Cluster 2

Case Note
The case is based on the beyond budgeting theory of Jeremy Hope and Robin Fraser.

- The fundamental focus is to move away from “predict and control” to “adaptive and
devolved”.
- Beyond Budgeting wants to shift focus over to the rigidity of budgets when faced with the
rapid changing environment which is today’s business world.
- Handelsbanken found it necessary to decentralize their branches in such a way that they
would be able to respond quicker to changes.
 Furthermore, they assess that the individual best suited to make decisions about
customers is the one closest to the customer.
- This decentralization is impossible, or at least very difficult in a centralized organization
where every decision is to be made at an executive level.
- Employee accountability ensures employees choosing the right choice.
- Boundary systems are used to some extent as a way of guiding the employees to make the
right choices.
- Resources are given on a running basis
 This is an important part of the beyond budgeting. With budgets, it might be
tempting to increase the expenditure to ensure increased budgets next period. This
might result in resources being spent in areas where they this year will be unused.
- Handelsbanken used cost/income ratios to ensure that the local managers used the
resources wisely.
- The bank used relative performance measures (KPI’s)
 Bank managers would share “best practices” with other managers, thus lifting
weaker performing banks up.
- Continuous target-setting throughout the fiscal year. Good targets get funding and
resources.
- The Oktogonen gives employees an ownership of the company, which ensures that they act
in the best manner for the organization’s future outlook.
- So how can we ensure that branches help each other even as they compete among each
other?
 All customers belong to the different branches, they do not compete on the same
customers.
 The belief system of Handelsbanken ensures that the branches sees themselves as
support for other branches.
 Reward comes from relative performance compared to oneself. Being at the top
gives no reward other than peer recognition and praise.
 The incentive system of Handelsbanken is based on the performance of the entire
company. This gives an incentive to cooperate as poorly performing branches can
strip good performing branches of bonuses.
 - We can see that the control systems of Handelsbanken fits into Simons’ system:
 Core values: Belief System
 Customer service
 Empowerment
 Competitive
 High performance
 Strict accountability
 Thrift (low cost)
 Supporting the branch
 Risk to be avoided: Boundary Systems
 No memos/ directives
 40% cost/income
 Customer boundaries
 Loan-loss ratio acceptability
 Critical performance variables: Diagnostic Control Systems
 Cost/income
 Branch net income
 Loan delinquency
 Profit per employee
 Customer complaints
 Strategic Uncertainties: Interactive Control Systems
 Informal meetings
 Top 25 meetings
 Regional meetings

Beyond Budgeting (external article)

- Budgets were introduced in a different time, with a more stable business environment. The
rapid changes and volatility of todays environment calls for a different way of steering the
business.
- Budgets focus more on short-term financial goals, rather than the long-term future
prospectus of the company. This may lead to myopia regarding achievements and
accomplishments.
- Hope and Fraser list six important findings from their study of beyond budgeting:
 Budgets are barriers: People are aware that budgets are constraints or barriers to
change. The problem, however, is to show them that there exists a viable alternative.
Studies has however shown that managers, post-implementation, wonder why they
used some much time on budgeting, and how many opportunities were lost to
rigidity.
 Ten principles and practices: We cannot just dismantle the budgeting system and
hope everything will be fine. There must also be changes to the principles and
practices. The focus must both be on “soft” cultural issues (empowerment) and on
“hard" process issues (such as management reporting). The principles found are as
follows:
 Target setting: Maximizing long-term values
 Strategy: Devolve the strategy to the frontline
 Growth and improvement: Challenge people to think radically
 Resource management: Base this on value creation
  Co-ordination: Manage cause-and-effect relationships across units.
 Cost management: Challenge all costs
 Forecasting: Use rolling forecasts to manage strategy and making decisions
 Measurement and control: Use a few key leading and lagging indicators.
 Rewards: Base rewards on company and unit-level competitive performance
 Delegation: Give managers the responsibility and freedom to act.
 New steering mechanisms: Alternative steering mechanisms should be used.
Especially can we improve management information and control through better
predictability (rolling forecasts). There must be a continuous process to the business
and its plans.
 Organizational level: The management model can vary according to the needs and
the complexity of the business. Without budgets, managers will be more able to
build strategic capabilities and flexible organizations. Many questions if the removal
of budgets strips the managers of control. To the contrary: the fast accounting
information systems of this age, rolling forecasts and KPI’s can and are used to
control these adaptive firms even better than what budgets are able to.
 Building the new model: The organization, culture and values are important. These
take time to develop and should be appropriate to the competitive pressure of the
business. There needs to be less focus on hierarchy, and more focus on
decentralization and empowerment of employees. Giving up the direct control can
be hard for some managers. This is why it is so important to have good accounting
and information systems. As we have seen in the Handelsbanken case, a good form
of reward system is one which rewards the company performance, rather than just
individual or unit-performance.
 Implementation: The new strategy and structure needed to move beyond budgets
needs to be implemented. This can in fact be a troublesome affair as some
employees might oppose these changes. Beyond budgeting has large implications on
accounting staff of the company. Involving them in the process might be a good
choice.

Moving up the curve – Chapter 6 (The Wisdom of Teams)

- Common approaches to Building Team Performance
1. Establish urgency and direction: Make sure team members know the urgency of the
work and what are expected from them.
2. Select members based on skills and skill potential, not personalities: The team
should be built to include the three most notable skills 1) technical and functional, 2)
problem-solving and 3) interpersonal. It is important to not only focus current skills,
but also the skill potential of the members. Member selection should also be a
continuous task. Being part of the team now should not mean that you are part of
the team forever.
3. Pay particular attention to first meetings and actions: Initial impression always
means a great deal. How the team leader act in the first meetings is highly important
for future team dynamic.
4. Set some clear rules of behavior: All real teams develop rules of conduct, such as
attendance, discussion, confidentiality, analytic approach etc. Such rules promote
focus, openness, commitment and trust all oriented toward performance.
 5. Set and seize upon a few immediate performance-oriented tasks and goals: Most
teams trace their advancement to key performance-oriented events that forge them
together. The team can and should produce their own goals and targets, even if
other parts of the organization views these as impossible.
6. Challenge the group regularly with fresh facts and information: New information
causes a potential team to redefine and enrich its understanding of the performance
challenge, thereby helping the team shape a common purpose, set clearer goals, and
improve on its common approach. This makes it easier for the team to learn and
adapt.
7. Spend lots of time together: Common sense tells us that teams must spend a lot of
time together, especially at the beginning. Yet potential teams often fail to do so.
The time spent together must be both scheduled and unscheduled. the more
successful teams always find a way to spend extra time together, particularly when
things go awry.
8. Exploit the power of positive feedback, recognition, and reward: Positive
reinforcement works as well in a team context as elsewhere. The benefits of positive
feedback and recognition extend to people at all levels.
- Conclusion
 Most potential teams can become real teams, but not without takin risks involving
conflict, trust, interdependence, and hard work. The eight “best practices”
summarized above shows the risks necessary for a team to take on.
 Each team must find its own path to its own unique performance challenge.

Devising more effective ways of working together

- Common problems found in teams
 Loss of production or team output
 Evidence of conflicts or hostility among team members
 Lack of initiative, imagination, or innovation
 The list of possible problems is extensive and contains virtually all possible problems
- Difference between team members and the Team leader.
 The cause of team ineffectiveness is most often obvious to the outsider looking at
the team. However, it is not as apparent to the team leader itself.
 Difference between the team members and the team leader are erased by team
members conforming to the ideas of the leader, thereby erasing any positive conflict
and innovation.
 However, we can also see cases of over resistance – team members have to a too
high extent opposing the team leader, making everything stop and impossible to do
anything.
- Differences between team members
 More focus on team conflicts and disagreements.
 It is often the team leader or manager who sees such conflicts.
 Easier to solve using team building than when the leader is the problem.
- Team building as a process
 Team building should be seen as an ongoing and continuous process, rather than a
single event.
- Summary
 The ability to diagnose its own problem and initiate change is a prerequisite of a
high-performing team
 Individual incentive systems can erode the teams well-functioning work style.
Market versus Hierarchy

Information system for

Coordination and control

Top Organizational Operating rules Enforcement

managements structure rules
environment
Command Relative Command Specific Detect violation
Controls certainty of system behavior of instructions
economics of instructions and administer
the various issued appropriate
subunits punishment
Market Control Relative Market system General Encourage
uncertainty of instructions to managers to
the various maximize an increase he
economic objective values of the
subunits function objective
function as
much as
possible

Premise 1 Premise 2 Threats

Command Centralized and Information can be Absorption of every Info
Controls vertical structure transmitted and piece of information processing
assimilated by the would lead to capacity
different parts of the information overload
organization
Subordinates will always Info a-
know much more about symmetry
their activities than
higher officials
Market Decentralized External market prices Various parts of the Organiza-
Control structure into and internal transfer organization may work tional
many subunits prices are necessary to against the common alignment
calculate profitability of objective function
the business unit
The Wisdom of Teams

Katzenbach, Smith

Chapter 3: Team Basic: A Working Definition and Discipline

Definition: a team is a small number of people with complementary skills who are committed to a
common purpose, performance goals, and approach for which they hold themselves mutually
accountable

Most teams (and their companies) pay too little attention to either

 The company’s performance standards or;

 The purpose and goals of individual teams

 Many teams fall short of their potential

The most important in a team is each member’s commitment to a common purpose and set of
related performance goals for which the group holds itself jointly accountable for

 Each team member must believe the purpose is important to the success of the company
 Without internal discipline the team falls short

Team size

 Large teams face logistical issues

o Finding time and space to meet
o Crowd or herd behavior
 Prevent sharing of viewpoints needed in a team
 Large teams do, therefore, tend to settle on less clear statements of purpose
o Typically set by a hierarchical leader
 Large teams get faster to the point where meetings are a chore (ork)

Complementary skills

 Teams need the right mix of skills, can be divided in 3 categories

o Technical or functional expertise
o Problem solving and decision-making skills
 Must be able to identify the problems and opportunities they face
 Make necessary trade-offs
o Interpersonal skills
 Effective communication and constructive conflict
 Do not necessarily need all skill types
o Katzenbach found: the power of teams as vehicles for personal for personal learning
and development
  Their performance focus helps them to identify skill gaps and develop these
skills

Purpose and performance goals

 Near term performance goals must relate directly to its overall purpose
o If not: team members become confused, pull apart and revert to mediocre
performance behaviors
 A common meaningful purpose sets the tone and aspiration
 Specific performance goals are an integral part of the purpose
o Transforming broad directives into specific and measurable performance goals is the
surest first step for a team trying shape a common purpose meaningful to its
members
o Specific goals (e.g. cost, time etc.) provide clear and tangible footholds for teams
 Define a team-work-product that is different from the organization’s mission
and the summation of individual job objectives
 Facilities clear communication and constructive conflict
 Help teams focus on getting results
 Level positive contributions to team behavior
 Allows the team to achieve small wins  building commitment
 Performance goals are compelling
 The combination of goals and purpose is essential to performance

Committed to a common approach

 Must be committed to a common approach – how they will work together to accomplish
their purpose
 Economic and administrative aspect as well a social aspect
 Always someone who gets social and leadership roles

Mutual accountability

 Groups don’t become teams until it can hold itself accountable as a team
 Team accountability depends on commitment and trust

Conclusion

1. Are teams small enough?

2. Do the teams have adequate levels of complementary skill and potential in all three
categories?
3. Do the team have a truly meaningful purpose?
4. Do the team have specific performance goals that everyone agrees upon?
5. Is the working approach clear that everyone agrees upon?
6. Do the team members hold themselves mutually accountable for the results?
Chapter 4: High-Performance Teams

High-performance teams

 Are set apart from other teams by the level of commitment to one another
o “If one of us fails, we all fail”
 Helps the others to achieve personal and professional goals
 Deeper sense of purpose
 More complete approaches
 Fuller mutual accountability
 More ambitious performance goals
 Interchangeable as well as complementary skills
 Leadership roles are shared
o The formal leadership role remains, but its mostly ceremonial or for the benefit of
outsiders
o The formal leader’s opinion on an action matters, but the balance of approval is in
favor of the team
 High performance team member sees themselves as a part of something bigger
o Positively affects the performance ethic of the larger groups, or extended teams
around them
 Create an aura of excitement and focus that sustained the growth of new
capabilities and openness to change