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Leading with Flexible Targets: How to Create the Performance Revolution - Keynote, University of Bergamo (Bergamo/IT)

Keynote at the University of Bergamo.

NielsPflaeging
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Leading with Flexible Targets: How to Create the Performance Revolution - Keynote, University of Bergamo (Bergamo/IT)

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  1. Leadingwith FlexibleTargets BeyondBudgeting: HowCreatethe PerformanceRevolution Bergamo,09.11.2010 NielsPflaeging BBTNAssociate&PresidenteMetaManagementGroup Econique–DiálogoCFO 18/19deMayo2009 [ NielsPflaeging ] BetaCodexNetworkwwwbetacodex.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. ©BBTN–Allrightsreserved 4

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

  5. Periphery Command Center Decision Information Centralistcommandand control“collapses“in increasinglycomplex environments Impulse Reaction Source:GerhardWohland ©BBTN–Allrightsreserved 9

  6. Onecannottalksensiblyaboutleadership,orpeople management,nordesigndecentmanagementprocesses, unlessweclarifybeforehandourbeliefswithregardstowhat peopleinorganizationsarelike. Wehavetoarriveatasharedunderstandingofhuman natureandoftheconsequencesofthatforourorganizations. Leadership e obiettivi flessibili ©BBTN–Allrightsreserved 11

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

  8. TheoryX TheoryY Attitude Peopledislikework,finditboring, andwillavoiditiftheycan. Peopleneedtoworkandwanttotake aninterestinit.Underrightconditions, theycanenjoyit. Direction Peoplewilldirectthemselves towardsatargetthattheyaccept. Peoplemustbeforcedorbribed tomaketherighteffort. Responsibility Peoplewouldratherbedirectedthan acceptresponsibility,whichtheyavoid. Peoplewillseekandaccept responsibility,undertheright conditions. Motivation Peoplearemotivatedmainly bymoneyandfearsabouttheirjob security. Undertherightconditions,peopleare motivatedbythedesiretorealizetheir ownpotential. Creativity Creativityandingenuityarewidely distributed andgrosslyunderused. Mostpeoplehavelittlecreativity- exceptwhenitcomestogetting roundrules. Source:citedfromDouglasMcGregor,‘TheHumanSideofEnterprise’,1960 ©BBTN–Allrightsreserved 13

  9. ©BBTN–Allrightsreserved 16

  10. BeyondBudgeting (1998-2002) Beyondcommandandcontrol (2003-2007) Beyondincrementalchange (2008-) ©BBTN–Allrightsreserved 19

  11. 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 … ©BBTN–Allrightsreserved 21

  12. Industry Retail Services Governments. &NGOs ©BBTN–Allrightsreserved 22

  13. 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 ©BBTN–Allrightsreserved 23

  14. 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 ©BBTN–Allrightsreserved 24

  15. TheBetaCodex: Thinkingandworking onthemodel, inthemodel. not 25

  16. 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

  17. • 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.“ ©BBTN–Allrightsreserved 29

  18. Apertura 30 ©BBTN–Allrightsreserved 30

  19. Apertura 31 ©BBTN–Allrightsreserved 31

  20. FixedTargets–the“bluepill“! Target:absoluteROCEin% (here:15%) Actual Target Relative,self-adjustingtargets Target:relativeROCEin% (toMarket) Plan comparison: Market-Actual comparison Plan-Actual Most important competitor (28%) Target:„ROCE in%better thanmarket average” Market (25%) Actual (21%) Plan (15%) [expected market Ø: 13%] market Ø] [independent from expected • Interpretationwithinactual-actualcomparison: Performancewas4percentagepointsbelow competition!>negativeinterpretation • Absoluteassumptionsatthemomentofplanningdon´t • Interpretationwithintheplan-actual-comparison: Planwasoutperformedby6percentagepoints> positiveinterpretation • BetterROCEofthemarketaverageandthemost importantcompetitorremainunnoticed! matter. • Targetsalwaysremainupdatedandrelevant! Apertura 32 ©BBTN–Allrightsreserved 32

  21. 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 ©BBTN–Allrightsreserved 34

  22. 1verysimpleprinciple: Alwaysdisconnectcompensationfromtargets. Always. ©BBTN–Allrightsreserved 35

  23. Pay-for-performanceisanoutgrowthofbehaviorism,whichis focusedonindividualorganisms,notsystems-and,truetoitsname, looksonlyatbehaviors,notatreasonsandmotivesandthepeoplewho havethem. ItellFortune500executives (oratleastthosefoolishenoughtoaskme) thatthebestformulaforcompensationisthis:Paypeoplewell,paythem fairly,andthendoeverythingpossibletohelpthemforgetaboutmoney. Howshouldwerewardourstaff?Notatall!Theyarenotourpets. Paythemwell,respectandtrustthem,freethemfromdisturbance, providethemwithallavailableinformationandsupporttoperform onthehighestpossiblelevel. Alfie Kohn, Sociologist 1.  Paypeoplewell 2.  Paypeoplefairly 3.  Andthendoeverythingpossibletotakemoneyoffpeoplesminds! Allpay-for-performanceplansviolatethatlastprecept! ©BBTN–Allrightsreserved 36

  24. 1verysimpleprinciple: Neverusebonusesandincentives. Applyprofitsharingand/orshareholdingconcepts forcommunity. ©BBTN–Allrightsreserved 37

  25. Companies. Don´t Need.Period. Planning. Apertura EineKonsequenzausdemKodex. 39

  26. “Fixed”performancecontract Strategy •  Period •  Targets [Fixed] [Fixed] Strategic learningcycle •  Compensation •  Plan •  Resources •  Coordination •  Control •  Agreedthrough [Fixed] Annualplan Fixed Performance Contract [Fixed] [Fixed] Budget [Fixed] [Fixed] Management controlcycle [Negotiation] •  Signedby: [Manager/Director] Control Apertura Tayloristicmanagementworkslikethis:Ascentralistic-burocratichierarchies, heldtogetherthrougharegimeoffixedperformancecontracts! Source: BBRT 41 41 ©BBTN–Allrightsreserved 41

  27. Apertura 42 ©BBTN–Allrightsreserved 42

  28. Themostimportantobjective withinHandelsbankenGroup: “HigherReturn on Equitythanthe averageofcomparablebanksinthe NordicregionandEurope.” Maderealthrough: •  Radicaldecentralization,whichin turnleadsto… •  Bestcustomerservice •  Lowestcost AlexanderVDokukin   Consistently–overaperiodof30years–oneofthemostsuccessfulbanksinEurope, measuredbyalmostallkeyperformanceindicators (e.g.ROE,TSR,EPS,Cost/Income,customersatisfaction,…) Apertura ROE=ReturnonEquity,TSR=TotalShareholderReturn,EPS=Earningspershare 43 ©BBTN–Allrightsreserved 43

  29. Customers Principles Customerintimacy Alargenetworkofself-managed teamswithfullresponsibilityfor customerresults 600branchmanagers (ProfitCenters) Freedomandcapabilitytoact “Winning“culture,combined withthefreedom andabilitytoact 12regional managers (InvestCenters) Fast,open information systems Governanceandtransparency Frameworkfordecisionmaking withclearvalues,limitsand relativetargets,plus transparency CEO, productfirms, treasury,ITetc. Apertura Leadstomaximumcustomersatisfaction! Source: BBRT 44 ©BBTN–Allrightsreserved 44

  30. Strategic „cascade” 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%) Relativetargetsandrelative compensation 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 Apertura Result & value contribution Leadstolowestoperationalcost! 45 ©BBTN–Allrightsreserved 45

  31. Headquarters/ Region Branchesacquireresources throughinternalmarkets Resources (IT,HRetc.) Customer demand Branch Branchesaloneare responsibleforefficient useofresources Branchesdecide overnecessary resourcelevels Branches observe customer demand Apertura Leadstoeradicatingandavoidingwaste! Source: BBRT 46 ©BBTN–Allrightsreserved 46

  32. Bettertoinvestin 6.Sustainablevalue– Beatspeergroupeveryyear onROEandcost-to-income ratio;highesttotal shareholderreturninsector; devolvedadaptive organizationiskeydriverof success. Betterforsociety 5.Ethical&socialstandards– Supportthelongterminterestsof thebankandsociety. 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. Bettertoworkfor 1.Bestpeople–SHBisfirst choicefinancialservices companyinSwedenfor graduates;employee turnoverislowestinsector; challenge,personal responsibilityandfreedomto runtheirpartofthe business;group-wideprofit sharingscheme. Apertura TextrelatestoSvenskaHandelsbanken 47 ©BBTN–Allrightsreserved 47

  33. What waiting for? arewe

  34. ©BBTN–Allrightsreserved 49

  35. “Idon´tknowifitispossible. WhatIknow:Itisnecessary.“ Tom Peters Todaywealreadyknowforsureitispossible. Andwehavealsolearnedhowitcanbedone. ©BBTN–Allrightsreserved 50

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