keynote (en): beyond budgeting in practice, at quality & excellence conference, tehran/iran

Niels PflaegingBBTN & MetaManagement Group

Keynote at Excellence Conference, Tehran/Iran27.07.2008

Niels PflaegingBBTN & MetaManagement Group

Keynote at Excellence Conference, Tehran/Iran27.07.2008

>beyond budgetingtransformation network.

Beyond Budgeting in Practice.

Why an ever-changing world requires a new and different management model. And how you can make it happen.

Make it real!

© BBTN – All rights reservedExcellence Conference – Tehran/Iran 3

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,

pressure from societyHigh 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!


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


Our journey since 1998, within the international Beyond Budgeting movement

Beyond budgeting (1998-2002)

Beyond command and control (2003-2007)

Beyond incremental change (2008-)

…


A new brand. A new network.

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

Make it real!

www.bbtn.org


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 reservedExcellence Conference – Tehran/Iran 12From the film ‘Modern Times’ with Charlie Chaplin, 1936

Outlining the ‘industrial age’ model and its pitfalls

“command and control“

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


How markets govern organizations “from the outside in”

Periphery

Center

Market

Information Decision

Impulse

Command

Reaction

Centralist command and control “collapses“ in increasingly complex

environments

Source: Gerhard Wohland


From hierarchy to network structure.

• “Bosses” rule!• Top-down

command and control• Top management

is always in charge• Centralized leadership

• “The market” rules!• Outside-in

sense and respond• Front-line teams are always

in charge• Devolved leadership

Traditional model (centralized functional hierarchy)

New model (decentralized leadership network)

Changing leadership and structure


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, unless we 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


vs.

Douglas McGregor


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.


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“


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


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)


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

22


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 costAlexander V Dokukin


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


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


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


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


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


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]

• Controlle [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!


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


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


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


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“!

Organizations can free themselvesfrom conventional forms of

“pay for performance”, through simple and more transparent

compensation systems.


Coherence is the critical issue


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

The results:• More successful than its competitors in all

relevant performance indicators. • One of the most respected companies in

Germany. Strong organic growth. • Almost without hierarchy, since the late

1990s. “Branches rule“, leadership happens “by dialogue“.

• Doesn´t manage “cost” or “plans”, but shows employees how value creation flows through the organization, through internal value creation accounting system

Df( Vx Sx R) >

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


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

• Consistent performance during the last decades,inspite of deep crisises in Brazilian economy

• Transformed after deep crises in the early 80s, 3.000 employees today

• “The fastest-growing company in Latin America”(strategy+business)

• One of the most admired companies in Brazil. • “The most democratic company in the world” (HBR)• Lowest staff turnover among competitors• All people participate in their business unit results• Employees choose their own bosses and set their own salaries• No formality – minimum of meetings, memos and approvals.

Everybody knows the numbers.

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

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

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


are you“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


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 gains

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

Applying a fitting change model is key -the BBTN’s Double Helix Transformation Framework is tailored to this challenge.

Download the BBTN white papers on www.bbtn.org!

www.bbtn.org


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!

www.bbrtdiagnostics.org


What you can do now – four options.

1. You didn´t like Beyond Budgeting, and think this isn´t really relevant for you!

• That´s ok. We believe, however, that all traditionally managed organizations will at somepoint have to adopt the new model. Because market forces and human nature will evermore strongly put your organization under stress and make transformation a must.

2. You like the Beyond Budgeting idea a lot, but you didn´t like the speaker!

• 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. You liked what you heard, but feel you need to know more to start acting on it!

• 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. You liked what you heard, feel sufficiently informed, and want to make the nextstep towards transformation rightaway!

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

mailto:[email protected]


Peter Drucker

>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

[email protected]: gborckwww.gberatung.de

Niels Pflaeging BBTN & MetaManagement Group

Al. Santos 1.99101419-002 São Paulo – SP, Brazil

[email protected]: npflaegingwww.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!



http://www.metamanagementgroup.com

www.gberatung.de

www.xing.com/net/beyondbudgeting

www.bbtn.org

keynote (en): beyond budgeting in practice, at quality & excellence conference, tehran/iran

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