seminar (en): cfo forum - challenges in tough times, warszaw/poland, organized by hbr poland

>beyond budgetingtransformation network.

CFO Forum:Challenges in tough times -the role of the CFO in contributing to the organization´s performance management

Why your performance management systems have to change. And how you should approach this

.

Make it real!

Niels Pflaeging BBTN & MetaManagement Group

Seminar with HBR Poland, Warszaw17.06.2009


Seminar with HBR Poland, Warszaw17.06.2009

© BBTN – All rights reservedSeminar – Beyond Budgeting 222

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

2


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 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.

Now, all these factors are equally important!

Here, only efficiency mattered, really!


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!Full membership free of charge – visit www.bbtn.org

Make it real!


There is a “new” model, which is supported by science and practice

Sciences: Thought leaders(selected)

Practice: Industry leaders

(selected)

Henry MintzbergGary HamelJeremy HopeMichael HammerThomas JohnsonCharles Horngren…

Stafford BeerMargareth WheatleyNiklas LuhmannW. Edwards DemingKevin KellyRoss AshbyJoseph Bragdon…

Douglas McGregorChris ArgyrisJeffrey PfefferReinhard SprengerStephen CoveyHoward GardnerViktor Frankl…

Peter DruckerTom PetersCharles HandyJohn KotterPeter SengeThomas DavenportPeter Block…

Complexitytheories

Social sciences and HR

Leadership & change

Strategy & Performance management

Industry

Retail

Services

Governments& NGOs


Industria

Distribuição

Serviços

Governo& ONGs

• Innovators: A crises within their industries or firms caused them to change radically

• Mavericks: Exceptional leadership models

• Performers: Superior competetive success

It´s the coherence of the leadership model that matters!


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”


Traditional management processes keep teams from strategic thinking, and motivate counterproductive or unethical behavior

Financial problems• Process takes too long• Plans become obsolete quickly• Plans are of little or no use

Behavioral problems

Strategic problems

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

...

Fixed performance contacts and

“keep on track”

Fixed performance contacts and

“keep on track”

Source: BBRT


Managementcontrol cycle

Budget

Strategy

Strategiclearning cycle

Annual plan

Control

Management processes in command and controlorganizations 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!


Current practices are misaligned with the Critical Success Factors of today's competitive market places

Six examples of misalignment

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

Six “Critical Success Factors”

• Fast response

• Innovation

• Operational excellence

• Customer intimacy

• Best team

• Ethical behaviour

• Value creation • Inferior financial results

When pressure is applied, misalignment

gets worse!


Organizations need a different, trust-based form of “future-directed thinking”, not command and control!

The secret of success is not to foresee the future. But to build an organization that is able to prosper in any of the unforeseeable futures.

Michael Hammer

The problems with traditional planning and control are merely symptoms of a much deeper

problem.


Traditional model (fixed performance contracts, negotiated in advance)

New model (relative performance contracts, assessed with hindsight)

Beyond Budgeting means: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 21From 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


Beyond Budgeting means: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


Local control

Our 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


on the model,

Finance mustwork

in the model.not


General MotorsChryslerFord...

Toyota Honda...

What exactly is a ‘management model’?

Leadership culture

+ Management

processes+

Information systems

Industrial Age Information Age

“Complex and dynamic““Managed stability”

Organizations with traditional models must

eventually transformthemselves!


Centralized hierarchy,“command and control“

strategy

control

Fixedperformance

contracts

Decentralized network, “sense and 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)


The case of a radically decentralized organization: Handelsbanken – an extraordinary leadership philosophy

ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share

Consistently – over a period of 30 years – one of the most successful banks in Europe, measured by almost all key performance indicators(e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …)

The most important objective within Handelsbanken Group:“Higher Return on Equity than the average of comparable banks in the Nordic region and Europe.”

Made real through:• Radical decentralization,

which in turn leads to…• Best customer service• Lowest cost

Alexander V Dokukin


For more than a decade, this bank has been customer satisfaction leader among its peers, constantly

50

55

60

65

70

75

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

HandelsbankenAvrg. in sector

Private Customers, Source: Svenska Kvalitetsindex

Data from 2005:Sweden: Corporate and Private – Best among big and national competitors.

Denmark: Private market – best.�Norway: Corporate market - best. Private market – 2nd place after

substantial improvement.Finland: Corporate market - best,

Private market – best.


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.


Customers

600 branch managers(Profit Centers)

12 regional managers

(Invest Centers)

CEO,product firms,

treasury, IT etc.

Fast, open information

systems

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 intimacyA large network of self-managed teams with full responsibility for

customer results

Principles

How “radical decentralization“ is being reflected in the company´s organizational structure and decision-making

Leads to maximum customer satisfaction!

Source: BBRT


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%)


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.


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

Continuous planning/control

“On demand“ flow of resources/

dynamic coordination

Principles


Headquarters/Region

Headquarters/Region

Branches acquire resources through internal markets

Flexible coordination and resources “on demand“ -instead of allocations and budgets

Customer demand

Customer demand

Branches observe

customer demand

Resources (IT, HR etc.)

Resources (IT, HR etc.)

Branches decide over necessary

resource levels

BranchBranch

Branches alone are responsible for efficient

use of resources

Leads to eradicating and avoiding waste!

Source: BBRT


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!


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


But there is a further challenge. Which is why most theories about leadership, as well as most advice from consultants, are flawed...

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.

Niels Pflaeging, Leading with Flexible Targets


vs.

Douglas McGregor


Theory X (0%) Theory Y (100%)

People need to work and want to take an inte-rest 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 moti-vated by the desire to realize their own potential.

Creativity and ingenuity are widely distributedand grossly underused.

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

People must be forced or bribedto make the right effort.

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

People are motivated mainly by moneyand fears about their job security.

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

Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960

The industrial age management model not only fails because markets have changed. It is also misaligned with human nature.

Attitude

Direction

Responsibility

Creativity

Motivation


Do you BELIEVE in Theory Y?Firmly?

Good. Because then we can be sure that you would never, ever practice (or support, or tolerate) HR processes and tools that treat people like children, or animals, or worse. Right?Such as performance appraisals, individual target setting, incentive compensation, “meritocracy”, control of work-hours, …


W.L.Gore. The best-led “innovation machine“ in the world?

• Consistently successful, for more than 40 years

• “Most innovative company in the U.S.“(Fast Company)

• For the 8th year in a row among the 100 best employers in the U.S. (“Fortune“ – best medium-sized employer). Best employer in England for the third consecutive year. Among the best companies to work for in the EU and Germany.

• “Since 1958, Gore has avoided traditional hierarchy. Instead, we have practiced a team-based environment that stimulates personal initiative, innovation and communcation between all our Associates.”

• “The fundamental belief in the people in our organzation and in their ability continues to be the key to our success.“

• All employees participate in the firm´s success and become “virtual“ shareholders.

• No job titles. Little hierarchy. No job descriptions - instead: “job sculpting“.

• Highly empowered teams. “Temporary leadership“


It s a differentmental


The 12 principles of the Beyond Budgeting model are in fact a 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 continuous improvement

Rewards related to organization results

Continuous and inclusive planning

Compare performance against actuals

Resources “on demand”

Coordinate dynamic, market-like interactions

Customer/outside focus

Responsible teams (“cells”)

Performance culture, beat the market

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, hierarchy

Focus on the boss

Centralization, functional division

Inspired by the past, burocratic

Adherence to fixed plans

Impose objectives from above

Restricted information

Not that!Principles

6 “devolvedleadership” principles

6 “adaptive management processes” principles


There are two different ways of working on the model –evolution and transformation

Foundation Several decades oldTime scale: organization's age

Stagnationwithin the tayloristic model

Integration phase

High degree of decentralization/ empowerment

Sustaining and deepening of the decentralized model, through generations

Transformationthrough radical decentralization of decision-making

Pioneering phase

Bureaucratizationthrough growing hierarchy and functional differentiation

Evolutionwithin the decentralized model (culture of empowerment and trust)


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 the most 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 points below competition! > negative interpretation

• Absolute assumptions at the moment of planning don´t matter.

• Targets always remain updated and relevant!

[independent from expected

market Ø]

Target Actual

Comparison:Market-Actual

Source: Niels Pfläging


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

Ølast12

mnths

Ø12

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

Our unit A

Compe-titor B

Compe-titor A

KPI 1

Trend with tolerance

Tolerance levels

Time (Actuals)

KPI

Us



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%)


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.


Region to region Return on Assets(RoA)etc.






Strategic „cascade”

Result & value contribution


Relative target definition through “league tables“ (rankings) –instead of planned, fixed targets and internal negotiation

Relative targets and relative compensation

Continuous planning/control

“On demand“ flow of resources/

dynamic coordination

Principles


To evaluate performance in an adaptive and dynamic way, the basis of Performance Measurement must shift

Against plan Against time• Prior periods• Progress towards achievement of

medium-term (2-3 years) targets

Internal focus External focus• Internal peers• Competitors• Benchmarks/Stretch

Annual focus Trends and “as needed”

Financial measures Few key indicators

Closed systems Open information systems for all

Pure measurement Mixed approach meajuring/judging“Indicators only indicate“/

there is no “truth”in the numbers –living systems cannot be evaluated just by measuring!


Question:How often do the systems, especially the HR systems, get in the way of change, transformation, vision and strategic thinking?

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: based upon John Kotter, Leading Change, p, 110-111


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“compensation profile with fixed performance contract:Creates maniuplation incentive in any situation!

Bonus limit

Reduction incentive: Lowerresult even more

Reduction incentive: postpone results to

next period

Maximization incentive: Anticipate

results

Actualresult #2

Actual result #1

Actual result #3

Performance in relative evaluation

Salary/bonus

A better model: Result oriented compensation profile with relative performance contracts:No incentive to manipulation.

Linear compensation curve without breaks: variable compensation becomes decoupled from targets

Free from incentive to manipulate

The problem with “incentives”: How traditional management systematically forces people to cheat

Source: Michael Jensen


Let´s leave compensation myths behind!

We found no systemic pattern linking executive compensation to the process of going from Good to Great. JimCollins, From Good to Great, 2001

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

Individual incentive pay, in reality, undermines performance – of both the individual and the organization. Jeffrey Pfeffer, Six Dangerous Myths about Pay, HBR 1998


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


An example: “motivation”, or “threat”? What compensation systems really do...

100%Base salary

System with novariable compensation

100%: Total compensation expected by employee.

70%Base salary

30%Variable

compensation

System with variable compensation (bonus, incentive, etc.)

Is this an “energizingpromise”, or is it just a pitiful threat?

“We have a conservative pay philosophy. Your base salary equals your total compensation, which is USD 100.000,00.“

“We have an aggressive pay philosophy: 30% of your total compensation will be paid in form of a bonus. The total is USD 100.000,00, by the way.“


1 very simple principle:Pay the person. Not the position.Always.


I am arguing against…..

(1) attributing more importance to money than it actually has,

(2) pushing money into people's faces and making it more salient than it needs to be, and

(3) confusing compensation with reward(the latter being unnecessary and counterproductive).

The problem isn't with the dollars themselves, but with using dollars to get people to jump through hoops.

Social scientist Alfie Kohn says:


1. Pay people well2. Pay people fairly3. And then do everything possible to take money off peoples minds!All pay-for-performance plans violate that last precept!

And:

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.


1 very simple principle:Never use bonuses and incentives.Use profit sharing and/or shareholding concepts instead.


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


12

3


A case study – the organizational structure looked like this

CEO

Director Technology

Engeneers,Developers

Director Sales 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

customer fit in here?


Why isn’t everyone decentralizingdecision-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?


Some questions that we need to respond, if we want to decentralize decision-making power in an organization

“Devolved”/descentralized“Centralized”

People are divided by function and between ‘doers’ and ‘thinkers’.

Consequently, many decisions have to be taken centrally after being

passed up the hierarchy.

Leadership is devolved (within defined boundaries) to the frontline –

as close as possible to the customer and to as many people

and with as much autonomy as possible.

Seminar Beyond Budgeting - Niels Pflaeging

What will be those teams close to the customer (“cells“) like, in our

organization?

How do we link periphery and center of the organization –

leading, not managing?

How do we create an environment in which the 95% of good people within our organization can

act as entrepreneurs - the way they deserve?

How can we create oben dialogue and transparency between 100% of the

people in the organization?

“How can we end the arrogance of

the corporate center (HQ)?“


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


Coherence is the critical issue


“I don´t know if it is possible.

What I know: It is necessary.“

Tom Peters

Is transformation possible?

Today we already know for sure it is possible.

And we have also learned how it can be done.


1. Ending

3. Beginning2. Neutral Zone

To transform your organization from “command & control” to “decentralized network”, a double helix change is needed

3. Develop change

vision and strategy

4. Communi-

cate for under-

standing and buy-in

5. Empower all others

to act

6. Produce

short-term wins

7. Don't

let up!

8. Create a new culture

1.Create a sense of urgency

2. Pull

together a guiding coalition

Organizationalchange process

Individual

change process

References


This process is systemic and not like “project management“, but it can be guided and “temperature“ can be taken at any time

Status of the project

1. There is a strong guiding coalition that sustains the transformation.2. All over the organisation, “profound change“ is considered an issue.3. Different groups in the organisation (task forces) already work on specific changes.

3. Develop

change vision and strategy

4. Communicate for understan-

ding and buy-in

5. Empower all

others to act

6. Produce

short-term wins

7. Don´tlet up

1. Create a sense of urgency

2. Pull together a

guiding coalition

Phase in %


How does a decentralized organization work?

• The market is the boss. (“Outside“ rules!) Former bosses give up their power.

• A network cell is not a department: It is functionally integrated, t functionally divided!

• A network cell has clients - external or internal – which it serves. It doesn´t serve bosses!

• “Management“ is done inside the cell,not above it! A cell has at least 3 team members.

There are three kinds of building blocks of a radically decentralized organization,

as follows...


1. A “Sphere of Activity“(this is where “power“ and coherence come from)


2. “Network Cells“(this is where the work is done and where clients are being served)


3. “Strings“(this visualizes the interactions between cells)

And finally, you have “Market Pull“


The case study:From departmental hierarchy to decentralized cell network

CentralMarket Services

P 4 P 5

P 6

P 7

P 8

Equipment

Materials &Logistics

InfoShop

RegionSouthwest

RegionNortheast

RegionSoutheast

RegionCenter

RegionAmerica

…

OrgShop

Product Cell 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


“Cell structure“ as a foundation for sensible target definition 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


Region to RegionCost over income


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

Value contribution



Beyond Budgeting: Is this something for only a select few? Just for geniuses and mavericks?


Industria

Distribuição

Serviços

Governo& ONGs


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

>beyond budgetingtransformation network.

Gebhard Borck BBTN & gberatung

Fritz-Neuert-Str. 13a75181 Pforzheim - Germany

[email protected]: gborckwww.gberatung.de


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

[email protected]: npflaegingwww.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!

http://www.bbtn.org

http://www.metamanagementgroup.com

http://www.gberatung.de

seminar (en): cfo forum - challenges in tough times, warszaw/poland, organized by hbr poland

Business

lowest operational

87strategic

relative performance

resourcesdynamic

fixed performance

key performance

radically

internal negotiationrelative