Beyond Budgeting

The Leader’s Dilemma: How to Build an Empowered and Adaptive Organization Without Losing Control by Jeremy Hope, Peter Bunce, and Franz Röösli

The Leader’s Dilemma describes a practical new approach to management that has grown out of a dozen years of discussions by an outfit named the Beyond Budgeting Roundtable.


Franz Röösli, who suggested Stoos as the locus of our gathering 

Franz Röösli, co-director of the Roundtable and a co-author of the book, handed out copies at the Stoos Gathering. I haven’t been able to put it down.

The BBRT is an international shared learning network of member organizations with a common interest in transforming their performance management models to enable sustained, superior performance. BBRT helps organizations learn from world-wide best practice studies and encourages them to share information, past successes and implementation experiences to move beyond command and control.
The BBRT is at the heart of a movement that is searching for ways to build lean, adaptive and ethical enterprises that can sustain superior competitive performance. Its aim is to spread the idea through a vibrant community.

The Leader’s Dilemma is organized around the Beyond Budgeting Principles:

12 Beyond Budgeting Principles (2011)
Governance and transparency
Values Bind people to a common cause; not a central plan
Governance Govern through shared values and sound judgement; not detailed rules and regulations
Transparency Make information open and transparent; don’t restrict and control it
Accountable teams
Teams Organize around a seamless network of accountable teams; not centralized functions
Trust Trust teams to regulate their performance; don’t micro-manage them
Accountability Base accountability on holistic criteria and peer reviews; not on hierarchical relationships
Goals and rewards
Goals Encourage teams to set ambitious goals, don’t turn goals into fixed contracts
Rewards Base rewards on relative performance; not on fixed targets
Planning and controls
Planning Make planning a continuous and inclusive process; not a top-down annual event
Coordination Coordinate interactions dynamically; not through annual budgets
Resources Make resources available just-in-time; not just-in-case
Controls Base controls on fast, frequent feedback; not budget variances

 

The Roundtable believes that by replacing the command and control model with a Beyond Budgeting alternative (that is, an Empowered and Adaptive Organization), leaders can create an organizaiton that:

  • Responds rapidly to threats and opportunities. Adaptive organizations operate with speed and simplicity and this can best be achieved by giving managers the scope to act immediately and decisively within clear values and strategic boundaries. Making strategy an open, continuous and adaptive process is the key. It enables the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan.
  • Attracts and keeps the best people. It is no coincidence that Adaptive Organizations such as Google, Handelsbanken and W.L. Gore regularly appear in the lists of “best companies to work for”. The reasons are obvious. From the employee perspective, talented people want to learn and develop; they value time to think, reflect and try new ideas; they want decision-making responsibility and they want a friendly, collegiate culture. From the employer perspective they want people who have the right attitude, have ideas and can add value, want to participate in decision-making, are good team players and have the talent to become leaders at any level.
  • Enables and encourages continuous innovation. Innovation is about thinking and acting differently whether it is about strategies, business models, processes, or management practices. In adaptive organizations, people work within an open and self-questioning environment. Clear governance principles set the right climate and builds the mutual trust needed to share knowledge and best practices. This is also encouraged by the move away from rewards based on budgets and toward rewards based on a business unit or group.
  • Drives operational excellence. Adaptive organizations have lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects, and structures with their strategy. Operating managers also challenge resources used rather than seeing them as ‘entitlements’. Just asking the question, “Does it add value to the customer?” is often sufficient to ensure that unnecessary work is eliminated.
  • Leads to loyal and profitable customers. Adaptive organizations know how customers want to conduct business with them. Key issues are whether customers just want the lowest-cost transaction, added-value services, or customized solutions. Under this “outside-in” approach, firms know how to satisfy customers’ needs profitably. This means not only knowing their needs, but also their net profitability.
  • Support good governance and ethical behavior. Adaptive organizations are held together by strong values and inviolate principles. But it is not a soft option. It exposes nonperformers. It challenges people all the time. You can’t just agree on a number. You have to show people that you can actually achieve real performance improvements, and must always be prepared to be judged against others with similar problems and opportunities.
  • Leads to sustained value creation. Leaders in Adaptive organizations focus their attention (either explicitly or implicitly) on creating wealth over the longer term. In particular, they focus on setting high performance expectations and stretching people’s ambitions. Those companies that operate this way tend to beat the competition not just this quarter or this year but year after year.

The Adaptive Organization relies on teams:

Some leaders struggle with the idea that many small teams can actually cost less than a few large units. While economies of scale can look seductive on spreadsheets, creating many small teams leads to a more flexible and innovative organization that, with more accountability and less management, actually consumes fewer costs.

What do we mean by ‘teams’? In Beyond Budgeting organizations we believe there are three kinds of team (excluding ‘project’ teams that are usually temporary). The executive team is the C-level suite responsible for setting purpose, goals and strategic direction as well as challenging other units to maximize their performance. Support services teams (strategy, finance, human resources, marketing, supply chain management, design, production, logistics, sales and service teams, information technology and so forth) are responsible for serving and supporting value centers. Value centre teams are responsible for formulating strategy, investing capital and delivering value (or profit). They invariably have their own profit and loss accounts and are typically created around lines of business, brands/product groups, regions/countries and plants/branches.

 

The aim is to create as many value centre teams as possible by sub-dividing them and adding new ventures. They should be based round a clear market niche and have a distinctive customer value proposition. On the other hand, the aim is to reduce the numbers and size of support services centres. In other words, the aim is to have as many direct costs within value centres and as few indirect costs as possible.

With a tip of the hat to Meg Wheatley, BBRT argues that the appropriate mental model for the new-age organization is the complex adaptive system:

Putting this into practice is tough. The Leader’s Dilemma offers suggestions but I’m hungry for more. Of course, finding a way to turn dreams like these into reality was the whole purpose of meeting in Stoos.

 

 

 

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