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 The case for transformation 3 © Niels Pflaeging & Gebhard Borck – All rights reserved

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. The case for transformation 4 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 case for transformation 5 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 The case for transformation 8 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 The case for transformation 9 © 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! The case for transformation 11 © Niels Pflaeging & Gebhard Borck – All rights reserved

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” •… The case for transformation 13 © Niels Pflaeging & Gebhard Borck – All rights reserved

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! The case for transformation 14 © Niels Pflaeging & Gebhard Borck – All rights reserved

“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. performance New Adaptive model Traditional processes Low model Centralized & fixed Management model Decentralized & dynamic The case for transformation 15 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 The case for transformation 16 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 case for transformation 19 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 The case for transformation 20 © Niels Pflaeging & Gebhard Borck – All rights reserved

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

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 The case for transformation 24 © Niels Pflaeging & Gebhard Borck – All rights reserved

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. The case for transformation 25 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 The case for transformation 26 © Niels Pflaeging & Gebhard Borck – All rights reserved

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 27 © Niels Pflaeging & Gebhard Borck – All rights reserved

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. The case for transformation 28 © Niels Pflaeging & Gebhard Borck – All rights reserved

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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