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The coherent model for success in a changing world

Beyond Budgeting
The Coherent Model that reunites leadership thinking,
management processes and information systems for
sustained success in a changing world
Jeremy Hope, Robin Fraser, Peter Bunce and Franz Rsli
Beyond Budgeting Round Table (BBRT)

EXECUTIVE SUMMARY
The Command and Control model. This management model emerged in the early 1900s to
help companies meet rising demand and maximize profitability. With its main focus on
efficiency, it introduced division of labour; incentives linking pay to performance, functional
organization, and centralized decision making. It led to dramatic increases in productivity, but
it also dehumanized work. The annual planning and budgeting process that ties it all together
is its defining characteristic and the source of many of its problems today.
The changing environment. In conditions of discontinuous change, unpredictable
competition, and fickle customers, few companies can plan ahead with any confidence. Yet
most organisations today remain locked into a traditional management model that involves a
protracted annual planning and budgeting process resulting in negotiated fixed targets and
resources, which act as a constraint on responsiveness.
The barriers to change. Organisations need to find a new model that effectively empowers
front-line managers to make quick decisions based on fast, relevant information. But the
annual planning and budgeting process and the resulting fixed performance contract act as
barriers to change, both mental and systemic.
The Coherent model. A number of companies have broken free from the traditional model
and created a model that is much better aligned with todays competitive success factors. They
have done this by devolving accountability to front-line managers and replacing annual
planning and budgeting with alternative steering mechanisms. The BBRT has studied these
cases; seen what huge competitive advantage they have gained from this model; and identified
the principles on which it operates.
Making it happen. The BBRT has identified some of the best cases worldwide (e.g. Svenska
Handelsbanken and ALDI, which have been operating for over three decades, and UBS
Wealth Management and Business Banking, which has only recently started) and developed a
pragmatic, scientifically based approach to implementing the model and gaining real
competitive advantage from it.

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The coherent model for success in a changing world
The Command and Control Model
In the traditional multi-divisional or M-form management model pioneered by such US giants as
DuPont and General Motors, top management was the fountain of knowledge, strategic planner and
resource allocator; middle managers were the controllers; and front-line managers were the
implementers. While this so-called command and control model has been subject to much criticism
over recent years (it focuses on the hierarchy rather than the customer; it stifles sharing and innovation;
and it requires high costs to support the bureaucracy) we must remember that, like mass production, it
served twentieth century companies and their customers extremely well.
The M-form command and control management model coped with increasing complexity by placing
the activities of each distinct product line, region, or technology into a separately managed
compartment (for example, a business unit or division) and subjecting all these compartments to the
financial discipline of a strong corporate staff. The underlying thread was control. The mission
statement agreed by senior executives was translated into the strategic plan by the planners and handed
down the hierarchy to operational managers, who then prepared their plans and budgets. Once these
were agreed all that was demanded was adherence to the plan. Head office did not like surprises.
Control reports were constantly fed back up the line, and if they showed that performance was veering
off track new directives would be issued.
The model led to dramatic increases in productivity, but division of labour led to the dehumanization
of work. Ways have been found to ameliorate this problem to some degree, but the design of the model
is fundamentally one that works against, not with the best in human nature. The researcher, Douglas
McGregor, maintained in the 1960s that most managers tend towards Theory X (assuming the worst in
human nature) and generally get poor results, while enlightened managers use Theory Y (assuming the
best), which produces better performance and results, and allows people to grow and develop. Much of
his message was misinterpreted or ignored, but he hoped that a time would come when significant
changes in leadership philosophy would become a requirement for survival, because they would benefit
organizations and workers alike. Today, these conditions now exist. Workers are no longer the un-
automated parts of production processes, as they were in the industrial age. Most are now knowledge
workers (i.e. professionals). As Peter Drucker forecast decades ago, they must lead in the information
age, and this leadership has to be visionary and completely different from the traditional ways of
leadership and management applied in the Command and Control model.
The Changing Environment
The traditional model worked well when market conditions were stable, competitors were known and
their actions predictable, relatively few people took decisions, prices reflected internal costs, strategy
and product life cycles were lengthy, customers had limited choice, and the priority of shareholders
was good stewardship. But these conditions no longer apply. Todays competitive climate is far more
uncertain, many people are required to take decisions, the pace of innovation is increasing, costs reflect
market pressures, customers are fickle, and shareholders are more demanding. To compete more
effectively in the information economy firms must transform their centralized, functional hierarchies
into networks of relatively autonomous units accountable for customer outcomes. They must also break
free from the incremental planning and budgeting mentality, and involve all their people in building a
new platform for sustainable improvement.

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The Barriers to Change
While most senior executives want their organisations to be more adaptive (and thus more devolved),
few know how to turn management rhetoric into operating reality. While they talk about fast response,
empowerment, innovation, operational excellence, customer focus, and shareholder value, their
management processes (for example, targets, plans, measures, and rewards) all too often remain stuck
in the past. Fixed strategies prevent fast responses; rigid organisational structures turn off managers
who seek challenge and development; bureaucracies stifle innovation; entrenched functions undermine
cross-functional processes; an emphasis on product targets works against customer loyalty
programmes; and short-term performance contracts fail to support long-term value creation. Nor do the
millions spent every year on re-engineering, team-building, enterprise-wide systems, customer
relationship management, value-based management, and balanced scorecards seem to overcome these
problems. In fact, the vast majority of these initiatives fail for exactly the same reasonthey support
the rhetoric but flounder when they collide with the immovable forces of centralized decision making,
fixed performance contracts and the immune system of the annual budget.
The Beyond Budgeting or Coherent Model
The Beyond Budgeting or Coherent model is designed to overcome these barriers and create a flexible
and adaptive organisation. Unlike the Command and Control model, the Coherent model works with,
not against the best side of human nature (McGregors Theory Y); it is suitable for post-industrial
knowledge-based organizations; it supports the success factors that must be met in highly competitive
business conditions; and it is also consistent with cybernetics and systems theory the most relevant
management science. Twelve principles provide managers with a robust, albeit empirical framework
for evaluating where their organizations stand today, and guiding them towards an alternative
management model.
Principles of the Coherent Model
Leadership principles
1. Customers - Focus everyone on improving customer outcomes, not on hierarchical relationships.
2. Organization Organize as a network of lean, accountable teams, not around centralized functions.
3. Responsibility Enable everyone to think and act like a leader, not merely follow the plan.
4. Autonomy - Give teams the freedom and capability to act; dont micro-manage them.
5. Values Govern through a few clear values, goals and boundaries, not detailed rules and budgets.
6. Transparency - Promote open information for self management; dont restrict it hierarchically.
Process principles
7. Goals - Set relative goals for continuous improvement; dont negotiate fixed performance contracts.
8. Rewards - Reward shared success based on relative performance, not on meeting fixed targets.
9. Planning - Make planning a continuous and inclusive process, not a top-down annual event.
10. Controls - Base controls on relative indicators and trends, not variances against plan.
11. Resources - Make resources available as needed, not through annual budget allocations.
12. Coordination - Coordinate interactions dynamically, not through annual planning cycles.

When taken together these principles provide a holistic model that reunites competitive success factors,
leadership thinking, management processes and information systems in a way the enables leaders to
create coherent organisations. Its not a pick-and-mix mode; all the pieces must fit together for it to
be effective (though they will no doubt be adapted to fit different organisations). The compelling logic
of the need to move to the coherent (Beyond Budgeting) model is set out below:


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Todays competitive success factors
External changes Industrial age Information age Todays competitive
success factors
Pace of change Incremental Discontinuous Fast response
Growth constraints Access to capital Access to talent Great place to work
Price dynamics Rising (cost-plus pricing) Falling (price-led costing) Operational excellence
Product/strategy life cycles Long (years) Short (months) Continuous innovation
Customer relationships Loyal (little choice) Fickle (extensive choice) Customer intimacy
Ethical behaviour Tolerant to lapses Unforgiving to lapses Excellent governance



How leaders need to change to meet todays competitive success factors
Todays competitive
success factors
Leadership action Leadership principles
Fast response Create a large number of small self-
managed teams
Enable teams to sense-and-respond to
changing markets and customer needs
Great place to work Devolve planning and decision-making
to teams
Endow teams with the freedom and
capability to act
Operational excellence Create internal supplier-customer
relationships between teams
Make teams accountable for continuous
improvement against peers and
benchmarks
Continuous innovation Dismantle cellular boundaries and
enable company wide collaboration
Make strategy everyones job and
encourage innovation at every level
Customer intimacy Assign ownership of customers to teams Focus people and performance on
customer-oriented processes
Excellent governance Agree a governance constitution that
enables local decision-making
Base governance on clear purpose,
success criteria, values, and boundaries



How systems need to change to support leadership principles
Leadership principles Process changes Process principles
Enable teams to sense-and-
respond to changing
markets and customer needs
Implement regular performance reviews
that focus on continuous improvement
Make planning and control an inclusive
and continuous process
Endow teams with the
freedom and capability to
act
Reduce rules, management layers,
projects, reports and meetings to the
minimum
Devolve goal setting to local teams and
challenge their ambition
Make teams accountable for
continuous improvement
against peers and
benchmarks
Abandon negotiated fixed targets and
budgets
Reward shared success based on relative
performance with hindsight
Make strategy everyones
job and encourage
innovation at every level
Create a draw down method for teams
and fast track approval system to access
resources when needed
Make resources available as required to
meet the best current opportunities
Focus people and
performance on customer-
oriented processes
Measure end-to-end process flow and
customer outcomes
Use measures to learn and improve and
report through trends and abnormalities
Base governance on clear
purpose, success criteria,
values, and boundaries
Build a company-wide integrated
information system with only one
truth
Make information open and transparent
so that everyone can access the same
information at the same time

Mini-cases
Since its formation in 1998, the Beyond Budgeting Round Table (BBRT) has made numerous case
studies of organizations that have moved or started to move towards a Devolved Leadership model.
They are in all sectors and industries, from private to public, services to manufacturing and large to
small scale. The best cases among them have built management models that are based on a coherent set

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of principles and achieved alignment between their models and the success factors on which their
competitive strategies are based. They have evolved their models consistently for over three decades,
and even now continue daily to improve and deepen them. They affirm that their models have
contributed greatly to their outstanding success and sustained profitability, and will remain central to
their competitive strategies in the years ahead. Two exemplars are Swedish bank, Svenska
Handelsbanken, and German discount retailer, ALDI, while a third, the Swiss bank UBS Wealth
Management & Business Banking is a case that has more recently embarked on the journey.
Svenska Handelsbanken, the most successful Nordic bank, introduced its Devolved Leadership
model in 1970. Although a regional, rather than a global player, Handelsbankens performance is
nevertheless quite exceptional. They have achieved their corporate goal of making a higher return on
equity than the average of their competitors every year for the last 33 consecutive years. Their cost-to-
income ratio is well below 45% - the lowest among European banks. In Sweden, they have had more
satisfied customers, both business and private, than the average of their competitors in every single
year since 1989. They have had lower loan losses than their competitors since the early 1980s. And
they are rated Aa1 by Moodys and are thus among the five highest rated non-governmental banks in
the world. But the key point is that their sustained, high performance, through good times and bad,
results directly from their devolved leadership model. At Handelsbanken their model is their strategy
and the main source of their competitive advantage. Theirs is a coherent model, and under consistent
leadership for over three decades, they have evolved and deepened it.
ALDI, with Wal-Mart, is the most successful retailer in the world. Its founders, Karl and Theo
Albrecht, are the wealthiest men in Europe, and the third richest in the world, according to Forbes.
Their model has been derived from the thrift and entrepreneurship that was necessary at the time the
business was founded. It has evolved into what has been described as the retail idea of the century. The
fundamental principle is always to keep it as simple as possible. Continual improvements ensure that
the simple is not only well executed but perfected. The customer is always the prime consideration in
all decisions. They reduce the amount of communication and co-ordination and the risk of bad
decisions being taken remotely by establishing small autonomous units. It allows closer contact to the
market and customer as well as being faster. It is also one of the best ways to reduce unnecessary
complexity, and it enables many more people to feel they are running their own business. They
achieve this through cell division from ALDI headquarters, as soon as a certain size is reached in a
region (e.g. 50 or 60 branches). Chiefs of staff and controllers for supporting responsible line managers
do not exist. Their leadership is recruited from inside the company. Accordingly, they have an
outstanding knowledge of the business, a common doctrine and an unconditional interest in the
company. The strong company culture gives ALDI a strategic and competitive advantage which is not
easily imitated. They manage by means of their culture and values; there are no budgets and formally
agreed plans there never have been.

UBS Wealth Management and Business Banking realized, after a period of managing costs
successfully, that growth cant be achieved through bureaucracy. They are now in the process of
creating an entrepreneurial culture among their 44,000 people worldwide, and re-engineering their
management processes to support it, including totally abandoning budgeting. To quote them, they say
they are replacing budgets with leadership. They are in effect re-constructing their entire
management model to support significant, sustainable growth in profitability. They started the project
about a year ago. Quarter 3 results in 2005 for UBS Group showed record annual growth of 71%,
although other factors contributed to this too.

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Making It Happen
A well functioning management model is a delicate and intricate system. Every part
of it must steer in the same direction. Only then can the organization minimize its
internal conflicts and maximize its potential. You cannot therefore pick and mix
among the principles. All twelve are necessary to bring about and sustain a complete
change from the Command and Control model to Devolved Leadership. Unless the
model is coherent, it will not be fully effective, and it may regress. So, making it
happen requires:
Initiation - Building awareness of the gravity of the problems with the organizations
management model; raising a real sense of urgency to improve it; and making a compelling
case for change.
Change process - Creating a coalition of people in the organization that is strong enough to
guide the changes needed; working with them to create a clear vision of the new model;
communicating it credibly and widely; and importantly doing it together, not imposing it
from the top.
Design Tackling the design holistically; addressing the leadership issues before the
management processes; and the management processes before the systems and tools, because
all must be coherent with each other and support the new, not the existing model.
Implementation Not starting to implement anything until an overall vision and outline
design have been agreed by the leadership including the guiding team, but then using trial
and error, rather than delayed perfection, to find the most workable solutions.

Evolution Not letting up until the model is implemented and embedded into the
organization. Even then the model must be continually improved and deepened, if the
organization is to sustain competitive advantage from it.
Conclusion
Devolving accountability for results and replacing fixed performance contracts with more adaptive
steering mechanisms will create a management model that will enable an organisation to:
respond more quickly to change and be better able to deal with increasing levels of uncertainty
and complexity
attract more talented managers and potential strategic partners
generate a far better climate for generating breakthrough strategies aimed at improvement and
growth
operate at lower cost
find and keep the right customers
minimize dysfunctional, and encourage ethical behaviour
create sustained growth in shareholder wealth.
It is always a risk to make changes as profound as those required in introducing a Devolved Leadership
model, but the greater risk in the long run is to continue to use a management model that is not aligned
with todays CSFs, and works against human nature. As increasing numbers of organizations adopt a

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management model that supports todays competitive success factors, those who do not must fall
behind and eventually be forced to change, or fail to survive. Those who adopt it early will gain the
greatest relative advantage over those who wait, because its potential benefits are so great and it is very
hard to copy. So it is not really a matter of whether or even when - Its now! Its time has come.
The Best Sources of Help
Various articles and papers about Beyond Budgeting can be downloaded from the BBRT website at
www.bbrt.org.
You can benchmark your management model against Beyond Budgeting principles using the BBRTs
leadership diagnostic at www.bbrtdiagnostics.org.