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Beyond Budgeting: Leading with Flexible Targets. 2-day seminar


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Slides from 2-day Beyond Budgeting seminar in Kuala Lumpur, Malaysia
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Beyond Budgeting: Leading with Flexible Targets. 2-day seminar

  1. 1. beyond Make it real!budgeting >transformationnetwork. 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
  2. 2. 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
  3. 3. 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 GermanySeminar – Beyond Budgeting 3 © BBTN – All rights reserved
  4. 4. There are many outstanding cases of companiesthat have applied the “new” model. This is a selection. 4 4Seminar – Beyond Budgeting 4 © BBTN – All rights reserved
  5. 5. The world has changed: outlining todays 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 responsecomplexity 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. Seminar – Beyond Budgeting 5 © BBTN – All rights reserved
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  8. 8. Our journey since 1998, within the internationalBeyond Budgeting movement Beyond budgeting (1998-2002) Beyond command and control (2003-2007) Beyond incremental change (2008-) …Seminar – Beyond Budgeting 8 © BBTN – All rights reserved
  9. 9. A new brand. A new network. Make it real!The first “open source“ movement in the management arena - worldwide!Seminar – Beyond Budgeting 9 © BBTN – All rights reserved
  10. 10. The new model is supported by science and practiceSciences: Practice:Thought leaders •  Stafford Beer Industry leaders •  Margareth Wheatley(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 •  Peter Block performance & Not-for profit •  … management •  Charles Horngren •  Henry Mintzberg •  Gary Hamel •  Jeremy Hope •  Michael Hammer •  Thomas Johnson •  …Seminar – Beyond Budgeting 10 © BBTN – All rights reserved
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  13. 13. 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 •  … From the film Modern Times with Charlie Chaplin, 1936Seminar – Beyond Budgeting 13 © BBTN – All rights reserved
  14. 14. How markets govern organizations from the outside in Periphery Center Information Decision Command Centralist command and Impulse control collapses in Reaction increasingly complex environments Source: Gerhard WohlandSeminar – Beyond Budgeting 14 © BBTN – All rights reserved
  15. 15. 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 leadershipSeminar – Beyond Budgeting 15 © BBTN – All rights reserved
  16. 16. “faale ghah-ve“ Budgeting Seminar – Beyond 16 © BBTN – All rights reserved
  17. 17. Does planning really work?The traditional model can destroy value on a massive scale!Seminar – Beyond Budgeting 17 © BBTN – All rights reserved
  18. 18. 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 PflaegingSeminar – Beyond Budgeting 18 © BBTN – All rights reserved
  19. 19. 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 ...Seminar – Beyond Budgeting 19 © BBTN – All rights reserved
  20. 20. 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
  21. 21. Current practices are misaligned with theCritical 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!Seminar – Beyond Budgeting 21 © BBTN – All rights reserved
  22. 22. 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." Michael Hammer The problems with traditional planning and control are merely symptoms of a much deeper problem.Seminar – Beyond Budgeting 22 © BBTN – All rights reserved
  23. 23. 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 pressureSeminar – Beyond Budgeting 23 © BBTN – All rights reserved
  24. 24. The proposal of Beyond Budgeting : Real change requires acoherent 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 UniversitySource: Quoted from the preface to Fraser/Hope: „Beyond BudgetingSeminar – Beyond Budgeting 24 © BBTN – All rights reserved
  25. 25. Our systems and modern management tools conflict with theold 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 value added Supports Deemphasizes Benchmarking short term external Central Local stretch comparisons control targets Supports Creates ‘Make & Sell’ multiple Customer strategy Supports contracts relationship central decision Balanced management making Scorecard Activity-based managementSeminar – Beyond Budgeting 25 © BBTN – All rights reserved
  26. 26. What is a ‘management model’?Industrial Age Information AgeManaged stability Complex and dynamic Leadership culture + Management processes + Information systems Seminar – Beyond Budgeting 26 © BBTN – All rights reserved
  27. 27. We must workon the model, notin the model.Seminar – Beyond Budgeting 27 27 © BBTN – All rights reserved
  28. 28. 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 processes Dynamic processes controlSeminar – Beyond Budgeting 28 © BBTN – All rights reserved
  29. 29. 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 shareSeminar – Beyond Budgeting 29 © BBTN – All rights reserved
  30. 30. For more than a decade, this bank has been customersatisfaction 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 2002Private Customers, Source: Svenska KvalitetsindexSeminar – Beyond Budgeting 30 © BBTN – All rights reserved
  31. 31. Comparison between the major publicly listed universal banks inEurope universales in Europe. Jan-Dec 2005, after credit losses. * Refers to loans to the public or deposits if deposits > lending1,0 Cost/Total loans*, % Danske Bank Handelsbanken FöreningsSparbanken DnB Nor2,0 Nordea Bank of Ireland SEB HypoVereinsbank Allied Irish Banks Banco Santander KBC3,0 Credit Agricole Royal Bank of Scotland Bank Austria Commerzbank BBVA Unicredit Lloyds TSB San Paolo-IMI Standard Chartered4,0 Erste Banca Intesa Capitalia ABN Amro Monte dei Paschi di Siena Barclays HSBC5,0 Deutsche Bank BNP Paribas HBOS Société Générale UBS CS Group Cost/Income ratio, %6,0 90 80 70 60 50 40Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition. Seminar – Beyond Budgeting 31 © BBTN – All rights reserved
  32. 32. 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 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: BBRTSeminar – Beyond Budgeting 32 © BBTN – All rights reserved
  33. 33. Relative target definition through “league tables“ (rankings) –instead of planned, fixed targets and internal negotiation Strategic „cascade” 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% Continuous planning/ 6.  Bank F 13%5.  Region F 15%3.  Branch E 37% 7.  Bank C 12%6.  Region E 12%4.  Branch A 39% control 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% 10.  Bank A (2%)9.  Region G resources/ 10.  Region D (5%)8.  Branch G 65% dynamic coordination 9.  Branch H 72% 10.  Branch B 87% Result & value contribution Leads to lowest operational cost!Seminar – Beyond Budgeting 33 © BBTN – All rights reserved
  34. 34. 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: BBRTSeminar – Beyond Budgeting 34 © BBTN – All rights reserved
  35. 35. 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! Seminar – Beyond Budgeting 35 © BBTN – All rights reserved
  36. 36. 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 HandelsbankenSeminar – Beyond Budgeting 36 © BBTN – All rights reserved
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  38. 38. 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 TargetsSeminar – Beyond Budgeting 38 © BBTN – All rights reserved
  39. 39. Theory X vs.Theory YSeminar – Beyond Budgeting 39 39 Douglas McGregor © BBTN – All rights reserved
  40. 40. 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 – 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 target right effort. 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 , 1960Seminar – Beyond Budgeting 40 © BBTN – All rights reserved
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  44. 44. 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.“Seminar – Beyond Budgeting 44 © BBTN – All rights reserved
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  46. 46. It´s a different mental disciplineSeminar – Beyond Budgeting 46 46 © BBTN – All rights reserved
  47. 47. The 12 principles of the Beyond Budgeting model are in facta 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 ) CentralizationLeadership 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 goalsProcesses 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 Seminar – Beyond Budgeting 47 © BBTN – All rights reserved
  48. 48. Now, it is time for transforming your organization –by closing the gapsA typical company – results from the BBRT online diagnostic Table 1: The case for change Problems Vision Practice Close the gaps!Seminar – Beyond Budgeting 48 © BBTN – All rights reserved
  49. 49. There are two different ways of working on the model – evolution and transformationLow degree ofdecentralization/empowerment and Differentiation Stagnationfixed performance phase within the tayloristic modelcontracts: in conflictwith todays criticalsuccess factors! Transformation Bureaucratization through radical devolution growing hierarchy and and decentralization functional differentiationHigh degree ofdecentralization/empowermentwith relative Evolution Sustaining andperformance Pioneering within the decentralized Integration deepening of thecontracts: aligned phase model phase decentralized model,with todays critical through generationssuccess factors! Organizations with Foundation Time scale: organizations age traditional models must Several decades old eventually transform themselves! Seminar – Beyond Budgeting 49 © BBTN – All rights reserved
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  51. 51. 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 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! Source: Niels PflägingSeminar – Beyond Budgeting 51 © BBTN – All rights reserved
  52. 52. 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 Seminar – Beyond Budgeting 52 © BBTN – All rights reserved
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  54. 54. 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!Seminar – Beyond Budgeting 54 © BBTN – All rights reserved
  55. 55. beyond Make it real!budgeting >transformationnetwork. BBTN: 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 Skype: npflaeging Skype: gborck Xing forum: Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.
  56. 56. beyond Make it real!budgeting >transformationnetwork. 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
  57. 57. Seminar – Beyond Budgeting 57 © BBTN – All rights reserved
  58. 58. 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, 2001Seminar – Beyond Budgeting 58 © BBTN – All rights reserved
  59. 59. 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.Seminar – Beyond Budgeting 59 © BBTN – All rights reserved
  60. 60. 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…Seminar – Beyond Budgeting 60 © BBTN – All rights reserved
  61. 61. 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 evaluationSeminar – Beyond Budgeting 61 © BBTN – All rights reserved
  62. 62. General principles for designing compensation systemsin 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“!Seminar – Beyond Budgeting 62 © BBTN – All rights reserved
  63. 63. How often do the systems, especially the HR systems, get in theway 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, 110-111Seminar – Beyond Budgeting 63 © BBTN – All rights reserved
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  65. 65. 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 WaterSeminar – Beyond Budgeting 65 © BBTN – All rights reserved
  66. 66. 1 3 2Seminar – Beyond Budgeting 66 © BBTN – All rights reserved
  67. 67. Why isn’t everyone devolving decision-making powerto 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?Seminar – Beyond Budgeting 67 © BBTN – All rights reserved
  68. 68. 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. Seminar – Beyond Budgeting 68 © BBTN – All rights reserved
  69. 69. 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 PflaegingSeminar – Beyond Budgeting 69 © BBTN – All rights reserved
  70. 70. Seminar – Beyond Budgeting 70 © BBTN – All rights reserved
  71. 71. Coherence is the critical issueSeminar – Beyond Budgeting 71 © BBTN – All rights reserved
  72. 72. 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 = ResistanceSeminar – Beyond Budgeting 72 © BBTN – All rights reserved
  73. 73. 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“, 2004Seminar – Beyond Budgeting 73 © BBTN – All rights reserved
  74. 74. The case study: Transforming an organization, as suggested byJohn Kotter, HBS: A process model for organizational change ReferencesOrganizationalchange process(John Kotter, Leading Changeto Our Iceberg is Melting ) 1. 2. 3. 4. 5. 6. 7. 8.Create a Pull Develop Communi- Empower Produce Dont Create asense of together a change cate for all others short-term let up! new cultureurgency guiding vision and understan- to act wins coalition strategy ding and buy-in Seminar – Beyond Budgeting 74 © BBTN – All rights reserved
  75. 75. 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-in1.  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.Seminar – Beyond Budgeting 75 © BBTN – All rights reserved
  76. 76. 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 structureSeminar – Beyond Budgeting 76 © BBTN – All rights reserved
  77. 77. The case study – the organizational structure looked like this CEO Director Director Director Director CFO es the International Production Technology Sales Germany ere do Region Region Region Region Branch Branch Branch Branch nd wh 1&2 3&4 5&6 7&8 I II III IV A Admini- HR Assistant IT Sales Control- Marke- Production Sales Cont. Assistant ling Admini- Material Assistant Quality Engeneers, Cont. Marke- here? stration OEM education tingOEMSales stration Sales education ting/ CI Region Region Region Region Leader SalesPlanning Developers Sales et fit in 9 & 10 11 & 12 13 & 14 14 & 15 mark 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 DispositionSeminar – Beyond Budgeting 77 © BBTN – All rights reserved
  78. 78. 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 serves. And it has at least 3 team members.Seminar – Beyond Budgeting 78 © BBTN – All rights reserved
  79. 79. Seminar – Beyond Budgeting 79 © BBTN – All rights reserved
  80. 80. 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 RegionRegion Cells ( R-Cells ) Europe Clients: all P-CellsKey Roles of R-Cells Region 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“Own“ all customers in P8 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 Seminar – Beyond Budgeting 80 © BBTN – All rights reserved
  81. 81. “Cell structure“ as a foundation for sensible targetdefinition in a “relative“ way - using league tables Strategic cascade Firm to Firm ROCE Region to Region 1.  Firm D 31% Cost over income 2.  Firm J 24%1.  P-Cell to P-Cell Region A 38% On-time-delivery etc. 3.  Firm I 20%2.  Region C 27% 4.  Firm B 18%3.  Region H 20%1.  P-Cell J 28% 5.  Firm E 15%4.  Region B 17%2.  P-Cell D 32% 6.  Firm F 13%5.  Region F 15%3.  P-Cell E 37% 7.  Firm C 12%6.  Region E 12%4.  P-Cell A 39% 8.  Firm H 10%7.  Region J 10%5.  P-Cell I 41% 9.  Firm G 8% 8.  Region I 7% 6.  P-Cell F 45% 10.  Firm A (2%)9.  Region G 6% 7.  P-Cell C 54% 10.  Region D (5%)8.  P-Cell G 65% 9.  P-Cell H 72% 10.  P-Cell B 87% Contrib. to value creation Leads to lowest operational cost!Seminar – Beyond Budgeting 81 © BBTN – All rights reserved
  82. 82. What are the consequences?Seminar – Beyond Budgeting 82 © BBTN – All rights reserved
  83. 83. Whatwe arewaiting “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.”Seminar – Beyond Budgeting Seneca, Roman philosopher and statesman, 4BC – 65AD 83 83 © BBTN – All rights reserved
  84. 84. Beyond Budgeting: Is this something for only a select few?For geniuses and mavericks? Seminar – Beyond Budgeting 84 © BBTN – All rights reserved
  85. 85. 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 modeltraditional 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 Seminar – Beyond Budgeting 85 © BBTN – All rights reserved
  86. 86. 90%Seminar – Beyond Budgeting 86 86 Peter Drucker © BBTN – All rights reserved
  87. 87. Part I of the Double Helix transformation framework:A process model for organizational change ReferencesOrganizationalchange process(John Kotter, Leading Changeto Our Iceberg is Melting ) 1. 2. 3. 4. 5. 6. 7. 8.Create a Pull Develop Communi- Empower Produce Dont Create asense of together a change cate for all others short-term let up! new cultureurgency guiding vision and understan- to act wins coalition strategy ding and buy-in Seminar – Beyond Budgeting 87 © BBTN – All rights reserved
  88. 88. What to do when in the process?Two examples •  Create array of larger Task Forces to changeOrganizational organizational structure, managementchange process processes and business processes(John Kotter, Leading Change •  Align projects and decision processesto Our Iceberg is Melting ) with 12 principles and the values defined in the case for change 1. 2. 3. 4. 5. 6. 7. 8.Create a Pull Develop Communi- Empower Produce Dont Create asense of together a change cate for all others short-term let up! new cultureurgency guiding vision and understan- to act wins coalition strategy ding and 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 Seminar – Beyond Budgeting 88 © BBTN – All rights reserved
  89. 89. Seminar – Beyond Budgeting 89 Logoplaste Leadership Workshop, Mar 2007 © BBTN – All rights reserved
  90. 90. Part II of the Double Helix transformation framework: a process model for personal changeReference 3. Beginning Individual change process (William Bridges, Managing Transitions ) 2. Neutral Zone Individual 1.  Ending change process (William Bridges, Managing Transitions ) Seminar – Beyond Budgeting 90 © BBTN – All rights reserved
  91. 91. Putting the Double Helix together.Organizati o nachange pro l cess 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 Dont Createurgency guiding under- all others short-term vision and let a new coalition standing to act wins strategy up! culture and buy-in 1.  Ending ual I ndivid rocess ep chang Seminar – Beyond Budgeting 91 © BBTN – All rights reserved
  92. 92. Principles: Leading profound, transformational change 3. BeginningOrganizational Individualchange process change process 2. Neutral Zone 1. 2. 3. 4. 5. 6. 7. 8.Create a Pull Develop Communi- Empower Produce Dont Create asense of together a change cate for all others short-term let up! new cultureurgency guiding vision and understan- to act wins coalition strategy ding and buy-inReferences 1.  Ending Seminar – Beyond Budgeting 92 © BBTN – All rights reserved
  93. 93. 2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen? Seminar – Beyond Budgeting 93 © BBTN – All rights reserved
  94. 94. Underlying assumptions of our recentmanagement model transformation projects1.  Organizations are systems . So they have to be transformed as such. Thus, finance people cannot do it alone. (And its actually much more fun approaching change holistically.)2.  It´s all about human nature . Apply Theory Y rigidly!3.  Everyones 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 – Beyond Budgeting 94 © BBTN – All rights reserved
  95. 95. beyond Make it real!budgeting >transformationnetwork. BBTN: 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 Skype: npflaeging Skype: gborck Xing forum: Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.
  96. 96. Seminar – Beyond Budgeting 96 © BBTN – All rights reserved
  97. 97. How we can proceed NOW.1.  Go straight into denial! •  That´s ok. We believe, however, that all traditionally managed organizations will at some point have to adopt the new model. Because market forces and human nature will ever more strongly put your organization under stress and make transformation a must.2.  asdfasdf! •  That´s quite a common phenomenon. Sometimes the chemistry just doesn´t work! Talk with the speaker about meeting another BBTN director, and organize a workshop with that other director.3.  asdfs! •  Try additional information sources on Beyond Budgeting, like, or the Beyond Budgeting channel on Youtube, or our books and DVDs, or the online diagnostic on Ask the speaker for additional resources and suggestions! We will gladly assist you. •  Talk with the speaker about joining a “BBTN Master Course“, or book our coaching program “Beyond Budgeting On The Fly!“4.  Go straight into the Neutral Zone! •  Talk with the speaker about scheduling an in-company workshop at your firm.Seminar – Beyond Budgeting 97 © BBTN – All rights reserved