Leading with Flexible Targets: How to Create the Performance Revolution - Keynote, University of...

Niels Pflaeging BBTN Associate & Presidente MetaManagement Group Econique – Diálogo CFO 18/19 de Mayo 2009

[ Niels Pflaeging ] BetaCodex Network wwwbetacodex.org

Leading with Flexible Targets

Beyond Budgeting: How Create the Performance Revolution Bergamo, 09.11.2010

90% Peter Drucker

© BBTN – All rights reserved 4

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

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

Dynamics and

complexity

1890 1980 1990

low

high

2000 2010 2020 2030

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

  High financial expectations

Knowledge economy advances: ”Customers have the power“,

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

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

Characteristics

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

Now, all these factors are equally important!

Here, only efficiency mattered, really!


“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 • …


Periphery

Center

Information Decision

Impulse

Command

Reaction Centralist command and control “collapses“ in increasingly complex

environments

Source: Gerhard Wohland


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

We have to arrive at a shared understanding of human nature and of the consequences of that for our organizations.

Leadership e obiettivi flessibili

vs. Theory Y

Douglas McGregor

Theory X


Theory X Theory Y

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

People will direct themselves towards a target that they accept.

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

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

Creativity and ingenuity are widely distributed and grossly underused.

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

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

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

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

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

Source: cited from Douglas McGregor, ‘The Human Side of Enterprise’, 1960

Attitude

Direction

Responsibility

Creativity

Motivation


Beyond Budgeting (1998-2002)

Beyond command and control (2003-2007)

Beyond incremental change (2008-)


Sciences: Thought leaders (selected)

Practice: Industry leaders

(selected)

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

Stafford Beer Margareth Wheatley Niklas Luhmann W. Edwards Deming 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 …

Complexity theories

Social sciences and

HR

Leadership & change

Strategy & Performance management

Industry

Retail

Services

Governments & NGOs


Industry

Retail

Services

Governments. & NGOs


The BetaCodex: The 12 new laws of Leadership

§1 Freedom to act Connectedness not Dependency

§2 Responsibility Cells not Departments

§3 Governance Leadership not Management

§4 Performance climate Result culture not Duty fulfillment

§5 Success Fit not Maximization §6 Transparency Intelligence flow not Power accumulation

§7 Orientation Relative Targets not Top-down prescription

§8 Recognition Sharing not Incentives

§9 Mental presence Preparedness not Planning

§10 Decision-making Consequence not Bureaucracy §11 Resource usage Purpose-driven not Status-oriented

§12 Coordination Market dynamics not Commands


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 Critical success factors and it does not support ‘Theory Y’. > We need a new model to cope with complexity

> We must change the whole model!

Fixed processes

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

25

on the model,

The BetaCodex: Thinking and working

in the model.

not

Foundation Several decades old Time scale: organization's age

Low degree of decentralization/ empowerment

Differentiation phase

Stagnation within the tayloristic model

Integration phase

High degree of decentralization/ empowerment

Sustaining and deepening of the decentralized model, through generations

Transformation through radical decentralization of decision-making

Pioneering phase

Bureaucratization through growing hierarchy and functional differentiation

Evolution within the decentralized model (culture of empowerment and trust)


•  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“

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30 © BBTN – All rights reserved 30

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Fixed Targets – the “blue pill“!

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

•  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)

Target: „ROCE in % better than market average”

•  Interpretation within actual-actual comparison: 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

comparison: Market-Actual


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

Source: Michael Jensen


1 very simple principle: Always disconnect compensation from targets. Always.


1.  Pay people well 2.  Pay people fairly 3.  And then do everything possible to take money off peoples minds! All pay-for-performance plans violate that last precept!

Pay-for-performance is an outgrowth of behaviorism, which is focused on individual organisms, not systems - and, true to its name, looks only at behaviors, not at reasons and motives and the people who have them.

I tell Fortune 500 executives (or at least those foolish enough to ask me) that the best formula for compensation is this: Pay people well, pay them fairly, and then do everything possible to help them forget about money.

How should we reward our staff? Not at all! They are not our pets. Pay them well, respect and trust them, free them from disturbance, provide them with all available information and support to perform on the highest possible level. Alfie Kohn, Sociologist


1 very simple principle: Never use bonuses and incentives. Apply profit sharing and/or shareholding concepts for community.

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39 Eine Konsequenz aus dem Kodex.

Planning. Don´t

Companies. Need.

Period.

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41

Management control cycle

Budget

Strategy

Strategic learning cycle

Annual plan

Control

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!

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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

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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

Leads to maximum customer satisfaction!

Source: BBRT

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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 targets and relative compensation

Continuous preparation/ social control

“On demand“ flow of resources/

dynamic coordination

Principles

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Headquarters/ Region

Branches acquire resources through internal markets

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

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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

What waiting for?

are we


“I don´t know if it is possible.

What I know: It is necessary.“

Tom Peters

Today we already know for sure it is possible.

And we have also learned how it can be done.

Niels Pfläging nielspflaeging.

New York - Wiesbaden [email protected] Skype: npflaeging www.nielspflaeging.com

www.betacodex.org A selection of associates:

Make it real!

Silke Hermann Insights Group Deutschland

Wiesbaden – Berlin – New York [email protected] Skype: silkehermann www.insights-group.de

Leading with Flexible Targets: How to Create the Performance Revolution - Keynote, University of...

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