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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 3
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 5
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 6
© BBTN – All rights reserved Seminar – Beyond Budgeting 7
© BBTN – All rights reserved Seminar – Beyond Budgeting 8
Our journey since 1998, within the international Beyond Budgeting movement
Beyond budgeting (1998-2002)
Beyond command and control (2003-2007)
Beyond incremental change (2008-)
…
© BBTN – All rights reserved Seminar – Beyond Budgeting 9
A new brand. A new network.
The first “open source“ movement in the management arena - worldwide!
Make it real!
© BBTN – All rights reserved Seminar – Beyond Budgeting 10
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 • …
© BBTN – All rights reserved Seminar – Beyond Budgeting 11
© BBTN – All rights reserved Seminar – Beyond Budgeting 12
© BBTN – All rights reserved Seminar – Beyond Budgeting 13
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 • …
© BBTN – All rights reserved Seminar – Beyond Budgeting 14
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 15
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 16 “faale ghah-ve“
© BBTN – All rights reserved Seminar – Beyond Budgeting 17
Does planning really work? The traditional model can destroy value on a massive scale!
© BBTN – All rights reserved Seminar – Beyond Budgeting 18
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”
© BBTN – All rights reserved Seminar – Beyond Budgeting 19
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 20 20
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 21
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 22
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 23
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 24
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 25
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 26
Complex and dynamic
Managed stability
What is a ‘management model’?
Leadership culture
+ Management processes
+ Information systems
Industrial Age Information Age
© BBTN – All rights reserved Seminar – Beyond Budgeting 27 27
on the model,
We must work
in the model.
not
© BBTN – All rights reserved Seminar – Beyond Budgeting 28
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)
© BBTN – All rights reserved Seminar – Beyond Budgeting 29
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 30
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 31
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 32
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 33
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 34
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 35
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 36
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 37
© BBTN – All rights reserved Seminar – Beyond Budgeting 38
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 39 39
vs. Theory Y
Douglas McGregor
Theory X
© BBTN – All rights reserved Seminar – Beyond Budgeting 40
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 41
© BBTN – All rights reserved Seminar – Beyond Budgeting 42
© BBTN – All rights reserved Seminar – Beyond Budgeting 43
© BBTN – All rights reserved Seminar – Beyond Budgeting 44
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“
© BBTN – All rights reserved Seminar – Beyond Budgeting 45
© BBTN – All rights reserved Seminar – Beyond Budgeting 46 46
discipline It´s a different mental
© BBTN – All rights reserved Seminar – Beyond Budgeting 47
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 48
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 49
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 50
© BBTN – All rights reserved Seminar – Beyond Budgeting 51
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 52
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 53
© BBTN – All rights reserved Seminar – Beyond Budgeting 54
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!
> beyond budgeting transformation network.
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 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 57
© BBTN – All rights reserved Seminar – Beyond Budgeting 58
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 59
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 60
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…
© BBTN – All rights reserved Seminar – Beyond Budgeting 61
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 62
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 63
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 64
© BBTN – All rights reserved Seminar – Beyond Budgeting 65
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 66
1 2
3
© BBTN – All rights reserved Seminar – Beyond Budgeting 67
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?
© BBTN – All rights reserved Seminar – Beyond Budgeting 68
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 69
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)?“
© BBTN – All rights reserved Seminar – Beyond Budgeting 70
© BBTN – All rights reserved Seminar – Beyond Budgeting 71
Coherence is the critical issue
© BBTN – All rights reserved Seminar – Beyond Budgeting 72
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 73
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 74
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”)
© BBTN – All rights reserved Seminar – Beyond Budgeting 75
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
5. Empower all others to act
6. Produce short-term wins
7. Don´t let up
1. Create a sense of urgency
2. Pull together a guiding coalition
Phase in %
© BBTN – All rights reserved Seminar – Beyond Budgeting 76
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 77
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?
© BBTN – All rights reserved Seminar – Beyond Budgeting 78
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.
© BBTN – All rights reserved Seminar – Beyond Budgeting 79
© BBTN – All rights reserved Seminar – Beyond Budgeting 80
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 81
“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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 82
What are the consequences?
© BBTN – All rights reserved Seminar – Beyond Budgeting 83 83
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
© BBTN – All rights reserved Seminar – Beyond Budgeting 84
Beyond Budgeting: Is this something for only a select few? For geniuses and mavericks?
© BBTN – All rights reserved Seminar – Beyond Budgeting 85
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 86 86
90% Peter Drucker
© BBTN – All rights reserved Seminar – Beyond Budgeting 87
Part I of the “Double Helix” transformation framework: 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”)
© BBTN – All rights reserved Seminar – Beyond Budgeting 88
What to do when in the process? Two examples
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
• 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
Organizational change process (John Kotter, “Leading Change” to “Our Iceberg is Melting”)
© BBTN – All rights reserved Seminar – Beyond Budgeting 89 Logoplaste Leadership Workshop, Mar 2007
© BBTN – All rights reserved Seminar – Beyond Budgeting 90
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”)
Individual change process
(William Bridges, “Managing Transitions”)
© BBTN – All rights reserved Seminar – Beyond Budgeting 91
1. Ending
3. Beginning 2. Neutral Zone
Putting the “Double Helix” together.
3. Develop change vision and strategy
4. Communi-cate for under-standing 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
Organizational change process
Individual
change proces
s
© BBTN – All rights reserved Seminar – Beyond Budgeting 92
Principles: Leading profound, transformational 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
Organizational change process
1. Ending
3. Beginning
2. Neutral Zone
Individual change process
References
© BBTN – All rights reserved Seminar – Beyond Budgeting 93
2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen?
© BBTN – All rights reserved Seminar – Beyond Budgeting 94
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.
> beyond budgeting transformation network.
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!
© BBTN – All rights reserved Seminar – Beyond Budgeting 96
© BBTN – All rights reserved Seminar – Beyond Budgeting 97
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.