Keynote (EN): Beyond Budgeting in Practice, at Quality & Excellence Conference, Tehran/Iran

beyond Make it real!
budgeting

>
transformation
network.

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

Niels Pflaeging
BBTN & MetaManagement Group
Keynote at Excellence Conference, Tehran/Iran
27.07.2008

“faale ghah-ve“ – Tehran/Iran
Excellence Conference 2 © BBTN – All rights reserved

The world has changed:
outlining today's critical success factors

high
Industrial age ends: Knowledge economy advances:
”Supplies have the power“, ”Customers have the power“,
Evolution of mass markets: strong competition, individualized demand:
Taylorism as the superior model decentralized and adaptive model is superior!

All are
important today!
Competitive
Characteristics success factors (CSF)
Dynamics
and 1. Discontinuous change - Fast response
complexity 2. Short life cycles - Innovation
3. Constant pressure on prices Operational excellence
-
Characteristics 4. Less loyal customers - Customer intimacy
• Incremental change 5. Choosy employees - Great place to work
• Long life cycles 6. Transparency, - Effective
• Stable prices pressure from society governance
• Loyal customers High financial - Sustained superior
• Choosy employers expectations value creation/fin.perf.
low • „Managed“ results

1890 Most organizations still use a management model 2010 was designed 2030
1980 1990 2000 that 2020
for efficiency, while the problem today is complexity.
Excellence Conference – Tehran/Iran 3 © BBTN – All rights reserved

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

Industry, Airline, Technology, Engin. Services,
USA USA USA Brazil
Retail,
Services, Sweden
Switzerland

• Innovators: A crises within their industries
Banking, or firms caused them to change radically Services,
Sweden Australia
• Exoten: Exceptional leadership models
• Performer: Superior competetive success

Industry, It´s the coherence of the Industry,
USA leadership model that matters! Japan

Retail,
Retail, Sweden
Germany
Energy, Industry, Services, Retail,
USA USA Brazil Germany


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.

Make it real!

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


The new model is supported by science and practice

Sciences: Practice:
Thought leaders •
•
Stafford Beer
Margareth Wheatley
Industry leaders
(selected) • Niklas Luhmann (selected)
• Kevin Kelly
• Ross Ashby
• Joseph Bragdon
• …
• Douglas McGregor
• Chris Argyris Complexity
• Jeffrey Pfeffer theories Manufacturing
• Reinhard Sprenger
• Stephen Covey
• Howard Gardner Social
• Viktor Frankl sciences & HR Distribution
• …

• Peter Drucker Leadership &
• Tom Peters Services
• Charles Handy Change
• John Kotter
• Peter Senge Strategy &
• Thomas Davenport Government
performance & Not-for profit
• Peter Block
• … management
• Charles Horngren
• Henry Mintzberg
• Gary Hamel
• Jeremy Hope
• Michael Hammer
• Thomas Johnson
• …


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
• … film ‘Modern Times’ with Charlie Chaplin, 1936
From the

How markets govern organizations “from the outside in”

Periphery
Mar
ke t
Center

Information Decision

Command

Centralist command and
Impulse control “collapses“ in
Reaction
increasingly complex
environments

Source: Gerhard Wohland

From hierarchy to network structure.

Traditional model New model
(centralized functional hierarchy) (decentralized leadership network)

Changing
leadership and
structure

• “Bosses” rule! • “The market” rules!
• Top-down • Outside-in
command and control sense and respond
• Top management • Front-line teams are always
is always in charge in charge
• Centralized leadership • Devolved leadership

Why most concepts, books and theories about leadership,
as well as most advice on management are flawed

“One cannot talk sensibly about leadership or people management,
nor design decent management processes, unless we 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.”
Leading with Flexible Targets


vs.
Douglas McGregor

Excellence Conference – Tehran/Iran 16
16 © BBTN – All rights reserved

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

Theory X (0%) Theory Y (100%)
Attitude – Attitude - People need to work and want to
People dislike work, find it boring, and will take an interest in it. Under the right
avoid it if they can. conditions, they can enjoy it.

Direction – Direction –
People must be forced or bribed to make the People will direct themselves towards a
right effort. target that they accept.

Responsibility – Responsibility –
People would rather be directed than accept People will seek and accept responsibility,
responsibility, which they avoid. under the right conditions.

Motivation – Motivation - Under the right conditions,
People are motivated mainly by money and people are motivated by the desire to realize
fears about their job security. their own potential.

Creativity – Most people have little creativity Creativity –
- except when it comes to getting round Creativity and ingenuity are widely distributed
management rules. and grossly underused.

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


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.
• 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“

• “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.“

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

Principles Do this! Not that!
Customers and Customer/outside focus Focus on the boss
responsibility Responsible teams (“cells”) Centralization
Leadership

Performance and Performance culture Inspired by the past
6 devolved
freedom Autonomy and responsibility Adherence to fixed plans
leadership principles
Governance and Clearly defined objectives and values Impose objectives
transparency Open and shared information Restrict information
Goals and Goals related to continual improvement Fiscal year fixed goals
rewards Rewards related to company results Reward local fixed goals
Processes

Planning and 6 adaptive management down annual planning
Continuous and inclusive planning Top
controls process principles Variations against fixed plans
Compare performance against actuals
Resources and Resources on demand Annual budget allocations
coordination Coordinate dynamic interactions Departmentalization


From the old coherence to a new coherence.

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

Centralized Decentralized
hierarchy, network,
“command “sense
and control“ and respond“

The old model is not
aligned with today’s
CSF and it does not
support ‘Theory Y’.
> We need a new Relative
strategy model to cope with performance
complexity contracts
> We must change
Fixed the whole model!
performance Dynamic
contracts
coordination
Fixed Dynamic
processes processes
control

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

22
22

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

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
Alexander V Dokukin
• Lowest cost

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, …)

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


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

Principles Customers

Customer intimacy
A large network of self-managed
teams with full responsibility for 600 branch managers
(Profit Centers)
customer results

Freedom and
capability to act 12 regional Fast, open
“Winning“ culture, combined with the managers Fast, open
(Invest Centers)
information
information
freedom and ability to act
systems
systems
Governance and
transparency CEO,
Framework for decision making with product firms,
clear values, limits and relative treasury, IT etc.
targets, plus transparency

Leads to maximum customer satisfaction!
Source: BBRT

Relative target definition through “league tables“ (rankings) –
instead of planned, fixed targets and internal negotiation
Strategic „cascade”
Bank to bank
Bank to bank
Return on Equity (RoE)
Return on Equity (RoE) Region to region
Principles Region to region
Return on Assets(RoA)etc.
1. Bank D 31% Return on Assets(RoA)etc.
1. Bank D 31% Branch to branch
2. Bank JJ 24%1.
2. Bank Branch to branch
24%1. Region A 38% Cost/income ratio etc.
Region A 38% Cost/income ratio etc.
3. Bank I I 20%2.
3. Bank 20%2. Region CC 27%
Relative targets and Region 27%
relative compensation 4. Bank BB 18%3.
4. Bank Region H 20%1. Branch JJ 28%
18%3. Region H 20%1. Branch 28%
5. Bank EE 15%4.
5. Bank 15%4. Region B 17%2.
Region B 17%2. Branch D 32%
Branch D 32%
Continuous 6. Bank FF 13%5.
6. Bank 13%5. Region FF 15% 3.
Region 15%3. Branch EE 37%
Branch 37%
7. Bank CC 12%6. Region EE 12%4.
12%4. Branch A 39%
Branch A 39%
planning/control 7. Bank 12%6. Region
8. Bank H 10%7. Region JJ 10%5.
10%5. Branch I I 41%
Branch 41%
8. Bank H 10%7. Region
9. Bank GG 8% 8.
9. Bank 8% 8. Region I I 7% 6.
7% 6. Branch FF 45%
Region Branch 45%
“On demand“ flow of 9. Region G 6% 7.
Region G 6% 7. Branch CC 54%
10. Bank AA (2%)9.
10. Bank (2%)
Branch 54%
resources/ 10. Region D (5%)8.
10. Region D (5%)8. Branch G 65%
Branch G 65%
dynamic coordination 9.
9. Branch H 72%
Branch H 72%
10. Branch B 87%
10. Branch B 87%
Result & value contribution

Leads to lowest operational cost!

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

Headquarters/
Headquarters/
Region
Region

Branches acquire resources
through internal markets

Resources
Resources Customer
Customer
Branch
Branch
(IT, HR etc.)
(IT, HR etc.) demand
demand

Branches Branches alone are Branches
decide over responsible for efficient observe
necessary use of resources customer
resource levels demand

Leads to eradicating and avoiding waste!
Source: BBRT

From fixed to adaptive management processes.

Traditional model New model
(fixed performance contracts, (relative performance contracts,
negotiated in advance) assessed with hindsight)

Relative
strategy performance
contracts
Changing
Fixed
performance processes
Dynamic
contracts
coordination

control

• Fixed, annual processes • Dynamic, continuous processes
• Fixed targets and incentives • Relative targets/compensation
• Centralized and • Self-control, transparency and
bureaucratic control peer pressure


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

Financial problems
• Process takes too long
Vision • Plans become obsolete quickly
• Plans are of little or no use
Targets and
strategic guidelines Strategic problems
Profitability in petrochemical industry in Europe
600
500
• Target negotiation 400

Fixed • Definition of incentives 300

Fixed • Activity planning 200
performance
performance • Resource allocation 100

contacts and
contacts and • Coordination of plans 0
0
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Chem Systems
“keep on track”
“keep on track” • Approval
Behavioral problems
Budget

Performance control
(plan-actual)

Bonus (vs. targets)

Source: BBRT ...

Management processes in organizations are “straight jackets”

Strategy “Fixed” performance contract

Strategic • Period [Fixed]
learning cycle • Targets [Fixed]
• Compensation [Fixed]
Annual plan
Fixed • Plan [Fixed]
Performance
Contract • Resources [Fixed]
Budget • Coordination [Fixed]
• Controlle [Fixed]
Management • Agreed through [Negotiation]
control cycle
• Signed by: [Manager/Director]

Control

Tayloristic management works like this: As centralistic-burocratic hierarchies,
held together through a regime of fixed performance contracts!
ExcellenceBBRT
Source: Conference – Tehran/Iran 29

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 the
unforeseeable futures.quot;
Michael Hammer


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

Fixed targets Relative, self-adjusting targets
Target: absolute ROCE in % (here: 15%) Target: relative ROCE in % (to market)
Plan Actual Target Actual

Comparison:
Comparison: Market-Actual
Plan-Actual Most Target: „ROCE Most
important in % better important
Market competitor than market Market competitor
(25%) (28%) average” (25%) (28%)
Actual Actual
Plan (21%) (21%)
(15%) [independent
[expected from expected
market Ø: 13%] market Ø]

• Interpretation within the plan-actual- • Interpretation within actual-actual compa-
comparison: Plan was outperformed by 6 rison: Performance was 4 percentage points
percentage points > positive interpretation below competition! > negative interpretation
• Better ROCE of the market average and the • Absolute assumptions at the moment of
most important competitor remain unnoticed! planning don´t matter.
• Targets always remain updated and relevant!
Source: Niels Pfläging

The problem with “incentives”: How traditional management
systematically forces people to cheat
Bonus Variable Bonus
Common practice: hurdle area limit “Ceiling”
„Pay for performance“
compensation Salary/ Reduction Maximization Reduction incentive:
profile with fixed bonus incentive: Lower incentive: Anticipate postpone results to
performance contract: result even more results next period
Creates maniuplation
incentive in any situation! Base salary
80% 100%: 120% Performance as %
of target target of target of target realization

Linear compensation curve without breaks:
A better model: Result variable compensation becomes
oriented compensation decoupled from targets
profile with relative
Salary/ Free from
performance
bonus incentive to manipulate
contracts:
No incentive to
manipulation.

Actual Actual Actual Performance in
Source: Michael Jensen
result #1 result #2 result #3 relative evaluation

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“. Organizations can free themselves
from conventional forms of
All employees should earn a “pay for performance”,
share of the financial success. through simple and more transparent
Restrain from the idea of compensation systems.
Excellence Conference – Tehran/Iran them“!
“motivating 35 © BBTN – All rights reserved

Coherence is the critical issue


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

f( D x V x S )> R

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 = 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! • Fixed work hours and time control
• Org charts • “Strategic plans”
• HR department • Mission statement
• Rigid plans and fixed targets • Obligation to participate in meetings
• Fixed work places • Job and budget cuts
• Conflict with syndicates/unions • ...
Source: e.g. Ricardo Semler, „The Seven-Day Weekend“, 2004

are you
“It’s not because it’s difficult that we don’t dare to do it:
it seems difficult because we don’t dare to do it.”
Seneca, Roman philosopher and statesman, 4BC – 65AD


Principles: Leading profound, transformational change

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

3. Beginning
Organizational Individual
change process change process

2. Neutral Zone

1. 2. 3. 4. 5. 6. 7. 8.
Create a Pull Develop Communi- Empower Produce Don't Create a
sense of together a change cate for all others short-term let up! new
urgency guiding vision and understan- to act gains culture
coalition strategy ding and
buy-in

References
1. Ending

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

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

A typical company – results from the BBRT online diagnostic
Table 1: The case for change

Problems
Problems

Vision
Vision

Practice
Practice
Close
Close
the gaps!
the gaps!

What you can do now – four options.

1. You didn´t like Beyond Budgeting, and think this isn´t really relevant for you!
• That´s ok. We believe, however, that all traditionally managed organizations will at 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. You like the Beyond Budgeting idea a lot, but you didn´t like the speaker!
• That´s quite a common phenomenon. Sometimes the chemistry just doesn´t work!
Talk with the speaker about meeting another BBTN director,
and organize a workshop with that other director.
3. You liked what you heard, but feel you need to know more to start acting on it!
• Try additional information sources on Beyond Budgeting,
like www.bbtn.org, or the Beyond Budgeting channel on Youtube, or our books and DVDs,
or the online diagnostic on www.beyondbudgeting.org.
Ask the speaker for additional resources and suggestions! We will gladly assist you.
• Talk with the speaker about joining a “BBTN Master Course“,
or book our coaching program “Beyond Budgeting On The Fly!“
4. You liked what you heard, feel sufficiently informed, and want to make the next
step towards transformation rightaway!
• Talk with the speaker about scheduling an in-company workshop at your firm.


Peter Drucker


beyond Make it real!
budgeting

>
transformation
network.

BBTN: www.bbtn.org

Niels Pflaeging Gebhard Borck
BBTN & MetaManagement Group BBTN & gberatung
Al. Santos 1.991 Fritz-Neuert-Str. 13a
01419-002 São Paulo – SP, Brazil 75181 Pforzheim - Germany
niels@bbtn.org gebhard@bbtn.org
Skype: npflaeging Skype: gborck
www.metamanagementgroup.com www.gberatung.de

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.

Keynote (EN): Beyond Budgeting in Practice, at Quality & Excellence Conference, Tehran/Iran

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Keynote (EN): Beyond Budgeting in Practice, at Quality & Excellence Conference, Tehran/Iran