Keynote presentation for several companies in Bergamo, Italy. Presented by Sergio Mascheretti (I.T.M. Consulenza) and Niels Pflaeging (BetaCodex Network

1. beyond
budgeting
>
transformation
network.
Dr. Sergio Mascheretti e Niels Pflaeging
Leadership e obiettivi flessibili.
Beyond Budgeting:
come rivoluzionare il sistema delle performance.
Come trasformare, orientare e gestire
le aziende verso la creazione di valore
Venerdì 22 Gennaio 2010
Beyond Budgeting Introduction

2. beyond
budgeting
>
transformation
network.
Dr. Sergio Mascheretti e Niels Pflaeging
Presentazione
ITM Consulenza è lieta di organizzare nel territorio bergamasco, la prima tavola rotonda su un nuovo
approccio di management conosciuto a livello internazionale come Beyond Budgeting.
A tal proposito il Dr. Sergio Mascheretti ha ritenuto fondamentale la collaborazione di uno dei fondatori
del movimento, Niels Pflaeging, con il quale presenterà a breve, il libro:
Leadership e obiettivi flessibili – Beyond Budgeting: come rivoluzionare il sistema delle performance.
In più di un’occasione il Dr. Mascheretti si è trovato con ciascun partecipante a discutere di gestione, di
strumenti, di processi organizzativi, di sistemi incentivanti, al fine di trasformare, orientare e rendere
performante ciascuna organizzazione.
Questa tavola rotonda rappresenta un’occasione per cogliere nuovi stimoli di business management,
cogliendo l’opportunità della presenza di uno speaker e management consultant di livello internazionale.
Elenco Aziende Partecipanti
• Brembo
• Radici
• Percassi
• Banca Popolare dell’Emilia Romagnia
• Same
Beyond Budgeting Introduction

3. Workshop – Beyond Budgeting 3 © BBTN – All rights reserved

4. Workshop – Beyond Budgeting 4 © BBTN – All rights reserved

5. 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
Workshop – Beyond Budgeting 5 © BBTN – All rights reserved

7. 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
Workshop – Beyond Budgeting 7 © BBTN – All rights reserved

8. Beyond Budgeting means:
From hierarchy to network structure
beyond
budgeting
>
transformation
network. model
Traditional 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
Seminar – Beyond Budgeting 8 © BBTN – All rights reserved

9. 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
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
Workshop – Beyond Budgeting
… 9 © BBTN – All rights reserved

10. 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
contracts Dynamic
coordination
Fixed Dynamic
processes processes
control
Workshop – Beyond Budgeting 10 © BBTN – All rights reserved

11. 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
Workshop – Beyond Budgeting 11 © BBTN – All rights reserved

12. 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
6 “adaptive management
Planning and Continuous and inclusive planning Top-down annual planning
processes” principles
controls Compare performance against actuals Variations against fixed plans
Resources and Resources “on demand” Annual (budget) allocations
coordination Coordinate dynamic, market-like interactions Departmentalization, hierarchy
Workshop – Beyond Budgeting 12 © BBTN – All rights reserved

13. 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!
Workshop –Niels Pfläging
Source: Beyond Budgeting 13 © BBTN – All rights reserved

14. 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
Workshop – Beyond Budgeting 14 © BBTN – All rights reserved

15. 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 600 branch managers
teams with full responsibility for (Profit Centers)
customer results
Freedom and
capability to act 12 regional
managers Fast, open
Fast, open
“Winning“ culture, combined
(Invest Centers) information
information
with the freedom and ability to
systems
systems
act
Governance and transparency
Framework for decision making CEO,
with clear values, limits and product firms,
treasury, IT etc.
relative targets, plus
transparency
Leads to maximum customer satisfaction!
Workshop – Beyond Budgeting
Source: BBRT 15 © BBTN – All rights reserved

16. 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 18%3. Region H 20%1.
Region H 20%1. Branch JJ 28%
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. 5.
Region JJ 10% 5. Branch I I 41%
Branch 41%
8. Bank H 10%7. Region 10%
9. Bank GG 8% 8. Region I I 7% 6.
7% 6. Branch FF 45%
Branch 45%
“On demand“ flow of 9. Bank 8% 8. Region
10. Bank AA (2%)9.
10. Bank (2%) 9. Region G 6% 7.
Region G 6% 7. Branch CC 54%
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!
Workshop – Beyond Budgeting 16 © BBTN – All rights reserved

17. 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 decide Branches alone are Branches
over necessary responsible for efficient observe
resource levels use of resources customer
demand
Leads to eradicating and avoiding waste!
Source: BBRT
Workshop – Beyond Budgeting 17 © BBTN – All rights reserved

18. Creating a “virtuous circle”–
a common factor among “Beyond Budgeting” pioneers
Better to invest in
Better for society
Better to do business with 6. Sustainable value –
5. Ethical & social standards –
Beats peer group every year
4. Customer intimacy – Highest Support the long term interests of on ROE and cost-to-income
(independent) customer satisfaction the bank and society. ratio; highest total
scores in sector year-after-year; shareholder return in sector;
lowest customer complaints; devolved adaptive
monitors customer organization is key driver of
acquisitions/defections. success.
3. Operational excellence –
Lowest costs of any bank in Europe;
lowest bad debts; cost reduction Better to work for
culture; flat organization (half a 1. Best people – SHB is first
head office person per branch choice financial services
versus five for rivals); internal company in Sweden for
market exerts constant pressure on graduates; employee
central services. turnover is lowest in sector;
2. Innovation – SHB voted joint challenge, personal
responsibility and freedom to
best Internet bank in Europe in
run their part of the
2000; any competitive products Virtuous circle
business; group-wide profit
and solutions are fed back from sharing scheme.
branches to product development.
Text relates to Svenska Handelsbanken
Workshop – Beyond Budgeting 18 © BBTN – All rights reserved

19. Simple and relevant: creating reports without actual-plan-variances, fixed
targets, or plans!
last Same Same Ø Ø
Company KPI Regions KPI Compe- month month month last 12
titor A last prev.. 12 prev.
Competitor A 31% Region G 7% year year mnths mnths
Our
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% titor B Indicators
Us
Competitor D 12% Region D 3% or
Our Groups of accounts
Competitor G 10% Region C 1%
unit B
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
Workshop – Beyond Budgeting 19 © BBTN – All rights reserved

20. 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
Workshop – Beyond Budgeting 20 © BBTN – All rights reserved

21. beyond
budgeting
>
transformation
network.
Dr. Sergio Mascheretti e Niels Pflaeging
Niels Pflaeging
niels@bbtn.org
beyond
budgeting www.bbtn.org
>
transformation
network. www.metamanagementgroup.com
Dr. Sergio Mascheretti
s.mascheretti@itmconsulenza.it
www.itmconsulenza.it
Tel. 035 212224
Beyond Budgeting Introduction