26 August 2009

Thank you for your interest in BBRT. Welcome to the BBRT global newsletter, which is designed to keep you informed of developments in Beyond Budgeting and the BBRT. For further information visit our global web site at www.bbrt.org.

Table of contents

BBRT Upcoming Events
BBRT launches BBRT Online Knowledge
BBRT Research News
Incentive bonuses are bouncing back
Online Beyond Budgeting networking groups

August

28 August 2009: Webcast: BBRT and Lean – Linking Financial Redesign with Performance Improvement

September

24 September 2009: Webcast: Making the Case for Change

October

6 October 2009: BBRT European Members’ Meeting, London, England
26 October 2009: Webcast: Preparing Your Organization for Rolling Forecasts
27 October 2009: Webcast: The Cure for the Common Spreadsheet

November

17-19 November: BBRT Healthcare Interest Group meeting, Tampa FL, USA

Advanced notice

21-23 April 2010: BBRT North America Annual Conference, Dallas, TX, USA

BBRT has launched a new web site called BBRT Online Knowledge. This site contains BBRT Briefing Papers and BBRT White Papers on every aspect of Beyond Budgeting, topics include leadership & strategy, finance, tools, marketing & sales, operations, HR, and recession. The White Papers and a few of the Briefing Papers are a free public download, and the majority of the Briefing Papers can be publicly downloaded at a modest charge of £35 (all these Briefing Papers are available to BBRT members at no charge).

This web site can currently be accessed at www.beyondbudgeting.org, but during the next few weeks this site will replace the current public BBRT Online site and everyone currently registered with BBRT Online will be transferred to the new site.

Finance Transformation Blog

Steve Player (BBRT Director North America) is now authoring a Finance Transformation blog for Business Finance Magazine. You can connect to this blog at www.bigfatfinanceblog.com

BBRT INSIGHTS research series

The following papers have been circulated to BBRT members since the last Newsletter:

Why outsourcing should be aimed at greater flexibility rather than just lowering costs

Abstract: Outsourcing and offshoring, whether we like it or not, are here to stay. While many firms have had problems and some have reversed the process many more are learning how to manage this change well. Outsourcing contractors are also getting their act together and improving their performance. This paper looks at the current state of outsourcing and offers a number of guidelines that managers can follow to generate more value rather than just cut costs.

Why you should manage total (value stream) costs rather than unit (standard) costs

Abstract: Standard costing remains the product costing method of choice today despite the dramatic increase in the proportion of fixed to variable costs and the added difficulties of allocating overheads. As this paper discusses, there are alternative approaches that avoid many of these problems and enable managers to better manage total costs rather than focus too narrowly on unit costs. But it means embracing lean manufacturing and overhauling the whole cost accounting system.

BBRT members can download the full papers from the BBRT Members' Community (formerly Private Forum) at www.bbrt.org/online. Join the BBRT to obtain this and previous papers – contact Peter Bunce at peterbunce@bbrt.org, or Heather Bryce at heather@theplayergroup.com

Peter Bunce, BBRT Director

During the height of the financial crisis governments around the world blamed the bonus culture for creating many of the problems and that the short-term bonus culture in the global banking industry must end. Indeed at the upcoming G20 summit in Pittsburgh a further attempt will be made to get international agreements on bonuses. In BBRT we thought that at last our message about abandoning incentives linked to fixed targets was at last being vindicated.

In spite of this the bonus culture persists and is even making a comeback (here we are talking about the individual incentive scheme linked to fixed targets). In a recent report in the UK Times newspaper Dominic Rushie[1] stated that “Last year the average teacher’s salary in New York was $55,181 (£38,688). On Wall Street, which was having the worst year in living memory, the average bonus was $112,000. And last week we learnt that was just the start of it. Even as the world teetered on the brink of financial Armageddon, the banks that had caused the problems were doling out massive sums that would make even the most jaded Wall Street watcher blink..” According to a recent report by the New York attorney general, the bonus pools at the nine bank rescued by the US government bailout fund totalled $32.6 billion at a time when those banks were lost $81 billion[2]. So where did the money come from for the bonuses? It didn’t come out of the profit pool, there wasn’t any; it came out of US government funds (i.e. the US tax payer) and the shareholders. Was it a reward for excellent performance? Well the state of the banks indicates that they weren’t doing so well. No, the bonuses were paid because they were a contractual agreement and they took little account of any poor performance.

Now let’s contrast this with two examples, Handelsbanken and John Lewis. As we have reported on many occasions Handelsbanken does not have a system of individual incentives (bonuses) linked to fixed targets. Instead it rewards all employees (not just the top executives) with a share of the profit after the year end. So if the organization does well, so do the employees, if it were to make a loss then the employees wouldn’t get a reward. Last year Handelsbanken was the only Swedish bank that didn’t need a bailout from the Swedish government and its profits were the highest of the Swedish banks.

John Lewis is a UK department store chain, but with a difference (see side panel). Its profits are distributed among its partners (staff) every year, so they all get a share in the organization’s success. In a recent interview with the CEO, Andy Street when asked if money motivate him he replied “Not for me personally, but for the business it’s a key motivating driver for our profit-sharing model. It’s my responsibility to lead the business to achieve the profit that is shared amongst our partners at the end of every financial year”[3]. The John Lewis Partnership continues to grow sales year on year and steal market share from its competitors.

So both the rewards (note the change of word) are dependent on the overall success of the business, in this case profit, and not on individuals meeting fixed targets agreed in advance. These and other organizations that operate on this way have been successful and sustainable through both good and bad times.

Since it began BBRT has discovered in nearly every organization that it has studied that they have moved away from individual incentives (the fixed performance contract) to a reward system based on overall organization performance that can only be assessed after the event. Hence the pressure to perform is relentless as the reward cannot be calculated in advance. Examples such as Enron, Worldcom, Royal Bank of Scotland, Northern Rock and others have shown that top people can and will manipulate the system to maximize their bonuses, which is often not in the best medium and long-term interests of the organization and its stakeholders. To quote Andy Street again “I would like the political class to be alert to what the Partnership [John Lewis] shows about running a company in a socially responsible and sustainable way”[4]. The question is will the political class and the large financial institutes listen? We hope they will.

About the John Lewis Partnership
The John Lewis Partnership is a visionary and successful way of doing business, boldly putting the happiness of Partners at the centre of everything it does. It's the embodiment of an ideal, the outcome of nearly a century of endeavour to create a different sort of company, owned by Partners dedicated to serving customers with flair and fairness.
All 69,000 permanent staff are Partners who own 27 John Lewis department stores, 213 Waitrose supermarkets, an online and catalogue business, a direct services company, Greenbee , a production unit and a farm with a turnover of nearly £6.9 billion ($11.4 billion) last year. Partners share in the benefits and profits of a business that puts them first.
When the founder, John Spedan Lewis, set up the Partnership, he was careful to create a governance system, set out in the company’s Constitution that would be both commercial allowing it to move quickly to stay ahead in a competitive industry, and democratic giving every Partner a voice in the business they co-own. His combination of commercial acumen and corporate conscience, so ahead of its time, is what makes John Lewis what it is today.

In defending the latest round of bonuses the financial institutions state they have offer such large bonuses and packages “to attract the right sort of people to grow the business”. But it’s exactly this system that brought the banks crashing down, so are these really the “right” sort of people? Perhaps a system based on rewards with hindsight sharing in the success of the business might attract people who would create an organization that operates in a socially responsible and sustainable way and not just for short-term gain. Our studies have shown that nearly every organization that rewards team-based success based on relative performance, not on meeting fixed targets (one of the Beyond Budgeting principles) has outperformed the markets and their competitors over the long term. The Beyond Budgeting principles are the basis for a management model that supports such socially responsible and sustainable organizations.

1. Rushie, D. (2009) Big Bonuses, small change. The Times, 2 August 2009

2. Rushie, D. (2009) Big Bonuses, small change. The Times, 2 August 2009

4. Leroux, M. (2009) Monday Manifesto: John Lewis may come to a town near you. The Times, 17 August 2009

5. Leroux, M. (2009) Monday Manifesto: John Lewis may come to a town near you. The Times, 17 August 2009

Several members of the BBRT network have established online networking groups, the latest being

Beyond Budgeting at Linkedin – www.linkedin.com
Beyond Budgeting Implementers in Google Groups - http://groups.google.com/group/beyondbudgeting?hl=en&lnk=

These groups enable anyone with an interest in Beyond Budgeting and BBRT to exchange and discuss ideas and experiences.

In addition the BBRT Members have their own private online group called BBRT Members' Community that contains all the past deliverables, meeting notes and presentations and a comprehensive online BBRT Beyond Budgeting Implementation Guide.

BBRT is an independent international shared learning network for all organizations that seek to improve their performance management through sharing information, past successes and implementation experiences. Our purpose is to help organizations introduce a new management model for the innovation age.

For more information, please visit www.bbrt.org, email Peter Bunce, or call +44 1590 679803, email Heather Bryce or call +1 214 239 0155

BBRT, 1st Floor 745 Ampress Lane, Lymington, Hampshire SO41 8LW, UK Tel: +44 1590 679803 Fax: +44 870 705 8799 Email: info@bbrt.org
BBRT, 5310 Harvest Hill Road, Suite 211, Dallas, TX 75230, USA Tel: +1 214 239 0155