Seminar (EN): CFO Forum - Challenges in tough times, Warszaw/Poland, organized by HBR Poland

beyond Make it real!
budgeting

>
transformation
network.

CFO Forum:
Challenges in tough times -
the role of the CFO in contributing to
the organization´s performance management
Why your performance management systems have to
change. And how you should approach this

Niels Pflaeging
BBTN & MetaManagement Group

Seminar with HBR Poland, Warszaw
. 17.06.2009

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

2
2
Seminar – Beyond Budgeting 2 © BBTN – All rights reserved

The world has changed:
outlining today's critical success factors

Industrial age ends: Knowledge economy advances:
high ”Supplies have the power“, ”Customers have the power“,
Evolution of mass markets: strong competition, individualized demand:
Taylorism as the superior model decentralized and adaptive model is superior!

Now, all these factors
are equally important!
Here, only efficiency Competitive
mattered, really! Characteristics success factors (CSF)
Dynamics 1. Discontinuous change - Fast response
and 2. Short life cycles - Innovation
complexity 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.
• „Managed“ results
low

1890 Most organizations still use a management model that was designed 2030
1980 1990 2000 2010 2020
Seminar – Beyond Budgeting for efficiency, while the problem today is complexity.
5 © BBTN – All rights reserved

Our journey since 1998, within the international
Beyond Budgeting movement

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


A new brand. A new network.

Make it real!

The first “open source“ movement in the management arena – worldwide!
Full membership free of charge – visit www.bbtn.org


There is a “new” model, which is supported
by science and practice

Sciences: Practice:
Stafford Beer
Thought leaders Margareth Wheatley Industry leaders
(selected) Niklas Luhmann (selected)
W. Edwards Deming
Kevin Kelly
Ross Ashby
Joseph Bragdon
…
Douglas McGregor
Chris Argyris Complexity
Jeffrey Pfeffer theories
Reinhard Sprenger Industry
Stephen Covey
Howard Gardner
Viktor Frankl Social sciences
… and HR Retail

Peter Drucker
Tom Peters Leadership & Services
Charles Handy change
John Kotter
Peter Senge Strategy &
Thomas Davenport Governments
Peter Block Performance
& NGOs
… management
Henry Mintzberg
Gary Hamel
Jeremy Hope
Michael Hammer
Thomas Johnson
Charles Horngren
Seminar – Beyond Budgeting
… 10 © BBTN – All rights reserved

Industria

Distribuição

Serviços
• Innovators: A crises within their
industries or firms caused them
to change radically
Governo
• Mavericks: Exceptional leadership models
& ONGs
• Performers: Superior competetive success
It´s the coherence of the
leadership model that matters!

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

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

Fixed • Activity planning 200
performance
performance • Resource allocation 100

contacts and
contacts and • Coordination of plans 0
0
1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Chem Systems
“keep on track”
“keep on track” • Approval
Behavioral problems
Budget

Performance control
(plan-actual)

Bonus (vs. targets)

Source: BBRT ...

Management processes in command and control
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 15

Current practices are misaligned with the
Critical Success Factors of today's competitive market places

Six “Critical Success Factors” Six examples of misalignment

• Fast response Annual planning process retards it
• Innovation Centralized bureaucracy stifles it
• Operational excellence ‘Spend it or lose it’ mentality fights it
• Customer intimacy Short term targets prevent it
• Best team Extrinsic ‘motivators’ undermine it
• Ethical behaviour Dysfunctional, even unethical behaviour
conflicts with it

• Value creation • Inferior financial results

When pressure is
applied, misalignment
Seminar – Beyond Budgeting
gets worse! 16 © BBTN – All rights reserved

Organizations need a different, trust-based form of
“future-directed thinking”, not command and control!

The secret of success is not to foresee the future.
But to build an organization that is able to prosper in any
of the unforeseeable futures.
Michael Hammer

The problems with traditional
planning and control are merely
symptoms of a much deeper
problem.


Beyond Budgeting means:
From fixed to adaptive management processes.

Traditional model New model
(fixed performance contracts, (relative performance contracts,
negotiated in advance) assessed with hindsight)

Relative
strategy performance
contracts
Changing
Fixed
performance processes
Dynamic
contracts
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


Outlining the ‘industrial age’ model and its pitfalls

“command and control“

• Too centralized
• Too inward-looking
• Too little customer-oriented
• Too bureaucratic
• Too much focused on control
• Too functionally divided
• Too slow and time-consuming
• Too de-motivating
• … film ‘Modern Times’ with Charlie Chaplin, 1936
From the

How markets govern organizations “from the outside in”

Periphery
Mar
ke t
Center

Information Decision

Command

Centralist command and
Impulse control “collapses“ in
Reaction
increasingly complex
environments

Source: Gerhard Wohland

Beyond Budgeting means:
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

Our 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 Benchmarking
value added Supports Deemphasizes
short term Central
Local external
stretch control comparisons
targets

Supports Creates
‘Make & Sell’ multiple
Customer strategy Supports contracts
relationship central decision Balanced
management making Scorecard

Activity-based
management

Finance must
work
on the model,
not
in the model.

What exactly is a ‘management model’?

Industrial Age Information Age
“Managed stability” “Complex and dynamic“

Leadership
culture
+
General Motors Management Toyota
Chrysler processes Honda
Ford ...
...
+
Information
systems

Organizations with
traditional models must
eventually transform
themselves!

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 Dynamic
contracts
coordination
Fixed Dynamic
processes processes
control

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


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

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.


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 Fast, open
(Invest Centers)
information
information
freedom and ability to act
systems
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

Relative target definition through “league tables“ (rankings) –
instead of planned, fixed targets and internal negotiation
Strategic „cascade”
Bank to bank
Bank to bank
Return on Equity (RoE)
Return on Equity (RoE) Region to region
Principles Region to region
Return on Assets(RoA)etc.
1. Bank D 31% Return on Assets(RoA)etc.
1. Bank D 31% Branch to branch
2. Bank JJ 24%1.
2. Bank Branch to branch
24%1. Region A 38% Cost/income ratio etc.
Region A 38% Cost/income ratio etc.
3. Bank I I 20%2.
3. Bank 20%2. Region CC 27%
Relative targets and Region 27%
relative compensation 4. Bank BB 18%3.
4. Bank 18%3. Region H 20%1.
Region H 20%1. Branch JJ 28%
Branch 28%
5. Bank EE 15%4.
5. Bank 15%4. Region B 17%2.
Region B 17%2. Branch D 32%
Branch D 32%
Continuous 6. Bank FF 13%5.
6. Bank 13%5. Region FF 15% 3.
Region 15%3. Branch EE 37%
Branch 37%
7. Bank CC 12%6. 4.
Region EE 12% 4. Branch A 39%
Branch A 39%
planning/control 7. Bank 12%6. Region 12%
8. Bank H 10%7. Region JJ 10%5.
10%5. Branch I I 41%
Branch 41%
8. Bank H 10%7. Region
9. Bank GG 8% 8. Region I I 7% 6.
7% 6. Branch FF 45%
Branch 45%
“On demand“ flow of 9. Bank 8% 8. Region
7. Branch CC 54%
10. Bank AA (2%)9.
10. Bank
Region G 6% 7.
(2%)9. Region D (5%)8.
Region G 6% Branch 54%
resources/ 10. Region D (5%)8. Branch G 65%
10. Branch G 65%
dynamic coordination 9.
9. Branch H 72%
Branch H 72%
10. Branch B 87%
10. Branch B 87%
Result & value contribution

Leads to lowest operational cost!

Flexible coordination and resources “on demand“ -
instead of allocations and budgets

Headquarters/
Headquarters/
Region
Region

Branches acquire resources
through internal markets

Resources
Resources Customer
Customer
Branch
Branch
(IT, HR etc.)
(IT, HR etc.) demand
demand

Branches 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

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!

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 shareholder return in sector;
acquisitions/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
versus five for rivals); internal 1. Best people – SHB is first
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 responsibility and freedom to
and 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

But there is a further challenge. Which is why most theories about
leadership, as well as most advice from consultants, are flawed...

One cannot talk sensibly about leadership, or people
management, nor design decent management processes,
unless we clarify beforehand our beliefs with regards to what
people in organizations are like.
We have to arrive at a shared understanding of human
nature and of the consequences of that for our organizations.
Niels Pflaeging, Leading with Flexible Targets


vs.
Douglas McGregor

Seminar – Beyond Budgeting 39

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
People dislike work, find it boring, People need to work and want to take an inte-
and will avoid it if they can. rest in it. Under right conditions, they can enjoy it.
Direction
People must be forced or bribed People will direct themselves towards
to make the right effort. a target that they accept.
Responsibility
People would rather be directed than People will seek and accept responsibility,
accept responsibility, which they avoid. under the right conditions.
Motivation
People are motivated mainly by money Under the right conditions, people are moti-
and fears about their job security. vated by the desire to realize their own potential.
Creativity
Most people have little creativity - except Creativity and ingenuity are widely distributed
when it comes to getting round rules. and grossly underused.

Based on Douglas McGregor, ‘The Human Side of Enterprise’, 1960


Do you BELIEVE in Theory Y?
Firmly?

Good. Because then we can be sure that you would
never, ever practice (or support, or tolerate)
HR processes and tools that treat people like children,
or animals, or worse. Right?
Such as performance appraisals, individual target
setting, incentive compensation, “meritocracy”,
control of work-hours, …

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.“

It s a different
mental


The 12 principles of the Beyond Budgeting model are in fact
a full set of “design principles“ for the new organization type.

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

Performance and Performance culture, beat the market Inspired by the past, burocratic
6 “devolved
freedom Autonomy and responsibility Adherence to fixed plans
leadership” principles
Governance and Clearly defined objectives and values Impose objectives from above
transparency Open and shared information Restricted information
Goals and Goals related to continuous improvement Fiscal year, fixed goals
rewards Rewards related to organization results Reward local, fixed goals
Processes

Planning and 6 “adaptive management
Continuous and inclusive planning Top-down annual planning
controls processes” principles
Compare performance against actuals Variations against fixed plans
Resources and Resources “on demand” Annual (budget) allocations
coordination Coordinate dynamic, market-like interactions Departmentalization, hierarchy


There are two different ways of working on the model –
evolution and transformation

Sustaining and
deepening of the
Integration decentralized model,
Evolution phase through generations
within the decentralized
model (culture of Transformation
empowerment and trust) through radical
decentralization of
decision-making
Stagnation
within the tayloristic model

Bureaucratization
through growing hierarchy
and functional differentiation
Pioneering
phase High degree of decentralization/
empowerment

Foundation Time scale: organization's age Several decades old

Why traditional management with “fixed performance contracts“
regularily fools us: We have lost control a long time ago…

Fixed targets Relative, self-adjusting targets
Target: absolute ROCE in % (here: 15%) Target: relative ROCE in % (to market)
Plan Actual Target Actual

Comparison:
Comparison: Market-Actual
Plan-Actual Most Target: „ROCE Most
important in % better important
Market competitor than market Market competitor
(25%) (28%) average” (25%) (28%)
Actual Actual
Plan (21%) (21%)
(15%) [independent
[expected from expected
market Ø: 13%] market Ø]

• Interpretation within the plan-actual- • Interpretation within actual-actual compa-
comparison: Plan was outperformed by 6 rison: Performance was 4 percentage points
percentage points > positive interpretation below competition! > negative interpretation
• Better ROCE of the market average and the • Absolute assumptions at the moment of
most important competitor remain unnoticed! planning don´t matter.
• Targets always remain updated and relevant!
Source: Niels Pfläging

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

Relative target definition through “league tables“ (rankings) –
instead of planned, fixed targets and internal negotiation
Strategic „cascade”
Bank to bank
Bank to bank
Return on Equity (RoE)
Return on Equity (RoE) Region to region
Principles Region to region
Return on Assets(RoA)etc.
1. Bank D 31% Return on Assets(RoA)etc.
1. Bank D 31% Branch to branch
2. Bank JJ 24%1.
2. Bank Branch to branch
24%1. Region A 38% Cost/income ratio etc.
Region A 38% Cost/income ratio etc.
3. Bank I I 20%2.
3. Bank 20%2. Region CC 27%
Relative targets and Region 27%
relative compensation 4. Bank BB 18%3.
4. Bank 18%3. Region H 20%1.
Region H 20%1. Branch JJ 28%
Branch 28%
5. Bank EE 15%4.
5. Bank 15%4. Region B 17%2.
Region B 17%2. Branch D 32%
Branch D 32%
Continuous 6. Bank FF 13%5.
6. Bank 13%5. Region FF 15% 3.
Region 15%3. Branch EE 37%
Branch 37%
7. Bank CC 12%6. 4.
Region EE 12% 4. Branch A 39%
Branch A 39%
planning/control 7. Bank 12%6. Region 12%
8. Bank H 10%7. Region JJ 10%5.
10%5. Branch I I 41%
Branch 41%
8. Bank H 10%7. Region
9. Bank GG 8% 8. Region I I 7% 6.
7% 6. Branch FF 45%
Branch 45%
“On demand“ flow of 9. Bank 8% 8. Region
7. Branch CC 54%
10. Bank AA (2%)9.
10. Bank
Region G 6% 7.
(2%)9. Region D (5%)8.
Region G 6% Branch 54%
resources/ 10. Region D (5%)8. Branch G 65%
10. Branch G 65%
dynamic coordination 9.
9. Branch H 72%
Branch H 72%
10. Branch B 87%
10. Branch B 87%
Result & value contribution


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! © BBTN – All rights reserved

Question:
How often do the systems,
especially the HR systems,
get in the way of change, transformation,
vision and strategic thinking?

Answer:
Far too often.
History often leaves HR people in highly bureaucratic
personnel functions that discourage leadership and make
altering human resource practices a big challenge.
Seminar – Beyond Budgeting Kotter, Leading Change, p, 110-111
Source: based upon John 61 © 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
Salary/ Free from
performance
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

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


1 very simple principle:
Always disconnect compensation from targets.
Always.


An example: “motivation”, or “threat”?
What compensation systems really do...

System with no System with variable compensation
variable compensation (bonus, incentive, etc.)

30%
Variable
compensation

100%
Base salary 100%: Total 70%
compensation Base salary Is this an “energizing
expected by promise”, or is it
employee. just a pitiful threat?

“We have a conservative pay “We have an aggressive pay
philosophy. philosophy: 30% of your total
Your base salary equals your total compensation will be paid in form of
compensation, which is USD a bonus. The total is USD
100.000,00.“ 100.000,00, by the way.“


Pay the person. Not the position.
Always.


Social scientist Alfie Kohn says:

I am arguing against…..
(1) attributing more importance to money than it actually has,
(2) pushing money into people's faces and making it more
salient than it needs to be, and
(3) confusing compensation with reward
(the latter being unnecessary and counterproductive).
The problem isn't with the dollars themselves,
but with using dollars to get people to jump through hoops.


And:

Pay-for-performance is an outgrowth of behaviorism, which is
focused on individual organisms, not systems - and, true to its name,
looks only at behaviors, not at reasons and motives and the people who
have them.
I tell Fortune 500 executives (or at least those foolish enough to ask me)
that the best formula for compensation is this: Pay people well, pay them
fairly, and then do everything possible to help them forget about money.
How should we reward our staff? Not at all! They are not our pets.
Pay them well, respect and trust them, free them from disturbance,
provide them with all available information and support to perform
on the highest possible level.

1. Pay people well
2. Pay people fairly
3. And then do everything possible to take money off peoples minds!
All pay-for-performance plans violate that last precept!

Never use bonuses and incentives.
Use profit sharing and/or shareholding concepts instead.


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

1 3
2


A case study – the organizational structure looked like this

And whe re does the
mer fit in her e?
CEO

custo
Director Director Director Director
CFO
International Production Technology Sales Germany
Region Region Region Region Branch Branch Branch Branch
1&2 3&4 5&6 7&8 I II III IV

Admini- HRSales Control- Marke-
Production Sales
Cont. Admini-
Material Cont. Marke-
Assistant IT Assistant ling Assistant Quality Engeneers,
stration OEM education tingOEMSales stration Sales education ting/ CI
Region Region Region Region Leader SalesPlanning
Developers Sales
9 & 10 11 & 12 13 & 14 14 & 15
Accoun- Work
Sales After-Sales Customer
Customer
Central sales TelephonistsAssistant
Internal sales
Region Region Region Pro- Services
ting Region
Assembly planni Logistics
office Services Services
support 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


Why isn’t everyone decentralizing
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?


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” “Devolved”/descentralized
transparency between 100% of the the arrogance of
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 which the
between ‘doers’ and ‘thinkers’. boundaries) to the frontline –
95% of good people within our organization can customer
Consequently, many decisions 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

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


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

Coherence is the critical issue


Is transformation possible?

“I don´t know if it is possible.
What I know: It is necessary.“
Tom Peters

Today we already know for sure it is possible.
And we have also learned how it can be done.

To transform your organization from “command & control” to
“decentralized network”, a double helix change is needed

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

References
1. Ending

ual
Individ rocess
ep
chang


This process is systemic and not like “project management“,
but it can be guided and “temperature“ can be taken at any time

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.

How does a decentralized organization work?

• The market is the boss. (“Outside“ rules!)
Former bosses give up their power.
• A network cell is not a department: It is functionally integrated,
t functionally divided!
• A network cell has clients - external or internal – which it serves.
It doesn´t serve bosses!
• “Management“ is done inside the cell,
not above it!
A cell has at least 3 team members.

There are three kinds of building blocks of a radically decentralized organization,
as follows...


1. A “Sphere of Activity“
(this is where “power“ and coherence come from)


2. “Network Cells“
(this is where the work is done and where clients are being served)


3. “Strings“
(this visualizes the interactions between cells)


And finally, you have “Market Pull“

The case study:
From departmental hierarchy to decentralized cell network

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”) Clients: all P-Cells
Region Europe
Key Roles of R-Cells 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 P8
“Own“ all customers in
Cell 1 Shop Product cells (“P-cells”)
their regions
• Production
• Process & work
Region “Sphere of planning
Org Shop Southwest •…Quality
• HR Activity”
• Maintenance
• Executive board + assistance Info Shop • Production logistics
• Central office • IT • Process optimization
Clients: All R- and P-Cells • Financial accounting • Material planning
• Controlling • Design/R&D
Clients: all R- and P-cells Customers: All R-Cells

“Cell structure“ as a foundation for sensible target
definition in a “relative“ way - using league tables
Strategic cascade
Firm to Firm
Firm to Firm
ROCE
ROCE Region to Region
Region to Region
1. Firm D 31% Cost over income
Cost over income
1. Firm D 31%
P-Cell to P-Cell
2. Firm JJ
2. Firm 24%1. P-Cell to P-Cell
24%1. Region A 38% On-time-delivery etc.
Region A 38% On-time-delivery etc.
3. Firm I I
3. Firm 20%2.
20%2. Region CC 27%
Region 27%
4. Firm BB
4. Firm 18%3.
18%3. Region H 20%1.
Region H 20%1. P-Cell JJ 28%
P-Cell 28%
5. Firm EE
5. Firm 15%4. Region B 17%2.
15%4. Region B 17%2. P-Cell D 32%
P-Cell D 32%
6. Firm FF
6. Firm 13%5.
13%5. Region FF 15% 3.
Region 3.
15% P-Cell EE 37%
P-Cell 37%
7. Firm CC 12%6. Region EE 12%4.
12%4. P-Cell A 39%
P-Cell A 39%
7. Firm 12%6. Region
8. Firm H 10%7. Region JJ 10%5.
10%5. P-Cell I I 41%
P-Cell 41%
8. Firm H 10%7. Region
9. Firm GG 8% 8. 6.
Region I I 7% 6. P-Cell FF 45%
P-Cell 45%
9. Firm 8% 8. Region 7%
10. Firm AA
10. Firm (2%)9. Region G 6% 7.
(2%)9. Region G 6% 7. P-Cell CC 54%
P-Cell 54%
10. Region D (5%)8.
10. Region D (5%)8. P-Cell G 65%
P-Cell G 65%
9.
9. P-Cell H 72%
P-Cell H 72%
10. P-Cell B 87%
10. P-Cell B 87%
Value contribution


Beyond Budgeting: Is this something for only a select few?
Just for geniuses and mavericks?


Industria

Distribuição

Serviços

Governo
& ONGs


are we
“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.”
Seneca, Roman philosopher and statesman, 4BC – 65AD


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

Seminar (EN): CFO Forum - Challenges in tough times, Warszaw/Poland, organized by HBR Poland

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Seminar (EN): CFO Forum - Challenges in tough times, Warszaw/Poland, organized by HBR Poland