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  1. BeyondBudgeting: Creatinghigh-performanceorganizations fortoday'smarkets Howtoachievesustainedcompetitiveadvantageinthecorporaterace- withoutfixedtargetsandannualplanning! KualaLumpur,03.-04.May2011 NielsPflaeging BBTNAssociate&PresidenteMetaManagementGroup Econique–DiálogoCFO 18/19deMayo2009 [ NielsPflaeging ] BetaCodexNetworkwww.betacodex.org

  2. 90% 90% PeterDrucker

  3. Industrialageends: ”Supplieshavethepower“, Evolutionofmassmarkets: Taylorismasthesuperiormodel Knowledgeeconomyadvances: ”Customershavethepower“, strongcompetition,individualizeddemand: decentralizedandadaptivemodelissuperior! high Now,allthesefactors areequallyimportant! Here,onlyefficiency mattered,really! 1.  Discontinuouschange 2.  Shortlifecycles 3.  Constantpressureonprices 4.  Lessloyalcustomers 5.  Choosyemployees 6.  Transparency, societalpressure   Highfinancial expectations Competitive successfactors (CSF) -Fastresponse -Innovation -Operationalexcellence -Customerintimacy -Greatplacetowork - Effective governance - Sustainedsuperior valuecreation/fin.perf. Characteristics Dynamics and complexity Characteristics •  Incrementalchange •  Longlifecycles •  Stableprices •  Loyalcustomers •  Choosyemployers •  „Managed“results low 1890 1980 1990 2000 2010 2030 2020 Mostorganizationsstilluseamanagementmodelthatwasdesigned forefficiency,whiletheproblemtodayiscomplexity. 4

  4. “commandandcontrol“ • Toocentralized • Tooinward-looking • Toolittlecustomer-oriented • Toobureaucratic • Toomuchfocusedoncontrol • Toofunctionallydivided • Tooslowandtime- consuming • Toode-motivating • … 7

  5. Thehistoricalcourseofmarketdynamics highdynamics sluggishness highdynamics dynamic man Globalmarkets Tayloristicindustry Craftsmanufacturing Outperformers Marketpressure Conventional companies machine formal t 1900 1980 2008 Thedominationofhighdynamicisneithergoodorbad.It‘sahistoricalfact. Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 8

  6. Periphery Command Center Decision Information Centralistcommandand control“collapses“in increasinglycomplex environments Impulse Reaction Source:GerhardWohland 10

  7. Fromhierarchytonetworkstructure. Traditionalmodel (centralizedfunctionalhierarchy) Newmodel (decentralizedleadershipnetwork) Changing leadershipand structure •  “Bosses”rule! •  Top-down commandandcontrol •  Topmanagement isalwaysincharge •  Centralizedleadership •  “Themarket”rules! •  Outside-in senseandrespond •  Front-lineteamsarealways incharge •  Devolvedleadership Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 12

  8. BeyondBudgeting (1998-2002) Beyondcommandandcontrol (2003-2007) Beyondincrementalchange (2008-) 13

  9. Butthereisafurtherchallenge.Whichiswhymosttheoriesabout leadership,aswellasmostadvicefromconsultants,areflawed... Onecannottalksensiblyaboutleadership,orpeople management,nordesigndecentmanagementprocesses, unlessweclarifybeforehandourbeliefswithregardstowhat peopleinorganizationsarelike. Wehavetoarriveatasharedunderstandingofhuman natureandoftheconsequencesofthatforourorganizations. Niels Pflaeging, Leading with Flexible Targets Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 14

  10. vs. Theory TheoryY Y Theory TheoryX X vs. DouglasMcGregor

  11. Theindustrialagemanagementmodelnotonlyfailsbecause marketshavechanged.Itisalsomisalignedwithhumannature. TheoryX (0%) TheoryY (100%) Attitude Peopledislikework,finditboring, andwillavoiditiftheycan. Peopleneedtoworkandwanttotakeaninte- restinit.Underrightconditions,theycanenjoyit. Direction Peoplemustbeforcedorbribed tomaketherighteffort. Peoplewilldirectthemselvestowards atargetthattheyaccept. Responsibility Peoplewouldratherbedirectedthan acceptresponsibility,whichtheyavoid. Peoplewillseekandacceptresponsibility, undertherightconditions. Motivation Peoplearemotivatedmainlybymoney andfearsabouttheirjobsecurity. Undertherightconditions,peoplearemoti- vatedbythedesiretorealizetheirownpotential. Creativity Mostpeoplehavelittlecreativity-except whenitcomestogettingroundrules. Creativityandingenuityarewidelydistributed andgrosslyunderused. BasedonDouglasMcGregor,‘TheHumanSideofEnterprise’,1960 Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 16

  12. Theindustrialagemanagementmodelnotonlyfailsbecause marketshavechanged.Itisalsomisalignedwithhumannature. TheoryX (0%) TheoryY (100%) Motivation? Attitude Peopledislikework,finditboring, andwillavoiditiftheycan. Peopleneedtoworkandwanttotakeaninte- restinit.Underrightconditions,theycanenjoyit. Direction Peoplemustbeforcedorbribed tomaketherighteffort. Peoplewilldirectthemselvestowards atargetthattheyaccept. Responsibility Peoplewouldratherbedirectedthan acceptresponsibility,whichtheyavoid. Peoplewillseekandacceptresponsibility, undertherightconditions. Peoplearemotivatedmainlybymoney andfearsabouttheirjobsecurity. Undertherightconditions,peoplearemoti- vatedbythedesiretorealizetheirownpotential. Creativity Mostpeoplehavelittlecreativity-except whenitcomestogettingroundrules. Creativityandingenuityarewidelydistributed andgrosslyunderused. BasedonDouglasMcGregor,‘TheHumanSideofEnterprise’,1960 Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 17

  13. 18

  14. DoyouBELIEVEinTheoryY? Firmly? Good.Becausewearesurethenyouwouldnever, ever practice (orsupport,ortolerate) HRprocessesandtools thattreatpeoplelikechildren,oranimals,orworse.Right? Suchasperformanceappraisals,individualtargetsetting, incentivecompensation,meritocracy,orcontrolofwork- hours…

  15. Question: Howoftendothesystems, especiallytheHRsystems, getinthewayofchange,transformation, visionandstrategicthinking? Answer: Fartoooften. HistoryoftenleavesHRpeopleinhighlybureaucratic personnelfunctionsthatdiscourageleadershipandmake alteringhumanresourcepracticesabigchallenge. Whitepaper–MakingPerformanceManagementWork Source: based upon John Kotter, Leading Change, p, 110-111 ©BetaCodexNetwork–Allrightsreserved 20

  16. DoyourHRsystemsmakeitinpeople'sbestinterestto implementyournewvision? WhatismeantbyHRsystems?   Performanceappraisal   Compensation   HiringandPromotions   Successionplanning   ... Mostoften,examinationofafirm'shumanresourcesystemsreveal:   Performanceevaluationprocesseshavevirtuallynothingtodowithcustomers orstrategy–yetthatistypicallyatthecoreofanewvisionormanagement model   Compensationdecisionsarebasedmuchmoreonnotmakingmistakesthan oncreatingtherightandusefulchange   Promotiondecisionsaremadeinahighlysubjectivewayandseemtohaveat bestalimitedrelationshiptothechangeeffort   Recruitingandhiringsystemsareadecadeoldandonlymarginallysupport thetransformation Source: J. Kotter, Leading Change, HBSP, p, 110-111 Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 21

  17. Sciences: Thoughtleaders (selected) Practice: Industryleaders (selected) StaffordBeer MargarethWheatley NiklasLuhmann W.EdwardsDeming KevinKelly RossAshby JosephBragdon … DouglasMcGregor ChrisArgyris JeffreyPfeffer ReinhardSprenger StephenCovey HowardGardner ViktorFrankl … Complexity theories Industry Social sciencesand HR Retail PeterDrucker TomPeters CharlesHandy JohnKotter PeterSenge ThomasDavenport PeterBlock … Leadership& change Services Strategy& Performance management Governments &NGOs HenryMintzberg GaryHamel JeremyHope MichaelHammer ThomasJohnson CharlesHorngren … 25

  18. Industry Retail Services Governments. &NGOs 26

  19. TheBetaCodex:The12newlawsofLeadership §1Freedomtoact §2Responsibility §3Governance §4PerformanceclimateResultculture §5Success §6Transparency §7Orientation §8Recognition §9Mentalpresence §10Decision-making §11Resourceusage §12Coordination ConnectednessnotDependency Cells Leadership notDepartments notManagement notDutyfulfillment notMaximization Fit IntelligenceflownotPoweraccumulation RelativeTargetsnotTop-downprescription Sharing notIncentives Preparedness notPlanning Consequence notBureaucracy Purpose-drivennotStatus-oriented MarketdynamicsnotCommands 27

  20. Comparingthemodels

  21. Traditionalmodel(supports efficiency) Newmodel(supports complexity) Centralized hierarchy, “command andcontrol” Decentralized network, “sense andrespond“ Theoldmodelisnot alignedwithtoday’s Criticalsuccessfactorsand itdoesnotsupport‘TheoryY’. >Weneedanew modeltocopewith complexity >Wemustchange thewholemodel! Relative performance contracts strategy Fixed performance contracts Dynamic coordination Fixedprocesses Dynamic processes control 29

  22. TheBetaCodex: Thinkingandworking onthemodel, inthemodel. not

  23. Therearetwodifferentwaysofworkingonthemodel– evolutionandtransformation Sustainingand deepeningofthe decentralizedmodel, throughgenerations Integration phase Evolution withinthedecentralized model (cultureof empowermentandtrust) Transformation throughradical decentralizationof decision-making Differentiation phase Stagnation withinthetayloristicmodel Lowdegreeofdecentralization/ empowerment Bureaucratization throughgrowinghierarchy andfunctionaldifferentiation Pioneering phase Highdegreeofdecentralization/ empowerment Severaldecadesold Foundation Timescale:organization'sage Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 31

  24. Therearetwodifferentwaysofworkingonthemodel– evolutionandtransformation Sustainingand deepeningofthe decentralizedmodel, throughgenerations Integration phase Evolution withinthedecentralized model (cultureof empowermentandtrust) Transformation throughradical decentralizationof decision-making Differentiation phase Stagnation withinthetayloristicmodel Lowdegreeofdecentralization/ empowerment Bureaucratization throughgrowinghierarchy andfunctionaldifferentiation Pioneering phase Highdegreeofdecentralization/ empowerment Organizationswith traditionalmodelsmust eventuallytransform Severaldecadesold themselves! Foundation Timescale:organization'sage Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 32

  25. • Consistentlysuccessful,formorethan40years • “MostinnovativecompanyintheU.S.“ (FastCompany) • Forthe8thyearinarowamongthe100bestemployersinthe U.S. (“Fortune“–bestmedium-sizedemployer). BestemployerinEnglandforthethirdconsecutiveyear. AmongthebestcompaniestoworkforintheEUandGermany. • Allemployeesparticipateinthefirm´ssuccessandbecome “virtual“shareholders. • Nojobtitles.Littlehierarchy. Nojobdescriptions-instead:“jobsculpting“. • Highlyempoweredteams.“Temporaryleadership“ • “Since1958,Gorehasavoidedtraditionalhierarchy.Instead,wehavepracticeda team-basedenvironmentthatstimulatespersonalinitiative,innovationand communcationbetweenallourAssociates.” • “Thefundamentalbeliefinthepeopleinourorganzation andintheirabilitycontinuestobethekeytooursuccess.“ 35

  26. Thecaseofaradicallydecentralizedorganization: Handelsbanken–anextraordinaryleadershipphilosophy Themostimportantobjective withinHandelsbankenGroup: “HigherReturn on Equitythanthe averageofcomparablebanksin theNordicregionandEurope.” Maderealthrough: • Radicaldecentralization, whichinturnleadsto… • Bestcustomerservice • Lowestcost AlexanderVDokukin   Consistently–overaperiodof30years–oneofthemostsuccessfulbanksin Europe,measuredbyalmostallkeyperformanceindicators (e.g.ROE,TSR,EPS,Cost/Income,customersatisfaction,…) ROE=ReturnonEquity,TSR=TotalShareholderReturn,EPS=Earningspershare Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 36

  27. Comparisonbetweenthemajorpubliclylisteduniversalbanks inEuropeuniversalesinEurope.Jan-Dec2005,aftercreditlosses. *Referstoloanstothepublicordepositsifdeposits>lending Handelsbanken Cost/Totalloans*,% DanskeBank FöreningsSparbanken DnBNor Nordea BankofIreland SEB AlliedIrishBanks HypoVereinsbank KBC BancoSantander CreditAgricole RoyalBankofScotland BankAustria BBVA Commerzbank Unicredit LloydsTSB StandardChartered SanPaolo-IMI Erste BancaIntesa Capitalia MontedeiPaschidiSiena ABNAmro Barclays HSBC DeutscheBank HBOS BNPParibas SociétéGénérale Cost/Incomeratio,% UBS CSGroup 908070605040 Source:DeutscheBank:EuropeanBanks-RunningtheNumbers,Springedition. Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 37

  28. How“radicaldecentralization“isbeingreflectedinthe company´sorganizationalstructureanddecision-making Principles Customers Customerintimacy Alargenetworkofself-managed teamswithfullresponsibilityfor customerresults 600branchmanagers (ProfitCenters) Freedomand capabilitytoact “Winning“culture,combinedwiththe freedomandabilitytoact 12regional managers (InvestCenters) Fast,open information systems Governanceand transparency Frameworkfordecisionmakingwith clearvalues,limitsandrelative targets,plustransparency CEO, productfirms, treasury,ITetc. Leadstomaximumcustomersatisfaction! Whitepaper–MakingPerformanceManagementWork Source: BBRT ©BetaCodexNetwork–Allrightsreserved 38

  29. Relativetargetdefinitionthrough“leaguetables“ (rankings) – insteadofplanned,fixedtargetsandinternalnegotiation Banktobank Return on Equity (RoE) Regiontoregion Return on Assets(RoA)etc. Principles 1.  2.  3.  4.  5.  6.  7.  8.  9.  10.  BankD BankJ BankI BankB BankE BankF BankC BankH BankG BankA 31% 24% 20% 18% 15% 13% 12% 10% 8% (2%) Branchtobranch Cost/income ratio etc. 1.  2.  3.  4.  5.  6.  7.  8.  9.  10.  RegionA RegionC RegionH RegionB RegionF RegionE RegionJ RegionI RegionG RegionD 38% 27% 20% 17% 15% 12% 10% 7% 6% (5%) Relativetargetsand relativecompensation 1.  2.  3.  4.  5.  6.  7.  8.  9.  10.  BranchJ28% BranchD32% BranchE37% BranchA39% BranchI41% BranchF45% BranchC54% BranchG65% BranchH72% BranchB87% Continuouspreparation/ socialcontrol “Ondemand“flowof resources/ dynamiccoordination Leadstolowestoperationalcost! Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 39

  30. Flexiblecoordinationandresources“ondemand“- insteadofallocationsandbudgets Headquarters/ Region Branchesacquireresources throughinternalmarkets Resources (IT,HRetc.) Customer demand Branch Branchesaloneare responsibleforefficient useofresources Branches decideover necessary resourcelevels Branches observe customer demand Leadstoeradicatingandavoidingwaste! Whitepaper–MakingPerformanceManagementWork Source: BBRT ©BetaCodexNetwork–Allrightsreserved 40

  31. Howpreparingforactionandforecasting (continuouspreviews) areusedinthismodel,insteadofcentrallycoordinatedplanning Regionalmanagers andHQ challengemonitor check Teamsclose aim act tothecustomer (branches) plan Forecasts Leadingtofastestpossiblereactiontochange! Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 41

  32. Creatinga“virtuouscircle”– acommonfactoramong“BeyondBudgeting”pioneers Bettertodobusinesswith 4.Customerintimacy–Highest (independent) customersatisfaction scoresinsectoryear-after-year; lowestcustomercomplaints; monitorscustomeracquisitions/ defections. 3.Operationalexcellence– LowestcostsofanybankinEurope; lowestbaddebts;costreduction culture;flatorganization (halfa headofficepersonperbranch versusfiveforrivals);internal marketexertsconstantpressureon centralservices. 2.Innovation–SHBvotedjoint bestInternetbankinEuropein 2000;anycompetitiveproductsand solutionsarefedbackfrom branchestoproductdevelopment. Betterforsociety 5.Ethical&socialstandards– Supportthelongterminterestsof thebankandsociety. Bettertoinvestin 6.Sustainablevalue– Beatspeergroupeveryyear onROEandcost-to-income ratio;highesttotal shareholderreturninsector; devolvedadaptive organizationiskeydriverof success. Bettertoworkfor 1.Bestpeople–SHBisfirst choicefinancialservices companyinSwedenfor graduates;employee turnoverislowestinsector; challenge,personal responsibilityandfreedomto runtheirpartofthe business;group-wideprofit sharingscheme. Virtuouscircle TextrelatestoSvenskaHandelsbanken Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 42

  33. MorpheustoNeo: "Youtakethebluepillandthestoryends.Youwakeinyour bedandbelievewhateveryouwanttobelieve.... YoutaketheredpillandyoustayinWonderlandandIshow youhowdeeptherabbit-holegoes." Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 43

  34. Theworldofcommandandcontrolmanagementandplanning-basedsteeringhasalotTheworldofcommandandcontrolmanagementandplanning-basedsteeringhasalot todowiththefictitious,machine-generatedworldinthemovietrilogy"TheMatrix". Actually,likeinthatcrucialsceneinthefirstmovieoftheseries,traditionalmanagementis muchlikethebluepillthemovie'sheroNeoisoffered,andBeyondBudgetingistheredpill. Organizationshavethechoicetoeitherstickwith theillusionofcontrolthattheir“managementby numbers”delivers,ortoacknowledgethatthereisa wholeworldofperformancemanagement“beyond planningandcontrol”.Onethatdoesn'tdenyuncertainty andparadoxes.Andthatmakesfarbetteruseofpeople´s talentandpotential. Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 44

  35. Whytraditionalmanagementwith“fixedperformancecontracts“ regularilyfoolsus:Wehavelostcontrolalongtimeago… Thebluepill:Fixed,negotiatedtargets Theredpill:Relative,self-adjustingtargets Target:absoluteROCEin% (here:15%) Plan Target:relativeROCEin% (tomarket) Target Actual Actual Comparison: Market-Actual Comparison: Plan-Actual Target:„ROCE in%better thanmarket average” Most important competitor (28%) Most important competitor (28%) Market (25%) Market (25%) Actual (21%) Actual (21%) Plan (15%) [expected market Ø: 13%] [independent from expected market Ø] •  Interpretationwithinactual-actualcompa- rison:Performancewas4percentagepoints belowcompetition!>negativeinterpretation •  Absoluteassumptionsatthemomentof planningdon´tmatter. •  Targetsalwaysremainupdatedandrelevant! •  Interpretationwithintheplan-actual- comparison:Planwasoutperformedby6 percentagepoints>positiveinterpretation •  BetterROCEofthemarketaverageandthe mostimportantcompetitorremainunnoticed! Whitepaper–MakingPerformanceManagementWork Source: Niels Pfläging ©BetaCodexNetwork–Allrightsreserved 45

  36. Let'sstartwithcompensationthen. Firstofall,let'sbeclear.Carrotsdon'twork. Theymightbeattheintellectofdonkeys.Buttheycertainly don'ttrickhumanbeings,whoallhave“TheoryY” wiringinsidethem.Incentivessimplydon't haveapositiveinfluenceonorganizational performance.Fullstop. Sowhydosomanyofusstillapply inthecarrot-and-stickmethodwithpeople? Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 46

  37. Theproblemwith“incentives”:Howtraditionalmanagement systematicallyforcespeopletocheat Bonus limit Bonus hurdle Variable area “Ceiling” Commonpractice: „Payforperformance“ compensation profilewithfixed performancecontract: Createsmaniuplation incentiveinanysituation! Reduction incentive:Lower resultevenmore Maximization incentive:Anticipate results Reductionincentive: postponeresultsto nextperiod Salary/ bonus Basesalary 80% oftarget 100%: target 120% oftarget Performanceas% oftargetrealization Abettermodel:Result orientedcompensation profilewithrelative performance contracts: Noincentiveto manipulation. Linearcompensationcurvewithoutbreaks: variablecompensationbecomes decoupledfromtargets Salary/ bonus Freefrom incentivetomanipulate Actual result#1 Actual result#2 Actual result#3 Performancein relativeevaluation Source: Michael Jensen Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 47

  38. Backgroundstorieswewouldn´ttellourclients: Real-lifeexamplesfromcompanies ThecaseofMarieTaylor Thisiswhathappened: MarieTaylor,asalespersonfromourorganization,hasgenerated incomethatgoesagainstourcompany´sprinciple “Alwaysacttothebenefitofourcustomers“. Thedecision:MarieTaylorisbeingtransferredtotheinternalsales supportdepartment.Allherbonusesrightshavebeenimmediately cancelled. Thebackgroundstory: Itistrue–allsalespeopleareobliguedtoactintheinterestofcustomers. Butitisalsotruethat40%ofMarieTaylor´ssalarydependontheamountof netsalesshegenerates. Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 48

  39. Backgroundstorieswewouldn´ttellourclients: Real-lifeexamplesfromcompanies ThecaseofFrankMiller Thisiswhathappened: FrankMiller,aconsultant,hasoverchargedduringhisworkwith clients,whichmeanshehassystematicallyinflatedtheamount ofworkedhourschargedtohiscustomers. Thedecision:FrankMillerwasfiredandisleavingthecompany immediately. Thebackgroundstory: Itistrue:FrankMillerhasactedagainstthelaw,bychargingformorethan hehasactuallyworkedforhisclients. Butitisalsotruethat25%ofFrankMiller´sincomedependonthehours chargedtoclients… Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 49

  40. Anexample:“motivation”,or“threat”? Whatcompensationsystemsreallydo... Systemwithno variablecompensation Systemwithvariablecompensation (bonus,incentive,etc.) 30% Variable compensation 100% Basesalary 100%:Total compensation expectedby employee. 70% Isthisan“energizing promise”,orisit justapitifulthreat? Basesalary “Wehaveanaggressivepay philosophy:30%ofyourtotal compensationwillbepaidinformof abonus.ThetotalisUSD 100.000,00,bytheway.“ “Wehaveaconservativepayphilosophy. Yourbasesalaryequalsyourtotal compensation,whichisUSD 100.000,00.“ Whitepaper–MakingPerformanceManagementWork ©BetaCodexNetwork–Allrightsreserved 50