Post on 14-Sep-2014
description
Niels PflaegingBBTN & MetaManagement Group
Seminar with Uni Strategic, Kuala Lumpur01./02.12.2008
Niels PflaegingBBTN & MetaManagement Group
Seminar with Uni Strategic, Kuala Lumpur01./02.12.2008
>beyond budgetingtransformation 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 reservedSeminar – 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 reservedSeminar – 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 industriesor 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 reservedSeminar – Beyond Budgeting 444
There are many outstanding cases of companies that have applied the “new” model. This is a selection.
4
© BBTN – All rights reservedSeminar – 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
Dynamicsand
complexity
1890 1980 1990
low
high
2000 2010 2020 2030
1. Discontinuous change2. Short life cycles3. Constant pressure on prices4. Less loyal customers 5. Choosy employees6. Transparency,
societal pressureHigh financialexpectations
Knowledge economy advances: ”Customers have the power“,
strong competition, individualized demand: decentralized and adaptive model is superior!
Competitivesuccess 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 reservedSeminar – Beyond Budgeting 6
© BBTN – All rights reservedSeminar – Beyond Budgeting 7
© BBTN – All rights reservedSeminar – 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 reservedSeminar – 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 reservedSeminar – 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 reservedSeminar – Beyond Budgeting 11
© BBTN – All rights reservedSeminar – Beyond Budgeting 12
© BBTN – All rights reservedSeminar – Beyond Budgeting 13From 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 reservedSeminar – Beyond Budgeting 14
How markets govern organizations “from the outside in”
Periphery
Center
Market
Information Decision
Impulse
Command
Reaction
Centralist command and control “collapses“ in increasingly complex
environments
Source: Gerhard Wohland
© BBTN – All rights reservedSeminar – 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 reservedSeminar – Beyond Budgeting 16“faale ghah-ve“
© BBTN – All rights reservedSeminar – Beyond Budgeting 17
Does planning really work?The traditional model can destroy value on a massive scale!
© BBTN – All rights reservedSeminar – 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 reservedSeminar – Beyond Budgeting 19
Traditional management processes keep teams from strategicthinking, 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
00
100
1984 1986 1988 1990 1992 1994 1996 1998 2000Source: 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
...
Fixedperformancecontacts and
“keep on track”
Fixedperformancecontacts and
“keep on track”
Source: BBRT
© BBTN – All rights reservedSeminar – Beyond Budgeting 202020
Managementcontrol cycle
Budget
Strategy
Strategiclearning cycle
Annual plan
Control
Management processes in organizations are “straight jackets”
FixedPerformance
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 reservedSeminar – 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 behaviorconflicts 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 reservedSeminar – 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 theunforeseeable futures."
Michael Hammer
The problems with traditional planning and control are merelysymptoms of a much deeper
problem.
© BBTN – All rights reservedSeminar – 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
Fixedperformance
contractsDynamic
coordination
Relativeperformance
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 reservedSeminar – 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 reservedSeminar – 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 reservedSeminar – Beyond Budgeting 26
Complex and dynamicManaged stability
What is a ‘management model’?
Leadership culture
+ Management
processes+
Information systems
Industrial Age Information Age
© BBTN – All rights reservedSeminar – Beyond Budgeting 272727
on the model,
We mustwork
in the modelnot
© BBTN – All rights reservedSeminar – Beyond Budgeting 28
Centralized hierarchy,“command and control“
strategy
control
Fixedperformance
contracts
Decentralized network, “senseand respond“
Dynamic coordination
Relativeperformance
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 reservedSeminar – 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 objectivewithin Handelsbanken Group:“Higher Return on Equity than theaverage 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 reservedSeminar – 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 andPrivate – 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 reservedSeminar – 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 ScotlandBanco 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 reservedSeminar – Beyond Budgeting 32
Customers
600 branch managers(Profit Centers)
12 regional managers
(Invest Centers)
CEO,product firms,
treasury, IT etc.
Fast, openinformation
systems
Fast, openinformation
systems
Governance and transparency
Framework for decision making withclear values, limits and relative
targets, plus transparency
Freedom and capability to act
“Winning“ culture, combined with thefreedom and ability to act
Customer intimacyA large network of self-managedteams with full responsibility for
customer results
Principles
How “radical decentralization“ is being reflected in thecompany´s organizational structure and decision-making
Leads to maximum customer satisfaction!
Source: BBRT
© BBTN – All rights reservedSeminar – Beyond Budgeting 33
Bank to bankReturn 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%)
Bank to bankReturn 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 regionReturn 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%)
Region to regionReturn 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 branchCost/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%
Branch to branchCost/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
Continuousplanning/control
“On demand“ flow of resources/
dynamic coordination
Principles
© BBTN – All rights reservedSeminar – Beyond Budgeting 34
Headquarters/Region
Headquarters/Region
Branches acquire resourcesthrough internal markets
Flexible coordination and resources “on demand“ -instead of allocations and budgets
Customerdemand
Customerdemand
Branchesobserve
customerdemand
Resources(IT, HR etc.)
Resources(IT, HR etc.)
Branchesdecide overnecessary
resource levels
BranchBranch
Branches alone areresponsible for efficient
use of resources
Leads to eradicating and avoiding waste!
Source: BBRT
© BBTN – All rights reservedSeminar – 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 managersand HQ
challenge monitor
Leading to fastest possible reaction to change!
© BBTN – All rights reservedSeminar – Beyond Budgeting 36
Virtuous circle
Creating a “virtuous circle”–a common factor among “Beyond Budgeting” pioneers
Better to do business with4. 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 for1. 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 in6. 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 reservedSeminar – Beyond Budgeting 37
© BBTN – All rights reservedSeminar – 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 clarifybeforehand our beliefs with regards to what in organizations are like.
We have to develop a shared understanding of human natureand its influence on our organizations.”
Leading with Flexible Targets
© BBTN – All rights reservedSeminar – Beyond Budgeting 393939
vs.
Douglas McGregor
© BBTN – All rights reservedSeminar – 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 becausemarkets have changed. It is also misaligned with human nature.
© BBTN – All rights reservedSeminar – Beyond Budgeting 41
© BBTN – All rights reservedSeminar – Beyond Budgeting 42
© BBTN – All rights reservedSeminar – Beyond Budgeting 43
© BBTN – All rights reservedSeminar – 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 theU.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 andcommuncation between all our Associates.”
• “The fundamental belief in the people in our organzationand 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 reservedSeminar – Beyond Budgeting 45
© BBTN – All rights reservedSeminar – Beyond Budgeting 464646
It´s a differentmental
© BBTN – All rights reservedSeminar – Beyond Budgeting 47
The 12 principles of the Beyond Budgeting model are in facta full set of “design principles“ for the new organization type.
Pro
cess
es
Goals andrewards
Planning and controls
Resources andcoordination
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 devolvedleadership principles
6 adaptive management process principles
© BBTN – All rights reservedSeminar – 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
VisionVision
PracticePractice
ProblemsProblems
Closethe gaps!
Closethe gaps!
© BBTN – All rights reservedSeminar – Beyond Budgeting 49
There are two different ways of working on the model –evolution and transformation
Foundation Several decades oldTime scale: organization's age
Low degree of decentralization/ empowerment and fixed performance contracts: in conflict with today's critical success factors!
Differentiationphase
Stagnationwithin the tayloristic model
Pioneeringphase
Bureaucratizationgrowing hierarchy and functional differentiation
Integrationphase
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!
Transformationthrough radical devolution and decentralization
Evolutionwithin the decentralized model
Organizations with traditional models must eventually transform
themselves!
© BBTN – All rights reservedSeminar – Beyond Budgeting 50
© BBTN – All rights reservedSeminar – Beyond Budgeting 51
Fixed targets
Mostimportantcompetitor
(28%)Market(25%)
Plan(15%)
Actual(21%)
Target: absolute ROCE in % (here: 15%)
[expectedmarket 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 themost important competitor remain unnoticed!
Relative, self-adjusting targets
Target: relative ROCE in % (to market)
Mostimportantcompetitor
(28%)Market(25%)
Target: „ROCE in % betterthan market
average”Actual(21%)
• Interpretation within actual-actual compa-rison: Performance was 4 percentage pointsbelow 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 reservedSeminar – 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
lastmonth
Samemonth
lastyear
Samemonthprev..year
Ø last12
mnths
Ø 12
prev.mnths
IndicatorsorGroups 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
UsOur
unit B
Ourunit A
Compe-titor B
Compe-titor A
KPI 1
Trend with tolerance
Tolerance levels
Time (Actuals)
KPI
Us
© BBTN – All rights reservedSeminar – Beyond Budgeting 53
© BBTN – All rights reservedSeminar – 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 beevaluated just by measuring!
>beyond budgetingtransformation 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. 13a75181 Pforzheim - Germany
gebhard@bbtn.orgSkype: gborckwww.gberatung.de
Niels Pflaeging BBTN & MetaManagement Group
Al. Santos 1.99101419-002 São Paulo – SP, Brazil
niels@bbtn.orgSkype: npflaegingwww.metamanagementgroup.com
BBTN: www.bbtn.org
Make it real!
Niels PflaegingBBTN & MetaManagement Group
Seminar with Uni Strategic, Kuala Lumpur01./02.12.2008
Niels PflaegingBBTN & MetaManagement Group
Seminar with Uni Strategic, Kuala Lumpur01./02.12.2008
>beyond budgetingtransformation 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 reservedSeminar – Beyond Budgeting 57
© BBTN – All rights reservedSeminar – 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 reservedSeminar – 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 incomethat goes against our company´s principle“Always act to the benefit of our customers“.
The decision:
Marie Taylor is transferred to the internal sales support department. All her bonuses rights are 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 reservedSeminar – 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 hourscharged to his customers.
The decision:
Frank Miller has been fired and is leaving the company immediately.
The background story:
It is true – Frank Miller has acted against the law, by charging more than he has actually worked for customers.
But it is also true, that 25% of Frank Miller´s income depend on the hourscharged to clients…
© BBTN – All rights reservedSeminar – Beyond Budgeting 61
Variablearea “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“ compensationprofile with fixedperformance contract:Creates maniuplationincentive in any situation!
Bonus limit
Reductionincentive: Lowerresult even more
Reduction incentive: postpone results to
next period
Maximizationincentive: Anticipate
results
Actualresult #2
Actualresult #1
Actualresult #3
Performance in relative evaluation
Salary/bonus
A better model: Resultoriented compensationprofile with relative performancecontracts:No incentive to manipulation.
Linear compensation curve without breaks: variable compensation becomesdecoupled from targets
Free fromincentive to manipulate
The problem with “incentives”: How traditional managementsystematically forces people to cheat
Source: Michael Jensen
© BBTN – All rights reservedSeminar – Beyond Budgeting 62
General principles for designing compensation systemsin Beyond Budgeting organizations
1. Pay the person – not the position. Abolish salary bandwiths.
2. Reward results (ideally, relative to external benchmarks), not target realizationor actuals compared to plans. Abolish all links between targets and money.
3. Apply group- or team-based variable compensation, e.g. participation in theoverall 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 reservedSeminar – 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 reservedSeminar – Beyond Budgeting 64
© BBTN – All rights reservedSeminar – Beyond Budgeting 65
Projectedperiod (e.g. 5 quarters)
ResourcesIncome 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 reservedSeminar – Beyond Budgeting 66
12
3
© BBTN – All rights reservedSeminar – 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 reservedSeminar – Beyond Budgeting 68
More about devolved leadership
• Devolution: Like delegation, it is a form of decentralization. But there is a difference: Delegationoccurs when a superior decides to pass a power, responsibility or task to a subordinate. Devolutionoccurs 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 reservedSeminar – 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 the95% 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 reservedSeminar – Beyond Budgeting 70
© BBTN – All rights reservedSeminar – Beyond Budgeting 71
Coherence is the critical issue
© BBTN – All rights reservedSeminar – 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
Df( Vx Sx R) >
D = Dissatisfaction V = Vision S = Strategy/Steps R = Resistance
© BBTN – All rights reservedSeminar – 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 reservedSeminar – 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
Organizationalchange process(John Kotter, “Leading Change” to “Our Iceberg is Melting”)
© BBTN – All rights reservedSeminar – 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-termwins
7. Don´tlet up
1. Create a sense ofurgency
2. Pull together a
guidingcoalition
Phase in %
© BBTN – All rights reservedSeminar – Beyond Budgeting 76
A case study:What was done? „The week of truth“
Workshop preparation:
• Participants: Approx. 20% of thefirm´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 languagePhase 1 – Speaking a common language
Phase 2 - Recognize & describethe current situation
Phase 3 – Think and describethe networked cell structure
© BBTN – All rights reservedSeminar – Beyond Budgeting 77
The case study – the organizational structure looked like this
CEO
Director Technology
Engeneers,Developers
DirectorSales Germany
Admini-strationAssistant
Sales largeequipments
TechnicalHotline
Projects & Offers
Complaints
Marke-ting/ CI
After-Sales Services
Salesoffice
Cont.education
Customer Services
Region1 & 2
Region3 & 4
Region7 & 8
Region5 & 6
Region9 & 10
Region11 & 12
Region14 & 15
Region13 & 14
Region16 & 17
Region18 & 19
Region22 & 23
Region20 & 21
Region24 & 25
Region26 & 27
Region29
Region28
Director Production
ProductionLeaderAssistant Quality Material
PlanningSalesOEM
Process optimization
Toolings & Maintenance
Purchasing & Disposition
Design
Pro-duction
AssemblyWorkplanni
ngLogistics
IT HR Control-ling
Accoun-ting
AssistantTelephonists
CFODirector
International
Admini-strationAssistant
Sales OEM
Sales large systems
Technical Hotline
Projects & Proposals
Complaints
Sales
Marke-ting
Internal sales services
BranchI
BranchII
BranchIV
BranchIII
SalesSales Sales
Central sales support
Cont.education
Customer Services
And where does the
market fit in here?
© BBTN – All rights reservedSeminar – 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
© BBTN – All rights reservedSeminar – Beyond Budgeting 79
© BBTN – All rights reservedSeminar – Beyond Budgeting 80
The case study:What was done? “The week of truth“
CentralMarket Services
P 4 P 5
P 6
P 7
P 8
Equipment
Materials &Logistics
InfoShop
RegionSouthwest
RegionNortheast
RegionSoutheast
RegionCenter
RegionAmerica
…
OrgShop
ProductCell 1
P 2
P 3
RegionNorth
RegionWest
RegionEurope
Org Shop• HR• Executive board + assistance• Central officeClients: All R- and P-Cells
Central Market Services• Overall
Marketing/CI• TrainingClients: All R-Cells Equipment
• Tooling construction• Facility ManagementClients: all P-Cells
Materials & Logistics• Logistics• PurchasingClients: 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&DCustomers: All R-Cells
Info Shop• IT• Financial accounting• ControllingClients: all R- and P-cells
© BBTN – All rights reservedSeminar – Beyond Budgeting 81
“Cell structure“ as a foundation for sensible targetdefinition in a “relative“ way - using league tables
Firm to FirmROCE
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%)
Firm to FirmROCE
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 RegionCost 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%)
Region to RegionCost 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-CellOn-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%
P-Cell to P-CellOn-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 reservedSeminar – Beyond Budgeting 82
What are the consequences?
© BBTN – All rights reservedSeminar – Beyond Budgeting 838383
are we“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 reservedSeminar – Beyond Budgeting 84
Beyond Budgeting: Is this something for only a select few? For geniuses and mavericks?
© BBTN – All rights reservedSeminar – 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 withtraditional models will
eventually have totransform!
© BBTN – All rights reservedSeminar – Beyond Budgeting 868686
Peter Drucker
© BBTN – All rights reservedSeminar – 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
Organizationalchange process(John Kotter, “Leading Change” to “Our Iceberg is Melting”)
© BBTN – All rights reservedSeminar – 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 processeswith 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
Organizationalchange process(John Kotter, “Leading Change” to “Our Iceberg is Melting”)
© BBTN – All rights reservedSeminar – Beyond Budgeting 89 Logoplaste Leadership Workshop, Mar 2007
© BBTN – All rights reservedSeminar – 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
Individualchange process
(William Bridges, “Managing Transitions”)
Individualchange process
(William Bridges, “Managing Transitions”)
© BBTN – All rights reservedSeminar – Beyond Budgeting 91
Putting the “Double Helix” together.
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
Organizationalchange process
1. Ending
3. Beginning
2. Neutral Zone
Individualchange process
© BBTN – All rights reservedSeminar – 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
Organizationalchange process
1. Ending
3. Beginning
2. Neutral Zone
Individualchange process
References
© BBTN – All rights reservedSeminar – Beyond Budgeting 93
2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen?
© BBTN – All rights reservedSeminar – Beyond Budgeting 94
Underlying assumptions of our recentmanagement 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 budgetingtransformation 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. 13a75181 Pforzheim - Germany
gebhard@bbtn.orgSkype: gborckwww.gberatung.de
Niels Pflaeging BBTN & MetaManagement Group
Al. Santos 1.99101419-002 São Paulo – SP, Brazil
niels@bbtn.orgSkype: npflaegingwww.metamanagementgroup.com
BBTN: www.bbtn.org
Make it real!