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beyond                                              Make it real!
budgeting


         >
transformation
network.




      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
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
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         Germany

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There are many outstanding cases of companies
that have applied the “new” model. This is a selection.




                               4
                               4
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The world has changed:
 outlining today's 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 response
complexity                                               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.
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Our journey since 1998, within the international
Beyond Budgeting movement



        Beyond budgeting (1998-2002)
                  Beyond command and control (2003-2007)
                              Beyond incremental change (2008-)




                                                                                 …


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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
The new model is supported by science and practice

Sciences:                                                                                               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
                                         •    …

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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, 1936
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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 Wohland
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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 leadership
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“faale ghah-ve“ Budgeting
   Seminar – Beyond         16   © BBTN – All rights reserved
Does planning really work?
The traditional model can destroy value on a massive scale!




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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 Pflaeging
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Traditional management processes keep teams from strategic
thinking, 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                                                      ...
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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
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Current practices are misaligned with the
Critical 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!
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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.

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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 pressure

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The proposal of Beyond Budgeting : Real change requires a
coherent 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 University




Source: Quoted from the preface to Fraser/Hope: „Beyond Budgeting
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Our systems and modern management tools conflict with the
old 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
                                                 management

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What is a ‘management model’?

Industrial Age                                    Information Age
Managed stability                            Complex and dynamic




                                Leadership
                                  culture
                                     +
                               Management
                                processes
                                     +
                               Information
                                 systems




  Seminar – Beyond Budgeting      26               © BBTN – All rights reserved
We must
     work
on the model,
                                  not
in the model.
Seminar – Beyond Budgeting   27
                             27         © BBTN – All rights reserved
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
                   control
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The case of a radically decentralized organization:
Handelsbanken – an extraordinary leadership philosophy



                                                                                                         The most important objective
                                                                                                         within Handelsbanken Group:
                                                                                                         “Higher Return on Equity than the
                                                                                                         average of comparable banks in
                                                                                                         the Nordic region and Europe.”
                                                                                                         Made real through:
                                                                                                          •  Radical decentralization,
                                                                                                             which in turn leads to…
                                                                                                          •  Best customer service
                                                                                                          •  Lowest cost
                                                                                   Alexander V Dokukin




  Consistently – over a period of 30 years – one of the most successful banks in
      Europe, measured by almost all key performance indicators
      (e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …)
ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share

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For more than a decade, this bank has been customer
satisfaction 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 2002


Private Customers, Source: Svenska Kvalitetsindex
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Comparison between the major publicly listed universal banks in
Europe universales in Europe. Jan-Dec 2005, after credit losses.
                                                                                            * Refers to loans to the public or deposits if deposits > lending
1,0
       Cost/Total loans*, %                                                                                Danske Bank                      Handelsbanken

                                                                                                FöreningsSparbanken               DnB Nor
2,0                                                                                                          Nordea
                                                                                       Bank of Ireland

                                                              SEB
                               HypoVereinsbank                             Allied Irish Banks
                                                         Banco Santander                KBC
3,0
                                     Credit Agricole                               Royal Bank of Scotland
                                                     Bank Austria
       Commerzbank                                                                         BBVA
                                                     Unicredit
                                                                                   Lloyds TSB
                                           San Paolo-IMI                   Standard Chartered
4,0                                            Erste              Banca Intesa
                                           Capitalia
                                ABN Amro         Monte dei Paschi di Siena
                                                            Barclays

                                                                                HSBC
5,0
                                       Deutsche Bank                              BNP Paribas
                                     HBOS
                                                                               Société Générale

                                                 UBS CS Group                                                  Cost/Income ratio, %
6,0
  90                          80                        70                        60                         50                           40
Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition.

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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: BBRT
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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!
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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
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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!
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Creating a “virtuous circle”–
a common factor among “Beyond Budgeting” pioneers

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


Text relates to Svenska Handelsbanken
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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 Targets




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Theory X
                                  vs.
Theory Y
Seminar – Beyond Budgeting   39
                             39
                                        Douglas McGregor

                                        © BBTN – All rights reserved
The industrial age management model not only fails because
markets 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 , 1960

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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
Seminar – Beyond Budgeting   45   © BBTN – All rights reserved
It´s a different
                             mental
  discipline
Seminar – Beyond Budgeting     46
                               46     © BBTN – All rights reserved
The 12 principles of the Beyond Budgeting model are in fact
a full set of “design principles“ for the new organization type.


             Principles                       Do this!                             Not that!
              Customers and            Customer/outside focus                  Focus on the boss
               responsibility        Responsible teams ( cells )                  Centralization
Leadership




             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 goals
Processes




              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
Now, it is time for transforming your organization –
by closing the gaps

A typical company – results from the BBRT online diagnostic
                             Table 1: The case for change



                                                                      Problems



                                                            Vision




                                              Practice
                                                                              Close
                                                                            the gaps!
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There are two different ways of working on the model –
  evolution and transformation

Low degree of
decentralization/
empowerment and                                      Differentiation Stagnation
fixed performance                                        phase       within the tayloristic model
contracts: in conflict
with today's critical
success factors!
                                                                   Transformation
                               Bureaucratization                   through radical devolution
                               growing hierarchy and               and decentralization
                               functional differentiation

High degree of
decentralization/
empowerment
with relative                             Evolution                                             Sustaining and
performance         Pioneering            within the decentralized               Integration    deepening of the
contracts: aligned phase                  model                                     phase       decentralized model,
with today's critical                                                                           through generations
success factors!
                                                                                                   Organizations with
                     Foundation                     Time scale: organization's age              traditional models must
                                                                                                  Several decades old
                                                                                                  eventually transform
                                                                                                       themselves!
  Seminar – Beyond Budgeting                                  49                                  © BBTN – All rights reserved
Seminar – Beyond Budgeting   50   © BBTN – All rights reserved
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 Pfläging
Seminar – Beyond Budgeting                                 51                                 © BBTN – 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

  Seminar – Beyond Budgeting                                    52                                    © BBTN – All rights reserved
Seminar – Beyond Budgeting   53   © BBTN – 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 just by measuring!
Seminar – Beyond Budgeting          54                                © BBTN – All rights reserved
beyond                                                                   Make it real!
budgeting


         >
transformation
network.




      BBTN: www.bbtn.org

       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
       niels@bbtn.org                          gebhard@bbtn.org
       Skype: npflaeging                       Skype: gborck
       www.metamanagementgroup.com             www.gberatung.de

       Xing forum: www.xing.com/net/beyondbudgeting
       Get in touch with us for more information about BBTN membership
       and about leading transformation, or ask us for a workshop proposal.
beyond                                              Make it real!
budgeting


         >
transformation
network.




      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
Seminar – Beyond Budgeting   57   © BBTN – 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, 2001




Seminar – Beyond Budgeting                     58                            © BBTN – All rights reserved
Background stories we wouldn´t tell our clients:
Real-life examples from companies


        The case of Marie Taylor

This is what happened:
Marie Taylor, a sales person from our organization, has generated
income 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 sales
support department. All her bonuses rights have been immediately
cancelled.

 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
Background stories we wouldn´t tell our clients:
Real-life examples from companies


        The case of Frank Miller

This is what happened:
Frank Miller, a consultant, has overcharged during his work with
clients, which means he has systematically inflated the amount
of worked hours charged to his customers.

The decision: Frank Miller was fired and is leaving the company
immediately.


 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
The problem with “incentives”: How traditional management
systematically forces people to cheat
                                                  Bonus         Variable      Bonus
Common practice:                                  hurdle          area         limit       “Ceiling”
„Pay for performance“
compensation            Salary/      Reduction                Maximization             Reduction incentive:
profile with fixed       bonus    incentive: Lower        incentive: Anticipate        postpone results to
performance contract:             result even more               results                   next period
Creates maniuplation
incentive 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 becomes
oriented compensation              decoupled from targets
profile with relative
performance           Salary/                                      Free from
                       bonus                               incentive to manipulate
contracts:
No incentive to
manipulation.

                                                  Actual         Actual       Actual       Performance in
Source: Michael Jensen
                                                 result #1      result #2    result #3 relative evaluation
Seminar – Beyond Budgeting                           61                                    © BBTN – All rights reserved
General principles for designing compensation systems
in 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
How often do the systems, especially the HR systems, get in the
way 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, 110-111

Seminar – Beyond Budgeting                            63                     © BBTN – All rights reserved
Seminar – Beyond Budgeting   64   © BBTN – All rights reserved
Employing resources dynamically: A typical way of doing it,
as practiced by Sydney Water, Australia

Resources
                                                 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 Water
Seminar – Beyond Budgeting                           65                                © BBTN – All rights reserved
1                 3
                             2



Seminar – Beyond Budgeting   66   © BBTN – All rights reserved
Why isn’t everyone devolving decision-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 when
individuals have information [about       and strong evidence that such participation leads to
what’s occurring in the battlefield]      the effectiveness and productivity we crave… With
and know how to interpret it because      so much evidence supporting participation, why isn't
they know the ‘commander's intent’,       everyone working in a self-managed environment right
they 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 Summer
New 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
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
Some questions that we need to respond, if we want to
decentralize 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 Pflaeging
Seminar – Beyond Budgeting                              69                          © BBTN – All rights reserved
Seminar – Beyond Budgeting   70   © BBTN – All rights reserved
Coherence is the critical issue




Seminar – Beyond Budgeting        71   © BBTN – 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 = Resistance

Seminar – Beyond Budgeting             72                             © BBTN – All rights reserved
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“, 2004
Seminar – Beyond Budgeting                                    73                              © BBTN – All rights reserved
The case study: Transforming an organization, as suggested by
John Kotter, HBS: A process model for organizational change
                                                           References




Organizational
change process
(John Kotter, Leading Change
to Our Iceberg is Melting )




   1.        2.                     3.        4.         5.        6.          7.            8.
Create a    Pull                Develop Communi- Empower Produce             Don't        Create a
sense of together a              change    cate for all others short-term   let up!      new culture
urgency    guiding             vision and understan- to act       wins
          coalition             strategy   ding and
                                            buy-in




 Seminar – Beyond Budgeting                       74                          © BBTN – All rights reserved
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-in




1.  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
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 structure


Seminar – Beyond Budgeting                   76                    © BBTN – All rights reserved
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                Disposition


Seminar – Beyond Budgeting                         77                              © BBTN – All rights reserved
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
Seminar – Beyond Budgeting   79   © BBTN – All rights reserved
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
                                                                                   Region
Region Cells ( R-Cells )                                                           Europe        Clients: all P-Cells
Key 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
“Cell structure“ as a foundation for sensible target
definition 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
What are the consequences?


Seminar – Beyond Budgeting        82                 © BBTN – All rights reserved
Whatwe
  are
waiting                  “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
Beyond Budgeting: Is this something for only a select few?
For geniuses and mavericks?




 Seminar – Beyond Budgeting           84                     © BBTN – All rights reserved
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 model
traditional 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
90%
Seminar – Beyond Budgeting   86
                             86
                                     Peter Drucker

                                  © BBTN – All rights reserved
Part I of the Double Helix transformation framework:
A process model for organizational change
                                                           References




Organizational
change process
(John Kotter, Leading Change
to Our Iceberg is Melting )




   1.        2.                     3.        4.         5.        6.          7.            8.
Create a    Pull                Develop Communi- Empower Produce             Don't        Create a
sense of together a              change    cate for all others short-term   let up!      new culture
urgency    guiding             vision and understan- to act       wins
          coalition             strategy   ding and
                                            buy-in




 Seminar – Beyond Budgeting                       87                          © BBTN – All rights reserved
What to do when in the process?
Two examples


                                                       •  Create array of larger Task Forces to change
Organizational                                            organizational structure, management
change process                                            processes and business processes
(John Kotter, Leading Change                           •  Align projects and decision processes
to 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                     Don't         Create a
sense of together a              change    cate for all others short-term           let up!       new culture
urgency    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
Seminar – Beyond Budgeting   89   Logoplaste Leadership Workshop, Mar 2007
                                                   © BBTN – All rights reserved
Part II of the Double Helix transformation framework:
 a process model for personal change
Reference


                                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
Putting the Double Helix together.



Organizati
           o na
change 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                          Don't           Create
urgency    guiding                           under-   all others short-term
                              vision and                                       let            a new
          coalition                         standing    to act      wins
                               strategy                                        up!            culture
                                           and buy-in


                1.  Ending


         ual
 I ndivid rocess
         ep
  chang

 Seminar – Beyond Budgeting                        91                          © BBTN – All rights reserved
Principles: Leading profound, transformational change




                                         3. Beginning
Organizational                                                               Individual
change process                                                            change process

                                       2. Neutral Zone

   1.          2.            3.          4.            5.        6.           7.         8.
Create a      Pull       Develop     Communi-     Empower Produce           Don't     Create a
sense of   together a     change      cate for    all others short-term    let up!   new culture
urgency      guiding    vision and   understan-     to act      wins
            coalition    strategy     ding and
                                       buy-in




References
                                          1.  Ending




    Seminar – Beyond Budgeting                                                  92                 © BBTN – All rights reserved
2. Was meinen wir bei Paradigma, wenn
   wir von Beyond Budgeting sprechen?




 Seminar – Beyond Budgeting   93        © BBTN – All rights reserved
Underlying assumptions of our recent
management model transformation projects

1.  Organizations are systems . So they have to be transformed as such.
      Thus, finance people cannot do it alone.
      (And it's actually much more fun approaching change holistically.)
2.     It´s all about human nature .
      Apply Theory Y rigidly!
3.    Everyone's 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
beyond                                                                   Make it real!
budgeting


         >
transformation
network.




      BBTN: www.bbtn.org

       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
       niels@bbtn.org                          gebhard@bbtn.org
       Skype: npflaeging                       Skype: gborck
       www.metamanagementgroup.com             www.gberatung.de

       Xing forum: www.xing.com/net/beyondbudgeting
       Get in touch with us for more information about BBTN membership
       and about leading transformation, or ask us for a workshop proposal.
Seminar – Beyond Budgeting   96   © BBTN – All rights reserved
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 www.bbtn.org, or the Beyond Budgeting channel on Youtube, or our books and DVDs,
           or the online diagnostic on www.beyondbudgeting.org.
           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

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

  • 1. beyond Make it real! budgeting > transformation network. 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. 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. 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 Germany Seminar – Beyond Budgeting 3 © BBTN – All rights reserved
  • 4. There are many outstanding cases of companies that have applied the “new” model. This is a selection. 4 4 Seminar – Beyond Budgeting 4 © BBTN – All rights reserved
  • 5. The world has changed: outlining today's 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 response complexity 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
  • 6. Seminar – Beyond Budgeting 6 © BBTN – All rights reserved
  • 7. Seminar – Beyond Budgeting 7 © BBTN – All rights reserved
  • 8. Our journey since 1998, within the international Beyond 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. 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. The new model is supported by science and practice Sciences: 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
  • 11. Seminar – Beyond Budgeting 11 © BBTN – All rights reserved
  • 12. Seminar – Beyond Budgeting 12 © BBTN – All rights reserved
  • 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, 1936 Seminar – Beyond Budgeting 13 © BBTN – All rights reserved
  • 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 Wohland Seminar – Beyond Budgeting 14 © BBTN – All rights reserved
  • 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 leadership Seminar – Beyond Budgeting 15 © BBTN – All rights reserved
  • 16. “faale ghah-ve“ Budgeting Seminar – Beyond 16 © BBTN – All rights reserved
  • 17. Does planning really work? The traditional model can destroy value on a massive scale! Seminar – Beyond Budgeting 17 © BBTN – All rights reserved
  • 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 Pflaeging Seminar – Beyond Budgeting 18 © BBTN – All rights reserved
  • 19. Traditional management processes keep teams from strategic thinking, 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. 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. Current practices are misaligned with the Critical 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. 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. 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 pressure Seminar – Beyond Budgeting 23 © BBTN – All rights reserved
  • 24. The proposal of Beyond Budgeting : Real change requires a coherent 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 University Source: Quoted from the preface to Fraser/Hope: „Beyond Budgeting Seminar – Beyond Budgeting 24 © BBTN – All rights reserved
  • 25. Our systems and modern management tools conflict with the old 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 management Seminar – Beyond Budgeting 25 © BBTN – All rights reserved
  • 26. What is a ‘management model’? Industrial Age Information Age Managed stability Complex and dynamic Leadership culture + Management processes + Information systems Seminar – Beyond Budgeting 26 © BBTN – All rights reserved
  • 27. We must work on the model, not in the model. Seminar – Beyond Budgeting 27 27 © BBTN – All rights reserved
  • 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 control Seminar – Beyond Budgeting 28 © BBTN – All rights reserved
  • 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 share Seminar – Beyond Budgeting 29 © BBTN – All rights reserved
  • 30. For more than a decade, this bank has been customer satisfaction 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 2002 Private Customers, Source: Svenska Kvalitetsindex Seminar – Beyond Budgeting 30 © BBTN – All rights reserved
  • 31. Comparison between the major publicly listed universal banks in Europe universales in Europe. Jan-Dec 2005, after credit losses. * Refers to loans to the public or deposits if deposits > lending 1,0 Cost/Total loans*, % Danske Bank Handelsbanken FöreningsSparbanken DnB Nor 2,0 Nordea Bank of Ireland SEB HypoVereinsbank Allied Irish Banks Banco Santander KBC 3,0 Credit Agricole Royal Bank of Scotland Bank Austria Commerzbank BBVA Unicredit Lloyds TSB San Paolo-IMI Standard Chartered 4,0 Erste Banca Intesa Capitalia ABN Amro Monte dei Paschi di Siena Barclays HSBC 5,0 Deutsche Bank BNP Paribas HBOS Société Générale UBS CS Group Cost/Income ratio, % 6,0 90 80 70 60 50 40 Source: Deutsche Bank: European Banks - Running the Numbers, Spring edition. Seminar – Beyond Budgeting 31 © BBTN – All rights reserved
  • 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: BBRT Seminar – Beyond Budgeting 32 © BBTN – All rights reserved
  • 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. 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 Seminar – Beyond Budgeting 34 © BBTN – All rights reserved
  • 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. Creating a “virtuous circle”– a common factor among “Beyond Budgeting” pioneers Better to do business with Better for society Better to invest in 4. Customer intimacy – Highest 5. Ethical & social standards – 6. Sustainable value – (independent) customer satisfaction Support the long term interests of Beats peer group every year scores in sector year-after-year; the bank and society. on ROE and cost-to-income lowest customer complaints; ratio; highest total monitors customer acquisitions/ shareholder return in sector; defections. devolved adaptive organization is key driver of 3. Operational excellence – success. Lowest costs of any bank in Europe; lowest bad debts; cost reduction culture; flat organization (half a Better to work for head office person per branch 1. Best people – SHB is first versus five for rivals); internal choice financial services market exerts constant pressure on company in Sweden for central services. graduates; employee 2. Innovation – SHB voted joint turnover is lowest in sector; best Internet bank in Europe in challenge, personal 2000; any competitive products and responsibility and freedom to solutions are fed back from run their part of the branches to product development. Virtuous circle business; group-wide profit sharing scheme. Text relates to Svenska Handelsbanken Seminar – Beyond Budgeting 36 © BBTN – All rights reserved
  • 37. Seminar – Beyond Budgeting 37 © BBTN – All rights reserved
  • 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 Targets Seminar – Beyond Budgeting 38 © BBTN – All rights reserved
  • 39. Theory X vs. Theory Y Seminar – Beyond Budgeting 39 39 Douglas McGregor © BBTN – All rights reserved
  • 40. The industrial age management model not only fails because markets 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 , 1960 Seminar – Beyond Budgeting 40 © BBTN – All rights reserved
  • 41. Seminar – Beyond Budgeting 41 © BBTN – All rights reserved
  • 42. Seminar – Beyond Budgeting 42 © BBTN – All rights reserved
  • 43. Seminar – Beyond Budgeting 43 © BBTN – All rights reserved
  • 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
  • 45. Seminar – Beyond Budgeting 45 © BBTN – All rights reserved
  • 46. It´s a different mental discipline Seminar – Beyond Budgeting 46 46 © BBTN – All rights reserved
  • 47. The 12 principles of the Beyond Budgeting model are in fact a full set of “design principles“ for the new organization type. Principles Do this! Not that! Customers and Customer/outside focus Focus on the boss responsibility Responsible teams ( cells ) Centralization Leadership 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 goals Processes 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. Now, it is time for transforming your organization – by closing the gaps A typical company – results from the BBRT online diagnostic Table 1: The case for change Problems Vision Practice Close the gaps! Seminar – Beyond Budgeting 48 © BBTN – All rights reserved
  • 49. There are two different ways of working on the model – evolution and transformation Low degree of decentralization/ empowerment and Differentiation Stagnation fixed performance phase within the tayloristic model contracts: in conflict with today's critical success factors! Transformation Bureaucratization through radical devolution growing hierarchy and and decentralization functional differentiation High degree of decentralization/ empowerment with relative Evolution Sustaining and performance Pioneering within the decentralized Integration deepening of the contracts: aligned phase model phase decentralized model, with today's critical through generations success factors! Organizations with Foundation Time scale: organization's age traditional models must Several decades old eventually transform themselves! Seminar – Beyond Budgeting 49 © BBTN – All rights reserved
  • 50. Seminar – Beyond Budgeting 50 © BBTN – All rights reserved
  • 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 Pfläging Seminar – Beyond Budgeting 51 © BBTN – All rights reserved
  • 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
  • 53. Seminar – Beyond Budgeting 53 © BBTN – All rights reserved
  • 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. beyond Make it real! budgeting > transformation network. BBTN: www.bbtn.org 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 niels@bbtn.org gebhard@bbtn.org Skype: npflaeging Skype: gborck www.metamanagementgroup.com www.gberatung.de Xing forum: www.xing.com/net/beyondbudgeting Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.
  • 56. beyond Make it real! budgeting > transformation network. 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. Seminar – Beyond Budgeting 57 © BBTN – All rights reserved
  • 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, 2001 Seminar – Beyond Budgeting 58 © BBTN – All rights reserved
  • 59. Background stories we wouldn´t tell our clients: Real-life examples from companies The case of Marie Taylor This is what happened: Marie Taylor, a sales person from our organization, has generated income 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 sales support department. All her bonuses rights have been immediately cancelled. 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. Background stories we wouldn´t tell our clients: Real-life examples from companies The case of Frank Miller This is what happened: Frank Miller, a consultant, has overcharged during his work with clients, which means he has systematically inflated the amount of worked hours charged to his customers. The decision: Frank Miller was fired and is leaving the company immediately. 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. The problem with “incentives”: How traditional management systematically forces people to cheat Bonus Variable Bonus Common practice: hurdle area limit “Ceiling” „Pay for performance“ compensation Salary/ Reduction Maximization Reduction incentive: profile with fixed bonus incentive: Lower incentive: Anticipate postpone results to performance contract: result even more results next period Creates maniuplation incentive 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 becomes oriented compensation decoupled from targets profile with relative performance Salary/ Free from bonus incentive to manipulate contracts: No incentive to manipulation. Actual Actual Actual Performance in Source: Michael Jensen result #1 result #2 result #3 relative evaluation Seminar – Beyond Budgeting 61 © BBTN – All rights reserved
  • 62. General principles for designing compensation systems in 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. How often do the systems, especially the HR systems, get in the way 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, 110-111 Seminar – Beyond Budgeting 63 © BBTN – All rights reserved
  • 64. Seminar – Beyond Budgeting 64 © BBTN – All rights reserved
  • 65. Employing resources dynamically: A typical way of doing it, as practiced by Sydney Water, Australia Resources 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 Water Seminar – Beyond Budgeting 65 © BBTN – All rights reserved
  • 66. 1 3 2 Seminar – Beyond Budgeting 66 © BBTN – All rights reserved
  • 67. Why isn’t everyone devolving decision-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 when individuals have information [about and strong evidence that such participation leads to what’s occurring in the battlefield] the effectiveness and productivity we crave… With and know how to interpret it because so much evidence supporting participation, why isn't they know the ‘commander's intent’, everyone working in a self-managed environment right they 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 Summer New 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. 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. Some questions that we need to respond, if we want to decentralize 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 Pflaeging Seminar – Beyond Budgeting 69 © BBTN – All rights reserved
  • 70. Seminar – Beyond Budgeting 70 © BBTN – All rights reserved
  • 71. Coherence is the critical issue Seminar – Beyond Budgeting 71 © BBTN – All rights reserved
  • 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 = Resistance Seminar – Beyond Budgeting 72 © BBTN – All rights reserved
  • 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“, 2004 Seminar – Beyond Budgeting 73 © BBTN – All rights reserved
  • 74. The case study: Transforming an organization, as suggested by John Kotter, HBS: A process model for organizational change References Organizational change process (John Kotter, Leading Change to Our Iceberg is Melting ) 1. 2. 3. 4. 5. 6. 7. 8. Create a Pull Develop Communi- Empower Produce Don't Create a sense of together a change cate for all others short-term let up! new culture urgency guiding vision and understan- to act wins coalition strategy ding and buy-in Seminar – Beyond Budgeting 74 © BBTN – All rights reserved
  • 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-in 1.  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. 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 structure Seminar – Beyond Budgeting 76 © BBTN – All rights reserved
  • 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 Disposition Seminar – Beyond Budgeting 77 © BBTN – All rights reserved
  • 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. Seminar – Beyond Budgeting 79 © BBTN – All rights reserved
  • 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 Region Region Cells ( R-Cells ) Europe Clients: all P-Cells Key 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. “Cell structure“ as a foundation for sensible target definition 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. What are the consequences? Seminar – Beyond Budgeting 82 © BBTN – All rights reserved
  • 83. Whatwe are waiting “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. Beyond Budgeting: Is this something for only a select few? For geniuses and mavericks? Seminar – Beyond Budgeting 84 © BBTN – All rights reserved
  • 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 model traditional 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. 90% Seminar – Beyond Budgeting 86 86 Peter Drucker © BBTN – All rights reserved
  • 87. Part I of the Double Helix transformation framework: A process model for organizational change References Organizational change process (John Kotter, Leading Change to Our Iceberg is Melting ) 1. 2. 3. 4. 5. 6. 7. 8. Create a Pull Develop Communi- Empower Produce Don't Create a sense of together a change cate for all others short-term let up! new culture urgency guiding vision and understan- to act wins coalition strategy ding and buy-in Seminar – Beyond Budgeting 87 © BBTN – All rights reserved
  • 88. What to do when in the process? Two examples •  Create array of larger Task Forces to change Organizational organizational structure, management change process processes and business processes (John Kotter, Leading Change •  Align projects and decision processes to 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 Don't Create a sense of together a change cate for all others short-term let up! new culture urgency 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. Seminar – Beyond Budgeting 89 Logoplaste Leadership Workshop, Mar 2007 © BBTN – All rights reserved
  • 90. Part II of the Double Helix transformation framework: a process model for personal change Reference 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. Putting the Double Helix together. Organizati o na change 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 Don't Create urgency guiding under- all others short-term vision and let a new coalition standing to act wins strategy up! culture and buy-in 1.  Ending ual I ndivid rocess ep chang Seminar – Beyond Budgeting 91 © BBTN – All rights reserved
  • 92. Principles: Leading profound, transformational change 3. Beginning Organizational Individual change process change process 2. Neutral Zone 1. 2. 3. 4. 5. 6. 7. 8. Create a Pull Develop Communi- Empower Produce Don't Create a sense of together a change cate for all others short-term let up! new culture urgency guiding vision and understan- to act wins coalition strategy ding and buy-in References 1.  Ending Seminar – Beyond Budgeting 92 © BBTN – All rights reserved
  • 93. 2. Was meinen wir bei Paradigma, wenn wir von Beyond Budgeting sprechen? Seminar – Beyond Budgeting 93 © BBTN – All rights reserved
  • 94. Underlying assumptions of our recent management model transformation projects 1.  Organizations are systems . So they have to be transformed as such. Thus, finance people cannot do it alone. (And it's actually much more fun approaching change holistically.) 2.  It´s all about human nature . Apply Theory Y rigidly! 3.  Everyone's 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. beyond Make it real! budgeting > transformation network. BBTN: www.bbtn.org 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 niels@bbtn.org gebhard@bbtn.org Skype: npflaeging Skype: gborck www.metamanagementgroup.com www.gberatung.de Xing forum: www.xing.com/net/beyondbudgeting Get in touch with us for more information about BBTN membership and about leading transformation, or ask us for a workshop proposal.
  • 96. Seminar – Beyond Budgeting 96 © BBTN – All rights reserved
  • 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 www.bbtn.org, or the Beyond Budgeting channel on Youtube, or our books and DVDs, or the online diagnostic on www.beyondbudgeting.org. 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