beyond budgeting: a paradigm shift in the management model

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Reinventing Management Conference, Johannesburg, 20th May 2010

Beyond Budgeting: A Paradigm Shift in theManagement Model

Franz Röösli, University of Applied Sciences Northwestern Switzerland

2Franz Röösli – FHNW / BBRT 2010

Agenda

Why we need to think about management change

An offered alternative to think about: Beyond Budgeting

Thoughts about implementation

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Why Management Innovation?

Process Innovation(throughput)

Product Innovation(output)

ManagementInnovation(paradigm)

Strategic Innovation(position)

betterdifferent

betterdifferent

Source: Gary Hamel in „The Future of Management“, 2008

Innovation in products, processes and strategies are often seen in today‘s management practice. But these kinds of innovations are easy to copy.Only management innovation (innovation in leadership and management processes) provides a sustainable competitive advantage in the future. It is not easy to imitate.

© 2010 FHNW | BBRT 4Franz Röösli

Problems with Budgeting as starting point of research

New Management Model as an alternative to the traditional approach

Implementing Beyond Budgeting

1998 Today

The journey of the Beyond Budgeting Round Table (BBRT)

1. Beyond Budgeting 2. Beyond Command and Control

3. Beyond Incremental Change

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Industrial age has gone since a while…

Charly Chaplin, Modern Times 1936


Successful companies beat their competition, not the budget

Source: BBRT

Internal View

performance

time

budget

actual

Outperformance

Market View

performance

time

budget

actual

peer-comparison (profitability, marktet-share)

Underperformance

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Two remarkable senior managers on budgeting

„The budget is the bane of corporate america.“Jack Welch, EX-CEO, General Electric

„Budgeting is an unnecessary evil.“Dr. Jan Wallander, Ex-CEO Svenska Handelsbanken


The origins of budgeting• Budgeting was developed in the industrial age, about 100 years ago

• It was developed for the main problem of management of the industrial age: Improvement in efficiency!

• Fundamental was ‚Scientific Management‘ of Frederick W. Taylor (‚The Principles of Scientific Management‘, 1911)

• James O. McKinsey‘s authoritative book ‚Budgetary Control‘, was published 1922

Frederick W. Taylor1856 - 1915

James O. McKinsey1889 - 1937

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Traditional Management Model: Taylor‘s „Principles“ and McKinsey‘s „Budgetary Control“

“‘Fixed’management-processes”

“Centralized hierarchy”

Strategy

Control

Budget Fixed

PerformanceContract

Source: BBRT

Taylors principles for leadership and organisation(Scientific Management,1908):

• Separation of planning from doing• Work is based on detailed and precise

instructions• Division of labour / excessive use of

specialisation• Monetary incentives

Mc Kinseys budget process (Budgetary Control, 1922):„Budgetary Control, as an axiom of the presentday philosophy of business administration, is urgently needed for two purposes:

1. As a basis for centralized executive control2. As a means of coordinating the activities of the

various functional departments.“


Dissatisfaction with the budget

resource intensive, too long, too expensive

dysfunctional, unethical behaviour

quickly outdated, not adaptive

divorced from strategy

overly centralisedand controll-focused

„use it or loose it“-mentality

Most comanys are dissatisfied with their budget process

These are just symptoms of a deeper lying problem.

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The world has changed…INDUSTRIAL AGE

1980 1990 2000 2010 2020 2030

INFORMATION AGESteady, continuous change,

suppliers-in-chargeHighly competitive, unpredictable,

customers-in-charge

Discontinuous change

Choosy employees

Short life cycles

Falling prices

Fickle customers

Transparency

Incremental change

Choosy employers

Long life cycles

Stable prices

Loyal customers

Managed earnings

Pace

of

chan

ge


… and these are now our Critical Success Factors

1980 1990 2000 2010 2020 2030

INFORMATION AGEHighly competitive, unpredictable,

customers-in-charge


Choosy employees

Short life cycles

Falling prices

Fickle customers

Transparency

Pace

of

chan

ge

Competitive Success FactorsAll are important today

Fast response

Best people/teamwork

Innovation

Operational excellence

Customer intimacy

Compliance

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Traditional Management conflicts with the CSFs of today

Fast response

ContinuousInnovation

OperationalExcellence

CustomerIntimacy

Great place to work

Compliance

Information AgeInformation Age CriticalCritical SucessSucess FactorsFactors


Short life cycles

Volatile prices

Extensive choice

Access to talent

Intolerant shareholders

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 behaviour conflicts with it

MisalignmentMisalignment of traditionalof traditionalmanagementmanagement

Value creation Inferior financial results


Work has changed

‘The ‘knowledge worker’ … must lead in the information age. This leadership has to be visionary and completely different from traditional ways of leadership and management applied in the command and control model.’

Peter F. Drucker (1909 – 2005)

Manual work Knowledge work50-fold increase in productivity of manual work in manufacturing in 20th C.

Our greatest challenge is to increase the productivity of knowledge work in 21st C.

Manual workers are often treated as ‘costs to be reduced’.

Knowledge workers should be treated as ‘capital assets that yield a return’.

Machines have replaced most manual work.

Technology is increasing the productivity of knowledge work.

Manual workers need their employers far more than they need them.

Employers need knowledge workers far more than they need them.

Manual workers have to be supervised closely or in detail.

Knowledge workers can only be helped. They must direct themselves.

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Human Nature Assumptions


X or Y?

Theory X Theory YAttitude - 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 realise 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

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Traditional management conflicts with modern management tools

Local control

ERP systems and datawarehouses

Rolling forecasts

Customer relationship management

Benchmarking

Balanced Scorecard

Creates multiple

contracts

Traditional Management

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

Activity-based management


The problem

Most organisations use a management model, that was designed to improve efficiency. But the problem today is how to cope with complexity*, not just the improvement in efficiency.

* to meet all critical success factors, inclusive operational excellence (efficiency)

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Agenda





What have these companies in common?

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Svenska Handelsbanken (SHB)

Management model (since 1970)• Radical decentralization (devolved leadership)• Adaptive processes for self-management

Sucess• Universal Bank 10,000 employees• Ratings Aa1 / AA-• Return on Equity Consistently higher• Customer satisfaction Consistently better• Cost-income ratio Consistently lowest• Best employer Among the best


SBH‘s devolved network

Principles

Leading to high customer satisfaction

Customers

600 Branch Managers

11 Regional Managers

CEOProduct Companies

Treasury, IT etc

Governance and transparency

Freedom and capability to act

Customer responsiveness

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Best sector customer satisfaction*

Index

* Private customers - Source: Svenskt Kvalitetsindex

50

55

60

65

70

75

-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07

Handelsbanken Sector average (excl. SHB)


SBH‘s adaptive processes

Bank to banks(RoE)

1. Bank A 31%2. Bank D 24%3. Bank H 20%4. Bank C 18%5. Bank E 15%6. Bank F 13%7. Bank B 12%8. Bank I 10%9. Bank G 8%10. Bank J 2%

Bank to banks(RoE)

1. Bank A 31%2. Bank D 24%3. Bank H 20%4. Bank C 18%5. Bank E 15%6. Bank F 13%7. Bank B 12%8. Bank I 10%9. Bank G 8%10. Bank J 2%

Region to regions(RoE)

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

Region to regions(RoE)

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

Branch to branches(Cost/Income etc.)

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

Branch to branches(Cost/Income etc.)

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

Relative goals and rewards

Continuous planning and controls

Resources as needed and

dynamic coordination

Principles

Leading to low operating costs

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Best cost/income-ratio

1

2

3

4

5

690 80 70 60 50 40

C/I-ratio, %

HypoVereinsbank

Danske Bank

UBS

SociétéGénérale

SEB

BNP Paribas

Swedbank

Deutsche Bank

DnB NorCommerzbank

Nordea

Intesa SanPaoloBBVA

ABN Amro

CS Group

Lloyds TSB

HBOSHSBC

Unicredito

Barclays

Standard Chartered

Royal Bank of ScotlandBanco Santander

Allied Irish BanksBank of Ireland

Capitalia

Bank Austria

KBC

MPS Erste

Credit Agricole SA

Handels-banken

Costs/Total loans* %

Source: Deutsche Bank: European Banks – Running the Numbers, January 2007-edition.

Comparison European Universal Banks with Loans > EUR 100bn and Nordic Banks (Costs include Credit Loss).


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“Empowerment” and “Decoupling Plan and Goal”

‘Fixed process’

‘Efficiency’ model

‘Centralized hierarchy’

Strategy

Control

Fixed Performance

Contract

‘Complexity’ model

‘Devolved network’

Adaptiveprocesses

Relative goals‘Adaptive process’

Decentralisation ofDecisions (6 Principles)Paradigm Shift towards:Empowermentand Servant Leadership

Adaptive Management-Processes (6 Principles)Paradigm Shift towards: DecouplingPlan and Goal


Beyond Budgeting Principles

Quelle: Beyond Budgeting Round Table BBRT

Lead

ersh

ip

1. Customers

2. Network

3. Autonomy

4. Responsibility

5. Values

6. Transparency

Focus everyone on their customers

Organize as a lean network of accountable teams

Give teams the freedom and capability to act

Enable everyone to think and act like a leader

Govern through a few clear values, goals and boundaries

Promote open information for self management

Hierarchical relationships

Centralized functions

Micro-manage them

Merely follow ‘the plan’

Detailed rules and budgets

Restrict it hierarchically

Do this! Not that!Principles

Proc

esse

s

7. Goals

8. Rewards

9. Planning

10. Controls

11. Resources

12. Coordination

Set relative goals for continuous improvement

Reward shared success based on relative performance

Make planning a continuous and inclusive process

Base controls on relative indicators and trends

Make resources available as needed

Coordinate cross company interactions dynamically

Negotiated contracts

Fixed targets

Top-down, annual event

Variances against plan

Budget allocations

Annual planning cycles

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Lokale Kontrolle

Customer Relationship Management

Benchmarking

Balanced Scorecard

aligned with strategy

Lokale Kontrolle

Focus on business,not on gaming

internal and external

competition

customerintimacy

realtime information

supportssustainable

development

Economic Value Added

supportsdecentralised

decision-making

Beyond Budgeting facilitates the power of modern performance management tools

BeyondBudgeting

Activity-based management

ERP systems and datawarehouses

Rolling forecasts


Beyond Budgeting = pardigm shift in the managementmodel(therefore not comparable to Better Budgeting)

BetterBudgeting

TraditionelleBudgetierung

TraditionalBudgeting

Incremen-tal Change

More tools,„better“ process

TraditionalManagement

BeyondBudgeting

Strategy

Control

Fixedperformance

contract AdaptiveProcesses

Adaptive Goals

Paradigm

Shift

Working in the model Working on the model

ZieleundstrategischeRichtlinien


•Zielverhandlung•DefinitionvonAnreizen• Maßnahmenfestlegung•Ressourcenallokation•Plankoordination•Genehmigung


Leistungskontrolle(Plan-Ist)Leistungskontrolle(Plan-Ist)

BudgetBudget

„Auf-derSpur-Bleiben”


Bonus(gegenZielerreichung)Bonus(gegenZielerreichung)

VisionVision


Goals andStrategic Frame




• Objectives•Incentivexvon•Actionsß•Resource allocation• Coordination• Approuval

Leistungskontrolle(Plan-Ist)Leistungskontrolle(Plan-Ist)Leistungskontrolle(Plan-Ist)Controls -plan-actuak

BudgetBudgetBudgetBudget



Bonus(gegenZielerreichung)Bonus(gegenZielerreichung)Bonus(gegenZielerreichung)Bonus (budget-goals)

VisionVision

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Trends towards a new model

Thought Leaders:• Stafford Beer• Ross Ashby• Kevin Kelly• Joseph Bragdon

• Douglas McGregor• Chris Argyris• Peter Senge• Jeffrey Pfeffer• John Kotter• Margrith Weathley

• Linda Gratton• Tom Peters• Jim Collins• Gary Hamel• Julian Birkinshaw

• Charles Horngren• Thomas Malone• Thomas Davenport

• and more

NewNewModelModel

Complexity theories

Social sciences/HR

LeadershipManagement

Strategy, performance management,

IT

Manufacturing

Distribution

Services

Government & Not-for-profit

Industry Leaders:


Agenda




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Transformation Map

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'tlet up!

8. Create a

new culture

1.Create a sense of urgency

2. Pull

together a guiding coalition

1. Ending 3. Beginning2. Neutral Zone

Organisational Change

Individual-psychological Transition

Sources: F. Röösli based on an K. Lewin, J. Kotter, W. Bridges, F. Frei & A. Alioth

Revolution Evolution

Unfreeze Alter Stabilise


Partial vision leads to non-viable Incoherence

Coherent Managment Model

(‘Complexity’)

Full vision1. Fast response2. Continuous innovation3. Operational excellence4. Customer intimacy5. Best people6. Compliance and Ethical behaviour

Adaptive processes

Dangerous “vision”:• abandoning budgeting and replace it by introducing rolling planning.

Traditional model

(‘Efficiency’)

Management model Adaptive & DevolvedFixed & Centralized

Com

petit

ive

Perf

orm

ance

Hig

hLo

w

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Coherence is key to sustainability


Benefits versus Risks

• Any change-/tranformation-project is a risk

• But which risk is actually higher: To align management with today critical sucess factors?orKeep on managing in the tradtional pattern of the industrialtime?

Be aware of ‚perceived risk versus real risk – asymmetry‘

Pionieers and Early Adapters will have a strong competitiveadvantage:Leadership as ultimate competitive strategy!

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If everything seems under control, you're just not goingfast enough.

Mario Andretti, US automobile racer,

Forumula 1 Champion 1978

Franz Röösli [email protected] +41 (0)61 279 17 56

FHNW School of BusinessPeter Merian-Strasse 864002 Basel,Switzerland

beyond budgeting: a paradigm shift in the management model

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