Beyond Budgeting Case Study AES

1. AES Corp
International Center for
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Outperformance

2. Beyond-Budgeting-Case-Study
AES Corporation
“the power of being global”
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3. “God made us all a certain way. We’re all creative, capable of making
decisions, trustworthy, able to learn, and perhaps most important,
fallible. We all want to be part of a community and to use our skills to
make a difference in the world.”
Dennis Bakke
“A joy-filled workplace gives people the freedom to
use their talents and skills for the benefit of society,
without being crushed or controlled by autocratic
supervisors”
“Everything about how we organize gives
Dennis Bakke
people the power and the responsibility to
make important decisions, to engage with their
work as businesspeople, not as cogs in a
machine.”
“We abhor layers. We avoid them like the plague.
The more authority figures you have above you, the
Dennis Bakke
more likely it is that you won't make decisions
yourself. So we organize around small teams.”
Dennis Bakke
quot;If you're interested in moving up
in a traditional hierarchy, you' re
not going to choose to work at
AES.”
Dennis Bakke
quot;It is okay to make most mistakes. quot;We try to reinvent the wheel every
We are all human. Its part of time we get a chance. The process
AESs values to accept mistakes.quot; of learning and doing is what creates
engagement – fun.quot;
Dennis Bakke
Roger Sant
“We broke all the rules. No overtime. No
quot;Managers control people and things.
bosses. No time records. No shift
Leaders give up control and serve
schedules. No assigned responsibilities. No
people.
administration. And guess what? It worked!”
There's a huge difference—and that's
the essence of creating joy at work.quot;
Oscar Prieto, AES manager and director of
Light Servicios de
Dennis Bakke
Electricidade, Brazil, October 1998
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4. Table of contents:
Introduction to the Case Study..........................................................................................................................5
AES Corporation: „The power of being global“ - past to present.......................................................................6
Company Overview.....................................................................................................................................6
Worldwide expansion from the United States and IPO..............................................................................10
AES' two dramatical crisis .........................................................................................................................11
AES' culture...............................................................................................................................................13
Leadership model of AES...............................................................................................................................16
Introduction................................................................................................................................................16
Assumptions held about human nature at AES..........................................................................................18
Management Practices listed by Beyond-Budgeting-Principles.................................................................19
Adopting the AES way at new plants ........................................................................................................34
Appendices.....................................................................................................................................................36
Appendix 1: Theory X / Y...........................................................................................................................36
Appendix 2: Beyond-Budgeting-Principles.................................................................................................37
Appendix 3: Typical evolutionary path within an organization's life............................................................39
Appendix 4: The Double Helix Transformation Framework........................................................................40
Appendix 5: „Joy at Work“: Dennis Bakke's approach to leadership..........................................................41
Appendix 6: Bakke's Top 10.......................................................................................................................42
Appendix 7: AES' stock price ....................................................................................................................43
Resources.......................................................................................................................................................47
License...........................................................................................................................................................47
(Version 1.2, May 2009)
(Version 1.1, January 2009)
(Version 1.0 June 2008)
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5. Introduction to the Case Study
What makes AES so special among the Beyond-Budgeting-Pioneers? While keeping its entrepreneurial
spirit, its unique culture, consisting of shared values and principles, and its way of organization entitled the
“Honeycomb” since its foundation in 1981, AES did thus not transform to Beyond Budgeting. But it
transforms newly acquired plants to Beyond Budgeting! Moreover AES demonstrates that the Beyond-
Budgeting-Model works verbally „beyond“ national cultures, in AES' case over five continents in 29 different
countries and many different national cultures. Secondly AES demonstrates that even Beyond Budgeting
leads in a traditional-minded, capital-intensive, highly-regulated and controlled industry to industry
leadership using a “joy at work” approach for a product, that is without doubt a commodity. Further more
we will experience the effect of the Beyond-Budgeting-Principle “Transparency” when a Beyond-Budgeting-
Organization is publicly listed at the stock exchange. Forth we will learn the importance of AES' lived shared
values and mission when it comes to profit and financial issues, and last but not least, that the complete
management model from AES was build upon “try-and-error”. As Tom Tribone, AES' most creative new
business developer calls this: “We tried it out in practice and then see if it works in theory.”
The AES Case was investigated by the BBRT in 1998 stating: “The immediate impression is that of a
profound principle-based, small enterprise, in which everyone is involved and engaged. The philosophy of
AES has its roots in shared vales, teamwork, and the acceptance of responsibility.”
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6. AES Corporation: „The power of being global“ - past to present
Company Overview
AES' slogan „The Power of Being Global“ hits the grounds: founded in 1981 by Roger Sant and Dennis
Bakke, AES can today be truly described as a global company operating on 5 continents and in 29 countries
with 129 plants, 28.000 AES people and an overall turnover of $13.6 billion (in 2007). Focusing on power
generation and electric utilities, AES has developed itself within 25 years to one of today's world’s largest
global power companies, achieving worldwide industry leadership. The AES 2005 Annual Report points out
the companies slogan “The power of being global”:
Dennis Bakke
“AES is all about being global. And for good reason. Being global helps spread innovation. Sharing
Dennis Bakke
knowledge across our enterprise fosters excellence and yields remarkable results. A best practice for
turbine life cycle management found in Africa provides the power to improve performance across Europe
and the Middle East. Deep local insights and presence in the Southern Cone help mitigate the cross-border
impacts of a gas shortage in Argentina.
Globally, we command a robust and well-balanced portfolio of businesses. With practical expertise in
almost every form of power generation, we can identify the right fuel technology for each particular market
—helping to lower costs for consumers and supporting continued economic growth and expansion in the
markets we serve.
Globally, regionally and locally, AES seeks out ways to drive strategic growth. And our people are as
dynamic as our global footprint, cultivating deep roots in each local culture and economy. Wherever we do
business, we deliver results.
These qualities make AES a good investment, a good partner and a great place to work. At AES, that’s the
power of being global.”
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7. Being today one of the “poster companies” for empowerment, Roger Sant and Dennis Bakke never
indented to: “Bakke: We knew that we wanted to create a very different kind of company, that's for sure. I
don't think we used the word empowerment-I'm not sure it was even around in 1981. Our main goal at the
beginningRoger to build a company that we ourselves would want to work in. The actual type of business
was Sant
wasn't really important, to tell you the truth. It could have been an energy conservation company; it could
have been steel. It ended up being an electricity company. We just wanted to create a company that
embodied the four principles that we felt mattered in any kind of community, be it a business, church,
village, or whatever: fairness, integrity, social responsibility, and fun.“ These initial four shared values which
Roger Sant
were changed in 2005 to five shared values (s. below) comprised more values like for example ownership,
trust and accountability. Originally defined using the Seven-S Framework, AES initially had no company
mission or purpose due to the fact, that the Seven-S Framework had no place for it.
When asked where Dennis Bakke and Roger Sant got their idea of creating a complete empowered
organization, Dennis Bakke consequently mentions his Christian faith and the concept of Stewardship1 as
source. In accordance with the concept of Stewardship AES purpose was defined to serve society needs.
Contrary Roger Sant directly refers Douglas McGregor2 and Bob Waterman3: “My ideas about empowerment
are based on experience, stimulated significantly by an integration of theory X and theory Y and by Bob
Waterman, our long-time board member and author of In Search of Excellence. Quite a while back, I started
thinking about when I had the most fun at work, and I realized it was when I was given responsibility and
accountability, when I had the chance to make a difference.” Not only Roger Sant, but also Dennis Bakke
was keen on Robert Waterman and “In Search for excellence”, so that they both hired him to serve as a
board member. Waterman quickly accepted this offer, so that he see how his idea could actually be
implemented. Stanford Professor Jeffrey Pfeffer sums up: “Bakke has described Waterman as his soul mate,
and Waterman's influence on how the company operates is evident.”
1 Bakke's main resource book on Stewardship is “Stewardship – Choosing Service over Self-interest” by Peter Block. Stewardship is
itself a concept, that assumes that the resources that we use belong to s.o. else; and we are only protecting them, taking care of
them and make them useful for the owner. Like accountability without control or compliance.
2 See Appendix 1 for Theory X and Theory Y from Douglas McGregor
3 Co-author with Tom Peters of the landmark management bestseller “In search of excellence” in 1982; the eight principles can be
summarized on overall as “entrepreneurship” and “decentralization”
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8. Despite being a For-Profit-Company, Dennis Bakke and Roger Sant share the belief of many Beyond-
Budgeting-Pioneers, that profit is just a condition, but not the goal of the organization:
“Bakke: Profits are a consequence of doing a good job of stewarding and of meeting a need. And they are
essential so that we can pay shareholders the returns they deserve. Profits in and of themselves, however,
are not the central purpose of AES. Sant: You have to make money because the enterprise can't be
sustained unless you do. And profits often measure how effectively you are carrying out your mission.
Bakke: We don't operate with the traditional notion that the company exists, first and foremost, for the
benefit of the shareholders. Shareholders are one important constituency of our company, but they are not
the most important. We have many other stakeholders: AES people, our customer, the communities we build
and run our plants in, suppliers of debt and other services, the governments of the countries where AES
operates. I used to say that our competitors were stakeholders, too, but my colleagues laughed at me and
made me stop. But I still think it's true. Our competitors are critical to us because they make us better, and
they make us credible. If we don't do things better-if we don't surpass them in meeting the world's needs
for safe, clean, reliable electricity-then we'll disappear, as we should.”
Further they add: “Where do profits fit? Profits...are not any corporation’s main goal. Profits are to a
corporation much like breathing is to life. Breathing is not the goal, but without breath, life ends. Similarly,
without turning a profit, a corporation too, will cease to exist...At AES we strive not to make profits the
ultimate driver of the corporation. My desire is that the principles to which we strive would take
preeminence.” Bakke insists: quot;We do this because it maximizes our ability to have fun and make a
difference.quot; “Companies have to exist primarily in order to contribute to society, to meet its needs.
Businesses have to help people live better lives. They have to operate in ways that help communities cohere
and thrive.”
Finally Bakke defines the “ultimate” purpose not only for AES, but also for any given company: “[...] and by
far most important, the principles embraced by AES stand on their own merits whatever the company's
share price. Winning, especially winning financially, is second-order goal at best. Working accordingly to
timeless, true, and transcendent values and principles should be our ambition.” In Bakke's broader definition
for organzational success he emphasis a workplace filled with joy and decision-making for ordinary working
people using their talents. “Our experiment at AES showed that this kind of workplace can be the
cornerstone of an organization that is vibrant and economically robust.”
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9. AES' mission is to “to serve society in an economically sustainable manner with safe, clean, reliable,
electricity”. In this manner, AES serves today more than 100 million people worldwide with safe, clean,
reliable and sustainable electricity.
AES' business model can be described as follows:
Supplying energy to customers at the lowest cost possible, taking into account factors such as
•
reliability and environmental performance;
Constructing, acquiring, and operating projects of a relatively large size in geographically dispersed
•
markets;
When available, maximizing the amount of non-recourse financing
•
To the extent possible, entering into longer-term power sales contracts or other arrangements with
•
electric utilities or other customers with significant credit strength
If possible, participating in distribution markets that grant concessions with long-term pricing
•
arrangements; and
When available, entering into hedging, indexing, or other arrangements to protect against
•
fluctuations in fuel costs, currency, and electricity prices.
AES has attempts to establish an operating environment that leads to safe, clean and reliable
•
electricity generation, distribution and supply. Due to this emphasis, the AES prefers to operate all
facilities and businesses which it develops or acquires; however, there can be no assurance that AES
will have complete operating control of all of its facilities.
Furthermore AES attempts to finance each project (domestic and foreign) mainly under loan
•
agreements and related documents which require the loans to be repaid solely from the project’s
revenues and provide that the repayment of the loans (and interest thereon) is secured solely by the
capital stock, physical assets, contracts and cash flow of that project subsidiary or affiliate. This type
of financing is usually called a non-recourse debt or project financing.
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10. Worldwide expansion from the United States and IPO
Originally founded in the United States of America in Arlington, AES soon started a huge worldwide
expansion with the opening of the power markets in the early 90s to the United Kingdom, Argentina,
Pakistan, China, Hungary, Brazil and other emerging markets worldwide followed by Qatar, Oman, Sri Lanka,
Cameroon—and more recently Bulgaria, southeastern Europe, India, and China, Spain, Jordan, Indonesia
and Vietnam.
Country Number of AES people in 2007 Number of plants/utilities in 2007 In the county since
Argentina 1600+ 8/3 1993
Brazil 5400+ 11/2 1997
Bulgaria 40+ 1 under construction/0 2006
Cameroon 2500+ 12/1 2001
Chile 400+ 16/0 2000
China 370+ 7/0 1994
Colombia 80+ 1/0 2001
Czech Republic 90+ 1/0 2001
Dominican Republic 1400+ 7/1 1997
El Salvador 900+ 0/4 1996
Hungary 500+ 3/0 1996
India 15+ 1/0 1998
Jordan 10+ 1 under construction/0 2007
Kazakhstan 6200+ 3/0 (management of 3 plants and 2 1996
utilities)
Mexico 200+ 3/0 2000
Netherlands 30+ 1/0 1998
Nigeria 70+ 1/0 2001
Oman 50+ 1/0 2003
Pakistan 100+ 2/0 1997
Panama 100+ 4/0 1999
Qatar 80+ 1/0 2004
Spain 40+ 1/0 2006
Ski Lanka 40+ 1/0 2003
Ukraine 4500+ 0/2 2001
United Kingdom 90+ 2/0 1992
United States 3500+ 30/1 1885
Source: Single Country Fact Sheets available on aes.com, accessed 1st June 2008
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11. While still expanding into new geographic markets, AES nowadays concentrates more on expanding into new
business lines, e.g. like wind, climate change and other alternative energy. Former known as “The global
power company”, AES nowadays transforms itself to a “global power and alternative energy company”.
AES went public on 28th June 1991 at the New York Stock Exchange (NYSE). Staying to its former four
shared values of integrity, fairness, fun and social responsible, Dennis Bakke and Roger Sant formulated the
following letter to AES people and shareholders in March 1991:
We have contemplated the pros and cons of being public since the beginning of AES. We have until now
concluded that staying private made the most sense. However, we now believe that registration as a public
company may ultimately be inevitable. ... We continue to be committed to the purpose and values of AES. ...
To that end, we have established “Going Public Principles” for ourselves. ... These principles are: Make the
process fun; if its stops being fun, we should change the way we are doing or quit. ... If we find ourselves
tempted to change any significant elements of the way we do business, we must consider the change to be
a major red flag and we should make the change only if our current rationale for acting as we do doesn't
make sense-independent of the public offering process ... We well do our best to uphold these principles.”
AES' two dramatical crisis
During AES' aggressive worldwide expansion the company suffered to two dramatical crises in 1992 and in
2002, but is since 2003 stable.4
The 1992 crises even conflicted with AES core shared values and the management model build upon them.
Bakke explains: “That's what happened after the incident in Oklahoma. You know, our stock dropped $400
million in one day-one-third of the company's value at the time-and the board and others started saying,
quot;Okay, your experiment is over. It failed. It's time to revert to the traditional way of doing things.quot; And the
people at the plant agreed. They went to shift supervisors like conventional industrial facilities have; a
deputy plant manager was installed; and a bunch of functional departments were put insure as
environmental regulation, planning, and safety. And the plant manager basically fired me. He called me and
said, quot;Please don't come out here anymore.quot; I spent about four months talking to people all over AES. I
4 See Appendix 7 for stock prices charts
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12. asked, quot;How can we stick with our fundamental principles and not move backward?quot; Finally, step by step-
and there were a lot of conversations that took place-we agreed that we believed in our principles, and we
would not waver. As for the Oklahoma plant, it didn't happen all at once, but eventually the people there
undid what they had done to themselves. They got back to the AES way.”
At October 2000 AES' stock price reached its until nowadays not topped value of 70,82 US $. But the
economic environment in 2002 was much changed: The independent power sector which had boomed with
privatization and deregulation was no longer filled with opportunity and optimism. The California power
crisis, the collapse of Enron, risks in in the European and American business, currency crises in Latin America
and the problems of power producers in several emerging market countries had cast a pall over the entire
electricity sector. Meanwhile, competition had sky-rocked within the sector. While AES had been a pioneer of
independent power production, it was now a crowded sector with competition. Competitors for electricity
supply contracts included independent power producers (IPPs) such as AEP, Calpine, and Reliant Resources;
traditional utilities such as Duke Power, Dominion Resources, Consolidated Edison, Electricité de France, and
British Energy; gas companies such as Vectren, Centrica, and Gaz de France; and oil majors such as BP
Amoco, ExxonMobil, and Shell. Finally in October 2002 AES' stock price dropped to its ultimate bottom line of
1,77 US $. At this time in AES' history Dennis Bakke, who served as CEO since 1994 withdraw from the
company; Paul Hanrahan became the new CEO and massive restructuring program aimed at the company's
financial health then followed.
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13. AES' culture
Shared values
At the core of AES lies it unique culture based on the premise that AES was founded on the principle that
strong businesses are built on trust, accountability and an environment which allows people to reach their
full potential. AES' culture itself comprises the five shared values or principles of “Put Safety First”, “Act With
Integrity”, “Honor Commitments”, “Strive For Excellence” and “Have Fun Through Work” which underpin all
company-wide decision-making like talent hiring, talent development, talent compensation or customer
relationships.5 These values are even prioritized despite of plans and directions and paid attention to in the
annual report.6 Furthermore AES demands that the five shared values are not only lived within the
organization at work but also in the free time. The notion “shared” indicates the transformation of (the
founders) personal values to organizational values. Sant and Bakke explain: “Shared implies that members
of an organization agree on the definition and importance of a value. [...] If individuals, whether they are
vice presidents or board members, interpret values individually, the values are not shared.”
AES five core “shared “ values
Put Safety First. We will always put safety first—for our people, contractors and communities.
Act With Integrity. We are honest, trustworthy and dependable. Integrity is at the core of all we do—how we conduct ourselves
and how we interact with one another and all of our stakeholders.
Honor Commitments. We honor our commitments to our customers, teammates, communities, owners, suppliers and partners, and
we want our businesses, on the whole, to make a positive contribution to society.
Strive For Excellence. We strive to be the best in all that we do and to perform at world-class levels.
Have Fun Through Work. We work because work can be fun, fulfilling and exciting. We enjoy our work and appreciate the fun of
being part of a team that is making a difference. And when it stops being that way, we will change what or how we do things.
Source: http://aes.com/aes/index?page=culture_and_values, access 1st June 2008
5 This approach is in best defined by Harvard Professor Shart Paine “Values are not a “management” tool, or a specific type of
management system that runs parallel to a company's audit or compensation system. [... they are] beliefs, aims, and assumptions that
undergird the enterprise and guide its management in developing strategies, structures, processes, and policies. They constitute an
organizational “infrastructure” that gives a company its distinctive character and ethos – its moral personality ”. The European business
ethics approach based upon Prof. Dr. Wieland reflects the same European perspective on values.
6 AES has in 2005 changed to original four shared values to the above listed five shared values due to capture the increased focus on
safety and excellence.
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14. The SEC (Securities and Exchange Commission) requires AES to list its adherence to its “shared” values and
principles as a possible risk factor when it offers stock to the public. The following statement has to
accompany each public offering:
quot;An important element of AES is its commitment to four [five] major ‚shared' values. [...] AES believes that
earning a fair profit is an important result of providing a quality product to its customers. However if the
Company perceives a conflict between these values and profits, the Company will try to adhere to its values
-even though doing so might result in diminished profits or forgone opportunities. Moreover, the Company
seeks to adhere to these values not as a means to achieve economic success, but because adherence is a
worthwhile goal in and of itself. The Company intends to continue these policies after this offering.”
Very special about the culture at AES is its shared value fun. Dennis Bakke and Roger Sant explain, by what
they mean with the notion “fun”:
“[Bakke:]quot;We never set out to be the most efficient or most powerful” or richest company in the world-only
the most fun. And I think we're getting there. Sant: I would agree. But the word fun can be misleading.
We're not talking about having parties all the time. That's not why AES is fun. It's fun because the people
who work here are fully engaged. are accountable for results. What they do every day matters to the
company, and it matters to the communities we operate in. We do celebrate a lot-because lots of great
things are happening. We just did a billion-dollar deal, for instance, and that called for a party. But it's what
happens before the celebrations that's really fun. Bakke: The struggle before the deal, for instance, the
challenge and the creativity required to make it work, taking risks, even the sleepless nights. Believe it or
not, those things really are fun because they engage people - heart, mind, and soul. And that was the kind
of company we set out to create, one in which people could have engaging experiences on a daily basis.”
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15. AES' Corporate Responsibility
Since its foundation, AES has committed itself to be environmentally responsible and claims itself to be also
the industry leader on environmental issues, despite supporting global infinitives like the UN Global Compact 7
or having detailed code-of-conducts with extensive rules. The company itself sees its corporate responsibility
not as a program—but about how it conducts business and about the overall impact it has on society and on
the lives of the people it serves based on its lived shared values. This corporate responsibility also comprises
the responsibilities for the local communities in which the company is engaged.
The 2007 annual report reflects a good picture of AES commitment for social responsibility:
“At AES we see the impact of our business on people’s lives every day. The energy we produce provides
comfort and convenience, keeps production lines churning and illuminates computer screens. But beyond
the present is a broader, more enduring impact that comes from the work we do. The new plant we
construct in Chile not only lightens a dark street today, it helps ignite and stimulate the local economy, and
build community infrastructure. The facilities we make more efficient in Mexico and the Philippines not only
bring power to more homes and businesses, they also enable rigorous expansion of commerce and
educational opportunities for children. The new wind farms we’re building in Huanghua, China and Abilene,
Texas, and the climate change solutions we’re developing in Malaysia contribute to improved air quality
today and help ensure the environmental future of our planet. We are using our global footprint, along with
our development and operational expertise, to explore energy initiatives that support both immediate and
positive gains for our business, while also addressing the critical issues of our time: demand for cleaner,
more reliable and sustainable energy. The diverse portfolio of energy solutions we are building today reflects
the values that built AES and will define our company’s future for decades to come.”
As part of Corporate Responsibility AES' tries to compensate for the emissions that it generates. E.g. when it
built a coal-fired plant in Montville, Connecticut, it calculated that it would generate 15 million tons of carbon
over 40 years, it planted 52 million trees in Guatemala - enough to offset those emissions. As AES has
expanded into the developing world, its social initiatives have moved beyond environmentalism. For example
it has funded medical care in Kazakhstan, organized food banks in Argentina, and built schools in China.
Roger Sant says AES started shifting gears when it built two 340-megawatt power plants in Pakistan, where
the adult literacy rate is less than 40%. quot;You can't go to Pakistan and say that the number-one priority is
global warming,quot; he argues.
7 AES is not listed in the participants list of the UNGC up to 31st May 2008, but conducts since 2006 a worldwide Environment
Management System (EMS) applied in all plants
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16. Leadership model of AES
Introduction
AES' management model can be be described like the one of Semco by stating, what AES NOT has:
AES has NO:
Central staff Policies
Organizational charts Employees
Corporate Strategy Hourly wages
Management
Source: ito lean on “Joy at work”, page 26
Although developed under a try-and-error approach, AES’s unique organization and management systems
are the direct result of AES' shared values on which the company was established and continue to define
every aspect of its management. According to this approach Roger Sant advices that if other companies
would like to transform to AES way and thus to Beyond Budgeting, they have to first adopt to shared values:
“But I would not recommend that other businesses adopt only our mechanics. They'd have to adopt some
shared values first, because the mechanics flow from them. You can't have one without the other.”
To create a fun working environment for its AES people and to implement its strategy of operational
excellence, AES has adopted decentralized organizational principles and practices, fostering entrepreneurship
throughout the company.
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17. Like the traditional tayloristic command-and-control management model is a relict of the old Industrial Age,
such is our vocabulary. Dennis Bakke lists several of these dehumanizing terms: Labor, Labor cost,
personnel, personnel departments, human resources, employees, workers, management, and efficiency.
Therefore terms such as “HR” or “Employees” or “worker” are declined by AES, instead every person at AES
(and in this publication) is called an “AES people” or an “AES person”. Bakke expands this view even by the
notion “Our employees are our best assets.” due to the fact that people are not assets that can be used,
bought, sold, depreciated or disposed. Also the term “management” is disliked and unused by AES.
Furthermore no traditional employee rating does take place at AES, only annual employee surveys are used
as indicator of the importance which is accorded to the company’s shared values and principles. Former CEO
Dennis Bakke has commented that he devotes more attention to studying the annual employee surveys than
the annual financial statements of AES.
AES doesn't also like to talk about efficiency; this term is regarded as a concept from engineering, a ratio
from input and output. Jeffrey Pfeffer sums up: “It is a concept that sees people as analogous to machines,
and is consistent with a tayloristic, scientific approach to management . This is anathema to AES.”
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18. Assumptions held about human nature at AES
All assumptions about human nature made at AES do not even completely comply with Theory Y from
Douglas McGregor but are even inspired by it. Dennis Bakke states correct: “God made us all a certain way.
We’re all creative, capable of making decisions, trustworthy, able to learn, and perhaps most important,
fallible. We all want to be part of a community and to use our skills to make a difference in the world.” “It
amazes me - in our society, we tend to treat children like adults, and in the workplace, we treat adults like
children. Think about the responsibilities we give kids - the TV programs and movies they watch or the
subjects we expect them to know about and understand, like drugs and violence. But then,when they grow
up, we put them in work environments where every decision is made for them. We say, quot;Here are the rules,-
here are the systems,- here is how you do your job.quot; At AES, we're trying to turn that on its head.“
AES culture and value statements: “AES was founded on the principle that strong businesses are built on
trust, accountability and an environment that allows people to reach their full potential.”
In summer 1992 Dennis Bakke put up a paper stating the characteristics of AES people: AES people
“are creative, thoughtful, trustworthy adults, capable of making important decisions are accountable
•
and responsible for their decisions and actions
are fallible. We make mistakes, sometimes on purpose
•
are unique
•
want to use their talents and skills to make a positive contribution to the organization and the
•
world”
Bakke hypotheses by creating this “fun” workplace at AES was, that this workplace would allow people to
work in an environment that is most consistent with humans true nature.
“Why do people work so hard so that they can escape to Disneyland? Why are video games more popular
than work? Why is driving an automobile more exciting and enjoyable to many people than their work? [...]
The reason is simple and dispiriting. We have made the workplace a frustrating and joyless place where
people do what they're told and have few ways to participate in decisions or fully use their talents. As a
result they naturally gravitate to pursuits in which they can exercise a measure of control over their lives.”
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19. Management Practices listed by Beyond-Budgeting-Principles
Customers
The concept of Stewardship upon which AES' is based focus verbally everyone on their customers: The front-
line decision-making AES people and the team-based network cells on their external customers, the society
(in accordance with AES mission “to serve society in an economically sustainable manner with safe, clean,
reliable, electricity”) or in internal customers.
Organization
Although having five layers of hierarchy8, AES' organizational structure entitled the
“Honeycomb” can be truly described as a devolved network/cell structure each
team within a plant representing an accountable cell within the network. Central
departments like HR, Purchasing, Finance, Marketing, Operations, Central Planning,
Quality Assurance, Legal Affairs, Business Development, Safety, Environmental
Compliance or CSR do not exist. Although having a “HQ” in Arlington with about
100 AES people, they mainly serve as advisors like for example the CFO. Business
Development is on overall done by every AES person, incl. Juniors.
All these functions are handled at the plant level: plant managers assign them to volunteer cells comprised
of hands-on AES people who develop expertise in their area and take on responsibility and decision making.
Every plant manager oversees 5 to 20 cells within the plant, each comprising about 5 to 20 AES people,
including a team leader. Task forces comprising volunteer team members take on special assignments like for
instance security audits for the plants. The 80/20 Rule at AES defines, that about 80% of the working times
are spend within the network cell and the remaining 20% of the working are spend in task forces, giving
advice, or learning new skills or working on a special project.
8 Thomas W. Malone decribes in his landmark book „The future of work“ this type of hierarchy as a „loose hierarchy“ in which no
direction takes place and decisions are met at the front-lines.
Page 19

20. These small, flexible, and self-managed cells are able to operate cooperatively without any centralized
direction. At the basis of this “Honeycomb” cell structure lies the belief that organizations do not need to be
managed. Denis Bakke states on the “Honeycomb”: “I think of AES as a conglomeration of small
communities. And I don’t think there’s any company in the world that’s so big that you can’t organize this
way. Even a plant with 400 people can be broken down into smaller groups. It’s a small enough community
that there is the ability to have an accountability structure within it, you know, a social structure as opposed
to a military structure. We will break down the Kazakhstan plant into four units. How can we stay small and
be big? By breaking the organization into groups with chief operating officers.” Further he adds: “Many
people have asked us about our team structure and how it works. To begin with, there is no one person in
charge of teams and there is no Human Resources department. Teams are the basis of our structure, and
they encompass the four values of our company. They are fluid; many people are members of more than
one team at one time. A team is somewhat autonomous; all decisions about a project are made within that
team, with final say granted to that team. Decisions are made not from the top-down, but from the bottom-
up. Furthermore, responsibility is pushed to the lowest level possible, encouraging everyone to be part of a
decision. As a result, each team member views the project in terms of a whole. Colleagues and team
members must trust each other to follow through to the best of their ability. Because people are what make
up AES, we have decided not to resort to an organizational model. Instead, we give you the following
comments from AES people regarding teamwork. In general, AES teams work extremely well in both
achieving a common goal and having fun while doing so. The following ideas provide insight on what makes
teams work well and what can stimulate true and productive teamwork.” Finally he adds: “Teams imply
friendship; not only the ability but the desire to work together. Starting with the wonderful example set by
the original AES team, Roger and Dennis, working together in small groups has been a natural way to get
big things done while preserving the dignity of each person.” Tom Tribone completes: “There are two
reasons why teams are successful at AES: the type of people we have here and the environment in which
they work. People at AES tend to be independent and thrive in a loose environment where roles and
responsibilities are not always clearly defined. The environment at AES is one where responsibility is pushed
down to the lowest level possible, encouraging everyone to take ownership for not only their piece of the
project, but for the project in its entirety.”
Page 20

21. Sphere of activity: 5 AES core shared values, AES' code of conduct,
AES' business model, AES' mission, AES' brand
Network cell comprising a fully accountable team
String: formal or informal relationships, communication and/or networking
Market-pull: e.g. external customers, internal customers, competitors,
shareholders, environmental groups and initiatives and other stakeholders
AES's Cell Structure. Source International Center for Outperformance, BBTN
This delegation of authority to the single cells (the teams within each plant) can be for example very good
described in the case of the missing HR department:
For sure within this “Honeycomb” cell structure no centralized HR department does exist: At the HQ in
Arlington are no central HR staff or specialists who deal with salary ranges, or annual review procedures, or
personnel policies, or contract negotiations with unions, or central guidelines for separate HR processes.
There is only a person whose responsibility is to track 401k retirement plan benefits and send out the
necessary reports left at the AES HQ in Arlington. Instead HR decisions are made at plant level within the
plants teams like for example:
Page 21

22. Recruiting:
The complete recruiting and even the dismissal process is done at the plant level assigned to individual cells
without any support or guidelines from the corporate headquarter, but by using the AES advice consultancy
process.
Hiring the right people at AES is like in every company essential to company success: The complete AES
system would fall apart if there haven't been a lot of people who were passionately excited by the company's
five shared values or who didn't care about becoming businesspeople. Sant and Bakke point out: “The same
thing can be said about people who are fearful of ambiguity or don't like to make decisions. They usually
don't apply here for jobs. We attract people who want to be treated as responsible adults, who say, quot;I want
to be a teacher, a nurturer, a servant leader.quot; They are typically people who are ready to make decisions and
he held accountable for them.”
The hiring process itself generally involves an initial CV review, and a phone interview followed by a group
interview. And there is a lot of peer review. Teams interview candidates, and there are several meetings in
which they try to get the sense of the person and whether he or she will be comfortable with the AES-way.
Sant and Bakke point out: “We've made our biggest mistakes in hiring when people have said quot;We need
someone with such and such expertisequot; and put cultural fit second. We've been much better off when we've
hired people who don't just accept our values but are evangelical about them.”
Interviews normally do not include technical questions. Instead, they focus on characteristics that help
determine if the candidate will fit with AES' shared values ad their general competence and talents like e.g.
learning and rotating within the worldwide plants. Only a few importance is given to the candidates’
educational background or experience.
Page 22

23. Typical interview questions are:
Should everyone be treated equally?
•
What do you do when something needs to be done and no procedure exists?
•
What self-improvement efforts are you making?
•
Recall a time when people around you weren't being totally honest. What did you do?
•
What does quot;fairquot; mean to you? How important is fairness?
•
For what have you been counseled about the most?
•
What is the most difficult situation you have faced? What did you feel? How did you react?
•
Describe two important achievements.
•
Tell me about a time when a decision was needed and no supervisor was available.
•
What kinds of rewards are most satisfying to you?
•
What does quot;fun on the jobquot; mean to you?
•
Training and development:
In line with its shared values, AES persons are empowered to make decisions about their own development.
Training is mostly done on-the-job, supported by advice. Being always encouraged to expand their abilities,
AES people are free to take outside courses, AES reimburses 80% of the costs. If the AES person achieves a
B, even 90% are reimbursed, and if the AES person gets even an A, to complete course is reimbursed.
Career paths:
Regarding personal development, there are no fixed career paths at AES. Rather, the company encourages
job flexibility, that is necessary requirement in such a dynamic industry. AES people are encouraged to move
within the company worldwide if seek new challenges.
Compensation and benefits:
AES does not have a fixed salary and compensation schedule for any job, therefore salaries are determined
on what others person are being paid inside and outside of AES.
Page 23

24. Furthermore using this cell structure, employee specialization does not take place at AES. This approach,
according to former CEO Dennis Bakke fosters the entrepreneurial spirit within the people. Even AES
persons deny the dogma that specialization leads to economies of scale mainly arguing that specialization
causes higher cost and prevents adaptability. Furthermore specialists are less innovative due to their
permanent work repetition. Unlike AES people who take over new assignments, who challenge existing
approaches and use the common AES practice of consultation from AES persons. Roger Sant sums up: “For
the system to work, every person in the company has to become a well-rounded generalist who
understands all aspects of our operation, who understands the economy in which we work, and who has
the good of the whole company in mind when he or she makes decisions. It's like every AES person is a
mini-CEO.” Dennis Bakke adds:quot;Specialization is the root of a lot of boredom,quot; “As soon as you have a
specialist who’s very good, then everyone else quits thinking,”, “The better that person is, the worse it is for
the organization. The information goes through the specialist, so all the education is to the person who
knows the most.” Finally Bakke believes that it's the well-rounded AES person who delivers extraordinary
performance.
Moreover, AES relies strongly on expertise from the outside. A key aspect of AES' system is that individuals
and teams have to seek the best advice available, whether it is within the company or outside. For example
in finance if AES’s financial management and project management teams lack great depth in financial
expertise, they draw upon the knowledge of outside bankers and financiers. quot;The modern manager is
supposed to ask his people for advice and then makes a decision,quot; says Bakke. quot;But at AES, each decision is
made by a person and a team. Their job is to get advice from me and from anybody else they think it's
necessary to get advice from. And then they make the decision.quot; Also having to seek advice, AES people are
not dependent on it and can make their individual decisions.
For example had AES in India a team member, who had been to AES for three years. He and this team
wanted to buy two coal plants for AES. He asked for advice on how much to bid. Because the board
members of AES were at that time very interest in getting these two plants, they advised to bid $ 170
million. He refused the board's advice due to the fact, that the estimated return were not enough. He
decided regardless of the board's advice individually to bid $ 143 million – and he won the deal.
Page 24

25. To give you two example on how the AES team-based-cell structure works:
Cumberland plant
Using this cell-building approach, AES has for instance developed and financed a $400 million plant in
Cumberland with, Md., with a team of just 10 people. This team secured 36 different permit approvals
involving about 24 regulatory agencies and further arranged financing that involved tax-exempt bonds and
ten lenders. Within the power industry, such a project would normally involve well over a hundred
specialized employees.
Uncasville plant
Due to the fact, that AES has no central Finance department, of course these task are assigned to voluntary
teams at the plant level. In Uncasville, Connecticut, the plant's teams were asked which team would like to
invest the plants money reserves with a value of $ 12 million. The maintenance crew comprising 15 people
wanted to do this task. Sant and Bakke point out: “They didn't have a clue about how to invest short-term
money in the market, but they thought it would be fun to learn. So they hired a teacher who told them what
a spread was, who to call on Wall Street to get the process going, and so forth.” After a few weeks of
studying, they began calling up brokers and looking for the best vehicle for investing. You should have heard
them: “I'd get a little note saying, quot;Man,you won't believe what happened such and such broker reneged on
the deal! They've been lying to us!quot; Bakke further adds: “By the third month, they actually beat the returns
of the people who were investing the money for the company's treasury at the home office. They were so
proud. My point is this: Did letting the maintenance crew invest that money make a huge difference in our
bottom line, for better or for worse? Probably not. But those people will he changed forever. They have
become better businesspeople. And there is no other way to do that than by doing.” After the maintenance
crew figured out to invest the money, they passed this task to other teams at the plant. “And, by the way,
we don't have a a maintenance crew anymore at that plant. Their work is all distributed to the other teams.
As we've said, we're trying not to separate operations and maintenance.”
Page 25

26. Autonomy
AES people at the front-line make even crucial individual and team-based decisions and take on actions by
themselves and do not require explicit approval or direction from top management (and are of course
accountable for their decisions). Furthermore individual initiatives are encouraged. Former CEO Dennis Bakke
describes himself the delegation of authority to the front line and the consultation-process through AES
people as the heart of the governance model of AES. Due to the fact, that mistakes may arise by this
approach AES has established a culture that supports mistakes and therefore AES people do not get any
punishments or are afraid of dismissal. Furthermore due to the extent job rotation that takes place, AES
gives AES people enough time to learn the new assignments.
Many of these above mentioned individual initiatives are recorded at AES:
Oscar Prieto
Oscar Prieto had no idea how much his life was about to change when he sat in meeting and did't payed to
much to it in May 1996. Oscar Prieto, an independent producer of electrical power and new to AES, visited
the Arlington Headquarters of AES, and attended an meeting which was led Thomas, one of AES most
creative new business developers.
quot;I've got fourteen people from France and some guys from Houston coming in to talk about buying a
business in Rio de Janeiro,quot; Tribone stated. quot;We've only got two AES people. Could one of you show up?quot;
Oscar Prieto raised his hand and walked to a conference room down the hall, where the executives had
gathered to discuss the privatization of Light Servicios de Electricidade (known as quot;Lightquot;), one of Brazil's
largest public utilities. The French delegation comprised executives from Electricite de France (EdF) and
representatives of Houston Light & Power, was considering to bid on the soon-to-be-auctioned Light, seeing
saw AES as a potential partner.
Prieto was at this times very puzzled. Why would AES be interested in this deal? His small own company with
about 1,100 employees was focused on the power-generation side of the business - building, buying, and
operating plants, and selling the electricity from them to wholesale customers. Light Servicios de
Electricidade was a massive public utility with more than 11,000 employees and a sprawling distribution
system that served more than 2.7 million retail customers in Rio de Janeiro.
Page 26

27. After this meeting, Thomas Tribone asked Oscar Prieto if he would like to play a lead role in this potential
acquisition - a $1.7 billion deal that would cost AES about $400 million. quot;But Tom, we're not in the
distribution business,quot; Prieto added. quot;And I've never done this before.quot;
Prieto, being a chemical engineer, had worked for AES for just two years and has never been to the power
industry before. He was hired by AES to turn around a struggling 650-megawatt power plant in his native
Argentina - the company's first joint venture in Latin America.
quot;You've been through a very difficult partnership,quot; Tribone said. quot;You know what makes them work.quot;
Oscar Prieto soon left for Paris to negotiate an agreement with EdF: quot;I said to myself, What the hell am I
doing? I'm handling such a huge, huge job all alone.quot;
But Oscar Prieto got the job done. He moved afterwards to Rio de Janeiro and became one of Light's four
directors. Then the job got really interesting for him. In short order, AES completed a couple of deals: E.g. it
signed a joint-venture agreement to buy CEMIG - an even-larger Brazilian utility, with more than 4 million
customers. Then it led the foundation for a a new power plant in Uruguaiana, near Brazil's southern border.
Furthermore it took over the company that supplied electricity for Buenos Aires. And finally in October 1996,
it won a bid to distribute electricity to 800,000 customers in southern Brazil.
18 months after that fateful meeting in Arlington, Oscar Prieto works out of a 15th-floor office overlooking
downtown Rio de Janeiro. He is now a director of a major Brazilian company and a key figure in AES's rapid
expansion in South America. He helicopters from one plant to another and oversees hundreds of millions of
dollars in construction projects. His division has now a combined customer base of 8 million homes and
businesses.quot;That's what happens when you raise your hand around here,quot; Prieto states with a smile.
Page 27

28. Scott Gardner
Scott Gardner joined AES in 1992 right after his graduation from Dartmouth College. Gardner joined a team
who was developing a $200 million generation plant in San Francisco. “It involved a lot of work and few
people to do it,” he says. “I took on tasks that ranged from designing a water system to negotiating with the
community to buying and selling pollution credits.” Gardner also helped to lead a bid for a $225 million
generation plant in Vancouver, British Columbia. When a comparable deal has to be met in Australia, Gardner
volunteered for that assignment and was two weeks later on his way to Brisbane. “My task was to
understand an unfamiliar regional power system, develop a design for the plant, and prepare a financial and
technical bid document – all in six weeks,” he says. When Gardner’s proposal made the final round of
competition, his division manager had him to negotiate the terms of the $75 million deal. “The stress was
incredible, but I was having fun,” he says. His bid won. “I held a press conference and was interviewed by
local TV stations,” says Gardner. “I had to pinch myself to be sure this was happening.”
Paul Burdick
Paul Burdick, a mechanical engineer, had only been at AES for a short time when he was asked to purchase
$1 billion in coal. “I’d never negotiated anything before, save for a used car,” he said. Burdick spent three
weeks asking for advice people both within and outside of the company on how to accomplish the task. At
AES, he says, “You’re given a lot of leeway and a lot of rope. You can use it to climb or you can hang
yourself.””
Jeff Hatch & Joe Oddo
His hands still blackened from coal he has just unloaded from a barge, Jeff Hatch picks up the phone and
calls his favorite broker: “What kind of rate can you give me for $10 million at 30 days?” he asks the agent,
who is in charge for handling Treasury bills. “Only 6.09? But I just got a 6.13 quote from Chase.” In another
room, Joe Oddo is working on J.P. Morgan & Co. “6.15 at 30 days?” confirms Oddo, a maintenance
technician at AES's power plant: “I’ll get right back to you.” Oddo and Hatch quickly consult with their
associates, then close the deal. “It’s like playing Monopoly,” Mr. Oddo says,“Only the money’s real.”.
Page 28

29. Alessandra Marinheiro
In Brazil, AES's bid for CEMIG decreased as a joint-venture partner couldn't make up its mind. quot;We made our
decision within days,quot; says Alessandra Marinheiro, the AES project manager who has helped to place the bid.
quot;But our partner had to ask its board for approval, and that board had to ask another board. We delayed the
bid - only to have the company pull out because it couldn't get final approval.quot; But this action did not delay
Marinheiro, 24, an entry-level financial analyst who became a project manager with responsibility for more
than $2 billion in acquisitions - after less than a year working at AES. On the day before the CEMIG auction,
she found a new partner and reworked the bid. quot;We called Tom Tribone and made a decision,quot; she recalls.
quot;Other companies can't do that.quot;”
Responsibility
One of the goals of Dennis Bakke is that all AES people think and accordingly act like business persons. Even
in 1997 Dennis Bakke tried to give a definition: An AES business person must “steward resources (money,
equipment, fuels) ... to meet a need on society, while balancing the contributions and needs of all the
stakeholder groups. This means providing a profit to shareholders, a fun workplace and fair compensation to
employees, taxes and a clean environment to governments, and reliable electricity at reasonable prices to
customers. A per may very well an engineer, or a heavy equipment operator or a financial wizard or an
instrument technician, but a business person performs all those functions in the context of balancing the
interests of all stakeholders.” Furthermore an AES businessperson has to ask for advice before settling
decisions and is encouraged to take on new business development of AES.
As a consequence AES Corp. would see a person that needs direction and waits to be told what to or or
person who does not trust not in other people as bad hire.
Page 29

30. Values
AES operates with the above described five shared values, a very lean code of conduct 9 and without any
written policies or procedures. Issues such as hiring practices, leave periods, and promotion criteria, which in
more conventional companies would be spelled out in a “Policies and Procedures” handbook, are left to the
individual teams. Sant and Bakke explain:“When trying to find out” how much time she could take off after
the birth of her daughter, a Project Director for AES Puerto Rico discovered that the company did not have a
policy about maternity leave. After investigating what other “AES people” had done, she decided to do what
made sense for both herself and the business requirements of the project. In the end she decided to take
three months, but she made herself available at critical points in the project’s execution.”
Transparency
Each AES person is allowed to access the full financial information, operating information and market
information. Due to this information transparency, AES people are treated as “insiders“ by the Securities and
Exchange Commission (SEC). Dennis Bakke and Roger Sant also advocated to transparency on
compensation, but however only a few of the plants decided to share compensation information.
But AES does not put all required information to the people, but people share their information with others.
This can be described for instance on the following case:
Elora Zhou, a business development manager made a bid at the Vietnamese government concerning the
supply of a region with about 400 megawatts of electricity for 20 years. She knew that the Vietnamese
government decided up to 70% on the price. So she sent out an email referring to the bid to about 200 to
300 AES people for advice.
Sarah Slusser, a group manager in Central America, had experienced a similar situation with a plant in the
Yucatan. Sarah sent Flora a three-page e-mail that contained a wealth of information about what to pay
attention to with that technology. A few days later, Elora made the bid (and it was the lowest by two-tenths
of a percent). Sarah did not tell the actual dollar amount to bid, but Sarah and other plant leaders and even
board members shared all information with Elora.
9 Compared for example to the worldwide benchmark Code of Conduct from Nortel
Page 30

31. Goals & Controls
Although having no strategy, AES has for sure a goal. A very big goal. And a relative goal: to be the leading
global power company, to be the global industry leader (which AES actually is). Roger Sant commented on
this relative goal: “The biggest target I can't tell you how important that is ... It is magical how it
transformed the way business. ... It's a big statement to make. It's very different from saying we want to
grow 20 percent a year. ... I think it indicates that we were operating under some constraints before, when
we asked ourselves, “How do we get rid of those constraints? If we're really trying to be the leading global
power company, would we have done this or that?” .... The company exploded afterwards.”
Planning
AES does not do a lot of strategic analysis or has a long-term five year plan (not even a strategy), but does
have dynamic and flexible planning processes, however with only little meaning. Dennis Bakke sees long-
term planning as a waste of time, because conditions change so dramatically within the industry. Further he
realizes that “Strict financial planning often serves to centralize control of the company among a few leaders
at the top of the organization.”
Page 31

32. Rewards
At AES compensation bonuses are not rewarded on individual performance, but on the performance of single
facilities and the entire organization. Furthermore AES people are motivated to become shareholders of the
company. The results of this approach is best described by the one the AES persons himself. “We feel we're
part of the entrepreneurs. The fluctuation are in stock price reinforces the fact that we're responsible. If
there were only upside, we're taking a free ride. The fact that the stock price fluctuates and that people gain
and lose accordingly makes people feel like they are more of an owner of the company”. Even when AES'
stock are declining, most AES persons want to buy more stocks.
AES has experimented with allowing people to set their own salaries, but abandoned this practice. Sand and
Bakke explain:“The individuals who participated in this approach were changed by the process. They had a
much better understanding of how compensation affected the overall economies of the organization. They
learned that the value of seeking advice when they had to balance competing interests. They put the
interests of other stakeholders on a par or even ahead of their own. The process pulled team members
together and helped some make the transition from workers to to business people. It made them “owners”
of their business. For the first time, they understood what it meant to be stewards. This methods of setting
compensation was stressful, successful, and fun.”
Resources
Although AES does some forecasting (entitled budgeting), this “budget” has only little meaning and serves
mainly as a guideline, not as hard and fast constraints, and is taking out by the actual people in the plants
on what they think require next year based on the previous year and upcoming assignments. Moreover it is
used to understand and improve resource use and to determine costs.
Page 32

33. Coordination
Due to the fact, that AES has no strategy, Dennis Bakke maintains that AES follows Waterman's idea of
“ready, fire, aim”, which means actually retro perspectively determining your strategy after you done it. Since
the NYSE insists to know AES's strategy, former CEO Bakke claimed to tell them: “[W]e try a bunch of stuff,
we see what works, and we call it our strategy.” Further Bakke and Sant see their strategy further as
“disciplined opportunism”, which means, that every AES person can propose and work on new business
development.
Another way of asking about AES strategy is to ask what differentiates AES, the industry leader, from its
competitors and its relative success factors. Roger Sant immediately mentions the AES people and the
underlying assumptions about human nature. Dennis Bakke further adds: “There are some things about the
way we do things in terms of freeing up people that are amazingly adaptable to a world that's going topsy
turvy and changing all the time ... We're faster than anybody in the world. We may be one of the fastest
companies in being able to act and respond to the world that's ever been created. ... We have more people,
in more places, spending less money than any other company in our business. We're just everywhere.”
Page 33

34. Adopting the AES way at new plants
Usually AES takes over new plants to expand its business and dismisses huge parts of the original workforce.
This task can be true described as a Beyond-Budgeting-Transformation of the acquired pants because these
are transformed most from traditional command-and-controls system to the AES-way.10 That this not an easy
or smooth task is be sure of. Dennis Bakke describes this process: “We start telling them [the people] at the
acquired plant what we believe. Sometimes that's a plant manager or someone coming from afar, usually
bringing in some new leadership. ... We bring in someone who really believes this stuff, who's an outsider. If
you're going to be something radical ... you are better off having somebody from outside, someone who can
communicate the values and principles. There will be other people that will infiltrate the plant, too, not just
as top leadership. Enough people so that folks can ask them and can try the model we're talking about. I
come sometimes ... and I teach. We do a value survey immediately, and we do it every year, asking people
the questions. It doesn't really matter how they answer it. What is does force people to think about what all
of this is about. Then we bring people to orientation and have them experience the AES way. We let them
go on other plants to look at what really happens.”
Usually giving the new AES people time to adopt to the new system, AES advices the others, who do not fit
in it to, leave.
Transformation of the Pakistani plant
In Pakistan for example the plant manager thought that he didn't had the right people and only 20% of
them would making it. Dennis Bakke advised that he should keep working on this issue. When he returned 6
months later, the plant manager reported that there had been a huge change and now 80% had adopted to
the AES way. Even the Pakistani AES people shared their new values and assumptions about human nature
at their homes: On a trip to the Pakistani plant Dennis Bakke asked AES people if something had changed in
their lives and one of the AES persons replied after a long pause: “Yes, at home something has changed.
You know these assumptions about human nature – that we have about AES people – that every human
being is thoughtful, creative, trustworthy and capable in making decisions. I have appreciated that I have to
treat my wife the same way. Now I let her make decisions.” Another follows with a smile: “Yes, at home I
am no longer get around making my own decisions.”
10 About 90% of AES' workforce came in by acquisition, only 10% by “Hiring the right people”
Page 34

35. Transformation of Santa Branca
A good case that explains the transformation of former tayloris organizations is thqt of the plant in Santa
Branca, a small Light facility that sits along the Paraiba do Sul river, northwest of Sao Paulo. Until AES took
over Santa Branca, its only function was to redirect water to another hydro station located down the river.
With 32 permament staff. quot;How many people do you need?quot; Prieto marvels. Prieto has chosen Santa Branca
as his initial experiment in transplanting AES's bottom-up culture into Light's top-heavy command-and-
control bureaucracy. First he announced a massive downsizing, but then he unveiled an upgrade - a $35
million construction project that will enable Santa Branca to fuel two hydroelectric generators. Then he
asked for volunteers who would run things the AES way and quickly picked Carlos Baldi, 34, an engineer
from Fontes, to be his leader in Santa Branca. quot;I knew he was the right person,quot; says Prieto. quot;He was
young, eager to do more.quot; Then, after agreeing on shared goals and expectations ,zero accidents, and
thrifty construction budgets , Prieto passed the leadership of Santa Branca over to Baldi.
But didn't Prieto worry about distributing too much power too fast? quot;I trust people - without fear or
hesitation,quot; he says. quot;The best way to let them perform is with absolute freedom:I release you of all
constraints, including the constraints imposed by your boss.quot;Freedomquot; was very scary at the beginning,quot;
adds Baldi. quot;Every time I had to make a decision, I thought, 'Should I call Oscar?' But he just said, 'You
know better than I do - you decide.' quot;
Now Baldi operates the AES way with his people. E.g. Claudio Jorge Coelho de Souza, 36, runs electrical-
engineering projects at Santa Branca. quot;I'm always getting his opinion,quot; says Baldi. Aldir Cardozo Carreiro, 47,
a former maintenance supervisor, who now oversees the facility's entire $1.3 million operating budget. quot;Aldir
had never done anything like this,quot; notes Baldi. quot;So we got him an accounting program. Now he budgets
salaries, writes contracts, oversees all maintenance.quot;
Page 35

36. Appendices
Appendix 1: Theory X / Y
The notions Theory X and Theory Y was established by Harvard Professor Douglas McGregor who
investigated leadership styles and summed them up in two opposite approaches named Theory Y and
Theory X. Theory X and Theory Y both represent a collection of assumptions held about human nature.
Theory Y represents human's true nature, whereas contrary Theory X describes the traditional view of
people within a command-and-control culture.
Theory X believes held about Theory Y believes held about
human nature human nature
Attitude – Attitude –
People dislike work, find it boring, and People need to work and want to take
willavoid it if they can. an interest in it. Under the right
conditions, they can enjoy it.
Direction – Direction –
People must be forced or bribed to People will direct themselves towards
make the right effort. a target that they accept.
Responsibility – Responsibility –
People would rather be directed than People will seek, and accept
accept responsibility, which they avoid. responsibility, under the right conditions.
Motivation – Motivation –
People are motivated mainly by money Under the right conditions, people are
and fears about their job security. motivated by the desire to realize their
own potential.
Creativity – Creativity –
Most people have little creativity Creativity and ingenuity are widely
- except when it comes to getting round distributed and grossly underused
management rules.
Source: BBTN
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37. Appendix 2: Beyond-Budgeting-Principles
Principle Beyond Budgeting: Do this! Not that!
1. Customers Focus everyone on their customers Hierarchical
relationships
2. Organization Organize as a lean network of accountable Centralized functions
Leadership
teams
3. Autonomy Give teams the freedom and capability to act Micro-manage them
4. Responsibility Enable everyone to think and act like a leader Merely follow ‘the plan’
5. Values Govern through a few clear values, goals and Detailed rules and
boundaries budgets
6. Transparency Promote open information for self management Restrict it hierarchically
7. Goals Set relative goals for continuous improvement Negotiated contracts
8. Rewards Reward shared success based on relative Fixed targets
performance
Processes
9. Planning Make planning a continuous and inclusive Top-down, annual
process event
10. Controls Base controls on relative indicators and trends Variances against plan
11. Resources Make resources available as needed Budget allocations
12. Coordination Coordinate cross company interactions Annual planning cycles
dynamically
Source: BBTN
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38. Traditional tayloristic
New Beyond-Budgeting-Model
command-and-control-model
(supports complexity)
(supports efficiency)
Decentralized network,
Centralized functional hierarchy,
“Sense-and-respond“
“command-and-control“
• “Bosses” rule! • “The market” rules!
• Top-down command and control • Outside-in sense and respond
• Top managementis always in charge • Front-line teams are alwayas in
• Centralized leadership charge
• Devolved leadership
Fixed Processes Dynamic Processes
Relative
Fixed Processes
Strategy Performance
Contract
Fixed performance
contract Dynamic
coordination
Control
• Fixed, annual processes
• Fixed targets and incentives
• Centralized and bureaucratic control
• Dynamic, continuous processes
• Relative targets/compensation
• Self-control, transparency and peer pressure
Source: BBTN
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39. Appendix 3: Typical evolutionary path within an organization's life
Degree of decentralization/empowerment
Low degree of
decentralization/
Differentiation “Stagnationquot;
empowerment
and fixed performance within the tayloristic model
phase
contracts: in conflict
with today's critical
success factors!
“Transformation”
“Buraucratization”
through radical devolution
through growing
and functional integration
hierarchy and functional
differentiation
High degree of
decentralization/
empowerment
“Sustainment”
with relative
Integration and deepening of the
Pioneering
performance “Evolution”
contracts: aligned decentralized model,
within the
phase phase
with today's critical
over the course of
decentralized model
success factors!
generations
Foundation
Se ve ra l d years d e s
Several
e c a old
Time line: organization's age
o ld
The three original organizational development phases according to Beyond Budgeting. Source: BBTN
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40. Appendix 4: The Double Helix Transformation Framework
Organizational
change process
(John Kotter, “Leading Change” to “Our Iceberg
is Melting” to “a sense of urgency”)
• Check for complacency and a false
sense of urgency (use e.g. guiding
questions from the book)
• Create and increase a true sense of
• Change structure
urgency: Bring the outside in (use e.g.
• Change management processes
3D Models, videos, diagnostic,
3. Beginning
books ...) • Align projects and decision processes
Behave with urgency every day
with 12 principles and the values
Find opportunities in crises
defined in the Case for Transformation
Deal with the NoNos
2. The neutral zone
Win hearts
and minds!
4.
2. 3. Communi-
1. 5. 6.
Pull Develop cate for 7. 8.
Create a Empower Produce
together a change under- Don't Create a
sense of all others short-term
guiding vision and standing let up! new culture
urgency to act wins
coalition strategy and
buy-in
Individual
• Write the Case for Transformation
• Build awareness through selective change process
action (e.g. abolishing budgets)
1. Ending (William Bridges,
• Win hearts and minds, train for
“Managing Transitions”)
empowering leadership styles and
more transparency
The Double Helix Transformation Framework. Source: To lean on BBTN1 – Techniques for
Transformation, slide 14; Kotter, John: “a sense of urgency”, HB Press, 2008
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41. Appendix 5: „Joy at Work“: Dennis Bakke's approach to leadership
Traditional management (Command-and- Joy at Work (post-tayloristic approach, fully
Control approach) compatible with the Beyond-Budgeting-Model,
but not compromising all 12 principles)
The principal purpose of the company is creating shareholder The principal goal or purpose of the company is stewarding its
value although other purposes or goals may be mentioned. resources to serve in an economically strong manner.
Decisions are made or approved by leaders at the highest Decisions are made by non leaders at the lowest practicable
practicable organizational level. organizational level.
Leaders see their role as managing people and resources. Leaders see their role as serving other employees.
Adopt participative management techniques, in which bosses ask Allow subordinates to manage resources and make decisions.
subordinates for advice but make the final decisions themselves. Oversee rigorous advice process and fire people who do not use it
appropriately.
Job positions, slots, and titles remain basically the same over No company-wide job descriptions. Every person is considered
time. Only the names with the boxes change. unique and must build a job around his or her unique skills and
passions.
Management and labor are treated and paid differently. problems There is only one category of employee within the organization.
between management and labor will often arise There are no separate management people.
Pay set by bosses. Ongoing experiments allowing individuals to set their own
compensation, after getting advice from colleagues and
supervisors.
Shared values are promoted as a technique to improve chances to Shared values are goals to which the company aspires in and of
achieve economic goals. themselves, not merely as a means to financial ends.
Turnover of employees is higher. People enjoy their work and do not want to leave
Source: http://www.dennisbakke.com/pages/newvsold, accessed on 1st June 2008, a detailed version can be found in the
book “Joy at work” by Dennis Bakke on pages 283 to 291
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42. Appendix 6: Bakke's Top 10
“1. When given the opportunity to use our ability to reason, make decisions, and take responsibility for our
actions, we experience joy at work.
2. The purpose of business is not to maximize profits for shareholders but to steward our resources to serve
the world in an economically sustainable way.
3. Attempt to create the most fun workplace in the history of the world.
4. Eliminate management, organization charts, job descriptions, and hourly wages.
5. Fairness means treating everybody differently.
6. Principles and values must guide all decisions.
7. Put other stakeholders (shareholders, customers, suppliers, etc) equal to or above yourself.
8. Everyone must get advice before making a decision. If you don’t seek advice, “you’re fired.”
9. A “good” decision should make all the stakeholders unhappy because no individual or group got all they
wanted.
10. Lead with passion, humility, and love.”
Source: http://www.bluestratus.net/sites/JoyAtWork/bakketop10, access 1st June 2008
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43. Appendix 7: AES' stock price
Source: http://finance.aol.com, 1st June 2008
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44. Source: http://finance.aol.com, 1st June 2008
Page 44

45. Source: http://finance.aol.com, 1st June 2008
Page 45

46. Source: http://finance.aol.com, 1st June 2008
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47. Resources
Direct Resources from AES (all accessed 1st June 2008)
AES Annual Reports 2000 - 20007
•
AES 2007 Form 10-K
•
AES Fact sheets on all countries, The AES Corporation, AES History, and Environment
•
AES Homepage: aes.com
•
BBTN Papers (all accessed 1st January 2009 and available through www.bbtn.org)
Articles
Lovell, Nancy: “Interview with Dennis Bakke”, Faith in the Workplace
•
Markels, Alex: “Power to the People”, Fastmagazine, February-March 1998, ffp. 156
•
“Wetlaufer, Suzy: ”Organizing for Empowerment: An interview with AES Dennis Bakke and Roger
•
Sant” in HBR Jan-Feb 1999, p. 123ff
Books:
Bakke, Dennis W: “Joy at work. A revolutionary Approach to Fun on the Job.”, PVG, 2005
•
Grant, Robert M.:”Cases to Accompany Contemporary Strategy Analysis”, Sixth Edition.”, Blackwell
•
Publishers, 2007
O'Reilly, Charles A; Pfeffer, Jeffrey: “Hidden Value. How Companies Achieve Extraordinary Results
•
with Ordinary People”, HBS Press, 2000
Pfeffer, Jeffrey: “The Human Quotation.”, HBS Press, 1998
•
Pflaeging, Niels: “Fuehren mit flexiblen Zielen. Beyond Budgeting in der Praxis.”, Campus, 2008
•
Pictures:
Front Cover Picture: Creative Commons 2.0 BY NC: by fd:
•
http://www.flickr.com/photos/john/9321856/
License
This paper except all logos and the front cover picture is licensed under a Creative Commons BY-SA License.
Credit: quot;International Center for Outperformance (www.intco.org)quot; within the reference list
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