If you can't read this newsletter, please click here

October 2008

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 Member News
• BBRT Special Interest Group updates
• BBRT Research News
• The "Tortoise" (Adapt and Endure) Theory of Management
  • Why the credit crunch and economic crisis was a failure of management and how to change it

6 November 2008, BBRT Europe Members' meeting
MIC Centre, London, England

12 November 2008, BBRT Leadership Forum
Basel, Switzerland
Keynote presentations from: Dr. Reinhard Sprenger, Prof. Dr. Hans Wütrich (University der Bundeswehr) and Jeremy Hope (BBRT)
With speakers from Hilti, W.L. Gore, StatoilHydro, Globetrotter and Trisa

3-5 December 2008, BBRT Intro Workshop & Healthcare Special Interest Group Meeting
Cook Children's Hospital, Fort Worth, TX, USA

BBRT welcomes the following new members:

• IES, Inc.
• River Logic
• Group Health Cooperative

Public Sector – The BBRT Public Sector Interest Group met on 9 October in London, England. The meeting focused on the Beyond Budgeting journey in the Public Sector and developing the Guide to Implementing Beyond Budgeting in the Public Sector. It was decided that the best approach would be to create a completely separate and dedicated Public Sector Implementation Framework. This would be based on the Private Sector Implementation Framework, but would use ideas and terminology familiar to the public sector. For more information, please contact Peter Bunce at peterbunce@bbrt.org.

Utilities – The BBRT Utilities Special Interest Group met on Oct. 15-17 in Dallas, TX. This meeting was the launch of the Utilities Interest Group, focusing on improving the ways energy and utilities plan, forecast and control operations. The meeting provided a platform for in-depth discussion on planning in Energy & Electric Utilities, and included case presentations from PPL Electric and Luminant Energy (TXU) as well as APQC’s new Electric Utility Process Classification FrameworkSM (PCF). For more information, please contact Kisty Fairchild at kisty@theplayergroup.com

Healthcare – The BBRT Healthcare Interest Group will meet on 3-5 December in Fort Worth, TX, with 3 December being a BBRT intro workshop opened to all industries. The meeting will be hosted by Cook Children’s Hospital, a BBRT member organization. For more information, please contact Kisty Fairchild at kisty@theplayergroup.com

BBRT INSIGHTS research series

The following paper has been circulated to BBRT members in October:

Why we need to see customer (or call) centres as systems rather than costs

Abstract: Service (or call) centres have expanded rapidly as large organizations look to reduce their sales and service costs. But for many their impact on customer service and satisfaction has been negative (often destroying loyalty) and their impact on cost reduction has not been as great as expected. The root problem lies with management and measurement. For example, there is too much focus on ‘activity’ measures such as how quickly the telephone is answered and how quickly calls are completed and not enough on measuring the whole customer experience. This paper looks at these issues, pinpoints some of the problems, and suggests ways that managers can overcome them. The BBRT INSIGHTS research papers are delivered to BBRT members on a regular basis.

BBRT members can download the full papers from the BBRT Private Forum at www.bbrt.org. Join the BBRT to obtain this and previous papers – contact Peter Bunce at peterbunce@bbrt.org.

Why the credit crunch and economic crisis was a failure of management and how to change it

Jeremy Hope, BBRT

Most of you will remember Aesop’s fable about the tortoise and the hare who decide to have a race on a sunny day. The brash, confident hare thinks he has won the race before it even starts and decides to have a nap under a tree half way through. But when he awakes the tortoise is at the finishing line. Too many business leaders think and act like hares. They think they can grow shareholder value at unrealistic rates each year by setting aggressive targets and incentives and then (like the hare) ‘predict and control’ their future results through detailed budgets. Tortoises don’t make such promises, predictions or assumptions. Instead they keep their eye on the path ahead and continuously improve their performance. Their aim is to adapt to changing conditions, beat their peers and endure over long periods of time. This is the Tortoise (adapt and endure) theory of management. The tortoise always wins in the end.

Who was to blame for the current economic and finance crisis? Naïve bankers? Inept regulators? Unrealistic ratings agencies? Passive politicians? Greedy executives? Aggressive salespeople? Unscrupulous mortgage brokers? Take your pick! While these actors in this tragedy were all culpable in one way or another, the roots of the crisis lay elsewhere. They are deeply embedded in the management system itself – it was a disaster waiting to happen. There are so many uncertainties that can derail the best laid targets and plans, and they are becoming more common and exaggerated over time. Given that many of these uncertainties are almost certain to happen how do leaders respond? There are usually four approaches:

1. Support the share (stock) price by pursuing a major acquisition, or a share buy-back program.
2. Identify key risks and insure against them, e.g. by hedging against price increases
3. Reset targets, incentives and budgets during the year as required to reflect key changes in assumptions.
4. Carry on as though everything is normal and simply spin, cheat and lie your way through the year ‘fixing’ the numbers in line with targets hoping you can reverse the known errors in the following period.

The annual management system of setting annual targets, incentives, plans and budgets has been around for a long time. And in the hands of “old school” managers in stable markets focused on improving products, people, processes and customer value it enabled them to ‘command and control’ their organizations from the centre without causing too much dysfunctional behaviour (though it prevented rapid change and stifled innovation). But in the hands of “macho leaders” and “financial engineers” intent on maximizing short-term shareholder value it can have catastrophic consequences. Theirs is a mindset that says it is only the results that matter; we can somehow fix the numbers. The implications for an organization’s health (and, in some cases, the sanity of its people) are far-reaching. If you think these problems apply to only a few organizations or that they exist only at the top, then think again. This elevation of ends over means (measurement over management) is pervasive throughout the corporate and public sectors and permeates from top to bottom within many of our best known organizations. It is the cancer that is gradually destroying the corporate body.

Why haven’t the regulations (Sarbanes-Oxley, Basel II etc.) from previous corporate disasters prevented a repeat? Most organizations improved their internal process and controls, but they saw it as an additional cost of doing business and did the minimum necessary to comply. Regulation and compliance failed to change management mindsets, the culture of greed and unethical behaviour has been left intact. The problem will not be solved until regulators open their eyes and realize that the ‘command and control’ management model is at the root of the problems. At the present time regulators are part of the problem, not the solution. They have assumed that the traditional ‘command and control’ management model is the de facto standard and that every organization should be judged by how well they follow it. They expect to see targets, plans, budgets, mandates, document trails and so forth thus reinforcing a model that drives the wrong behaviour and has caused so much damage. Like many business leaders, what they fail to realize is that management systems and behaviour are two sides of the same coin. To change behaviour you need to change the system.

Regulators need to focus their attention on transparency both across the wider ecosystem (e.g., global finance) and within individual corporations. Transparency enables continuous scrutiny and builds confidence. Of course there will be difficult issues around sensitive information but this can be dealt with on a case-by-case basis. The general rule should be that all transactions, contracts, minutes of meetings and so forth should be open and easily accessible.

There are a growing number of companies that have rejected the command and control model and instead followed the tortoise-like (adapt and endure) theory of management. They aim to grow organically and endure over long periods of time. Leaders see success as passing on to the next generation a stronger and fitter company than the one they inherited. Shareholder value is a long-term result, not a short-term target. They see the organization in terms of hundreds of small teams, each accountable for improving (internal and external) customer value. Management is a marathon based on continuous relative improvement (rather than annual targets and budgets). The aim is to be the best team or company in your peer group. Peer pressure, pride and passion (rather than financial incentives) drive people to succeed. Planning is continuous and aimed at improving products, processes and people. Teams only use the minimum resources necessary to get the job done. And information is open and transparent. Anyone faced with an ethical dilemma needn’t ponder for long. The ethical decision is the only option available.

Think about what this system doesn’t support for a moment. There are no negotiated fixed targets and no bonuses for meeting them, no annual plans, no annual budgets, no annual resource allocations and no actual-budget-variance type reports. Management is continuous and doesn’t stop and start according to accounting deadlines. Sandbagging, gaming and spinning the numbers have all disappeared because there is no point. There is no ‘number’ to reach. Each manager is evaluated on how well they have improved against other benchmarks such as peers and best practices.

‘Adapt and endure’ companies go beyond contract, compliance and control and build a management culture based on truth, transparency and trust. Instead of operating in the twilight zone of “acceptability” they operate in the clear blue skies of “virtuousness.” Truth, transparency and trust is an all-or-nothing belief system that governs every thought, action and relationship. Never cheating or even being ‘economic with the truth’ with fellow employees, customers, external partners or investors is the guiding maxim throughout the organization. The ethical dilemma never arises when there is only one principle to consider: Is this action totally honest and in the best interests of the organization?

People have had enough of quick fixes, cheating, manipulation, and the greed that seems to be an accepted part of everyday life inside many hare-like command and control organizations today. They want to have a better work-life balance, to trust people, to be part of a team. They want to be reconnected with their leaders. They want to know what the company stands for and where it is going. They want to play their part in its journey and share in its success. And, most important of all, they want to find more meaning in their working lives. Tortoise-like (adapt and endure) organizations fulfill these desires.

The greatest barrier to becoming an ‘adapt and endure’ organization is the performance management system. How people are recognized and rewarded, how targets are set, how resources are allocated and how performance is measured – these are the key elements in these systems. Leaders need to act on the whole system rather than its parts. They need to abandon short-term negotiated performance contracts and focus their people on continuous relative improvement. Aspiring ‘adapt and endure’ leaders can learn much from a management model that we call “Beyond Budgeting.”

If you would like a copy of the full version of this paper, please contact Peter Bunce at peterbunce@bbrt.org.

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 Kisty Fairchild or call +1 214 239 0155