12 principles of highly adaptable, ethical and performing organisations #beyondbudgeting #innovation

As a member of the Beyond Budgeting Roundtable (BBRT) I have been studying management activities that encouraged or impeded performance and adaptability in organisations.

Initially, it started out with the dysfunctional effects of budgeting. We all hated the budget, yet many companies go through the annual budget process religiously with nobody even questioning why we do it.

I started to question the value of budgeting when many of our units within the organisation start to claim that they could not carry out certain (seemingly important) tasks because of the lack of a budget. Whilst this is a shocking thing to hear, it is not uncommon. Listen carefully, and you will discover that this is one of the most common “excuses” for not being able to do things.

But as I investigated further, it was not just about the budget. It had to do with the whole interconnected nature of management activities, including the way the organisation is governed, the way people are made accountable, the way we motivate people and as well as the way we plan and control the organisation. There are twelve principles that fall into these categories of management practices. It can be found on the BBRT website as follows: http://bbrt.org/about/the-beyond-budgeting-principles/

12 Beyond Budgeting Principles (2011)

Governance and transparency

1. Values – Bind people to a common cause; not a central plan

2. Governance – Govern through shared values and sound judgement; not detailed rules and regulations

3. Transparency – Make information open and transparent; don’t restrict and control it

Accountable teams

4. Teams – Organize around a seamless network of accountable teams; not centralized functions

5. Trust – Trust teams to regulate their performance; don’t micro-manage them

6. Accountability – Base accountability on holistic criteria and peer reviews; not on hierarchical relationships

Goals and rewards

7. Goals – Set ambitious medium-term goals, not short-term fixed targets

8. Rewards – Base rewards on relative performance; not on meeting fixed targets

Planning and controls

9. Planning – Make planning a continuous and inclusive process; not a top-down annual event

10. Coordination – Coordinate interactions dynamically; not through annual budgets

11. Resources – Make resources available just-in-time; not just-in-case

12. Controls – Base controls on fast, frequent feedback; not budget variances

If you want innovation, you have to encourage independent thought

Artists will see different solutions to problems than would engineers or accountants. People from different industries will see different ways to solve problems. This is vital in order to encourage innovation. Societies and organisations will need to infuse their own culture and groups of people with people from other backgrounds in order to create a much richer diversity of thought.

We live in an age where technology, customer expectations, and markets shift rapidly. Sticking with dogma and age old ideas, methods, products and services will no longer cut it.

Assuming that we believe in the above – and I would not be too far off the mark, I’d guess – then we need to be able to adapt, respond, anticipate these shifts before and as they happen. We need to be agile, and most of all we need to be innovative. We need to find even more effective solutions to old and new problems. What worked in the past will not guarantee to work in the future.

Innovation is the key to winning in the fast changing world.

But innovation is not just an activity. It is more than that. It is a mindset, a culture, a function that everyone plays – and not just some people in labs and research centres.

Like creativity, you cannot force innovation. Like creativity, innovation must be allowed to flow, naturally. The biggest enabler for innovation is allowing individuals the freedom to have independent thought.

The seed of a new idea would only come from a ground that is fertile with many different thinking. In groups of people, society and organisations – allowing people to think different allows them to explore new ideas, test new perspectives, find new solutions in ways never been thought of before. A social group that emphasises conformity over individuality will psychologically limit the collective minds. This is often the subtle tyranny of the majority.

A society or organisation that is conscious of these subtle effects will need to take steps to allow individuality and take these steps even further by bringing in people who would be expected to see things differently – given they come from different backgrounds and thus would naturally see things differently. Artists will see different solutions to problems than would engineers or accountants. People from different industries will see different ways to solve problems. This is vital in order to encourage innovation. Societies and organisations will need to infuse their own culture and groups of people with people from other backgrounds in order to create a much richer diversity of thought.

Any intelligent fool can make things bigger, more complex, and more violent… #einstein

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.” -Albert Einstein

We need fewer detailed rules, and more common sense

Over the past few weeks, I’ve been in debates with my colleagues on the subject and merits of detailed rules and procedures.

Many established firms such as public listed companies often document every single policy, process and procedure in manuals that rival the Encyclopeadia Brittanica in terms of comprehensiveness. This is often the standard practice in order to achieve ISO certification, and to for the firm to ensure that every single employee conduct their day to day activities in a predictable and standardised manner.

New employees need only to pick up the relevant manual and ensure that they fully understand and memorise what steps, templates, forms and people they need to work with in order to complete a certain task.

This orderly and predictable state of work activity seemed to work well with many firms for decades. And in fact, many firms institute controls and initiatives to ensure that activities adhere to the procedures manual and that variations in the processes are reduced.

This is a typical assembly-line type of work environment. Predictable work processes result in predictable outcomes (products and services) with minimum variance.

So far, so good.

Then, the technology boom happened in the mid to late 90s. Technology firms seemed to burst out from nowhere and suddenly started to take the market by storm. Companies such as Microsoft, Netscape, Amazon and Yahoo! started to win customers over with products and services that never even existed a decade earlier. Some of these start-ups reveled in the organised chaos of youthful employees and start-up culture. Anything and everything was possible. There were no limits to what could be explored and rules were broken everywhere.

As the world fast approached the year 2000 (“Y2K”), demand for updated technology solutions escalated. In the end, Y2K was a non-event.

Soon after at the turn of the millenium, the dot com phenomena imploded.

Only a few firms emerged unscathed. But a change in the business world had already begun. All of this enabled by technology and the fast proliferation of the internet and web based applications.

Companies such as Google and Amazon continued to grow from strength to strength. Microsoft, still the top dog then, struggled to make sense of how to deal with the new competition; whilst firms like Netscape, Yahoo! and a whole host of other technology companies fade away as quickly as they burst into the limelight.

Google led the technology rush and the internet continued to premeate into every home, office, school and places for human interaction. With a simple business model and easy to use technology Google became synonymous with the web and with searching for information and knowledge. But even mighty Google was unprepared for the next wave of internet revolution in social networking.

Early web 2.0 champions such as Myspace started to capitalise on the innate human need to connect with other people. Realising that humans loved socialising and sharing their interests, the likes of Myspace and YouTube raced ahead to be the early winners of the social media space. But even they had not expected a Hardvard student would start building what today is the world’s largest social network from his dorm room. Today Facebook has close to 800 million users (circa Oct 2011), and the likes of twitter garnering around 200 million users by late 2011. Together, Facebook and Twitter have been credited – rightly or wrongly – with a significant revolution in how people connect with each other and the speed of how fast news and information is distributed to a wider population. Both Facebook and Twitter have been linked to social and political revolutions in many countries.

Then the Global Financial Crisis (“GFC”) happened in 2008. This plunged the world to the edge of depression. The world has yet to recover from this crisis, teetering from one economic malaise to another. All throughout this, changes have been happening: Apple suddenly introduced the iPhone. Back from the brink, Apple became the darling of the industry and the stock market. It has disrupted the phone business, and to some extent the PC business with its iPads.

Today we are on another verge of a major change in the world as we know it. Crude oil prices plummeted, technology continues its breakneck pace of development, economic power is visibly shifting towards the east, social dislocation is happening, terrorists organisations creating fear, political power shifting towards the right… many of these changes pose unpredictable outcomes. We have no way of anticipating how to set rules for things we do not know. We will be in a state of flux, and in such situations more rules just doesn’t help. We need more common sense. We need to get back to our core, and universal values and work with this. Time to bring about positive change, rather than reacting to negativity.

There is a painful paradox in trying to separately optimise every part of a firm

Firms work on the basis of the interaction between different people, or groups of people. No single person in an organisation can deliver business results without having to rely on another person. The same applies to interactions between processes and systems.

Firms thrive on interconnectivity, interaction and interoperability.

This is why running optimisation / efficiency / target setting exercises (typical management activities) on discreet parts of the organisation often spells doom. Most insidious if performance measurements are done on discreet basis as this creates silos, and functional / individual mercenaries.

The firm may have every part meeting its targets and expectations, but the whole organisation failing in its purpose and strategic objectives.

This Harvard Business Review article describes this paradox best: Optimizing Each Part of a Firm Doesn’t Optimize the Whole Firm