, Brazil

Energy, USA

Industry, USA

Services, Switzerland

Industry, USA

Retail, Germany

Services, Australia

Retail, Sweden

Technology, USA

Engin. Services, Brazil

© BBTN – All rights reserved Seminar – Beyond Budgeting 4 4

There are many outstanding cases of companies that have applied the “new” model. This is a selection.

4


Industrial age ends: ”Supplies have the power“, Evolution of mass markets: Taylorism as the superior model

Characteristics •  Incremental change •  Long life cycles •  Stable prices •  Loyal customers •  Choosy employers •  „Managed“ results

Dynamics and

complexity

1890 1980 1990

low

high

2000 2010 2020 2030

1.  Discontinuous change 2.  Short life cycles 3.  Constant pressure on prices 4.  Less loyal customers 5.  Choosy employees 6.  Transparency, societal pressure

  High financial expectations

Knowledge economy advances: ”Customers have the power“,

strong competition, individualized demand: decentralized and adaptive model is superior!

Competitive success factors (CSF) - Fast response - Innovation - Operational excellence - Customer intimacy - Great place to work -  Effective governance -  Sustained superior value creation/fin.perf.

The world has changed: outlining today's critical success factors

Characteristics

Most organizations still use a management model that was designed for efficiency, while the problem today is complexity.

All are important today!


Our journey since 1998, within the international Beyond Budgeting movement

Beyond budgeting (1998-2002)

Beyond command and control (2003-2007)

Beyond incremental change (2008-)

…


A new brand. A new network.

The first “open source“ movement in the management arena - worldwide!

Make it real!


The new model is supported by science and practice

Sciences: Thought leaders (selected)

Practice: Industry leaders

(selected)

Complexity theories

Social sciences & HR

Leadership & Change

Strategy & performance management

Manufacturing

Distribution

Services

Government & Not-for profit

•  Charles Horngren •  Henry Mintzberg •  Gary Hamel •  Jeremy Hope •  Michael Hammer •  Thomas Johnson •  …

•  Stafford Beer •  Margareth Wheatley •  Niklas Luhmann •  Kevin Kelly •  Ross Ashby •  Joseph Bragdon •  …

•  Douglas McGregor •  Chris Argyris •  Jeffrey Pfeffer •  Reinhard Sprenger •  Stephen Covey •  Howard Gardner •  Viktor Frankl •  …

•  Peter Drucker •  Tom Peters •  Charles Handy •  John Kotter •  Peter Senge •  Thomas Davenport •  Peter Block •  …


From the film ‘Modern Times’ with Charlie Chaplin, 1936

Outlining the ‘industrial age’ model and its pitfalls

“command and control“

•  Too centralized •  Too inward-looking •  Too little customer-oriented •  Too bureaucratic •  Too much focused on control •  Too functionally divided •  Too slow and time-consuming •  Too de-motivating • …


How markets govern organizations “from the outside in”

Periphery

Center

Information Decision

Impulse

Command

Reaction

Centralist command and control “collapses“ in increasingly complex

environments

Source: Gerhard Wohland


From hierarchy to network structure.

•  “Bosses” rule! •  Top-down command and control •  Top management is always in charge •  Centralized leadership

•  “The market” rules! •  Outside-in sense and respond •  Front-line teams are always in charge •  Devolved leadership

Traditional model (centralized functional hierarchy)

New model (decentralized leadership network)

Changing leadership and structure


Does planning really work? The traditional model can destroy value on a massive scale!


The problem observed initially, by the Beyond Budgeting movement

James O. McKinsey, 1922

“Budgetary control… is urgently needed, as a foundation of control exercised by executives, and as a way to coordinate the activities of functional departments.”

Seminario Beyond Budgeting - Conferencista: Niels Pflaeging

Dr. Jan Wallander, 1997

“Budgetary management is an unnecessary evil”


Traditional management processes keep teams from strategic thinking, and motivate counterproductive or unethical behavior

Financial problems •  Process takes too long •  Plans become obsolete quickly •  Plans are of little or no use

Behavioral problems

Strategic problems

0

100

1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: Chem Systems

Profitability in petrochemical industry in Europe

300

400

500

600

200

Targets and strategic guidelines

•  Target negotiation •  Definition of incentives •  Activity planning •  Resource allocation •  Coordination of plans •  Approval

Performance control (plan-actual)

Budget

Bonus (vs. targets)

Vision

...

Fixed performance contacts and “keep on track”

Source: BBRT


Management control cycle

Budget

Strategy

Strategic learning cycle

Annual plan

Control

Management processes in organizations are “straight jackets”

Fixed Performance Contract

“Fixed” performance contract •  Period [Fixed]

•  Targets [Fixed]

•  Compensation [Fixed]

•  Plan [Fixed]

•  Resources [Fixed]

•  Coordination [Fixed]

•  Control [Fixed]

•  Agreed through [Negotiation]

•  Signed by: [Manager/Director]

Source: BBRT

Tayloristic management works like this: As centralistic-burocratic hierarchies, held together through a regime of fixed performance contracts!


Current practices are misaligned with the Critical Success Factors

Six misalignment examples

  Annual planning process retards it

  Centralized bureaucracy stifles it

  ‘Spend it or lose it’ mentality fights it

  Short term targets prevent it

  Extrinsic ‘motivators’ undermine it

  Dysfunctional, even unethical behavior conflicts with it

Six “CSFs”

•  Fast response

•  Innovation

•  Operational excellence

•  Customer intimacy

•  Best team

•  Ethical behaviour

•  Value creation •  Inferior financial results

When pressure is applied, misalignment

gets worse!


Organizations need a different, trust-based form of “future-directed thinking”, NOT excessive planning!

“The secret of success is not to foresee the future. But to build an organization that is able to prosper in any of the unforeseeable futures."

Michael Hammer

The problems with traditional planning and control are merely symptoms of a much deeper

problem.


Traditional model (fixed performance contracts, negotiated in advance)

New model (relative performance contracts, assessed with hindsight)

From fixed to adaptive management processes.

strategy

control

Fixed performance contracts Dynamic

coordination

Relative performance contracts

•  Dynamic, continuous processes •  Relative targets/compensation •  Self-control, transparency and peer pressure

•  Fixed, annual processes •  Fixed targets and incentives •  Centralized and bureaucratic control

Changing processes


The proposal of Beyond Budgeting : Real change requires a coherent alternative to the command and control model

“‘Beyond budgeting’ is a positive idea that uses the abandonment of budgeting as a trigger for improving the entire management model.”

Charles T. Horngren, Littlefield Professor of Accounting, Emeritus,

Stanford University

Source: Quoted from the preface to Fraser/Hope: „Beyond Budgeting”

This is what “Beyond Budgeting” really is about


Local control

Our systems and modern management tools conflict with the old model and are not able to solve the underlying problems.

ERP systems and data warehouses

Rolling forecasts

Customer relationship management

Activity-based management

Benchmarking

Balanced Scorecard

Creates multiple contracts

Central control

Focuses on year end and distorts information

Deemphasizesexternal comparisons

Supports ‘Make & Sell’ strategy

Provides information to the hierarchy

Supports short term stretch targets

Economic value added

Supports central decision making


Complex and dynamic

Managed stability

What is a ‘management model’?

Leadership culture

+ Management processes

+ Information systems

Industrial Age Information Age


on the model,

We must work

in the model.

not


Centralized hierarchy, “command and control“

strategy

control

Fixed performance contracts

Decentralized network, “sense and respond“

Dynamic coordination

Relative performance contracts

Dynamic processes

The old model is not aligned with today’s CSF and it does not support ‘Theory Y’. > We need a new model to cope with complexity

> We must change the whole model!

From the old coherence to a new coherence.

Fixed processes

Traditional model (supports efficiency) New model (supports complexity)


The case of a radically decentralized organization: Handelsbanken – an extraordinary leadership philosophy

ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share

  Consistently – over a period of 30 years – one of the most successful banks in Europe, measured by almost all key performance indicators (e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …)

The most important objective within Handelsbanken Group: “Higher Return on Equity than the average of comparable banks in the Nordic region and Europe.”

Made real through:

•  Radical decentralization, which in turn leads to…

•  Best customer service •  Lowest cost

Alexander V Dokukin


For more than a decade, this bank has been customer satisfaction leader among its peers, constantly

50

55

60

65

70

75

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

HandelsbankenAvrg. in sector

Private Customers, Source: Svenska Kvalitetsindex

Data from 2005: Sweden: Corporate and Private – Best among big and national competitors.

Denmark: Private market – best.! Norway: Corporate market - best. Private market – 2nd place after substantial improvement.

Finland: Corporate market - best, Private market – best.


Comparison between the major publicly listed universal banks in Europe universales in Europe. Jan-Dec 2005, after credit losses.

1,0

2,0

3,0

4,0

5,0

6,090 80 70 60 50 40

Cost/Total loans*, %

Cost/Income ratio, %

HypoVereinsbank

Danske Bank

UBS

Société Générale

S E B

BNP Paribas

FöreningsSparbanken

Deutsche Bank

DnB Nor

Commerzbank

Nordea

Banca Intesa

BBVA

ABN Amro

CS Group

Credit Agricole

Lloyds TSB

HBOS

HSBC

Unicredit

San Paolo-IMI

Barclays

Standard Chartered

Royal Bank of Scotland Banco Santander

Handelsbanken

Allied Irish Banks

Bank of Ireland

Capitalia

Bank Austria

KBC

Monte dei Paschi di Siena

Erste

* Refers to loans to the public or deposits if deposits > lending

Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition.


Customers

600 branch managers (Profit Centers)

12 regional managers

(Invest Centers)

CEO, product firms, treasury, IT etc.

Fast, open information systems

Governance and transparency

Framework for decision making with clear values, limits and relative targets, plus transparency

Freedom and capability to act

“Winning“ culture, combined with the freedom and ability to act

Customer intimacy A large network of self-managed teams with full responsibility for

customer results

Principles

How “radical decentralization“ is being reflected in the company´s organizational structure and decision-making

Leads to maximum customer satisfaction!

Source: BBRT


Bank to bank Return on Equity (RoE)

1.  Bank D 31%

2.  Bank J 24%

3.  Bank I 20%

4.  Bank B 18%

5.  Bank E 15%

6.  Bank F 13%

7.  Bank C 12%

8.  Bank H 10%

9.  Bank G 8%

10.  Bank A (2%)

Region to region Return on Assets(RoA)etc.

1.  Region A 38% 2.  Region C 27% 3.  Region H 20% 4.  Region B 17% 5.  Region F 15% 6.  Region E 12% 7.  Region J 10% 8.  Region I 7% 9.  Region G 6% 10.  Region D (5%)

Branch to branch Cost/income ratio etc.

1.  Branch J 28% 2.  Branch D 32% 3.  Branch E 37% 4.  Branch A 39% 5.  Branch I 41% 6.  Branch F 45% 7.  Branch C 54% 8.  Branch G 65% 9.  Branch H 72% 10.  Branch B 87%

Strategic „cascade”

Result & value contribution

Leads to lowest operational cost!

Relative target definition through “league tables“ (rankings) – instead of planned, fixed targets and internal negotiation

Relative targets and relative compensation

Continuous planning/control

“On demand“ flow of resources/

dynamic coordination

Principles


Headquarters/ Region

Branches acquire resources through internal markets

Flexible coordination and resources “on demand“ - instead of allocations and budgets

Customer demand

Branches observe customer demand

Resources (IT, HR etc.)

Branches decide over necessary resource levels

Branch

Branches alone are responsible for efficient

use of resources

Leads to eradicating and avoiding waste!

Source: BBRT


How preparing for action and forecasting (continuous previews) are used in this model – instead of centrally coordinated planning

Teams close to the customer (branches)

plan

check

aim act

Forecasts

Regional managers and HQ

challenge monitor

Leading to fastest possible reaction to change!


Virtuous circle

Creating a “virtuous circle”– a common factor among “Beyond Budgeting” pioneers

Better to do business with 4. Customer intimacy – Highest (independent) customer satisfaction scores in sector year-after-year; lowest customer complaints; monitors customer acquisitions/defections.

3. Operational excellence – Lowest costs of any bank in Europe; lowest bad debts; cost reduction culture; flat organization (half a head office person per branch versus five for rivals); internal market exerts constant pressure on central services.

2. Innovation – SHB voted joint best Internet bank in Europe in 2000; any competitive products and solutions are fed back from branches to product development.

Better to work for 1. Best people – SHB is first choice financial services company in Sweden for graduates; employee turnover is lowest in sector; challenge, personal responsibility and freedom to run their part of the business; group-wide profit sharing scheme.

Better to invest in 6. Sustainable value – Beats peer group every year on ROE and cost-to-income ratio; highest total shareholder return in sector; devolved adaptive organization is key driver of success.

Better for society 5. Ethical & social standards – Support the long term interests of the bank and society.

Text relates to Svenska Handelsbanken


Why most concepts, books and theories about leadership, as well as most advice on management are flawed

“One cannot talk sensibly about leadership or people management, nor design decent management processes, if we don´t clarify beforehand our beliefs with regards to what in organizations are like.

We have to develop a shared understanding of human nature and its influence on our organizations.”

Leading with Flexible Targets


vs. Theory Y

Douglas McGregor

Theory X


Theory X (0%) Theory Y (100%)

Attitude - People need to work and want to take an interest in it. Under the right conditions, they can enjoy it.

Direction – People will direct themselves towards a target that they accept.

Responsibility – People will seek and accept responsibility, under the right conditions.

Motivation - Under the right conditions, people are motivated by the desire to realize their own potential.

Creativity – Creativity and ingenuity are widely distributed and grossly underused.

Attitude – People dislike work, find it boring, and will avoid it if they can.

Direction – People must be forced or bribed to make the right effort.

Responsibility – People would rather be directed than accept responsibility, which they avoid.

Motivation – People are motivated mainly by money and fears about their job security.

Creativity – Most people have little creativity - except when it comes to getting round management rules.

Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960

The industrial age management model not only fails because markets have changed. It is also misaligned with human nature.


W.L.Gore. The best-led “innovation machine“ in the world?

•  Consistently successful, for more than 40 years

•  “Most innovative company in the U.S.“ (Fast Company)

•  For the 8th year in a row among the 100 best employers in the U.S. (“Fortune“ – best medium-sized employer). Best employer in England for the third consecutive year. Among the best companies to work for in the EU and Germany.

•  “Since 1958, Gore has avoided traditional hierarchy. Instead, we have practiced a team-based environment that stimulates personal initiative, innovation and communcation between all our Associates.”

•  “The fundamental belief in the people in our organzation and in their ability continues to be the key to our success.“

•  All employees participate in the firm´s success and become “virtual“ shareholders.

•  No job titles. Little hierarchy. No job descriptions - instead: “job sculpting“.

• Highly empowered teams. “Temporary leadership“


discipline It´s a different mental


The 12 principles of the Beyond Budgeting model are in fact a full set of “design principles“ for the new organization type.

Processes

Goals and rewards

Planning and controls

Resources and coordination

Lead

ersh

ip

Customers and responsibility

Performance and freedom

Governance and transparency

Goals related to continual improvement

Rewards related to company results

Continuous and inclusive planning

Compare performance against actuals

Resources on demand

Coordinate dynamic interactions

Customer/outside focus

Responsible teams (“cells”)

Performance culture

Autonomy and responsibility

Clearly defined objectives and values

Open and shared information

Do this!

Fiscal year fixed goals

Reward local fixed goals

Top down annual planning

Variations against fixed plans

Annual budget allocations

Departmentalization

Focus on the boss

Centralization

Inspired by the past

Adherence to fixed plans

Impose objectives

Restrict information

Not that! Principles

6 devolved leadership principles

6 adaptive management process principles


Table 1: The case for change

A typical company – results from the BBRT online diagnostic

Now, it is time for transforming your organization – by closing the gaps

Vision

Practice

Problems

Close the gaps!


There are two different ways of working on the model – evolution and transformation

Foundation Several decades old Time scale: organization's age

Low degree of decentralization/ empowerment and fixed performance contracts: in conflict with today's critical success factors!

Differentiation phase

Stagnation within the tayloristic model

Pioneering phase

Bureaucratization growing hierarchy and functional differentiation

Integration phase

Sustaining and deepening of the decentralized model, through generations

High degree of decentralization/ empowerment with relative performance contracts: aligned with today's critical success factors!

Transformation through radical devolution and decentralization

Evolution within the decentralized model

Organizations with traditional models must eventually transform themselves!


Fixed targets

Most important competitor

(28%)

Market (25%)

Plan (15%)

Actual (21%)

Target: absolute ROCE in % (here: 15%)

[expected market Ø: 13%]

Plan

Comparison: Plan-Actual

Actual

Why traditional management with “fixed performance contracts“ regularily fools us: We have lost control a long time ago…

•  Interpretation within the plan-actual-comparison: Plan was outperformed by 6 percentage points > positive interpretation •  Better ROCE of the market average and the most important competitor remain unnoticed!

Relative, self-adjusting targets

Target: relative ROCE in % (to market)

Most important competitor

(28%)

Market (25%)

Target: „ROCE in % better than market average”

Actual (21%)

•  Interpretation within actual-actual compa-rison: Performance was 4 percentage points below competition! > negative interpretation •  Absolute assumptions at the moment of planning don´t matter. •  Targets always remain updated and relevant!

[independent from expected

market Ø]

Target Actual

Comparison: Market-Actual

Source: Niels Pfläging


Simple and relevant: creating reports without actual-plan-variances, fixed targets, or plans!

Trend with references

(A) Maximum

Curve with variance

KPI

(B) Gliding average

Time (Actuals)

Accouts/KPIs vs. Previous periods

last month

Same month last year

Same month prev.. year

Ø last 12 mnths

Ø 12 prev. mnths

Indicators or Groups of accounts

Ranking (League table) ext./intern.

Company KPI

Competitor A 31% Competitor E 24% Competitor C 20% Us 18% Competitor B 13% Competitor D 12% Competitor G 10% Competitor F 8%

Regions KPI

Region G 7% Region E 7% Region B 6% Region F 4% Region A 3% Region D 3% Region C 1% Region H 0%

Trend with benchmark

Us

Competitor A

Time (Actuals)

KPI

Snapshot (static) with benchmarks

KPI 2

Us Our unit B

Our unit A

Compe- titor B

Compe- titor A

KPI 1

Trend with tolerance

Tolerance levels

Time (Actuals)

KPI

Us


To evaluate performance in an adaptive and dynamic way, the basis of Performance Measurement must shift

  Against plan Against time • Prior periods • Progress towards achievement of

medium-term (2-3 years) targets

  Internal focus External focus • Internal peers • Competitors • Benchmarks/Stretch

  Annual focus Trends and “as needed”

  Financial measures Few key indicators

  Closed systems Open information systems for all

  Pure measurement Mixed approach meajuring/judging “Indicators only indicate“/there is no “truth“

in the numbers – living systems cannot be evaluated just by measuring!


Xing forum: www.xing.com/net/beyondbudgeting

Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.

Gebhard Borck BBTN & gberatung

Fritz-Neuert-Str. 13a 75181 Pforzheim - Germany

[email protected] Skype: gborck www.gberatung.de

Niels Pflaeging BBTN & MetaManagement Group

Al. Santos 1.991 01419-002 São Paulo – SP, Brazil

[email protected] Skype: npflaeging www.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!

Niels Pflaeging BBTN & MetaManagement Group Seminar with Uni Strategic, Kuala Lumpur 01./02.12.2008


Beyond Budgeting: Leading with flexible targets.

How to beat the competition – without fixed targets and with no annual planning whatsoever!

Make it real!


Let´s leave compensation myths behind!

“We found no systemic pattern linking executive compensation to the process of going from Good to Great.”

Jim Collins, From Good to Great, 2001

“Individual incentive pay, in reality, undermines performance – of both the individual and the organization.”

Jeffrey Pfeffer, Six Dangerous Myths about Pay, HBR 1998

“Spending time and energy trying to “motivate” people is a waste of effort... The key is not to de-motivate them.”

Jim Collins, From Good to Great, 2001


Background stories we wouldn´t tell our clients: Real-life examples from companies

The case of Marie Taylor

This is what happened:

Marie Taylor, a sales person from our organization, has generated income that goes against our company´s principle “Always act to the benefit of our customers“.

The decision: Marie Taylor is being transferred to the internal sales support department. All her bonuses rights have been immediately cancelled.

The background story:

It is true – all sales people are obligued to act in the interest of customers.

But it is also true that 40% of Marie Taylor´s salary depend on the amount of net sales she generates.


Background stories we wouldn´t tell our clients: Real-life examples from companies

The case of Frank Miller

This is what happened:

Frank Miller, a consultant, has overcharged during his work with clients, which means he has systematically inflated the amount of worked hours charged to his customers.

The decision: Frank Miller was fired and is leaving the company immediately.

The background story:

It is true: Frank Miller has acted against the law, by charging for more than he has actually worked for his clients.

But it is also true that 25% of Frank Miller´s income depend on the hours charged to clients…


Variable area “Ceiling”

Bonus hurdle

100%: target

80% of target

120% of target

Base salary

Performance as % of target realization

Salary/ bonus

Common practice: „Pay for performance“ compensation profile with fixed performance contract: Creates maniuplation incentive in any situation!

Bonus limit

Reduction incentive: Lower result even more

Reduction incentive: postpone results to next period

Maximization incentive: Anticipate

results

Actual result #2

Actual result #1

Actual result #3

Performance in relative evaluation

Salary/ bonus

A better model: Result oriented compensation profile with relative performance contracts: No incentive to manipulation.

Linear compensation curve without breaks: variable compensation becomes decoupled from targets

Free from incentive to manipulate

The problem with “incentives”: How traditional management systematically forces people to cheat

Source: Michael Jensen


General principles for designing compensation systems in Beyond Budgeting organizations

1.  Pay the person – not the position. Abolish salary bandwiths.

2.  Reward results (ideally, relative to external benchmarks), not target realization or actuals compared to plans. Abolish all links between targets and money.

3.  Apply group- or team-based variable compensation, e.g. participation in the overall financial result of the firm, not individual bonuses.

4.  Design simple variable compensation systems – eliminate complexities, which will lead to manipulation.

5.  Compensate long-term value creation – not short-term performance.

6.  Only use financial performace indicators in compensation systems – not intermediate indicators which are often hard to quantify or measure (such as quality or customer satisfaction).

7.  Include all people in the variable compensation system (turning the system fair and inclusive) – not only an “elite“.

8.  Use the language of participation in results - not the philosophy of “incentives“.

All employees should earn a share of the financial success.

Restrain from the idea of “motivating them“!

By freeing themselves from conven-tional forms of “pay for

performance”, organizations will create simple and more transparent

compensation systems.


How often do the systems, especially the HR systems, get in the way of change, transformation, vision and strategy?

Answer: Far too often.

History often leaves HR people in highly bureaucratic personnel functions

that discourage leadership and make altering human resource practices

a big challenge.

Source: J. Kotter, Leading Change, HBSP, p, 110-111


Projected period (e.g. 5 quarters)

Resources Income as

“total (expected) available resources over time“ - forecasted as “limiting factor“

Already approved investments - actively handled as “dynamic portfolio“

Yet uncommited resources – work actively on available “options for a better future“

Operational resources – controlled by Key Performance Indicators (KPIs) – activities are focused on continuous improvement!

Employing resources dynamically: A typical way of doing it, as practiced by Sydney Water, Australia

Source: Sydney Water


1 2

3


Why isn’t everyone devolving decision-making power to the periphery?

“We have known for nearly half a century that self-managed teams are far more productive than any other form of organizing… productivity gains in truly self-managed work environments are at minimum 35% higher than in traditionally managed organizations. … [People] are asking for more local autonomy… There is both a desire to participate more and strong evidence that such participation leads to the effectiveness and productivity we crave… With so much evidence supporting participation, why isn't everyone working in a self-managed environment right now?” Margaret Wheatley, Author of “Leadership and The New Science”, Goodbye, Command and Control, Leader to Leader, No. 5 Summer 1997

“Through extensive field tests, the [US] Army has discovered that when individuals have information [about what’s occurring in the battlefield] and know how to interpret it because they know the ‘commander's intent’, they can make decisions that lead to greater success in battle.”

Margaret Wheatley, Leadership and the New Science, Berret-Koehler Publishers

Do mangers not want to devolve power? … or do they not know how to do it? … or both?


More about devolved leadership

• Devolution: Like delegation, it is a form of decentralization. But there is a difference: Delegation occurs when a superior decides to pass a power, responsibility or task to a subordinate. Devolution occurs when a board (or equivalent) decides as a policy to empower a lower level in an organization. Devolution is therefore much more permanent than delegation. It involves structural changes that impart a greater degree of autonomy (Greek: self governance).

• Devolved Leadership means decentralizing decision making authority to teams at as low a level in the organization as possible. The aim is to enable everyone to think and act like a leader. It is likely to require changes in organization, and for people to acquire new capabilities. It will usually involve decentralizing some activities in order to provide teams with greater autonomy, but it does not mean that all activities must be decentralized.

• Centralize what? Under Devolved Leadership, activities may be centralized or decentralized. As a rule decentralization of activities is preferred because it leads to better customer service and reduces organizational complexity, but it does not preclude centralizing activities if doing so will make significant cost savings or enable more specialist expertise to be retained, and these benefits outweigh those of greater autonomy. • Relationships: However, what has to change under Devolved Leadership is the relationship between units. Power must be given to the customer, whether external or internal. Suppliers must respond to the needs of their customers, not be driven through a functional hierarchy. • Results of devolution: As an outcome, the organization becomes flatter. It can then act as a network of autonomous units, each unit adjusting continuously to the needs of its customers (internal and external), thereby enabling the whole organization to become more adaptive.


Some questions that we need to respond, if we want to decentralize decision-making power in an organization

“Devolved”/descentralized

“Centralized”

People are divided by function and between ‘doers’ and ‘thinkers’. Consequently, many decisions have to be taken centrally after being passed up the hierarchy.

Leadership is devolved (within defined boundaries) to the frontline –

as close as possible to the customer and to as many people

and with as much autonomy as possible.

Seminar Beyond Budgeting - Niels Pflaeging

What will be those teams close to the customer (“cells“) like, in our

organization?

How do we link periphery and center of the organization – leading, not managing?

How do we create an environment in which the 95% of good people within our organization can act as entrepreneurs - the way they deserve?

How can we create oben dialogue and transparency between 100% of the people in the organization?

“How can we end the arrogance of the corporate center (HQ)?“


Coherence is the critical issue


The power of visionary leadership: dm-drogerie markt, transformed during the 1990s

The results: •  More successful than its competitors in all relevant performance indicators. •  One of the most respected companies in Germany. Strong organic growth. •  Almost without hierarchy, since the late 1990s. “Branches rule“, leadership happens “by dialogue“. •  Doesn´t manage “cost” or “plans”, but shows employees how value creation flows through the organization, through internal value creation accounting system

D f( V x S x R ) >

D = Dissatisfaction V = Vision S = Strategy/Steps R = Resistance


The best-led technology firm in the world? Semco, from Brazil – transformed at the beginning of the 1980s

•  Consistent performance during the last decades, inspite of deep crisises in Brazilian economy •  Transformed after deep crises in the early 80s, 3.000 employees today •  “The fastest-growing company in Latin America” (strategy+business) •  One of the most admired companies in Brazil. •  “The most democratic company in the world” (HBR) •  Lowest staff turnover among competitors •  All people participate in their business unit results •  Employees choose their own bosses and set their own salaries •  No formality – minimum of meetings, memos and approvals. Everybody knows the numbers.

What they don´t need at Semco! • Org charts • HR department • Rigid plans and fixed targets • Fixed work places • Conflict with syndicates/unions

• Fixed work hours and time control • “Strategic plans” • Mission statement • Obligation to participate in meetings • Job and budget cuts • ...

Source: e.g. Ricardo Semler, „The Seven-Day Weekend“, 2004


The case study: Transforming an organization, as suggested by John Kotter, HBS: A process model for organizational change

3. Develop change vision and strategy

4. Communi-cate for understan-ding and buy-in

5. Empower all others to act

6. Produce short-term wins

7. Don't let up!

8. Create a new culture

1. Create a sense of urgency

2. Pull

together a guiding coalition

References

Organizational change process (John Kotter, “Leading Change” to “Our Iceberg is Melting”)


The case study: What was done? „The week of truth“

Status of the project

1.  There is a strong guiding coalition that sustains the transformation. 2.  All over the organisation, “profound change“ is considered an issue. 3.  Different groups in the organisation (task forces) already work on specific changes.

3. Develop

change vision and strategy

4. Communicate for understan-ding and buy-in



7. Don´t let up


2. Pull together a guiding coalition

Phase in %


A case study: What was done? „The week of truth“

Workshop preparation:

•  Participants: Approx. 20% of the firm´s employees

•  from all areas of the firm.

•  from all hierarchical levels.

•  Three groups were formed •  Market •  Product •  Central Services

Execution:

Phase 1 – Speaking a common language

Phase 2 - Recognize & describe the current situation

Phase 3 – Think and describe the networked cell structure


The case study – the organizational structure looked like this

CEO

Director Technology

Engeneers, Developers

Director Sales Germany

Admini-stration Assistant

Sales large equipments

Technical Hotline

Projects & Offers

Complaints

Marke-ting/ CI

After-Sales Services

Sales office

Cont. education

Customer Services

Region 1 & 2

Region 3 & 4

Region 7 & 8

Region 5 & 6

Region 9 & 10

Region 11 & 12

Region 14 & 15

Region 13 & 14

Region 16 & 17

Region 18 & 19

Region 22 & 23

Region 20 & 21

Region 24 & 25

Region 26 & 27

Region 29

Region 28

Director Production

Production Leader Assistant Quality Material

Planning Sales OEM

Process optimization

Toolings & Maintenance

Purchasing & Disposition

Design

Pro-duction

Assembly Work planning

Logistics

IT HR Control-ling

Accoun-ting

Assistant Telephonists

CFO Director International

Admini-stration Assistant

Sales OEM

Sales large systems

Technical Hotline

Projects & Proposals

Complaints

Sales

Marke-ting

Internal sales services

Branch I Branch II

Branch IV

Branch III

Sales Sales Sales

Central sales support

Cont. education

Customer Services

And where does the

market fit in here?


Our excercise: Develop a dentralized networked cell structure instead!

•  The market is the boss. (“Outside“ rules!)

•  There are three kinds of building blocks of a devolved organization:

  A sphere of activity,

  network cells,   “strings“.

•  All “key tasks“ performed in the old structure have to be performed in the new structure as well.

•  A cell is not a department: It is functionally integrated, not functionally divided!

•  A cell has clients - external or internal – which it serves. And it has at least 3 team members.


The case study: What was done? “The week of truth“

Central Market Services

P 4 P 5

P 6

P 7

P 8

Equipment

Materials & Logistics

Info Shop

Region Southwest

Region Northeast

Region Southeast

Region Center

Region America

…

Org Shop

Product Cell 1

P 2

P 3

Region North

Region West

Region Europe

Org Shop •  HR •  Executive board + assistance •  Central office Clients: All R- and P-Cells

Central Market Services •  Overall Marketing/CI •  Training Clients: All R-Cells Equipment

•  Tooling construction •  Facility Management Clients: all P-Cells

Materials & Logistics •  Logistics •  Purchasing Clients: All P-Cells

“Market”

“Sphere of Activity”

Region Cells (“R-Cells”) Key Roles of R-Cells •  Planning & offers •  Sales •  After-sales services •  Sales office •  Hotline •  Complaints “Own“ all customers in their regions

Product cells (“P-cells”) •  Production •  Process & work planning •  Quality •  Maintenance •  Production logistics •  Process optimization •  Material planning •  Design/R&D Customers: All R-Cells

Info Shop •  IT •  Financial accounting •  Controlling Clients: all R- and P-cells


“Cell structure“ as a foundation for sensible target definition in a “relative“ way - using league tables

Firm to Firm ROCE

1.  Firm D 31%

2.  Firm J 24%

3.  Firm I 20%

4.  Firm B 18%

5.  Firm E 15%

6.  Firm F 13%

7.  Firm C 12%

8.  Firm H 10%

9.  Firm G 8%

10.  Firm A (2%)

Region to Region Cost over income

1.  Region A 38% 2.  Region C 27% 3.  Region H 20% 4.  Region B 17% 5.  Region F 15% 6.  Region E 12% 7.  Region J 10% 8.  Region I 7% 9.  Region G 6% 10.  Region D (5%)

P-Cell to P-Cell On-time-delivery etc.

1.  P-Cell J 28% 2.  P-Cell D 32% 3.  P-Cell E 37% 4.  P-Cell A 39% 5.  P-Cell I 41% 6.  P-Cell F 45% 7.  P-Cell C 54% 8.  P-Cell G 65% 9.  P-Cell H 72% 10.  P-Cell B 87%

Strategic cascade

Contrib. to value creation

Leads to lowest operational cost!


What are the consequences?


What are we

waiting for? “It’s not because it’s difficult that we don’t dare to do it: it seems difficult because we don’t dare to do it.”

Seneca, Roman philosopher and statesman, 4BC – 65AD


Beyond Budgeting: Is this something for only a select few? For geniuses and mavericks?


There are many pioneers of the new model, worldwide. But only very few of them have undergone transformation.

Selected pioneers of the model

Pioneers that went through transformation

In the 70s

In the 90s

In the 80s

In the 90s

In the 90s

In the 50s

All organizations with traditional models will eventually have to

transform!


90% Peter Drucker


Part I of the “Double Helix” transformation framework: A process model for organizational change





7. Don't let up!



2. Pull


References



What to do when in the process? Two examples





7. Don't let up!



2. Pull


•  Create array of larger Task Forces to change organizational structure, management processes and business processes •  Align projects and decision processes with 12 principles and the values defined in the case for change

•  Write the case for change •  Build awareness through selective action (e.g. abolishing budgets)

•  Win hearts and minds, train for empowering leadership styles and more transparency



Part II of the “Double Helix” transformation framework: a process model for personal change

1.  Ending

3. Beginning

2. Neutral Zone

Reference

Individual change process

(William Bridges, “Managing Transitions”)


(William Bridges, “Managing Transitions”)


1.  Ending

3. Beginning 2. Neutral Zone

Putting the “Double Helix” together.


4. Communi-cate for under-standing and buy-in



7. Don't let up!



2. Pull


Organizational change process

Individual

change proces

s


Principles: Leading profound, transformational change





7. Don't let up!



2. Pull


Organizational change process

1.  Ending

3. Beginning

2. Neutral Zone


References


2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen?


Underlying assumptions of our recent management model transformation projects

1.   Organizations are “systems”. So they have to be transformed as such. Thus, finance people cannot do it alone. (And it's actually much more fun approaching change holistically.)

2.  “It´s all about human nature”. Apply “Theory Y” rigidly!

3.   Everyone's communication styles and behaviour patterns must change. Transformation thus requires “people” specialists, coaching and some training.

4.   A systemic view of the change process: it is senseless to plan too far ahead. So we will not do it. We will instead “follow the energy”!

5.   You have to do this yourself! We will give advice, and guarantee that you are aware of the consequences, beforehand. We will help you in applying the mental model in any situation. You will make the decisions for yourselves, our role is to make the consequences clear. We will also provice you with methods to solve problems, all the time.

6.  “Mature” cases and the model itself are key to making the vision palpable. We will also use “emotional” techniques, metaphors, stories, scientific evidence, and our international network, wherever indicated.

7.   Abolishing budgets is 0,5% of the project (and not the difficult bit). Creating an entrepreneurial devolved network is key to the “new” model. Which in case of PE means changing a hundred mindsets.


Xing forum: www.xing.com/net/beyondbudgeting

Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.

Gebhard Borck BBTN & gberatung

Fritz-Neuert-Str. 13a 75181 Pforzheim - Germany

[email protected] Skype: gborck www.gberatung.de

Niels Pflaeging BBTN & MetaManagement Group

Al. Santos 1.991 01419-002 São Paulo – SP, Brazil

[email protected] Skype: npflaeging www.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!


How we can proceed NOW.

1.  Go straight into denial! •  That´s ok. We believe, however, that all traditionally managed organizations will at some point have to adopt the new model. Because market forces and human nature will ever more strongly put your organization under stress and make transformation a must.

2.  asdfasdf! •  That´s quite a common phenomenon. Sometimes the chemistry just doesn´t work! Talk with the speaker about meeting another BBTN director, and organize a workshop with that other director.

3.  asdfs! •  Try additional information sources on Beyond Budgeting, like www.bbtn.org, or the Beyond Budgeting channel on Youtube, or our books and DVDs, or the online diagnostic on www.beyondbudgeting.org. Ask the speaker for additional resources and suggestions! We will gladly assist you.

•  Talk with the speaker about joining a “BBTN Master Course“, or book our coaching program “Beyond Budgeting On The Fly!“

4.  Go straight into the Neutral Zone!

•  Talk with the speaker about scheduling an in-company workshop at your firm.