Niels Pflaeging BBTN & MetaManagement Group Seminar with Uni Strategic, Kuala Lumpur 01./02.12.2008 > beyond budgeting transformation network. Beyond Budgeting: Leading with flexible targets. How to beat the competition – without fixed targets and with no annual planning whatsoever! Make it real!
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Beyond Budgeting: Leading with Flexible Targets. 2-day seminar
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Niels Pflaeging BBTN & MetaManagement Group Seminar with Uni Strategic, Kuala Lumpur 01./02.12.2008
> beyond budgeting transformation network.
Beyond Budgeting: Leading with flexible targets.
How to beat the competition – without fixed targets and with no annual planning whatsoever!
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.
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.
From 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 • …
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.”
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…
1. Region A 38% 2. Region C 27% 3. Region H 20% 4. Region B 17% 5. Region F 15% 6. Region E 12% 7. Region J 10% 8. Region I 7% 9. Region G 6% 10. Region D (5%)
Branch to branch Cost/income ratio etc.
1. Branch J 28% 2. Branch D 32% 3. Branch E 37% 4. Branch A 39% 5. Branch I 41% 6. Branch F 45% 7. Branch C 54% 8. Branch G 65% 9. Branch H 72% 10. Branch B 87%
Strategic „cascade”
Result & value contribution
Leads to lowest operational cost!
Relative target definition through “league tables“ (rankings) – instead of planned, fixed targets and internal negotiation
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.
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, if we don´t clarify beforehand our beliefs with regards to what in organizations are like.
We have to develop a shared understanding of human nature and its influence on our organizations.”
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“.
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)
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!
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…
General principles for designing compensation systems in Beyond Budgeting organizations
1. Pay the person – not the position. Abolish salary bandwiths.
2. Reward results (ideally, relative to external benchmarks), not target realization or actuals compared to plans. Abolish all links between targets and money.
3. Apply group- or team-based variable compensation, e.g. participation in the overall 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“!
By freeing themselves from conven-tional forms of “pay for
performance”, organizations will create simple and more transparent
Why isn’t everyone devolving 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?
• Devolution: Like delegation, it is a form of decentralization. But there is a difference: 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 much 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 some activities in order to provide teams with greater autonomy, but it does not mean that all activities must be decentralized.
• Centralize what? 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. • Relationships: 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. • Results of devolution: As an outcome, 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.
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
D f( V x S x 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
The case study: What was done? „The week of truth“
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.
The case study: What was done? “The week of truth“
Central Market Services
P 4 P 5
P 6
P 7
P 8
Equipment
Materials & Logistics
Info Shop
Region Southwest
Region Northeast
Region Southeast
Region Center
Region America
…
Org Shop
Product Cell 1
P 2
P 3
Region North
Region West
Region Europe
Org Shop • HR • Executive board + assistance • Central office Clients: All R- and P-Cells
Central Market Services • Overall Marketing/CI • Training Clients: All R-Cells Equipment
• Tooling construction • Facility Management Clients: all P-Cells
Materials & Logistics • Logistics • Purchasing Clients: 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&D Customers: All R-Cells
Info Shop • IT • Financial accounting • Controlling Clients: all R- and P-cells
“Cell structure“ as a foundation for sensible target definition in a “relative“ way - using league tables
Firm to Firm ROCE
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 Region Cost over income
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%)
P-Cell to P-Cell On-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%
• Create array of larger Task Forces to change organizational structure, management processes and business processes • Align projects and decision processes with 12 principles and the values defined in the case for change
• Write the case for change • Build awareness through selective action (e.g. abolishing budgets)
• Win hearts and minds, train for empowering leadership styles and more transparency
Organizational change process (John Kotter, “Leading Change” to “Our Iceberg is Melting”)
Underlying assumptions of our recent management model transformation projects
1. Organizations are “systems”. So they have to be transformed as such. Thus, finance people cannot do it alone. (And it's actually much more fun approaching change holistically.)
2. “It´s all about human nature”. Apply “Theory Y” rigidly!
3. Everyone's communication styles and behaviour patterns must change. Transformation thus requires “people” specialists, coaching and some training.
4. A systemic view of the change process: it is senseless to plan too far ahead. So we will not do it. We will instead “follow the energy”!
5. You have to do this yourself! We will give advice, and guarantee that you are aware of the consequences, beforehand. We will help you in applying the mental model in any situation. You will make the decisions for yourselves, our role is to make the consequences clear. We will also provice you with methods to solve problems, all the time.
6. “Mature” cases and the model itself are key to making the vision palpable. We will also use “emotional” techniques, metaphors, stories, scientific evidence, and our international network, wherever indicated.
7. Abolishing budgets is 0,5% of the project (and not the difficult bit). Creating an entrepreneurial devolved network is key to the “new” model. Which in case of PE means changing a hundred mindsets.
> beyond budgeting transformation 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.
1. Go straight into denial! • That´s ok. We believe, however, that all traditionally managed organizations will at some point have to adopt the new model. Because market forces and human nature will ever more strongly put your organization under stress and make transformation a must.
2. asdfasdf! • 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. asdfs! • 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. Go straight into the Neutral Zone!
• Talk with the speaker about scheduling an in-company workshop at your firm.