What are the Beyond Budgeting principles? For the past 12 years we have been studying organizations that have abandoned command and control and looked at the common principles they have adopted. This model is derived from the ‘best of best practices’ of leading-edge organizations and consists of 12 principles that redefine the management model. The first six “leadership” principles provide a framework for the devolution of responsibility to front line teams thus enabling them to respond quickly to emerging events and making them accountable for continuously improving (internal and external) customer outcomes and relative performance. The second six “process” principles support a more adaptive set of performance management systems that enable front line teams to be more responsive to the competitive environment and to customer needs. These principles represent a holistic model (not a menu of options) but different organizations will place different emphases on different elements at different times. What is the problem? Few managers enjoy radical change, so what are the compelling reasons why you should take Beyond Budgeting seriously? Bear in mind that we use the word ‘budgeting’ as an alternative term for ‘command and control’ management. Budgeting was designed to enable senior executives to command and control the organization from the corporate center. [For more information, see http://www.bbrt.org/beyond-budgeting/bb-problem.html] What is the vison for change? We believe that by replacing the command and control model with a Beyond Budgeting alternative (that is, an Empowered and Adaptive Organization), leaders can, over time, overcome these problems. [For more information, see http://www.bbrt.org/beyond-budgeting/bb-vision.html] Beyond Budgeting Roundtable BBRT _7b3362c2-25d7-11e2-9f9a-8cbd486f2952 Ahlsell DIY Retail, Sweden American Express Financial Services, USA Beth Israel Deaconess Medical Center Health Care, USA Coloplast Medical products, Denmark dm drogerie-markt Drug retail, Germany Egon Zehnder Inernational Executive recruitment, Switzerland W.L. Gore & Associates Multi-products manufacture, USA Google Internet search, USA Guardian Industries Float glass manufacture, USA Handelsbanken Universal bank, Sweden -- A World Class financial services model: Like Toyota, Handelsbanken has been consistently profitable for over 30 years. It is also consistently top of independent customer satisfaction ratings in Sweden and the UK and has the lowest number of customer complaints. It is consistently one of the most cost efficient banks in the world with a cost-to-income ratio of around 40 percent (compared with 60-80 percent for most of its rivals). Its profits even increased in 2008 when other banks were suffering huge falls and it has come through the credit crunch relatively unscathed (it was the only Swedish bank not to require Government support). The focus is on continuously improving performance and meeting customers’ needs. There is no fixed performance contract to worry about. The pressure comes from not letting down the team you are in or the regional group you are part of. Branches are profit centres and have considerable decision-making authority. Goals are self-imposed by branch teams aimed at improving against peers. But these are not communicated to a higher authority - they are not a contract. There are no top-down targets. Planning takes place at the branch level, usually at six-to-twelve week intervals according to the needs of the branch. There are only a few metrics that tell managers how they are performing (return-on-equity and cost/income ratio at group and regional levels and cost/income ratio and profit per employee at branch level). Information is fast and open. Peer comparisons are used to spur improvement. Resources are made available through an internal market that enables branches to access them at any time. This approach drastically reduces waste and costs. HCL Technologies IT Services, India Hilti Building products, Liechtenstein John Lewis Partnership Retail, UK Leyland Trucks Truck manufacture, UK Nucor Steel Steel maker, USA Southwest Airlines Airline, USA -- A World Class airline model: Southwest is an icon of Corporate America. It has been consistently profitable for over 30 years and is regularly top of independent customer satisfaction ratings. It is also the most cost efficient airline and has the highest shareholder returns of its peer group. It has been voted one of best “corporate citizens” in America. The focus is on continuously improving performance and meeting customers’ needs. Service is a “way of life” rather than a technique. Targets are set by each team within broad-based parameters and expectations. This enables innovative thinking and builds ownership and commitment at the local level. Benchmarks (such as cost per available seat mile) and other key indicators are widely shared. Planning takes place at the front line. It is a continuous process based on 12-month rolling forecasts and quarterly plans within a clear strategic framework. Managers have fast, relevant information within one unified reporting and open information system. Resources are made available monthly and quarterly based on rolling forecasts. Action plans can be approved at any time through the year and implemented immediately. Statoil Oil & Gas, Norway Sydney Water Water utility, Australia Telekom Malaysia Telecommunications, Malaysia Telenor Telecommunications, Norway Toyota Car manufacture, Japan -- A World Class manufacturing model: Despite incurring its first loss in many decades (not even Toyota can make a profit when the market suddenly collapses by over 30 percent) Toyota remains the best managed manufacturing company in the world. Its Toyota Production System is legendary and spawned the lean manufacturing movement. The management focus is on continuously improving systems and meeting internal and external customers’ needs. Everyone has a voice and is expected to contribute to the continuous improvement of their work. Medium-term operational goals aimed at best practice are set at every level. Planning takes place at the plant/team level and happens monthly within a clear strategic framework (12 month rolling forecasts support capacity planning). Knowledge about current performance is visual and immediate (e.g. throughput, downtime, inventory levels). Resources are made available just-in-time to meet each customer order. There are no fixed targets, no annual budget contracts and people are trusted with information to make the right decisions. Whole Foods Market Natural foods retailer, USA Empowered and Adaptive Organizations _7b336920-25d7-11e2-9f9a-8cbd486f2952 To identify best of best practices to redefine the management model. _7b336ab0-25d7-11e2-9f9a-8cbd486f2952 Speed Faster Response -- Beyond Budgeting organizations operate with speed and simplicity. Simplicity comes from reducing complexity in the management process. This can best be achieved by giving front line people the scope to act immediately and decisively within clear principles, values and strategic boundaries Operating within a flexible network is also important to enable people to respond quickly to customized requests by reconfiguring processes. Making strategy an open, continuous and adaptive process is the key element in a fast response organization. It enables and organization to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan. Underlying all these approaches is the shredding of bureaucracy that still plagues most organizations. Simplicity Flexibility Innovation Innovative Strategies -- In Beyond Budgeting organizations, people work within an open and self-managed environment. Clear governance principles set the right climate and build the mutual trust needed to share knowledge and best practices. This is encouraged by moving away from incentives based on fixed performance targets locked into the budget (a formidable barrier to sharing and cooperation) to rewards based on performance relative to the peers. Openness Self-Management Clarity Trust Knowledge Sharing Best Practices Low Cost Lower Costs -- Only by seeing process as supplier-customer relationships will people respond to demands for improvement in quality and cost. Only by eradicating the mentality surrounding traditional budgets (which fix a floor and ceiling on costs) will people be motivated to question fixed costs and seek sustainable long term cost reductions. Operating mangers and front line people are able to base requests on resources as needed rather than viewing them as ‘entitlements’. Just asking the question, “does it add value to the customer?” often ensures that unnecessary work is eliminated. Quality Improvement Cost Reduction Customer Value Customer Loyalty More Loyal Customers -- Beyond Budgeting organizations place customer value needs at the centre of their strategy and adapt their processes to satisfying and even delighting them. Fast response to customer requests is vital. Thus front line people must have the authority to make quick decisions and manage their own bit of the business such that the overall organization becomes much more competitive than its competitors. Decentralized Authority Competitiveness Values Bind people to a common cause; not a central plan _7b336b3c-25d7-11e2-9f9a-8cbd486f2952 1 _7b336bd2-25d7-11e2-9f9a-8cbd486f2952 101134c5-9f93-42ad-96e5-044d093c1379 Governance Govern through shared values and sound judgement; not detailed rules and regulations _7b336ccc-25d7-11e2-9f9a-8cbd486f2952 2 _7b336d6c-25d7-11e2-9f9a-8cbd486f2952 0ef3f36c-6c13-49a9-84be-9452eba63322 Transparency Make information open and transparent; don't restrict and control it _7b336e0c-25d7-11e2-9f9a-8cbd486f2952 3 _7b336ec0-25d7-11e2-9f9a-8cbd486f2952 dc26b0f3-ccff-4565-92eb-7d120466dc4d Teams Organize around a seamless network of accountable teams; not centralized functions _7b336f60-25d7-11e2-9f9a-8cbd486f2952 4 _7b337000-25d7-11e2-9f9a-8cbd486f2952 b5607100-3cf8-4dcb-9124-4c04ceae802d Trust Trust teams to regulate their performance; don't micro-manage them _7b3370be-25d7-11e2-9f9a-8cbd486f2952 5 _7b337168-25d7-11e2-9f9a-8cbd486f2952 e75ba961-8a87-4347-a19d-b3b04402d52a Accountability Base accountability on holistic criteria and peer reviews; not on hierarchical relationships _7b337208-25d7-11e2-9f9a-8cbd486f2952 6 _7b3372d0-25d7-11e2-9f9a-8cbd486f2952 f712616c-b6ee-4a60-af29-8c3a49bf1c5c Goals Set ambitious medium-term goals, not short-term fixed targets _7b33737a-25d7-11e2-9f9a-8cbd486f2952 7 _7b337424-25d7-11e2-9f9a-8cbd486f2952 7c5b455e-5772-4138-b5f8-a4cc4f2dfc63 Rewards Base rewards on relative performance; not on meeting fixed target _7b3374f6-25d7-11e2-9f9a-8cbd486f2952 8 _7b3375aa-25d7-11e2-9f9a-8cbd486f2952 5fa3880a-5bdd-44e2-aab9-fefe29dfe2c5 Planning Make planning a continuous and inclusive process; not a top-down annual event _7b33765e-25d7-11e2-9f9a-8cbd486f2952 9 _7b33773a-25d7-11e2-9f9a-8cbd486f2952 53700e88-5a72-4e89-9a23-0aa61f911c07 Coordination Coordinate interactions dynamically; not through annual budgets _7b3377f8-25d7-11e2-9f9a-8cbd486f2952 10 _7b3378ac-25d7-11e2-9f9a-8cbd486f2952 fcfc4e0e-7d9f-4d6a-830b-3e86f88abcaa Resources Make resources available just-in-time; not just-in-case _7b337988-25d7-11e2-9f9a-8cbd486f2952 11 _7b337a50-25d7-11e2-9f9a-8cbd486f2952 5dba2558-1c81-49f3-8956-d63832a62157 Controls Base controls on fast, frequent feedback; not budget variances _7b337b0e-25d7-11e2-9f9a-8cbd486f2952 12 _7b337bf4-25d7-11e2-9f9a-8cbd486f2952 5b9d581a-8d76-4e39-9309-3f1e7bd49eba 2012-11-03 http://www.bbrt.org/beyond-budgeting/bb-principles.html Owen Ambur Owen.Ambur@verizon.net Submit error.