In the last blog, I described how it is possible to implement Beyond Budgeting in a step-by-step fashion.
If you choose to go down this route you will become increasingly uncomfortably aware of a disconnect between Beyond Budgeting style processes and the rules and routines that govern normal business life in a traditional organisation.
In the brave new world I have described, senior managers perched high in the organisational pyramid can no longer use targets and incentives to remotely control the activities of their subordinates and measurement systems no longer highlight deviations from pre agreed plans and budgets and trigger ‘corrective action’. Resources are allocated continuously and an annual set piece planning ritual cannot effectively coordinate activities in an organisation that is continuously adapting to events.
As BB principles are progressively applied, the traditional hierarchy loses many of the levers that they normally use to direct performance. At best those in authority will feel very uncomfortable; at worse these new practices could be seen are a threat that needs to be strangled by reintroducing old familiar practices.
But just as big a problem is that the kind of leadership and management structures that the new processes DO require may not be available. A set of processes that facilitate change and adaptation cannot be directed in the same prescriptive, top down manner as before. Increasingly responsibility is devolved to largely self-organised teams that need guidance and practical support instead of command and control based on a conventional hierarchy. Control needs to be embedded into the systems, processes and culture of the entire organisation rather than imposed from on high.
What does this mean in practical terms?
Just like Beyond Budgeting’s process principles the shift in organisational practices required to create a dynamic and adaptive system can be distilled under six headings
|Narrowly defined roles organised in a strict hierarchy based on functional specialisations in order to exploit economies of scale.||Multi skilled teams organised around the work that delivers value to customers in a defined segment of the market.|
|The effective execution of plans to deliver returns to the owners of the business.||Orientating activity around purpose, manifest as a clear mission for the organisation and a shared understanding of how it is to be fulfilled (the strategy).|
|Putting decision making in the hands of senior employees who are assumed to be the most capable and best informed.||Clearly defined decision-making authority delegated wherever possible in order to maximise the range and speed of response.|
|Exercised by ensuring compliance to plans, rules and procedures.||Holding teams accountable for meeting broadly defined goals and working within the boundaries defined by the values and principles of the organisation.|
|Systems organised to provide senior management information they need to make decisions and reassurance that performance is in line with plan.||Providing free access to information to facilitate self-organise with minimal central direction and help create the peer pressure that is a source of both personal motivation and the organisation’s ‘self control’.|
|Conformity and the ability to execute plans are the most prized qualities.||Employees are expected to use sound judgement and act in the interests of customers and collective wellbeing rather than their own.|
Taken together these principles represent a recipe for creating a culture - a culture based on trust.
The reason why trust is so important is not that it creates a warm and welcoming workplace – as important as this is. It has long been recognised by organisational theorist and economists that trust is the grease that lubricates the wheels of enterprise.
The most obvious business impact of low trust is the cost of maintaining the infrastructure needed to police the system. Complex software, the bureaucracy and all of the rest. But the biggest cost of low is something that we cannot see or easily measure. It is the cost of lost opportunities to grow and flourish.
Without trust to lubricate the wheels of commerce the transactional cost of getting things done becomes so great that organisational life stagnates.
Back in 1937 in his influential essay ‘The Nature of the Firm’, Ronald Coase argued that the main reason why organisations exist at all is because transactional costs are lower inside their walls than in an open market, which is otherwise more efficient. And as firms grow transaction costs increase, thereby limiting how big it can become.
So trust is a big thing. It impacts costs, an organisation’s capacity to thrive and grow and ultimately it’s right to exist.
I think the message for finance professionals is that trust isn’t a fluffy concept that can be left to our cuddly colleagues in HR. It should be near the top of the agenda of everyone who is interested in business performance.