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

beyond Make it real!
budgeting

>
transformation
network.

Beyond Budgeting:
Leading with flexible targets.
How to beat the competition – without fixed targets and
with no annual planning whatsoever!

Niels Pflaeging
BBTN & MetaManagement Group

Seminar with Uni Strategic, Kuala Lumpur
01./02.12.2008

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!

Seminar – Beyond Budgeting 2 © 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


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

4
4

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 societal pressure 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.

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

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

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.”

Dr. Jan Wallander, 1997
“Budgetary management is an unnecessary evil”

Seminario Beyond Budgeting - Conferencista: Niels Pflaeging

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]
• 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!
Seminar –BBRT Budgeting
Source: Beyond 20
20 © BBTN – All rights reserved

Current practices are misaligned with the
Critical Success Factors

Six “CSFs” Six misalignment examples

• 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 behavior
conflicts with it

• 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 the
unforeseeable futures.quot;
Michael Hammer

The problems with traditional
planning and control are merely
symptoms of a much deeper
problem.


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


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,
This is what Littlefield Professor of
“Beyond Budgeting” Accounting, Emeritus,
really is about Stanford University

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

Our systems and modern management tools conflict with the
old model and are not able to solve the underlying problems.

ERP systems and Rolling
data warehouses forecasts

Provides Focuses on year
information to end and distorts
the hierarchy information
Economic Benchmarking
value added Supports Deemphasizes
short term Central
Local external
stretch control comparisons
targets

Supports Creates
‘Make & Sell’ multiple
Customer strategy Supports contracts
relationship central decision Balanced
management making Scorecard

Activity-based
management


What is a ‘management model’?

Industrial Age Information Age
Managed stability Complex and dynamic

Leadership
culture
+
Management
processes
+
Information
systems


We must
work
on the model,
not
in the model
Seminar – Beyond Budgeting 27

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

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


For more than a decade, this bank has been customer
satisfaction leader among its peers, constantly

Handelsbanken
75
Avrg. in sector

70

65 Data from 2005:
Sweden: Corporate and
Private – Best among big
60 and national competitors.
Denmark: Private market – best.
Norway: Corporate market - best.
55 Private market – 2nd place after
substantial improvement.
Finland: Corporate market - best,
50 Private market – best.
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Private Customers, Source: Svenska Kvalitetsindex

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
1,0
Cost/Total loans*, % Danske Bank Handelsbanken

FöreningsSparbanken DnB Nor
2,0 Nordea
Bank of Ireland

SEB
HypoVereinsbank Allied Irish Banks
Banco Santander KBC
3,0 Credit Agricole Royal Bank of Scotland
Bank Austria
Commerzbank BBVA
Unicredit
Lloyds TSB
San Paolo-IMI Standard Chartered
4,0 Erste Banca Intesa
Capitalia
ABN Amro Monte dei Paschi di Siena
Barclays

HSBC
5,0
Deutsche Bank BNP Paribas
HBOS
Société Générale

UBS CS Group Cost/Income ratio, %
6,0
90 80 70 60 50 40
Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition.


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

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!

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 shareholder return in sector;
acquisitions/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
versus five for rivals); internal 1. Best people – SHB is first
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 responsibility and freedom to
and 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

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

“One cannot talk sensibly about leadership or people management,
nor design decent management processes, if we don´t clarify
beforehand our beliefs with regards to what in organizations are like.
We have to develop a shared understanding of human nature
and its influence on our organizations.”
Leading with Flexible Targets


vs.
Douglas McGregor


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.“

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
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


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!

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

Low degree of
decentralization/
empowerment and Differentiation Stagnation
fixed performance phase within the tayloristic model
contracts: in conflict
with today's critical
success factors!
Transformation
Bureaucratization through radical devolution
growing hierarchy and and decentralization
functional differentiation

High degree of
decentralization/
empowerment
with relative Evolution Sustaining and
performance
Pioneering within the decentralized Integration deepening of the
contracts: aligned phase model phase decentralized model,
with today's critical through generations
success factors!
Organizations with
Foundation Time scale: organization's age traditional models must
Several decades old
eventually transform
themselves!

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

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


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 just by measuring!

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.

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 income
that 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 hours
charged 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 hours
charged to clients…


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“. By freeing themselves from conven-
tional forms of “pay for
All employees should earn a performance”, organizations will
share of the financial success. create simple and more transparent
Restrain from the idea of compensation systems.
“motivating them“!

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


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

1 3
2


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
“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?


More about devolved leadership

• Devolution: Like delegation, it is a form of decentralization. But there is a difference: Delegation
occurs when a superior decides to pass a power, responsibility or task to a subordinate. Devolution
occurs when a board (or equivalent) decides as a policy to empower a lower level in an organization.
Devolution is therefore much more permanent than delegation. It involves structural changes that
impart a greater degree of autonomy (Greek: self governance).
• Devolved Leadership means decentralizing decision making authority to teams at as low a level in
the organization as possible. The aim is to enable everyone to think and act like a leader.
It is likely to require changes in organization, and for people to acquire new capabilities. It will usually
involve decentralizing some activities in order to provide teams with greater autonomy, but it does
not mean that all activities must be decentralized.
• Centralize what? Under Devolved Leadership, activities may be centralized or decentralized. As a
rule decentralization of activities is preferred because it leads to better customer service and reduces
organizational complexity, but it does not preclude centralizing activities if doing so will make
significant cost savings or enable more specialist expertise to be retained, and these benefits
outweigh those of greater autonomy.
• Relationships: However, what has to change under Devolved Leadership is the relationship between
units. Power must be given to the customer, whether external or internal. Suppliers must respond to
the needs of their customers, not be driven through a functional hierarchy.
• Results of devolution: As an outcome, the organization becomes flatter. It can then act as a
network of autonomous units, each unit adjusting continuously to the needs of its customers
(internal and external), thereby enabling the whole organization to become more adaptive.


Some questions that we need to respond, if we want to
decentralize decision-making power in an organization
How can we create oben dialogue and “How can we end
“Centralized” “Devolved”/descentralized
transparency between 100% of the the arrogance of
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 which the
between ‘doers’ and ‘thinkers’. boundaries) to the frontline –
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 to as many people
act being they deserve?
passed up the hierarchy. and with as much autonomy as possible.
Seminar Beyond Budgeting - Niels Pflaeging

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

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

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

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 culture
urgency guiding vision and understan- to act wins
coalition strategy ding and
buy-in


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

Status of the project

1. 2. 3. 4. 5. 6. 7.
Create a Pull together a Develop Communicate Empower all Produce Don´t
Phase in % sense of guiding change vision for understan- others short-term let up
urgency coalition and strategy ding and to act wins
buy-in

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.

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

Workshop preparation: Execution:

• Participants: Approx. 20% of the
firm´s employees
• from all areas of the firm.
Phase 1 – Speaking a
• from all hierarchical levels.
common language

• Three groups were formed
• Market Phase 2 - Recognize & describe
• Product the current situation
• Central Services

Phase 3 – Think and describe
the networked cell structure


The case study – the organizational structure looked like this

CEO

Director Director Director Director
CFO

oes the
International Production Technology Sales Germany

here d
Region Region Region Region Branch Branch Branch Branch

And w
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,

here?
stration OEM education tingOEMSales stration Sales education ting/ CI
Region Region Region Region Leader SalesPlanning
Developers Sales

t fit in
9 & 10 11 & 12 13 & 14 14 & 15

ma r k e
Accoun- Work
Sales After-Sales Customer
Customer
Central sales TelephonistsAssistant
Internal sales
Region Region Region Pro- Services
ting Region
Assembly planni Logistics
office Services Services
support services
duction 23
16 & 17 18 & 19 20 & 21 22 & ng

Sales large Region Region Region Sales large Technical
Region Technical Projects & Projects &
Process Toolings &
Complaints Complaints
Purchasing &
systems 26 &Hotline 28
24 & 25 27optimization 29 equipments Hotline
ProposalsDesign Offers
Maintenance Disposition


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“

Central Market Services
• Overall Region “Market”
Marketing/CI Northeast Region
• Training Region
Clients: All R-Cells Center
Southeast Equipment
• Tooling construction
P4 P5 • Facility Management
Region
Region Cells (“R-Cells”) Clients: all P-Cells
Region Europe
Key Roles of R-Cells P3 P6
• Planning & offers West Central Equipment
• Sales Market
• After-sales services Services Materials & Logistics
P2 P7 Region • Logistics
• Sales office Materials &
• Hotline Org Logistics America • Purchasing
Region Clients: All P-Cells
• Complaints Shop
North Product Info P8
“Own“ all customers in
Cell 1 Shop Product cells (“P-cells”)
their regions
• Production
• Info Shop work
Process &
Region “Sphere of • IT
planning
Org Shop Southwest •…• Financial accounting
Quality
• HR Activity” • Controlling
• Maintenance
• Executive board + assistance • Clients: all R- and P-cells
Production logistics
• Central office • Process optimization
Clients: All R- and P-Cells • Material planning
• Design/R&D
Customers: All R-Cells

“Cell structure“ as a foundation for sensible target
definition in a “relative“ way - using league tables
Strategic cascade
Firm to Firm
Firm to Firm
ROCE
ROCE Region to Region
Region to Region
1. Firm D 31% Cost over income
Cost over income
1. Firm D 31%
P-Cell to P-Cell
2. Firm JJ
2. Firm 24%1. P-Cell to P-Cell
24%1. Region A 38% On-time-delivery etc.
Region A 38% On-time-delivery etc.
3. Firm I I
3. Firm 20%2.
20%2. Region CC 27%
Region 27%
4. Firm BB
4. Firm 18%3.
Region H 20%1. P-Cell JJ 28%
18%3. Region H 20%1. P-Cell 28%
5. Firm EE
5. Firm 15%4.
15%4. Region B 17% 2.
Region B 17% 2. P-Cell D 32%
P-Cell D 32%
6. Firm FF
6. Firm 13%5.
13%5. Region FF 15% 3.
Region 3.
15% P-Cell EE 37%
P-Cell 37%
7. Firm CC 12%6. Region EE 12%4.
12%4. P-Cell A 39%
P-Cell A 39%
7. Firm 12%6. Region
8. Firm H 10%7. 5.
Region JJ 10% 5. P-Cell I I 41%
P-Cell 41%
8. Firm H 10%7. Region 10%
9. Firm GG 8% 8. Region I I 7% 6.
7% 6. P-Cell FF 45%
P-Cell 45%
9. Firm 8% 8. Region
10. Firm AA
10. Firm (2%)9. Region G 6% 7.
Region G 6% 7. P-Cell CC 54%
(2%)9. P-Cell 54%
10. Region D (5%) 8.
10. Region D (5%) 8. P-Cell G 65%
P-Cell G 65%
9.
9. P-Cell H 72%
P-Cell H 72%
10. P-Cell B 87%
10. P-Cell B 87%
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.

All organizations with Selected pioneers of the model
traditional models will
eventually have to
transform! In the 70s

In the 50s
In the 90s

In the 90s
In the 80s

In the 90s

Pioneers that went through transformation


Peter Drucker


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

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

1. 2. 3. 4. 5. 6. 7. 8.
buy-in


What to do when in the process?
Two examples

• Create array of larger Task Forces to change
Organizational organizational structure, management
change process processes and business processes
(John Kotter, “Leading Change” • Align projects and decision processes
to “Our Iceberg is Melting”) with 12 principles and the values defined in the
case for change

1. 2. 3. 4. 5. 6. 7. 8.
buy-in

• 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


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

3. Beginning
Individual
change process
(William Bridges,
“Managing Transitions”)

2. Neutral Zone

Individual
1. Ending change process
(William Bridges,
“Managing Transitions”)


Putting the “Double Helix” together.

3. Beginning
Organizational Individual
change process change process

2. Neutral Zone

1. 2. 3. 4. 5. 6. 7. 8.
buy-in

1. Ending


Principles: Leading profound, transformational change

3. Beginning
Organizational Individual
change process change process

2. Neutral Zone

1. 2. 3. 4. 5. 6. 7. 8.
sense of together a change cate for all others short-term let up! new
urgency guiding vision and understan- to act wins culture
buy-in

References
1. Ending


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


Underlying assumptions of our recent
management model transformation projects

1. Organizations are “systems”. So they have to be transformed as such.
Thus, finance people cannot do it alone.
(And it's actually much more fun approaching change holistically.)
2. “It´s all about human nature”.
Apply “Theory Y” rigidly!
3. Everyone's communication styles and behaviour patterns must change.
Transformation thus requires “people” specialists, coaching and some training.
4. A systemic view of the change process:
it is senseless to plan too far ahead. So we will not do it.
We will instead “follow the energy”!
5. You have to do this yourself!
We will give advice, and guarantee that you are aware of the consequences,
beforehand. We will help you in applying the mental model in any situation.
You will make the decisions for yourselves, our role is to make the consequences clear.
We will also provice you with methods to solve problems, all the time.
6. “Mature” cases and the model itself are key to making the vision palpable.
We will also use “emotional” techniques, metaphors, stories, scientific evidence, and
our international network, wherever indicated.
7. Abolishing budgets is 0,5% of the project (and not the difficult bit).
Creating an entrepreneurial devolved network is key to the “new” model. Which in case
of PE means changing a hundred mindsets.

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

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