Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA)

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

[ Niels Pflaeging ] BetaCodex Network www.betacodex.org

Beyond Budgeting: Creating high-performance organizations for today's markets

How to achieve sustained competitive advantage in the corporate race - without fixed targets and annual planning! Kuala Lumpur, 03.-04. May 2011

90% Peter Drucker

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!

7

“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 • …

© BetaCodex Network – All rights reserved White paper – Making Performance Management Work 8

formal

dynamic

sluggishness high dynamics high dynamics

machine

man

The historical course of market dynamics

The domination of high dynamic is neither good or bad. It‘s a historical fact.

t 1900 1980 2008

Conventional companies

Outperformers

Market pressure

Crafts manufacturing Tayloristic industry Global markets

10

Periphery

Center

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

13

Beyond Budgeting (1998-2002)

Beyond command and control (2003-2007)

Beyond incremental change (2008-)


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. Theory Y

Douglas McGregor

Theory X


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 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.

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


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 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.

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

Attitude

Direction

Responsibility

Creativity

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

18

Do you BELIEVE in Theory Y? Firmly? Good. Because we are sure then 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, or control of work-hours…


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


Do your HR systems make it in people's best interest to implement your new vision?

What is meant by HR systems?   Performance appraisal   Compensation   Hiring and Promotions   Succession planning   ...

Most often, examination of a firm's human resource systems reveal:   Performance evaluation processes have virtually nothing to do with customers or strategy – yet that is typically at the core of a new vision or management model

  Compensation decisions are based much more on not making mistakes than on creating the right and useful change

  Promotion decisions are made in a highly subjective way and seem to have at best a limited relationship to the change effort

  Recruiting and hiring systems are a decade old and only marginally support the transformation

Source: J. Kotter, Leading Change, HBSP, p, 110-111

25

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

26

Industry

Retail

Services

Governments. & NGOs

27

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

Comparing the models

29

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)

on the model,

The BetaCodex: Thinking and working

in the model.

not


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

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)


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

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)

Organizations with traditional models must eventually transform themselves!

35

•  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“


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


Comparison between the major publicly listed universal banks in Europe universales in Europe. Jan-Dec 2005, after credit losses.

90 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 Scotland Banco 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

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

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

Leads to maximum customer satisfaction!

Source: BBRT


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

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%

Leads to lowest operational cost!

Relative targets and relative compensation

Continuous preparation/ social control

“On demand“ flow of resources/

dynamic coordination

Principles


Headquarters/ Region

Branches acquire resources through internal markets

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

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


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 managers and 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 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


Morpheus to Neo:

"You take the blue pill and the story ends. You wake in your bed and believe whatever you want to believe.... You take the red pill and you stay in Wonderland and I show you how deep the rabbit-hole goes."


The world of command and control management and planning-based steering has a lot to do with the fictitious, machine-generated world in the movie trilogy "The Matrix". Actually, like in that crucial scene in the first movie of the series, traditional management is much like the blue pill the movie's hero Neo is offered, and Beyond Budgeting is the red pill.

Organizations have the choice to either stick with the illusion of control that their “management by numbers” delivers, or to acknowledge that there is a whole world of performance management “beyond planning and control”. One that doesn't deny uncertainty and paradoxes. And that makes far better use of people´s talent and potential.


The blue pill: Fixed, negotiated targets

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

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!

The red pill: Relative, self-adjusting targets

Target: relative ROCE in % (to market)

Most important competitor

(28%)

Market (25%)

Target: „ROCE in % better than 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


Let's start with compensation then. First of all, let's be clear. Carrots don't work. They might beat the intellect of donkeys. But they certainly don't trick human beings, who all have “Theory Y” wiring inside them. Incentives simply don't have a positive influence on organizational performance. Full stop.

So why do so many of us still apply in the carrot-and-stick method with people?


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

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

Source: Michael Jensen


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 income that goes against our company´s principle “Always act to the benefit of our customers“.

The decision: Marie Taylor is being transferred to the internal sales support department. All her bonuses rights have been 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.


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 hours charged to his customers.

The decision: Frank Miller was fired and is leaving the company immediately.

The background story:

It is true: Frank Miller has acted against the law, by charging for more than he has actually worked for his clients.

But it is also true that 25% of Frank Miller´s income depend on the hours charged to clients…


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

100% Base salary

System with no variable compensation

100%: Total compensation expected by employee.

70% Base salary

30% Variable

compensation

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

Is this an “energizing promise”, 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.“


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

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


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 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!

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.

54

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

56

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

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


Variable compensation: Unbundling fixed “Pay for Performance” contracts, in favor of “Relative Improvement”

•  Beyond Budgeting principles advocate basing evaluation and rewards on relative improvement contracts with hindsight, rather than fixed performance contracts agreed upon in advance.

•  In formulating a rewards policy, the Beyond Budgeting model leads to eight key recommendations:

1.   Base rewards on relative measures, not fixed targets.

2.   Align rewards with strategic measures, not budgets.

3.   Reward the performance of teams, not individuals.

4.   Align rewards with independent groups, not parochial interests.

5.   Use clear and transparent measures, not unfathomable numbers.

6.   Use the language and thinking of gain sharing, not incentives.

7.   Make rewards fair and inclusive, not unfair and divisive.

8.   Recognize and reward company values, not just the numbers.

Source: BBRT

All employees should earn a share of the financial success. Restrain from the idea of “motivating them“!

Organizations can free themselves from conventional forms of “pay for performance”,

through simple and more transparent compensation systems.


Can you read the future, from the bottom of a cup of coffee? Or do you have a crystal ball that lets you to look into the future? Can you read the cards and see what will happen next year? Well, if none of this actually works, and if we accept that it´s impossible to predict the future, then why do we still spend massive energy and time on formal techniques that try

to achieve just that for businesses?


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

Eine Konsequenz aus dem Kodex.

Planning. Don´t

Companies. Need.

Period.

Ape

rtura

62

A small elite governing the powerless masses. An economic system held together by tight planning, and control. Mistrust in entrepreneurial initiative.

Those were key features of the soviet union.

Now guess where this kind of governance remains in place today: It is the worlds corporations and small to large-size firms. It is just that we call the practice “management”.


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!

© BetaCodex Network – All rights reserved White paper – Making Performance Management Work 64 64

Management control cycle

Budget

Strategy

Strategic learning cycle

Annual plan

Control

Management processes in command and control organizations are “straight jackets”

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!


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

0

100

1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: 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”

Source: BBRT


Traditional model (fixed performance contracts, negotiated in advance)

New model (relative performance contracts, assessed with hindsight)

Applying the BetaCodex means: From fixed to adaptive management processes.

strategy

control

Fixed performance contracts Dynamic

coordination

Relative performance 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


We have come to believe that the source of great performance is good planning. But planning actually never (ever!) is the source of performance. Preparation is. Preparation enables individuals and teams to achieve high performance. Just like in a Racing Team. The situation pictured here is a one where high performance is produced, and in fact required.


If you think about it, a Formula 1 team does not rely on intense planning at all, but on intense preparation. Things that teams like this indulge in are: •  All-team mastery: Every team member has to be a master. No exception. This enables the team to sense and respond. To improvise. To be intuitive. •  Trying. Trying. More trying. You cannot run enough test races. •  Intense and open communication flow. Everyone is always up to date. •  Rituals for group cohesion and a culture aimed at winning. These characteristics are typically absent from larger organizations. Ask yourself why.

“I will prepare myself and my time must come.”

Abraham Lincoln


True, it is tempting to believe that we can “control”, or “steer” organizations. Looking at the

reports, and indicators, and accounting statements, it appears that an intelligent

executive might be able to remote- control a company, right?

Now, the problem is: That's just a

beautiful illusion.


Resources. What most organizations do with them is basically this: Once a year, they define the size of the pie. Then, they invite managers to fight for a piece of the action… Organizational research has shown over and over that this is the fundamental mechanism organizations use… and that it

inevitably leads to sub-optimization, to say the least. Happily, there is a far better way to steer resources. Just imagine for a

moment that you simply wouldn't define the size of the pie for a fixed period any more. And that you would take important resource decisions together in a team, and always as late as possible! (Yes, you read that right!)


Projected period (e.g. 5 quarters)

Resources Income 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


Does your organization use “traffic light” reporting? Those red, orange and green dots indicating what to pay attention to? Most of these reports are made for managers and executives, because, so the the story goes, those people have short attention spans and “need” the color coding.

Now, isn't it fascinating that organizations have such a low opinion of their supposedly “top” people?


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 by measuring alone!


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

last month

Same month last year

Same month prev.. year

Ø last 12 mnths

Ø 12 prev. mnths

Indicators or Groups 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

Us Our unit B

Our unit A

Compe- titor B

Compe- titor A

KPI 1

Trend with tolerance

Tolerance levels

Time (Actuals)

KPI

Us


1 2

3


A case study – the organizational structure looked like this

CEO

Director Technology

Engeneers, Developers

Director Sales Germany

Admini-stration Assistant

Sales large equipments

Technical Hotline

Projects & Offers

Complaints

Marke-ting/ CI

After-Sales Services

Sales office

Cont. education

Customer Services

Region 1 & 2

Region 3 & 4

Region 7 & 8

Region 5 & 6

Region 9 & 10

Region 11 & 12

Region 14 & 15

Region 13 & 14

Region 16 & 17

Region 18 & 19

Region 22 & 23

Region 20 & 21

Region 24 & 25

Region 26 & 27

Region 29

Region 28

Director Production

Production Leader Assistant Quality Material

Planning Sales OEM

Process optimization

Toolings & Maintenance

Purchasing & Disposition

Design

Pro-duction

Assembly Work planning

Logistics

IT HR Control-ling

Accoun-ting

Assistant Telephonists

CFO Director International

Admini-stration Assistant

Sales OEM

Sales large systems

Technical Hotline

Projects & Proposals

Complaints

Sales

Marke-ting

Internal sales services

Branch I Branch II

Branch IV

Branch III

Sales Sales Sales

Central sales support

Cont. education

Customer Services

And where does the

customer fit in here?


Why isn’t everyone decentralizing 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?


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)?“

More about devolved leadership

•  Devolution, like delegation, is a form of decentralization. While delegation occurs when a superior decides to pass a power, responsibility or task to a subordinate, devolution occurs when a board (or equivalent) decides as a policy to empower a lower level in an organization. •  Devolution is therefore 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 activities in order to provide teams with greater autonomy, but it does not mean that all activities must be decentralized.

•  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.

•  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. •  The result is that 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.

The notion of dividing an organization into functions, and then departments, is fundamentally flawed.

But what is the alternative?


Building blocks of the networked organization I: “Spheres of activity“ - distinguishing the inside from the outside

•  Every organization operates within its own “sphere of activity”. Consciously or unconsciously. The sphere originates from the combination of an organization’s purpose and identity. This encompasses its business model, its shared values and principles, its brand proposal, its vision and mission.

•  Traditional command and control organizations frequently fail to make their sphere of activity explicit to its people and stakeholders. The sphere thus remains ambiguous to the involved parties within the system. Not so in pioneering organizations of the new model, which always have an extremely strong corporate culture, a clear value system and explicit boundaries. The pioneers have a need for a well-defined sphere, because their governance doesn´t rely on command and control, use of power, and fear.

•  In traditional organizations, consequences cause actions. In pioneering organizations, on the other hand, all acting is a consequence.

•  Defining the sphere of activity is a key ingredient of the case for change, which has to be written up in the transformation from command and control (Alpha) to the BetaCodex.


Building blocks of the networked organization II: “Network cells“ – how they differ from functions & departments

•  Network cells integrate several functions, roles and duties, which would be traditionally separated into different departments, divisions and areas. A cell thus contains different functions and roles!

•  Network cells offer and sell products and/or services on its own, and only depend on its market in its decisions about them.

•  Network cells are customer focused, as they respond only to internal or external clients, not to hierarchy.

•  Network cells are held accountable by other members of the organization and are responsible for their own value-creation. Each cell has its own P&L statement.

•  Network cells apply the full set of 12 laws of the beta codex.


Building blocks of the networked organization III: “Network strings“ - the communication and value creation links

•  Strings depict the connections between cells, showing a high level of elasticity. Such connections arise from several different kinds of interaction:   Value creation flows from the inside out,   Formal communication, and   Informal networking.

•  Internal markets and pricing mirror the value creation flow from inside-out: Cell networks practice internal payments, from the outside-in, to compensate for internal services.


Building blocks of the networked organization, IV: “Market pull“ - the force that actually “manages“ organizations

• Market pull is what connects the market with the organizations, and thus the outer part of the sphere of activity with the inner part. Whenever an external stakeholder of an organization “wants“ or “demands“, “orders“ or does something relevant to the organization, it originates market pull.

• Market pull can be applied by customers wanting something, but also by shareholders demanding a compensation for their investments, or a bank demanding payback of a loan, or the state demanding the payment of taxes, or a competitor launching a new product. Market pull thus has varied sources.

•  In the real world, there is no such thing as “market pressure“. This might at first sight appear as a counter-intuitive claim. But if you consider organizations as operating within their own, self-defined Sphere of Activity, then markets simply cannot apply “pressure“. What markets really do is that they apply “pull“. They do this all the time. And pull is a powerful force. All market actors pull. They stimulate by pulling. They want things. They govern the organization.


Market pull comes with an interesting collateral. Because once market pull is accepted as a governing and energizing force, consciously and by all members of an organization, it is capable of turning management as an internal function unncessary.

In fact, management has been outsourced to markets long ago. This happened when competition and dynamic change took over within the environments of our organizations. In consequence, any effort to “manage“ an organization from the top down today means making a painstaking, but ultimately fruitless effort to “steer from within“, or to internally duplicate “what actually manages us“.

In other words: management these days usually means trying to do something internally that the market already does for you in a much better way, because it does so in a more relevant and timely fashion.

The importance of “market pull“



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

D f( V x S x R ) >

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

What waiting for?

are we


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

92

93

“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.

94

www.betacodex.org A selection of associates:

Make it real!

Niels Pflaeging [email protected] nielspflaeging.com São Paulo-New York-Wiesbaden

Valérya Carvalho [email protected] Betaleadership.com São Paulo

Silke Hermann silke.hermann@ insights-group.de Wiesbaden–New York

Walter Larralde wlarralde@ on-strategy.com.mx Mexico City

Sergio Mascheretti s.mascheretti@ itmconsulenza.it Bergamo/Milan

Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA)

Business

decentralization empowerment sustaining

functional differentiation evolution

age low degree

performance plans violate

fixed performance contracts

bbrt betacodex network

key performance indicators

people dislike work