1. Searching for a new future of Russian PE:
What we should do in the fog?
Alexander Abolmasov
Managing Partner
NRG
www.nrgc.com C5 Private equity conference 2014
09 - 10 April 2014, Moscow, Russia

2. February 13, 2014
TOP 100 Russian Banks profit
Just in February everything looked so positive…

3. Let’s focus on more positive issues

4. Main sources of value growth in Russia
1994-2007: Russian Economy
2007-2012: Specific niches/unique business
models
2012-…: Effective management

5. Problems cannot be solved at the same level of
awareness that created them.
Albert Einstein

6. The General Motors Management Style (1920s - …)
Strategy
• Centralized operational decisions, but decentralized divisional organization
Financial management
• Control by setting quantitative targets for the divisions and reporting back
performance metrics
• Decision making was based heavily on analysis of reported managerial
accounting data
• ROI is the king
People Motivation
• Performance based bonuses
Effective enough in a growing economy, but less effective in the crowded or
low-growth marketplaces

7. What is effective management?
• Effective management system – keeps organization adjusting
to unpredictable, dynamic conditions and satisfying
customers
• Behavioral routine (skill), which helps to handle unpredictable
and uncertain situations with confidence and effective action
– competitive advantage

8. Startup management
• Need practices and principles geared to the startup context of
extreme uncertainty
• In a startup, the product and customer are unknowns.
We need a new definition of value for startups: validated
learning about customers
• Case study: Begemot, Sovcombank

9. Traditional model
(centralized functional hierarchy)
New model
(decentralized leadership network)
Changing
leadership and
structure
+ ROI-based decisions
+ Mistrust and control
+ Extrinsic motivation
+ Improvement Kata
+ Employee development
+ Intrinsic motivation
Change to what?

10. There are two different ways of working on the
model – evolution and transformation
Foundation Time scale: organization's age
Low degree of decentralization/
empowerment
Differentiation
phase
Integration
phase
High degree of decentralization/
empowerment
Sustaining and
deepening of the
decentralized model,
through generations
Pioneering
phase
Bureaucratization through growing
hierarchy and functional
differentiation
Evolution
within the decentralized
model (culture of
empowerment and trust)
Organizations with
traditional models must
eventually transform
themselves
Transformation through
radical decentralization
of decision-making
Stagnation
within the tayloristic model

11. Current
Condition
Challenge
Vision
Toyota Kata
Toyota strategy: “Survive long term as a company by improving and
evolving how we make good products for the customer”

12. Non-Toyota thinking: normal daily
management + improvement
Toyota thinking: normal daily
management = process improvement
The Improvers
Process
The Improvers
“Everything deteriorates over time”
The second law of thermodynamics
Process

13. Success depends on your challenge
Shinichi Sasaki, former Toyota CEO

14. Toyota’s Vision for Its
Production Operations
 Zero defects
 100 percent value added
 One-piece flow, in sequence, on demand
 Security for people (no injuries)

16. “If you think it can be done or if you think it
can’t be done, you will be right!” – Henry Ford
Challenge
Mindset
“It can be done!”
Why?
Positive line of
argument
Search for solutions
High probability of success
“I told you: it can be done!”
“It cannot be done!”
Why?
Negative line of
argument
Search for problems
Low probability of success
“I told you: it cannot be done!” .

17. Brains are learning organs, so they reward us
with joy when we learn
(for example by means of serotonin)
Brain activity measured using computed tomography, presented by
Prof. Gerald Hüther at Production Systems 2009
“It cannot be done!”
“It can be done!”

18. Through frequent practice more electrical impulses
are fired and synapses are ‘trained’ to perform better
Untrained synapse Trained synapse
High electrical
resistance
Low electrical
resistance
changeable
chemical bond

19. Regular Kata practice and coaching can change a conservative
mindset into an open, ‘explorative’ attitude
Certainty Certainty
Explorative attitude
of a kata novice
Conservative attitude
(the norm)
Certainty
Explorative attitude
of an experienced
kata practitioner
“I avoid it!”
“I’m OK with it!”
“I like it!”

20. We are what we repeatedly do.
Excellence, then, is not an act but a habit.
Aristoteles

21. Financial management

22. Traditional Budgeting Has Many
Weaknesses....
Promotes centralization of decisions and responsibility
Motivates gaming the system
• Conflicting purposes − target setting versus financial forecasting
• Not only a ceiling − also a floor for costs
Ineffective
• Inflexible to changes in planning assumptions
• Absorbs significant resources across the organization
• Tends to make financial control an annual autumn event

23. We Have Separated Performance
Measurement From Financial Forecasting
Broader Performance Measurement
Balanced Scorecard
- Financial KPI’s
- Non-financial KPI’s
+
Rolling Financial
Forecast
- Rolling 5 quarters
- High level, few
details
Better forecasting with less resources
Financial
Budgeting
ToFrom

24. We Can Achieve What the Budget Did in a Simpler Way
The budget was used for: We achieve the same through:
High level financial and tax planning
Target-setting
Controlling fixed costs
Prioritising and allocating
investment/project
resources
Delegation of authority
Rolling financial forecasts
Balanced Scorecard
Trend reporting
Cost targets where and when needed
Activity approach
Small projects - trend reporting
Medium - Varying hurdle rates
Major strategic projects - Case by case, the
budget was never a tool ....
Use existing mandates/authority schedules

25. The New Tools Cover What the Budget Did, but
Also a Lot More
Controlling fixed costs
- Activity accounting and
product costing
- Improved cost understanding
- Product and customer costing
- Annual outlook
Balanced scorecard
- Non-financial targets
& measurements
- Link to strategy
- Financial targets relative to
market
- Financial targets
& measurement
- Limited cost
understanding
- Annual plan
BUDGET
Rolling Financial Forecast
- Quarterly update
- Rolling 5 quarters outlook
- Annual outlook
Investment management
- Trend reporting & 5 quarter
outlook
- Decentralised decisions
- Frames if needed

26. How Does the Manager’s Job Change ?
High degree of freedom in how to achieve
challenging relative targets No detailed
pre-approval of costs through a budget
Cost reports focusing on trends, projects and
total cost levels. Less focus on the calendar year
as reporting period
Increased measurement of non-financial
indicators supporting our strategy
No heavy budget process in the autumn, but
more focus on costs and performance throughout
the year
Increased
responsibility and
decision-making
More relevant cost
information
Better but also tougher
performance
measurement
Better use of your
time !

27. Motivation

28. 1. Rewards Punish
Incentives are Manipulative
Punishment and Rewards are Two Sides of the Same
Coin
2. Rewards Rupture Relationships
Forces People to Compete For Rewards
Damages Relationships Between Managers and
Employees
3. Rewards Ignore Reason
Incentives Are Easy Fix for Problems – Band Aid
4. Rewards Undermine Interest
Limits Creativity
Intrinsic Vs. Extrinsic Motivation
Pay-For-Performance Lowers Enthusiasm
Rewards Punish. Punishment blocks creativity.

29. What do you enjoy about work?
Typical answers given during brainstorming sessions:
- Overcoming challenges
- Learning
- Variety, trying new things
- Team spirit, constructive exchange of ideas, sense of belonging
- Recognition and praise, celebrating successes
- Seeing progress, improving, making a difference
- Helping other people in their work
- Scope for development, personal responsibility
- Etc.
Pay Is Not A Motivator
Employees Value Pay Less Than Most Expect
Paying More Does Not Mean Better Work

30. There is no combination of outcome metrics and incentive systems
that by themselves will generate continuous improvement and
adaptation.
And how could it? The people trying to achieve the quantitative
targets are not taught or guided by any sort of improvement kata.
Mike Rother, author of Toyota Kata

31. READING RECOMMENDATIONS

33. "Learning should be a joy
wonder