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. The achievement of this vision assumes that going Beyond Budgeting will lead to an organization 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the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan.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.
To become more empowered and adaptive, leaders need to rethink the “accountability map” (see figure 2). This means turning the traditional vertically shaped organization on its side to face the customer. This shape helps leaders to see more clearly where accountabilities should lie and how the information and reporting systems should flow. Rethinking team-based accountability is the platform for the Beyond Budgeting model.
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.