BetaCodex05 - The Case for Transformation

Make it real!

The case for transformation.

What the BetaCodex stands for today.
Why you should change your management model.
And how you can start your transformation journey.

Niels Pflaeging Gebhard Borck
BBTN & MetaManagement Group BBTN & gberatung
White paper
April 2008

The beta codex (or “beyond budgeting”) movement
has been on a 10-year journey so far…

The 1st phase
(1998-2002):
Looking for a world
“beyond budgeting”

The 1st phase:
• The BBRT is founded in 1998 as a study group within CAM-I, an industry association.
In 2002, the BBRT becomes independent from CAM-I.
• Company visits: The BBRT looks into organizations to find ways to abandon budgeting.
It finds organizations like Handelsbanken, AES, Borealis, and Ikea.
• More than 20 detailed case studies are written up, and discussed with the
membership during meetings and shared with the wider audience at conferences. The
BBRT expands to the Americas and other regions.
• The principles of the model are outlined and refined. Many articles are published.
• From 1998 on, the BBRT gathers around 150 member organizations.

The case for transformation 2 © Niels Pflaeging & Gebhard Borck – All rights reserved

Phase 1 of the journey:
Looking for a world “beyond budgeting”

1922, James O. McKinsey:
“Budgetary control… is urgently needed as the basis for centralized executive control
and to coordinate the activities of functional departments”.
1997, Dr. Jan Wallander:
“Budgeting is an unnecessary evil.”
Critical success factors Typical problems of budgetary management
1. Fast response 1. Too long/expensive annual planning/budgeting process
2. Innovation 2. Inflexible to change. Innovation stifled, not inspired
3. Operational excellence 3. ‘Spend it or lose it’ cost protection mentality
4. Customer intimacy 4. Sales targets and incentives drive behaviour,
which becomes divorced from strategy
5. Great place to work 5. Extrinsic, not intrinsic motivation, overly centralized
decision-making
6. Effective governance 6. Dysfunctional, even unethical behaviour

7. Financial performance • Inferior financial performance

These are symptoms of a deeper problem

Phase 2 of the journey:
Understanding the new model

The 1st phase The 2nd phase
(1998-2002): (2003-2007):
Looking for a world Understanding the
“beyond budgeting” new model

The 2nd phase:
• The first HBR article on Beyond Budgeting appears.
• The first books by BBRT directors are published,
in languages such as English, German, Spanish, Dutch and Chinese.
• The BBRT authors many concept papers on the model.
• Further pioneering case studies are identified and described,
such as Southwest Airlines, Toyota, Semco, Aldi, DM, and others.
• Tools such as the BBRT online diagnostic are being developed, transformation is tried.
• The BBRT positions the model not as a performance management solution, but as the
21st-century alternative to tayloristic management.

Outlining the ‘industrial age’ model and its pitfalls

“command and control“ “keep on track”

strategy

Fixed
performance
contracts
• Too centralized
• Too inward-looking
control • Too little customer-oriented
• Too bureaucratic
• Too much focused on control
• Too functionally divided
• Too slow and time-consuming
• Too de-motivating
• …
From the film ‘Modern Times’ with Charlie Chaplin, 1936

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

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
5. Choosy employees - Great place to work
• Long life cycles
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 Most organizations still use a management model that was & Gebhard Borck – All2030reserved
The case for transformation
1980 1990
6
2000 2010 designed
© Niels Pflaeging
2020
rights
for efficiency, while the problem today is complexity.

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
The case for transformation• Centralized leadership 7 © • Devolved leadershiprights reserved
Niels Pflaeging & Gebhard Borck – All

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

From the old coherence to a new coherence.

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

Centralized Decentralized
hierarchy, network,
“command and “Sense and
control“ 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.

The case for transformation 10
10 © Niels Pflaeging & Gebhard Borck – All rights reserved

The ultimate goal for applying the new model is
industry leadership. No less.

Industry

Retail

• Innovators: A crises within their
Services
industries or firms caused them
to change radically
• Mavericks: Exceptional leadership models
Governo
• Performers: Superior competetiveONGs
& success

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

There is a “new” model, which is supported
by science and practice

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

Peter Drucker
Tom Peters Leadership & Services
Charles Handy change
John Kotter
Peter Senge Strategy &
Thomas Davenport Governments
Peter Block Performance
& NGOs
… management
Henry Mintzberg
Gary Hamel
Jeremy Hope
Michael Hammer
Thomas Johnson
The case for transformation Charles Horngren 12 © Niels Pflaeging & Gebhard Borck – All rights reserved
…

Welcome to the 3rd phase of the BetaCodex journey!

The 1st phase The 2nd phase The 3rd phase
(1998-2002): (2003-2007): (2008–):
Looking for a world Understanding the Transforming
“beyond budgeting” new model organizations

The 3rd phase:
• The model is widely recognized and understood. Some organizations approach full
model transformation, guided by BetaCodex principles.
Concepts and tools for transformation are being presented.
• Two BBRT directors leave the BBRT (Robin Fraser and Niels Pflaeging).
• The Beyond Budgeting Transformation Network is founded, adopting a new
approach towards research and membership, and focusing on transformation, and
becoming open source.
• “The Beyond Budgeting model” is rebranded as “The Beta Codex”
•…

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!

“Incremental change”, starting with tools
or within a specific function (e.g. finance), fails to transform!

High
Geared towards efficiency Geared towards complexity

Starting with tools …
Industry
• Rolling forecasts leadership
• Benchmarking
• Reward systems
Compe-
• Balanced scorecard
titive • ABM, CRM, EVA … etc.
perfor-
mance

New
Adaptive model
Traditional processes
Low model

Centralized & fixed Management model Decentralized & dynamic


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

For transformation, we must work
on the model, not in the model.

Gap!

Gap!


Coherence is a critical issue


Is transformation possible?

“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.

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“.

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

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
The case for transformation 21 themselves!
© Niels Pflaeging & Gebhard Borck – All rights reserved

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


It s a different
mental


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, functional division
Leadership

Performance and Performance culture, beat the market Inspired by the past, burocratic
6 “devolved
freedom Autonomy and responsibility Adherence to fixed plans
leadership” principles
Governance and Clearly defined objectives and values Impose objectives from above
transparency Open and shared information Restricted information
Goals and Goals related to continuous improvement Fiscal year, fixed goals
rewards Rewards related to organization results Reward local, fixed goals
Processes

Planning and 6 “adaptive management
Continuous and inclusive planning Top-down annual planning
controls processes” principles
Compare performance against actuals Variations against fixed plans
Resources and Resources “on demand” Annual (budget) allocations
coordination Coordinate dynamic, market-like interactions Departmentalization, hierarchy


Principles for transforming the model

1. Initiation – Anyone anytime can recognize the need for change
but it has to be owned by the top.

2. Case for Change – A compelling change manifesto must be built at the top
before doing anything.

3. Leadership – Visionary leadership through a guiding coalition is the power
that drives transformation, not command and control.

4. Coherence – Every element of the new model must be coherent,
otherwise transformation will fail.

5. Process – The principles for leading change must be built into a process
and adopted without exception.

6. Evolution – The new model must be improved continuously
without ever declaring victory.


Principles: Leading major, transformational change

Applying a fitting change model is key –
the BetaCodex Network’s Double Helix Transformation
Framework is tailored to this challenge.

Organizati
ona
change pro l
cess 3. Beginning
2. Neutral Zone
1. 2. 3. 4.
Create a Pull 5. 6.
Develop Communi- 7.
sense of together a Empower Produce 8.
change cate for Don't
urgency guiding under- all others short-term Create
vision and let
coalition standing to act wins a new
strategy up!
and buy-in culture

References
1. Ending

ual
Individ rocess
c ha nge p


To transform your organization from “command & control” to
“decentralized network”, a double helix change is needed

Organizati
onal
change pr
ocess 3. Beginning
2. Neutral Zone
1. 2. 3. 4.
Create a Pull 5. 6.
Develop Communi- 7. 8.
sense of together a Empower Produce
change cate for Don't Create
urgency guiding under- all others short-term
vision and let a new
coalition standing to act wins
strategy up! culture
and buy-in

References
1. Ending

ual
Individ rocess
ep
chang


The case for transformation – a summary

• Our goal is ambitious
• Our case for change is compelling
• The whole model of the organization must be changed
• This requires to follow all the steps that are essential to successful
transformation
• An incremental approach to improving the model
or to getting to “beyond budgeting” will never succeed.

“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

The authors would like to thank Robin Fraser, whose
presentation on transformation at the BBRT 40 meeting,
October 2007, has served as a basis for this paper.

Make it real!

www.betacodex.org

Gebhard Borck Niels Pflaeging Valérya Carvalho
gebhard@bbtn.org niels@bbtn.org valeria@bbtn.org
gberatung.de nielspflaeging.com Betaleadership.com
Pforzheim, Germany Sao Paulo, Brazil Sao Paulo, Brazil

Get in touch with us for
more information about
leading transformation with
the BetaCodex and the
Double Helix Framework, or Andreas Zeuch Silke Hermann Markus Schellhammer
ask us for a workshop az@a-zeuch.de silke.hermann@ markus.schellhammer@
proposal. a-zeuch.de insights-group.de my-online.de
Winden, Germany Wiesbaden, Germany Zurich, Switzerland

BetaCodex05 - The Case for Transformation

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