Seminar (EN): Beyond Budgeting - Leading with Flexible Targets, Kuala Lumpur/Malaysia, organized by UniStrategic

Niels PflaegingBBTN & MetaManagement Group

Seminar with Uni Strategic, Kuala Lumpur01./02.12.2008



>beyond budgetingtransformation network.

Beyond Budgeting: Leading with flexible targets.

How to beat the competition – without fixed targets and with no annual planning whatsoever!

Make it real!

www.bbtn.org

© BBTN – All rights reservedSeminar – Beyond Budgeting 2

Some introductory words…

• English as a foreign language…

• Opening hearts and minds for two days…

• Everyone´s a CEO.

• Dialogue, not monologue.

• The material has changed!

• Excercises

• Cultural differences: We have to deal with that!


Industry, USA

What is it that these organizations have in common?Exceptional companies that do almost everything differently!

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

• Exoten: Exceptional leadership models

• Performer: Superior competetive success

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

Airline, USA

Banking,Sweden

Retail, Germany

Retail, Sweden

Industry, Japan

Services, Brazil

Energy, USA

Industry, USA

Services, Switzerland

Industry, USA

Retail, Germany

Services, Australia

Retail, Sweden

Technology, USA

Engin. Services, Brazil


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

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

Dynamicsand

complexity

1890 1980 1990

low

high

2000 2010 2020 2030

1. Discontinuous change2. Short life cycles3. Constant pressure on prices4. Less loyal customers 5. Choosy employees6. Transparency,

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.

All are important today!




Our journey since 1998, within the international Beyond Budgeting movement

Beyond budgeting (1998-2002)

Beyond command and control (2003-2007)

Beyond incremental change (2008-)

…


A new brand. A new network.

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

Make it real!

www.bbtn.org


The new model is supported by science and practice

Sciences: Thought leaders(selected)

Practice: Industry leaders

(selected)

Complexity theories

Social sciences & HR

Leadership & Change

Strategy & performance management

Manufacturing

Distribution

Services

Government & Not-for profit

• Charles Horngren• Henry Mintzberg• Gary Hamel• Jeremy Hope• Michael Hammer• Thomas Johnson• …

• Stafford Beer• Margareth Wheatley• Niklas Luhmann• Kevin Kelly• Ross Ashby• Joseph Bragdon• …

• Douglas McGregor• Chris Argyris• Jeffrey Pfeffer• Reinhard Sprenger• Stephen Covey• Howard Gardner• Viktor Frankl• …

• Peter Drucker• Tom Peters• Charles Handy• John Kotter• Peter Senge• Thomas Davenport• Peter Block• …



© BBTN – All rights reservedSeminar – Beyond Budgeting 13From the film ‘Modern Times’ with Charlie Chaplin, 1936

Outlining the ‘industrial age’ model and its pitfalls

“command and control“

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


How markets govern organizations “from the outside in”

Periphery

Center

Market

Information Decision

Impulse

Command

Reaction

Centralist command and control “collapses“ in increasingly complex

environments

Source: Gerhard Wohland


From hierarchy to network structure.

• “Bosses” rule!• Top-down

command and control• Top management

is always in charge• Centralized leadership

• “The market” rules!• Outside-in

sense and respond• Front-line teams are always

in charge• Devolved leadership

Traditional model (centralized functional hierarchy)

New model (decentralized leadership network)

Changing leadership and structure

© BBTN – All rights reservedSeminar – Beyond Budgeting 16“faale ghah-ve“


Does planning really work?The traditional model can destroy value on a massive scale!


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 strategicthinking, and motivate counterproductive or unethical behavior

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

Behavioral problems

Strategic problems

00

100

1984 1986 1988 1990 1992 1994 1996 1998 2000Source: Chem Systems

Profitability in petrochemical industry in Europe

300

400

500

600

200

Targets and strategic guidelines

• Target negotiation• Definition of incentives• Activity planning• Resource allocation• Coordination of plans• Approval

Performance control(plan-actual)

Budget

Bonus (vs. targets)

Vision

...

Fixedperformancecontacts and

“keep on track”

Fixedperformancecontacts and

“keep on track”

Source: BBRT


Managementcontrol cycle

Budget

Strategy

Strategiclearning cycle

Annual plan

Control

Management processes in organizations are “straight jackets”

FixedPerformance

Contract

“Fixed” performance contract

• Period [Fixed]

• Targets [Fixed]

• Compensation [Fixed]

• Plan [Fixed]

• Resources [Fixed]

• Coordination [Fixed]

• 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

Six misalignment examples

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 behaviorconflicts with it

Six “CSFs”

• 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 excessive planning!

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

Michael Hammer

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

problem.


Traditional model (fixed performance contracts, negotiated in advance)

New model (relative performance contracts, assessed with hindsight)

From fixed to adaptive management processes.

strategy

control

Fixedperformance

contractsDynamic

coordination

Relativeperformance

contracts

• Dynamic, continuous processes• Relative targets/compensation• Self-control, transparency and

peer pressure

• Fixed, annual processes• Fixed targets and incentives• Centralized and

bureaucratic control

Changing processes


The proposal of Beyond Budgeting : Real change requires a coherent alternative to the command and control model

“‘Beyond budgeting’ is a positive idea that uses the abandonment of budgeting as a trigger for improving the entire management model.”

Charles T. Horngren, Littlefield Professor of Accounting, Emeritus,

Stanford University

Source: Quoted from the preface to Fraser/Hope: „Beyond Budgeting”

This is what “Beyond Budgeting”

really is about


Local control

Our systems and 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


Complex and dynamicManaged stability

What is a ‘management model’?

Leadership culture

+ Management

processes+

Information systems

Industrial Age Information Age


on the model,

We mustwork

in the modelnot


Centralized hierarchy,“command and control“

strategy

control

Fixedperformance

contracts

Decentralized network, “senseand respond“

Dynamic coordination

Relativeperformance

contracts

Dynamic processes

The old model is not aligned with today’s CSF and it does not support ‘Theory Y’.> We need a new

model to cope with complexity

> We must change the whole model!

From the old coherence to a new coherence.

Fixed processes

Traditional model (supports efficiency) New model (supports complexity)


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

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

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

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

Made real through:• Radical decentralization,

which in turn leads to…• Best customer service• Lowest 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 andPrivate – 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, openinformation

systems

Fast, openinformation

systems

Governance and transparency

Framework for decision making withclear values, limits and relative

targets, plus transparency

Freedom and capability to act

“Winning“ culture, combined with thefreedom and ability to act

Customer intimacyA large network of self-managedteams with full responsibility for

customer results

Principles

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

Leads to maximum customer satisfaction!

Source: BBRT


Bank to bankReturn on Equity (RoE)

1. Bank D 31%

2. Bank J 24%

3. Bank I 20%

4. Bank B 18%

5. Bank E 15%

6. Bank F 13%

7. Bank C 12%

8. Bank H 10%

9. Bank G 8%

10. Bank A (2%)

Bank to bankReturn on Equity (RoE)

1. Bank D 31%

2. Bank J 24%

3. Bank I 20%

4. Bank B 18%

5. Bank E 15%

6. Bank F 13%

7. Bank C 12%

8. Bank H 10%

9. Bank G 8%

10. Bank A (2%)

Region to regionReturn on Assets(RoA)etc.

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

Region to regionReturn on Assets(RoA)etc.


Branch to branchCost/income ratio etc.

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

Branch to branchCost/income ratio etc.

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

Strategic „cascade”

Result & value contribution

Leads to lowest operational cost!

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

Relative targets and relative compensation

Continuousplanning/control

“On demand“ flow of resources/

dynamic coordination

Principles


Headquarters/Region

Headquarters/Region

Branches acquire resourcesthrough internal markets

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

Customerdemand

Customerdemand

Branchesobserve

customerdemand

Resources(IT, HR etc.)

Resources(IT, HR etc.)

Branchesdecide overnecessary

resource levels

BranchBranch

Branches alone areresponsible for efficient

use of resources

Leads to eradicating and avoiding waste!

Source: BBRT


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



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 clarifybeforehand our beliefs with regards to what in organizations are like.

We have to develop a shared understanding of human natureand its influence on our organizations.”

Leading with Flexible Targets


vs.

Douglas McGregor


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

Attitude - People need to work and want to take an interest in it. Under the right conditions, they can enjoy it.

Direction –People will direct themselves towards a target that they accept.

Responsibility –People will seek and accept responsibility, under the right conditions.

Motivation - Under the right conditions, people are motivated by the desire to realize their own potential.

Creativity –Creativity and ingenuity are widely distributed and grossly underused.

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

Direction –People must be forced or bribed to make the right effort.

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

Motivation –People are motivated mainly by money and fears about their job security.

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

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

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





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

• Consistently successful, for more than 40 years

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

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

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

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

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

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

• Highly empowered teams. “Temporary leadership“



It´s a differentmental


The 12 principles of the Beyond Budgeting model are in facta full set of “design principles“ for the new organization type.

Pro

cess

es

Goals andrewards

Planning and controls

Resources andcoordination

Lead

ersh

ip

Customers and responsibility

Performance and freedom

Governance and transparency

Goals related to continual improvement

Rewards related to company results

Continuous and inclusive planning

Compare performance against actuals

Resources on demand

Coordinate dynamic interactions

Customer/outside focus

Responsible teams (“cells”)

Performance culture

Autonomy and responsibility

Clearly defined objectives and values

Open and shared information

Do this!

Fiscal year fixed goals

Reward local fixed goals

Top down annual planning

Variations against fixed plans

Annual budget allocations

Departmentalization

Focus on the boss

Centralization

Inspired by the past

Adherence to fixed plans

Impose objectives

Restrict information

Not that!Principles

6 devolvedleadership principles

6 adaptive management process principles


Table 1: The case for change

A typical company – results from the BBRT online diagnostic

Now, it is time for transforming your organization –by closing the gaps

VisionVision

PracticePractice

ProblemsProblems

Closethe gaps!

Closethe gaps!

www.beyondbudgeting.org


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

Foundation Several decades oldTime scale: organization's age

Low degree of decentralization/ empowerment and fixed performance contracts: in conflict with today's critical success factors!

Differentiationphase

Stagnationwithin the tayloristic model

Pioneeringphase

Bureaucratizationgrowing hierarchy and functional differentiation

Integrationphase

Sustaining and deepening of the decentralized model, through generations

High degree of decentralization/ empowerment with relative performance contracts: aligned with today's critical success factors!

Transformationthrough radical devolution and decentralization

Evolutionwithin the decentralized model

Organizations with traditional models must eventually transform

themselves!



Fixed targets

Mostimportantcompetitor

(28%)Market(25%)

Plan(15%)

Actual(21%)

Target: absolute ROCE in % (here: 15%)

[expectedmarket Ø: 13%]

Plan

Comparison:Plan-Actual

Actual

Why traditional management with “fixed performance contracts“regularily fools us: We have lost control a long time ago…

• Interpretation within the plan-actual-comparison: Plan was outperformed by 6 percentage points > positive interpretation

• Better ROCE of the market average and themost important competitor remain unnoticed!

Relative, self-adjusting targets

Target: relative ROCE in % (to market)

Mostimportantcompetitor

(28%)Market(25%)

Target: „ROCE in % betterthan market

average”Actual(21%)

• Interpretation within actual-actual compa-rison: Performance was 4 percentage pointsbelow competition! > negative interpretation

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

• Targets always remain updated and relevant!

[independent from expected

market Ø]

Target Actual

Comparison:Market-Actual

Source: Niels Pfläging


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

Ø last12

mnths

Ø 12

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

Ourunit A

Compe-titor B

Compe-titor A

KPI 1

Trend with tolerance

Tolerance levels

Time (Actuals)

KPI

Us



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 beevaluated just by measuring!


Xing forum: www.xing.com/net/beyondbudgeting

Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.

Gebhard Borck BBTN & gberatung

Fritz-Neuert-Str. 13a75181 Pforzheim - Germany

[email protected]: gborckwww.gberatung.de

Niels Pflaeging BBTN & MetaManagement Group

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

[email protected]: npflaegingwww.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!

www.bbtn.org

mailto:[email protected]


www.xing.com/net/beyondbudgeting

http://www.metamanagementgroup.com

www.bbtn.org






Beyond Budgeting: Leading with flexible targets.

How to beat the competition – without fixed targets and with no annual planning whatsoever!

Make it real!



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

“Individual incentive pay, in reality, undermines performance – of both the individual and the organization.”

Jeffrey Pfeffer, Six Dangerous Myths about Pay, HBR 1998

“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


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

The decision:

Marie Taylor is transferred to the internal sales support department. All her bonuses rights are 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 hourscharged to his customers.

The decision:

Frank Miller has been fired and is leaving the company immediately.

The background story:

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

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


Variablearea “Ceiling”

Bonus hurdle

100%:target

80% of target

120% of target

Base salary

Performance as %of target realization

Salary/bonus

Common practice: „Pay for performance“ compensationprofile with fixedperformance contract:Creates maniuplationincentive in any situation!

Bonus limit

Reductionincentive: Lowerresult even more

Reduction incentive: postpone results to

next period

Maximizationincentive: Anticipate

results

Actualresult #2

Actualresult #1

Actualresult #3

Performance in relative evaluation

Salary/bonus

A better model: Resultoriented compensationprofile with relative performancecontracts:No incentive to manipulation.

Linear compensation curve without breaks: variable compensation becomesdecoupled from targets

Free fromincentive to manipulate

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

Source: Michael Jensen


General principles for designing compensation systemsin Beyond Budgeting organizations

1. Pay the person – not the position. Abolish salary bandwiths.

2. Reward results (ideally, relative to external benchmarks), not target realizationor actuals compared to plans. Abolish all links between targets and money.

3. Apply group- or team-based variable compensation, e.g. participation in theoverall financial result of the firm, not individual bonuses.

4. Design simple variable compensation systems –eliminate complexities, which will lead to manipulation.

5. Compensate long-term value creation – not short-term performance.

6. Only use financial performace indicators in compensation systems –not intermediate indicators which are often hard to quantify or measure(such as quality or customer satisfaction).

7. Include all people in the variable compensation system(turning the system fair and inclusive) – not only an “elite“.

8. Use the language of participation in results -not the philosophy of “incentives“.

All employees should earn a share of the financial success.

Restrain from the idea of “motivating them“!

By freeing themselves from conven-tional forms of “pay for

performance”, organizations will create simple and more transparent

compensation systems.


How often do the systems, especially the HR systems, get in the way of change, transformation, vision and strategy?

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



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


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?


More about devolved leadership

• Devolution: Like delegation, it is a form of decentralization. But there is a difference: Delegationoccurs when a superior decides to pass a power, responsibility or task to a subordinate. Devolutionoccurs 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 the95% 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)?“



Coherence is the critical issue


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

The results:• More successful than its competitors in all

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

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

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

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

Df( Vx Sx R) >

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


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

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

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

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

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

Everybody knows the numbers.

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

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

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


The case study: Transforming an organization, as suggested by John Kotter, HBS: A process model for organizational change

3. Develop change

vision and strategy

4. Communi-

cate for understan-ding and buy-in

5. Empower all others

to act

6. Produce

short-term wins

7. Don't let up!

8. Create a

new culture

1.Create a sense of urgency

2. Pull

together a guiding coalition

References

Organizationalchange process(John Kotter, “Leading Change” to “Our Iceberg is Melting”)


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.

3. Develop

change vision and strategy

4. Communicate for understan-

ding and buy-in

5. Empower all

others to act

6. Produce

short-termwins

7. Don´tlet up

1. Create a sense ofurgency

2. Pull together a

guidingcoalition

Phase in %


A case study:What was done? „The week of truth“

Workshop preparation:

• Participants: Approx. 20% of thefirm´s employees

• from all areas of the firm.

• from all hierarchical levels.

• Three groups were formed

• Market

• Product

• Central Services

Execution:

Phase 1 – Speaking a common languagePhase 1 – Speaking a common language

Phase 2 - Recognize & describethe current situation

Phase 3 – Think and describethe networked cell structure


The case study – the organizational structure looked like this

CEO

Director Technology

Engeneers,Developers

DirectorSales 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

market fit in here?


Our excercise: Develop a dentralized networked cell structure instead!

• The market is the boss. (“Outside“ rules!)

• There are three kinds of building blocks of a devolved organization:

A sphere of activity,

network cells,

“strings“.

• All “key tasks“ performed in the old structure have to be performed in the new structure as well.

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

• A cell has clients - external or internal – which it



The case study:What was done? “The week of truth“

CentralMarket Services

P 4 P 5

P 6

P 7

P 8

Equipment

Materials &Logistics

InfoShop

RegionSouthwest

RegionNortheast

RegionSoutheast

RegionCenter

RegionAmerica

…

OrgShop

ProductCell 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 targetdefinition 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

Contrib. to value creation

Leads to lowest operational cost!


What are the consequences?


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


There are many pioneers of the new model, worldwide. But only very few of them have undergone transformation.

Selected pioneers of the model

Pioneers that went through transformation

In the 70s

In the 90s

In the 80s

In the 90s

In the 90s

In the 50s

All organizations withtraditional models will

eventually have totransform!


Peter Drucker


Part I of the “Double Helix” transformation framework: A process model for organizational change

3. Develop change

vision and strategy

4. Communi-



to act

6. Produce

short-term wins

7. Don't let up!

8. Create a

new culture


2. Pull


References



What to do when in the process? Two examples

3. Develop change

vision and strategy

4. Communi-



to act

6. Produce

short-term wins

7. Don't let up!

8. Create a

new culture


2. Pull


• Create array of larger Task Forces to change organizational structure, management processes and business processes

• Align projects and decision processeswith 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


© BBTN – All rights reservedSeminar – Beyond Budgeting 89 Logoplaste Leadership Workshop, Mar 2007


Part II of the “Double Helix” transformation framework: a process model for personal change

1. Ending

3. Beginning

2. Neutral Zone

Reference

Individualchange process

(William Bridges, “Managing Transitions”)


(William Bridges, “Managing Transitions”)


Putting the “Double Helix” together.

3. Develop change

vision and strategy

4. Communi-



to act

6. Produce

short-term wins

7. Don't let up!

8. Create a

new culture


2. Pull


Organizationalchange process

1. Ending

3. Beginning

2. Neutral Zone



Principles: Leading profound, transformational change

3. Develop change

vision and strategy

4. Communi-



to act

6. Produce

short-term wins

7. Don't let up!

8. Create a

new culture


2. Pull


Organizationalchange process

1. Ending

3. Beginning

2. Neutral Zone


References


2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen?


Underlying assumptions of our recentmanagement 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.


Xing forum: www.xing.com/net/beyondbudgeting

Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.

Gebhard Borck BBTN & gberatung

Fritz-Neuert-Str. 13a75181 Pforzheim - Germany

[email protected]: gborckwww.gberatung.de

Niels Pflaeging BBTN & MetaManagement Group

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

[email protected]: npflaegingwww.metamanagementgroup.com

BBTN: www.bbtn.org

Make it real!

www.bbtn.org

www.bbtn.org



www.xing.com/net/beyondbudgeting

http://www.metamanagementgroup.com

Seminar (EN): Beyond Budgeting - Leading with Flexible Targets, Kuala Lumpur/Malaysia, organized by UniStrategic

Business

guiding coalitionorganizationalchange

annual planning

2008niels

guiding coalitionreferencesorganizationalchange

lowest operational

niels pflaegingbbtn

relative performance

critical success