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Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA)
 

Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA)

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

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

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    Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA) Beyond Budgeting - Creating High-Performance Organizations for Today’s Markets - a seminar with Niels Pflaeging, organized by UNIstrategic (Kuala Lumpur/MA) Presentation Transcript

    • Beyond Budgeting:Creating high-performance organizationsfor todays marketsHow 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
    • 90% Peter Drucker
    • 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 - Innovationcomplexity 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
    • “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
    • The historical course of market dynamics high dynamics sluggishness high dynamicsdynamic Crafts manufacturing Tayloristic industry Global marketsman Outperformers Market pressure Conventional companies machine formal 1900 1980 2008 tThe domination of high dynamic is neither good or bad. It‘s a historical fact.White paper – Making Performance Management Work 8 © BetaCodex Network – All rights reserved
    • Periphery Center Information Decision Command Impulse Centralist command and Reaction control “collapses“ in increasingly complex environmentsSource: Gerhard Wohland 10
    • 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 leadershipWhite paper – Making Performance Management Work 12 © BetaCodex Network – All rights reserved
    • Beyond Budgeting (1998-2002) Beyond command and control (2003-2007) Beyond incremental change (2008-) 13
    • But there is a further challenge. Which is why most theories aboutleadership, 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 White paper – Making Performance Management Work 14 © BetaCodex Network – All rights reserved
    • Theory X vs.Theory Y Douglas McGregor
    • The industrial age management model not only fails becausemarkets 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’, 1960White paper – Making Performance Management Work 16 © BetaCodex Network – All rights reserved
    • The industrial age management model not only fails becausemarkets 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’, 1960White paper – Making Performance Management Work 17 © BetaCodex Network – All rights reserved
    • 18
    • Do you BELIEVE in Theory Y?Firmly?Good. Because we are sure then you would never, everpractice (or support, or tolerate) HR processes and toolsthat treat people like children, or animals, or worse. Right?Such as performance appraisals, individual target setting,incentive compensation, meritocracy, or control of work-hours…
    • 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
    • Do your HR systems make it in peoples best interest toimplement your new vision?What is meant by HR systems?   Performance appraisal   Compensation   Hiring and Promotions   Succession planning   ...Most often, examination of a firms 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 transformationSource: J. Kotter, Leading Change, HBSP, p, 110-111White paper – Making Performance Management Work 21 © BetaCodex Network – All rights reserved
    • 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
    • Industry Retail ServicesGovernments. & NGOs 26
    • 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
    • Comparing the models
    • 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
    • The BetaCodex: Thinking and workingon the model, not in the model.
    • 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: organizations age Several decades oldWhite paper – Making Performance Management Work 31 © BetaCodex Network – 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: organizations age Several decades old themselves!White paper – Making Performance Management Work 32 © BetaCodex Network – All rights reserved
    • •  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
    • 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 shareWhite paper – Making Performance Management Work 36 © BetaCodex Network – All rights reserved
    • Comparison between the major publicly listed universal banksin 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 40Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition. White paper – Making Performance Management Work 37 © BetaCodex Network – All rights reserved
    • How “radical decentralization“ is being reflected in thecompany´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 WorkWhite paper – 38 © BetaCodex Network – All rights reserved
    • 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!White paper – Making Performance Management Work 39 © BetaCodex Network – All rights reserved
    • 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 WorkWhite paper – 40 © BetaCodex Network – All rights reserved
    • 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!White paper – Making Performance Management Work 41 © BetaCodex Network – All rights reserved
    • Creating a “virtuous circle”–a common factor among “Beyond Budgeting” pioneersBetter to do business with Better for society Better to invest in4. Customer intimacy – Highest 5. Ethical & social standards – 6. Sustainable value –(independent) customer satisfaction Support the long term interests of Beats peer group every yearscores in sector year-after-year; the bank and society. on ROE and cost-to-incomelowest customer complaints; ratio; highest totalmonitors customer acquisitions/ shareholder return in sector;defections. devolved adaptive organization is key driver of3. Operational excellence – success.Lowest costs of any bank in Europe;lowest bad debts; cost reductionculture; flat organization (half a Better to work forhead office person per branch 1. Best people – SHB is firstversus five for rivals); internal choice financial servicesmarket exerts constant pressure on company in Sweden forcentral services. graduates; employee2. Innovation – SHB voted joint turnover is lowest in sector;best Internet bank in Europe in challenge, personal2000; any competitive products and responsibility and freedom tosolutions are fed back from run their part of thebranches to product development. Virtuous circle business; group-wide profit sharing scheme.Text relates to Svenska HandelsbankenWhite paper – Making Performance Management Work 42 © BetaCodex Network – All rights reserved
    • 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."White paper – Making Performance Management Work 43 © BetaCodex Network – All rights reserved
    • The world of command and control management and planning-based steering has a lotto 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 ismuch like the blue pill the movies hero Neo is offered, and Beyond Budgeting is the red pill.Organizations have the choice to either stick withthe illusion of control that their “management bynumbers” delivers, or to acknowledge that there is awhole world of performance management “beyondplanning and control”. One that doesnt deny uncertaintyand paradoxes. And that makes far better use of people´stalent and potential.White paper – Making Performance Management Work 44 © BetaCodex Network – All rights reserved
    • 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
    • Lets start with compensation then. First of all, lets be clear. Carrots dont work. They might beat the intellect of donkeys. But they certainly dont trick human beings, who all have “Theory Y” wiring inside them. Incentives simply dont 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?White paper – Making Performance Management Work 46 © BetaCodex Network – All rights reserved
    • The problem with “incentives”: How traditional managementsystematically forces people to cheat Bonus Variable BonusCommon practice: hurdle area limit “Ceiling”„Pay for performance“compensation Salary/ Reduction Maximization Reduction incentive:profile with fixed bonus incentive: Lower incentive: Anticipate postpone results toperformance contract: result even more results next periodCreates maniuplationincentive 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 becomesoriented compensation decoupled from targetsprofile with relativeperformance Salary/ Free from bonus incentive to manipulatecontracts:No incentive tomanipulation. Actual Actual Actual Performance inSource: Michael Jensen result #1 result #2 result #3 relative evaluationWhite paper – Making Performance Management Work 47 © BetaCodex Network – All rights reserved
    • Background stories we wouldn´t tell our clients:Real-life examples from companies The case of Marie TaylorThis is what happened:Marie Taylor, a sales person from our organization, has generatedincome 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 salessupport department. All her bonuses rights have been immediatelycancelled. 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.White paper – Making Performance Management Work 48 © BetaCodex Network – All rights reserved
    • Background stories we wouldn´t tell our clients:Real-life examples from companies The case of Frank MillerThis is what happened:Frank Miller, a consultant, has overcharged during his work withclients, which means he has systematically inflated the amountof worked hours charged to his customers.The decision: Frank Miller was fired and is leaving the companyimmediately. 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…White paper – Making Performance Management Work 49 © BetaCodex Network – All rights reserved
    • 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.“White paper – Making Performance Management Work 50 © BetaCodex Network – All rights reserved
    • 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, 2001White paper – Making Performance Management Work 51 © BetaCodex Network – All rights reserved
    • Social scientist Alfie Kohn says: I am arguing against….. (1)  attributing more importance to money than it actually has, (2)  pushing money into peoples 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 isnt with the dollars themselves, but with using dollars to get people to jump through hoops.White paper – Making Performance Management Work 52 © BetaCodex Network – All rights reserved
    • 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!White paper – Making Performance Management Work 53 © BetaCodex Network – All rights reserved
    • 1 very simple principle:Always disconnect compensation from targets.Always. 54
    • Pay-for-performance is an outgrowth of behaviorism, which isfocused on individual organisms, not systems - and, true to its name,looks only at behaviors, not at reasons and motives and the people whohave 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 themfairly, 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 performon the highest possible level. Alfie Kohn, Sociologist1.  Pay people well2.  Pay people fairly3.  And then do everything possible to take money off peoples minds!All pay-for-performance plans violate that last precept!
    • 1 very simple principle:Never use bonuses and incentives.Apply profit sharing and/or shareholding conceptsfor community. 56
    • 1 very simple principle:Pay the person. Not the position.Always.
    • Variable compensation: Unbundling fixed “Pay forPerformance” 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 transparentWhite paper – “motivating Management Work Making Performance them“! 58 compensation systems.rights reserved © BetaCodex Network – All
    • 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?White paper – Making Performance Management Work 59 © BetaCodex Network – All rights reserved
    • 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 HammerWhite paper – Making Performance Management Work 60 © BetaCodex Network – All rights reserved
    • Companies. Don´tNeed. Planning.Eine Konsequenz aus dem Kodex.
    • 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
    • Current practices are misaligned with theCritical Success Factors of todays 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!White paper – Making Performance Management Work 63 © BetaCodex Network – All rights reserved
    • Management processes in command and controlorganizations 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: BBRTWhite paper – Making Performance Management Work 64 © BetaCodex Network – All rights reserved
    • Traditional management processes keep teams from strategicthinking, 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
    • 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 pressureWhite paper – Making Performance Management Work 66 © BetaCodex Network – All rights reserved
    • We have come to believe that the source of great performance is good planning. But planningactually never (ever!) is the source of performance. Preparation is. Preparation enablesindividuals and teams to achieve high performance. Just like in a Racing Team. The situationpictured 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
    • If you think about it, a Formula 1 team does not rely on intense planning at all, but on intensepreparation. Things that teams like this indulge in are:•  All-team mastery: Every team member has to be a master. No exception. This enables theteam 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
    • “I will prepare myself andmy time must come.” Abraham Lincoln
    • 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: Thats just a beautiful illusion.White paper – Making Performance Management Work 70 © BetaCodex Network – All rights reserved
    • 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 wouldnt 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
    • Employing resources dynamically: A typical way of doing it,as practiced by Sydney Water, AustraliaResources 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 WaterWhite paper – Making Performance Management Work 72 © BetaCodex Network – All rights reserved
    • 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 attentionspans and “need” the color coding.Now, isnt it fascinating that organizations have such a low opinion oftheir supposedly “top” people?White paper – Making Performance Management Work 73 © BetaCodex Network – All rights reserved
    • 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
    • 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
    • 1 3 2White paper – Making Performance Management Work 76 © BetaCodex Network – All rights reserved
    • A case study – the organizational structure looked like thisAnd where does theCEOcustomer 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 DispositionWhite paper – Making Performance Management Work 77 © BetaCodex Network – All rights reserved
    • Why isn’t everyone decentralizingdecision-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 whenindividuals have information [about and strong evidence that such participation leads towhat’s occurring in the battlefield] the effectiveness and productivity we crave… Withand know how to interpret it because so much evidence supporting participation, why isntthey know the ‘commanders intent’, everyone working in a self-managed environment rightthey 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 SummerNew 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
    • Some questions that we need to respond, if we want todecentralize 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 PflaegingWhite paper – Making Performance Management Work 79 © BetaCodex Network – All rights reserved
    • 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.
    • The notion ofdividing an organizationinto functions,and then departments,is fundamentally flawed.But what is the alternative?
    • 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
    • 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.White paper – Making Performance Management Work 83 © BetaCodex Network – All rights reserved
    • 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
    • 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.White paper – Making Performance Management Work 85 © BetaCodex Network – All rights reserved
    • The importance of “market pull“Market pull comes with an interesting collateral. Because once market pull is accepted as agoverning and energizing force, consciously and by all members of an organization, it is capable ofturning management as an internal function unncessary.In fact, management has been outsourced to markets long ago. This happened when competitionand dynamic change took over within the environments of our organizations. In consequence, any effortto “manage“ an organization from the top down today means making a painstaking, but ultimatelyfruitless 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 marketalready 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
    • White paper – Making Performance Management Work 87 © BetaCodex Network – 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“. •  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 = ResistanceWhite paper – Making Performance Management Work 89 © BetaCodex Network – All rights reserved
    • Whatwe arewaiting
    • 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
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    • “I don´t know if it is possible. What I know: It is necessary.“ Tom PetersToday we already know for sure it is possible.And we have also learned how it can be done. 93
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    • Make it real!www.betacodex.orgA 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