Large slide set (96 slides) from KL seminar on "Beyond Budgeting". Most slides with explanations!

1. 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
Niels Pflaeging
[ BBTN Associate & Presidente MetaManagement Group
Niels Pflaeging ]
BetaCodex Diálogo CFO www.betacodex.org
Econique – Network
18/19 de Mayo 2009

2. 90%
Peter Drucker

4. Industrial age ends: Knowledge economy advances:
high ”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!
Now, all these factors
are equally important!
Here, only efficiency Competitive
mattered, really! Characteristics success factors (CSF)
Dynamics 1. Discontinuous change - Fast response
and 2. Short life cycles - Innovation
complexity 3. Constant pressure on prices Operational excellence
-
Characteristics
4. Less loyal customers - Customer intimacy
• Incremental change
• Long life cycles 5. Choosy employees - Great place to work
6. Transparency, - Effective
• Stable prices
societal pressure governance
• Loyal customers
 High financial - Sustained superior
• Choosy employers expectations value creation/fin.perf.
• „Managed“ results
low
1890 1980 1990 2000 2010 2020
Most organizations still use a management model that was designed 2030
for efficiency, while the problem today is complexity.
4

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
• …
7

8. The historical course of market dynamics
high dynamics sluggishness high dynamics
dynamic Crafts manufacturing Tayloristic industry Global markets
man
Outperformers
Market pressure
Conventional
companies
machine
formal
1900 1980 2008 t
The domination of high dynamic is neither good or bad. It‘s a historical fact.
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10. Periphery
Center
Information Decision
Command
Impulse Centralist command and
Reaction
control “collapses“ in
increasingly complex
environments
Source: Gerhard Wohland 10

12. 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
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13. Beyond Budgeting (1998-2002)
Beyond command and control (2003-2007)
Beyond incremental change (2008-)
13

14. 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
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15. Theory X
vs.
Theory Y Douglas McGregor

16. 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
People dislike work, find it boring, People need to work and want to take an inte-
and will avoid it if they can. rest in it. Under right conditions, they can enjoy it.
Direction
People must be forced or bribed People will direct themselves towards
to make the right effort. a target that they accept.
Responsibility
People would rather be directed than People will seek and accept responsibility,
accept responsibility, which they avoid. under the right conditions.
Motivation
People are motivated mainly by money Under the right conditions, people are moti-
and fears about their job security. vated by the desire to realize their own potential.
Creativity
Most people have little creativity - except Creativity and ingenuity are widely distributed
when it comes to getting round rules. and grossly underused.
Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960
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17. 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
People dislike work, find it boring, People need to work and want to take an inte-
and will avoid it if they can. rest in it. Under right conditions, they can enjoy it.
Direction
People must be forced or bribed People will direct themselves towards
to make the right effort. a target that they accept.
Responsibility
People would rather be directed than People will seek and accept responsibility,
accept responsibility, which they avoid. under the right conditions.
Motivation
People are motivated mainly by money Under the right conditions, people are moti-
and fears about their job security. vated by the desire to realize their own potential.
Creativity
Most people have little creativity - except Creativity and ingenuity are widely distributed
when it comes to getting round rules. and grossly underused.
Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960
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18. 18

19. 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…

20. 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.
WhiteSource:–based upon John Kotter, Leading Change, p, 110-111
paper Making Performance Management Work 20 © BetaCodex Network – All rights reserved

21. 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
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25. Sciences: Practice:
Thought leaders Stafford Beer Industry leaders
Margareth Wheatley
(selected) Niklas Luhmann (selected)
W. Edwards Deming
Kevin Kelly
Ross Ashby
Joseph Bragdon
…
Douglas McGregor
Chris Argyris Complexity
Jeffrey Pfeffer
Reinhard Sprenger theories Industry
Stephen Covey
Howard Gardner Social
Viktor Frankl
… sciences and
Retail
HR
Peter Drucker
Tom Peters Leadership & Services
Charles Handy change
John Kotter
Peter Senge
Thomas Davenport Strategy & Governments
Peter Block Performance & NGOs
… management
Henry Mintzberg
Gary Hamel
Jeremy Hope
Michael Hammer
Thomas Johnson
Charles Horngren
…
25

26. Industry
Retail
Services
Governments.
& NGOs
26

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
27

28. Comparing the models

29. 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
Critical success factors and
it does not support ‘Theory Y’.
> We need a new Relative
strategy model to cope with performance
complexity contracts
> We must change
the whole model!
Fixed
performance
contracts Dynamic
coordination
Fixed processes Dynamic
processes
control
29

30. The BetaCodex:
Thinking and working
on the model,
not
in the model.

31. There are two different ways of working on the model –
evolution and transformation
Sustaining and
deepening of the
Integration decentralized model,
Evolution phase through generations
within the decentralized
model (culture of Transformation
empowerment and trust) through radical
decentralization of
decision-making
Differentiation Stagnation
phase within the tayloristic model
Low degree of decentralization/
Bureaucratization empowerment
through growing hierarchy
and functional differentiation
Pioneering
phase High degree of decentralization/
empowerment
Foundation Time scale: organization's age Several decades old
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32. There are two different ways of working on the model –
evolution and transformation
Sustaining and
deepening of the
Integration decentralized model,
Evolution phase through generations
within the decentralized
model (culture of Transformation
empowerment and trust) through radical
decentralization of
decision-making
Differentiation Stagnation
phase within the tayloristic model
Low degree of decentralization/
Bureaucratization empowerment
through growing hierarchy
and functional differentiation
Pioneering
phase High degree of decentralization/
empowerment Organizations with
traditional models must
eventually transform
Foundation Time scale: organization's age Several decades old
themselves!
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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.
• 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.“
35

36. 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
• Lowest cost
Alexander V Dokukin
 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
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37. Comparison between the major publicly listed universal banks
in Europe universales in Europe. Jan-Dec 2005, after credit losses.
* Refers to loans to the public or deposits if deposits > lending
Cost/Total loans*, % Danske Bank Handelsbanken
FöreningsSparbanken DnB Nor
Nordea
Bank of Ireland
SEB
HypoVereinsbank Allied Irish Banks
Banco Santander KBC
Credit Agricole Royal Bank of Scotland
Bank Austria
Commerzbank BBVA
Unicredit
Lloyds TSB
San Paolo-IMI Standard Chartered
Erste Banca Intesa
Capitalia
ABN Amro Monte dei Paschi di Siena
Barclays
HSBC
Deutsche Bank BNP Paribas
HBOS
Société Générale
UBS CS Group Cost/Income ratio, %
90 80 70 60 50 40
Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition.
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38. 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 information
freedom and ability to act (Invest Centers)
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 Making Performance Management Work
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39. Relative target definition through “league tables“ (rankings) –
instead of planned, fixed targets and internal negotiation
Bank to bank
Return on Equity (RoE) Region to region
Principles
1. Bank D 31% Return on Assets(RoA)etc.
2. Bank J 24%1. Branch to branch
Region A 38% Cost/income ratio etc.
3. Bank I 20%2. Region C 27%
Relative targets and
relative compensation 4. Bank B 18%3. Region H 20%1. Branch J 28%
5. Bank E 15%4. Region B 17%2. Branch D 32%
6. Bank F 13%5. Region F 15%3. Branch E 37%
Continuous preparation/
social control 7. Bank C 12%6. Region E 12%4. Branch A 39%
8. Bank H 10%7. Region J 10%5. Branch I 41%
9. Bank G 8% 8. Region I 7% 6. Branch F 45%
“On demand“ flow of 6% 7. Branch C 54%
resources/ 10. Bank A (2%)9. Region G
10. Region D (5%)8. Branch G 65%
dynamic coordination 9. Branch H 72%
10. Branch B 87%
Leads to lowest operational cost!
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40. Flexible coordination and resources “on demand“ -
instead of allocations and budgets
Headquarters/
Region
Branches acquire resources
through internal markets
Resources Customer
Branch
(IT, HR etc.) 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 Making Performance Management Work
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41. How preparing for action and forecasting (continuous previews)
are used in this model, instead of centrally coordinated planning
Regional managers
and HQ
challenge monitor
check
Teams close
aim act
to the customer (branches)
plan
Forecasts
Leading to fastest possible reaction to change!
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42. Creating a “virtuous circle”–
a common factor among “Beyond Budgeting” pioneers
Better to do business with Better for society Better to invest in
4. Customer intimacy – Highest 5. Ethical & social standards – 6. Sustainable value –
(independent) customer satisfaction Support the long term interests of Beats peer group every year
scores in sector year-after-year; the bank and society. on ROE and cost-to-income
lowest customer complaints; ratio; highest total
monitors customer acquisitions/ shareholder return in sector;
defections. devolved adaptive
organization is key driver of
3. Operational excellence –
success.
Lowest costs of any bank in Europe;
lowest bad debts; cost reduction
culture; flat organization (half a Better to work for
head office person per branch
1. Best people – SHB is first
versus five for rivals); internal
choice financial services
market exerts constant pressure on
company in Sweden for
central services. graduates; employee
2. Innovation – SHB voted joint turnover is lowest in sector;
best Internet bank in Europe in challenge, personal
2000; any competitive products and responsibility and freedom to
solutions are fed back from run their part of the
branches to product development. Virtuous circle business; group-wide profit
sharing scheme.
Text relates to Svenska Handelsbanken
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43. 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."
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44. 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.
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45. Why traditional management with “fixed performance contracts“
regularily fools us: We have lost control a long time ago…
The blue pill: Fixed, negotiated targets The red pill: Relative, self-adjusting targets
Target: absolute ROCE in % (here: 15%) Target: relative ROCE in % (to market)
Plan Actual Target Actual
Comparison:
Comparison: Market-Actual
Most Target: „ROCE Most
Plan-Actual
important in % better important
Market competitor than market Market competitor
average”
Actual (25%) (28%) Actual (25%) (28%)
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!
White paperNiels Pfläging
Source: – Making Performance Management Work 45 © BetaCodex Network – All rights reserved

46. 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?
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47. 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
performance Salary/ Free from
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
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48. 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.
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49. 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…
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50. An example: “motivation”, or “threat”?
What compensation systems really do...
System with no System with variable compensation
variable compensation (bonus, incentive, etc.)
30%
Variable
compensation
100%
Base salary 100%: Total 70%
compensation Base salary Is this an “energizing
expected by promise”, or is it
employee. just a pitiful threat?
“We have a conservative pay philosophy. “We have an aggressive pay
Your base salary equals your total philosophy: 30% of your total
compensation, which is USD compensation will be paid in form of
100.000,00.“ a bonus. The total is USD
100.000,00, by the way.“
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51. 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
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52. Social scientist Alfie Kohn says:
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.
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53. And:
Pay-for-performance is an outgrowth of behaviorism, which is
focused on individual organisms, not systems - and, true to its name,
looks only at behaviors, not at reasons and motives and the people who
have them.
I tell Fortune 500 executives (or at least those foolish enough to ask me)
that the best formula for compensation is this: Pay people well, pay them
fairly, and then do everything possible to help them forget about money.
How should we reward our staff? Not at all! They are not our pets.
Pay them well, respect and trust them, free them from disturbance,
provide them with all available information and support to perform
on the highest possible level.
1. 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!
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54. 1 very simple principle:
Always disconnect compensation from targets.
Always.
54

55. 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
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!

56. 1 very simple principle:
Never use bonuses and incentives.
Apply profit sharing and/or shareholding concepts
for community.
56

57. 1 very simple principle:
Pay the person. Not the position.
Always.

58. 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.
Organizations can free themselves from
All employees should earn a conventional forms of
share of the financial success. “pay for performance”,
Source: BBRT
Restrain from the idea of through simple and more transparent
White paper – “motivating Management Work
Making Performance them“! 58 compensation systems.rights reserved
© BetaCodex Network – All

59. 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?
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60. 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
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61. Companies.
Don´t
Need.
Planning.
Eine Konsequenz aus dem Kodex.

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”.
Apertura
62

63. Current practices are misaligned with the
Critical Success Factors of today's competitive market places
Six “Critical Success Factors” Six examples of misalignment
• Fast response  Annual planning process retards it
• Innovation  Centralized bureaucracy stifles it
• Operational excellence  ‘Spend it or lose it’ mentality fights it
• Customer intimacy  Short term targets prevent it
• Best team  Extrinsic ‘motivators’ undermine it
• Ethical behaviour  Dysfunctional, even unethical behaviour
conflicts with it
• Value creation • Inferior financial results
When pressure is
applied, misalignment
gets worse!
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64. Management processes in command and control
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]
• Control [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!
Source: BBRT
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65. 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
• Activity planning 200
performance • Resource allocation 100
contacts and • Coordination of plans 0
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Chem Systems
“keep on track” • Approval
Behavioral problems
Budget
Performance control
(plan-actual)
Bonus (vs. targets)
Source: BBRT ...
White paper – Making Performance Management Work 65 © BetaCodex Network – All rights reserved

66. Applying the BetaCodex means:
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
contracts Dynamic
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
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67. 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.
White paper – Making Performance Management Work 67 © BetaCodex Network – All rights reserved

68. 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.
White paper – Making Performance Management Work 68 © BetaCodex Network – All rights reserved

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

70. 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.
White paper – Making Performance Management Work 70 © BetaCodex Network – All rights reserved

71. 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!)
White paper – Making Performance Management Work 71 © BetaCodex Network – All rights reserved

72. Employing resources dynamically: A typical way of doing it,
as practiced by Sydney Water, Australia
Resources
Income as
“total (expected) available resources over time“ -
forecasted as “limiting factor“
Yet uncommited resources –
work actively on available
Already approved investments - “options for a better future“
actively handled as “dynamic portfolio“
Operational resources –
controlled by Key Performance Indicators (KPIs) –
activities are focused on continuous improvement!
Projected
period (e.g. 5 quarters)
Source: Sydney Water
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73. 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?
White paper – Making Performance Management Work 73 © BetaCodex Network – All rights reserved

74. 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!
White paper – Making Performance Management Work 74 © BetaCodex Network – All rights reserved

75. Simple and relevant: creating reports without actual-plan-
variances, fixed targets, or plans!
Company KPI Regions KPI Compe- last Same Same Ø Ø
month month month last 12
Competitor A 31% Region G 7% titor A last prev.. 12 prev.
Our year year mnths mnths
Competitor E 24% Region E 7% unit A
Competitor C 20% Region B 6% KPI 2
Us 18% Region F 4% Compe-
Competitor B 13% Region A 3% Us titor B Indicators
Competitor D 12% Region D 3% Our or
Competitor G 10% Region C 1% unit B Groups of accounts
Competitor F 8% Region H 0%
KPI 1
Ranking (League table) ext./intern. Snapshot (static) with benchmarks Accouts/KPIs vs. Previous periods
(A) Maximum
Tolerance levels
Us
(B) Gliding average
KPI KPI KPI
Us
Competitor A Curve with variance
Time (Actuals) Time (Actuals) Time (Actuals)
Trend with tolerance Trend with benchmark Trend with references
White paper – Making Performance Management Work 75 © BetaCodex Network – All rights reserved

76. 1 3
2
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77. A case study – the organizational structure looked like this
And where does theCEO
customer fit in here?
Director Director Director Director
CFO
International Production Technology Sales Germany
Region Region Region Region Branch Branch Branch Branch
1&2 3&4 5&6 7&8 I II III IV
Admini- HRSales Control- Marke-
Production Sales
Cont. Admini-
Material Cont. Marke-
Assistant IT Assistant ling Assistant Quality Engeneers,
stration OEM education tingOEMSales stration Sales education ting/ CI
Region Region Region Region Leader SalesPlanning
Developers Sales
9 & 10 11 & 12 13 & 14 14 & 15
Accoun- Work
Sales After-Sales Customer
Central sales TelephonistsPro- Customer
Internal sales
Assistant
ting
Region Region Region Region Assembly planni Logistics
office Services Services
support services Services
duction 23
16 & 17 18 & 19 20 & 21 22 & ng
Sales large Region Region Region Sales large Technical
Region Technical Projects & Projects &
ProcessComplaints
Toolings & Complaints
Purchasing &
systems 26 &Hotline 28
24 & 25 27optimization 29 equipments Hotline
ProposalsDesign Offers
Maintenance Disposition
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78. 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
“Through extensive field tests, the
autonomy… There is both a desire to participate more
[US] Army has discovered that when
individuals have information [about and strong evidence that such participation leads to
what’s occurring in the battlefield] the effectiveness and productivity we crave… With
and know how to interpret it because so much evidence supporting participation, why isn't
they know the ‘commander's intent’, everyone working in a self-managed environment right
they can make decisions that lead to now?”
greater success in battle.” Margaret Wheatley, Author of “Leadership and The New Science”,
Margaret Wheatley, Leadership and the Goodbye, Command and Control, Leader to Leader, No. 5 Summer
New Science, Berret-Koehler Publishers 1997
Do mangers not want to devolve power? …
or do they not know how to do it? … or both?
White paper – Making Performance Management Work 78 © BetaCodex Network – All rights reserved

79. Some questions that we need to respond, if we want to
decentralize decision-making power in an organization
How can we create oben dialogue and “How can we end
“Centralized” transparency between 100% of the the arrogance of
“Devolved”/descentralized
people in the organization? the corporate
center (HQ)?“
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?
People are divided by function and Leadership is devolved (within defined
How do we create an environment in whichthe frontline –
between ‘doers’ and ‘thinkers’. boundaries) to
the
Consequently, many decisions good people within our organization can customer
95% of have as close as possible to the
to be taken centrally after as entrepreneurs - the way and todeserve?people
act being they as many
passed up the hierarchy. and with as much autonomy as possible.
Seminar Beyond Budgeting - Niels Pflaeging
White paper – Making Performance Management Work 79 © BetaCodex Network – All rights reserved

80. 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.

81. The notion of
dividing an organization
into functions,
and then departments,
is fundamentally flawed.
But what is the alternative?

82. 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.
White paper – Making Performance Management Work 82 © BetaCodex Network – All rights reserved

83. 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.
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84. 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.
White paper – Making Performance Management Work 84 © BetaCodex Network – All rights reserved

85. 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.
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86. The importance of “market pull“
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.
White paper – Making Performance Management Work 86 © BetaCodex Network – All rights reserved

87. White paper – Making Performance Management Work 87 © BetaCodex Network – All rights reserved

89. 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
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90. Whatwe
are
waiting

91. Beyond Budgeting: Is this something for only a select few?
Just for geniuses and mavericks?
White paper – Making Performance Management Work 91 © BetaCodex Network – All rights reserved

92. 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.
93

94. 94

96. Make it real!
www.betacodex.org
A selection of associates:
Silke Hermann Niels Pflaeging Valérya Carvalho
silke.hermann@ niels@betacodex.org valeria@betacodex.org
insights-group.de nielspflaeging.com Betaleadership.com
Wiesbaden–New York São Paulo-New York-Wiesbaden São Paulo
Walter Larralde Sergio Mascheretti
wlarralde@ s.mascheretti@
on-strategy.com.mx itmconsulenza.it
Mexico City Bergamo/Milan