by Aaron Dignan
Red Team. Over time, it can be hard to separate strategy from the status quo. Are we operating in sixty countries because that’s critical to our success or because we happened to acquire a bunch of foreign offices? The longer we operate, the more organizational debt we likely carry with us, limiting our ability to innovate. Indeed, Professor Clayton Christensen coined the term “the innovator’s dilemma” to describe why incumbents are so often disrupted by upstarts and unexpected competitors. To resist this pattern, try launching a red team. Originating in the military and intelligence communities but now practiced in a variety of business contexts, a red team is charged with one mission: putting you out of business. Gather any group of colleagues and ask them to design the competitor that would bury you. You’ll be amazed how quickly (and how excitedly) they jump to the task. Their enthusiasm is proportional to the amount of org debt you’re carrying. With your red team’s design in hand, you now have two options. You can go put their best ideas into practice by changing your OS. Or you can turn that red team into Red Team, Inc. and make a real go of it. The choice is yours.
Strategy in Change
One of the processes that stands in the way of reinventing our way of working is the annual planning process. In traditional organizations, this document lays out where we will play and how we will win, and contains implications for structure, budgets, projects . . . everything. The problem is that we put so much effort into creating it that we treat it as gospel. It becomes true north for our activity rather than what we’re seeing and learning in the real world. This prevents teams from evolving their OS. Instead, demote your annual operating plan. Make it an annual operating prediction. Let teams take ownership of their local expression of strategy and operations. This will leave space for emergence and harness the full potential of your membership.
Questions on Strategy
The following questions can be applied to the organization as a whole or the teams within it. Use them to provoke a conversation about what is present and what is possible.
What is our current strategy?
How is our strategy informed by our purpose?
What are the critical factors that will mean the difference between success and failure?
What are the trade-offs we’re willing to make?
How do we develop, refine, and refresh our strategy?
How do we communicate our strategy?
How do we use strategy to filter and steer day-to-day?
How does our strategy inform our planning process?
What does it mean to be People Positive about strategy? Recognize that sound strategy depends on our ability to perceive what’s really going on. Each of us has a piece of that truth. Create shared consciousness through forums and tools that integrate different perspectives, and question the logic of your strategy regularly.
What does it mean to be Complexity Conscious about strategy? Accept that in areas of rapid change, your strategy is only as good as your ability to learn and adjust course. Because complexity is inherently surprising, know that effective strategies may appear unlikely or counterintuitive, until they’re suddenly obvious.
RESOURCES
How we invest our time and money; the allocation of capital, effort, space, and other assets.
In Sweden, a century-old financial institution—Svenska Handelsbanken—organizes around the simple notion that, “the branch is the bank.” That means more than eight hundred branches are free to make their own decisions about lending, customers, service, marketing, you name it. The head office in Stockholm exists to support and enable these branches. That means no fixed targets from corporate, only relative targets comparing overall performance to the market average and branches to one another. And here’s the kicker: this bank abandoned budgeting more than fifty years ago. Jan Wallander, the man who decentralized operations as CEO in the 1970s, had seen enough forecasts gone awry by the time he took over. He was convinced that “either a budget will prove roughly right and then it will be trite, or it will be disastrously wrong and in that case it will be dangerous.” Instead the bank relies on dynamic funding and just-in-time spending that is supported by ongoing dialogue among branches and functions. Incentives and fat bonus programs are nowhere to be seen, instead replaced by the Oktogonen Foundation, a truly innovative profit-sharing and stock-ownership program that funnels a share of the firm’s profits to employees when the bank outperforms its rivals. More than 10 percent of the total equity is now held by employees. Handelsbanken has been more profitable than the average of its peer banks for more than forty years. It has weathered every major financial crisis in my lifetime with remarkable aplomb, delivering the biggest increase in shareholder value of any European bank over the last ten years.
Every organization, regardless of its beliefs, must decide how it will use the resources at its disposal to pursue its purpose. Every dollar is a chance to invest in something—current operations, new initiatives, external investments, distributions to shareholders, share buybacks, or even philanthropic donations. Every hour of human effort is a chance to energize existing roles and projects, embark on something new, strengthen a relationship, develop a new skill, rest and recuperate, and more. If organizations are like living systems, then resources are oxygen. Every choice we make nourishes or starves this network of possibilities.
The solution to this resource allocation problem, we think, is to create a budget. Perhaps no other process is so respected and reviled as the annual planning and budgeting process. For those who have managed to avoid direct contact with James O. McKinsey’s “gift” to humanity, here’s how it works:
A business plan is created through a bottom-up and top-down negotiation between business units and corporate headquarters, in which they make assumptions about what will happen, internally and externally, for the next twelve months.
The business “locks” a version of the plan that they believe walks the tightrope between satisfying shareholders and being theoretically achievable. This forms the basis of a budget for the year ahead.
The budget includes a detailed set of targets for sales and profitability, as well as funding commitments to support operations and investment. All of this is underpinned by an elaborate set of incentives designed to ensure the delivery of the budget as written.
During the ensuing twelve months, actual performance is compared to the budget with a high degree of scrutiny. Any variance is attributed to “good” or “bad” performance by the team. Managers are expected to eliminate any gaps in performance, ideally without reallocating resources. The idea that the underlying assumptions in the budget may have been unrealistic is never seriously considered.
Midway through that same year, the process starts all over again for the upcoming year, the resulting workload laid on top of the day-to-day execution of the existing plan and budget.
As I’m sure you’re already aware, there are a few problems with this approach. For starters, budgeting is extremely time consuming. Ford Motor Company once estimated that its planning and budgeting process cost around $1.2 billion a year. You read that right: the process by which the company controlled how money was spent cost it more than the GDP of Grenada. Many organizations I’ve worked with are similar, spending half their year winding through the process outlined above at the expense of doing actual work.
Budgets also suffer from being too rigid and unresponsive. In a complex world, circumstances change quickly, but traditional budgets don’t. Perhaps there’s a downturn in the market as a whole. Or customer preferences change. Maybe a new competitor emerges that disrupts your pricing model, as Warby Parker did to the traditional eyewear brands. An annual budget doesn’t allow for that volatility. The interdependence of the plan—the fact that it all has to add up—means that changes, even small ones, create cascades of adjustment that nobody has an appetit
e for. A leader whose year is going according to plan is actually disincentivized from helping a struggling division change the budget. The system doesn’t want to play jazz; it wants to play sheet music.
Most important, budgets can actually work against performance. Dr. Steve Morlidge offers a simple explanation for this in The Little Book of Beyond Budgeting. “Budgets also sub-optimize performance by forcing the business to use the same set of numbers for competing purposes. On the one hand, good targets need to include an element of stretch, but forecasts need to be realistic, while cost budgets need to be ‘tight’ in order to constrain spending. It’s simply not possible to fulfill all three purposes using the same number.” Because of this, everyone involved is actively trying to bend the process to their advantage. Leaders demand higher targets knowing that actual performance will probably miss, hoping to get what they need. Managers sandbag and propose targets they know they can beat, assuming that they will be forced to aim higher. Dr. Morlidge continues, “Revenue targets can act as a ceiling since there is no incentive to exceed them, whereas cost budgets become a floor as there is no motivation to spend less.”
Budgeting is broken. But few organizations find the courage to bring true dynamism and collective intelligence to resource allocation. Fortunately, it can be done, if we’re willing to give up the illusion of control that modern budgeting provides.
Thought Starters
It’s All Relative. If a Legacy Organization committed to—and hit—a fixed performance target of 10 percent growth this year, but the market grew 20 percent, does everyone deserve a bonus? The Beyond Budgeting Institute would say no. The institute is an organization and membership network that was founded to solve the issues and frustrations caused by traditional budgeting. Its quest led it to discover organizations who had moved “beyond budgeting” to something more adaptive and human. From these early cases and its own experiences, the institute articulated an alternative approach that is philosophically aligned with, and a source of inspiration for, many of the ideas in this book. The Beyond Budgeting community plays host to a treasure trove of stories and practices that defy convention. Take fixed performance contracts, for example. Many of its member organizations have abandoned fixed targets in favor of relative ones. Where a Legacy Organization might commit to a specific revenue-growth target for the year, Beyond Budgeting would recommend beating the average performance of their competitors. Why? Because what if the market was down 20 percent and the business stayed flat? That would be a miracle. But under the traditional approach no one would be rewarded. In an uncertain world, relative performance is the only true benchmark. Company to company. Team to team. And before you jump to the conclusion that relative performance might apply person to person, I’ll save you the stress. The Beyond Budgeting folks believe that individual performance doesn’t really exist. Performance is a team sport.
The “Tragedy” of the Commons. You may have heard about the tragedy of the commons, the idea that when we share a public resource, we ruin it by acting in our own self-interest. Your office refrigerator is a classic example. Why won’t anyone throw away their expired and rotting food! Who is stealing yogurts that don’t belong to them? And so on. The science says we’re incapable of managing resources that belong to everyone, right? Not so fast. Elinor Ostrom shared the 2009 Nobel Prize in Economics for her research into how humans successfully (and unsuccessfully) manage the commons. What she found was that successful communities leverage something she calls polycentric governance. In an interview at the Mercatus Center at George Mason University, she explained, “The strength of polycentric governance systems is each of the subunits has considerable autonomy to experiment with diverse rules for a particular type of resource system and with different response capabilities to external shock. In experimenting with rule combinations within the smaller-scale units of a polycentric system, citizens and officials have access to local knowledge, obtain rapid feedback from their own policy changes, and can learn from the experience of other parallel units.” By now this should sound familiar (albeit a bit technical). When teams have the right (and the inclination) to experiment with their own rules and norms, they can find ways to collaboratively leverage and preserve resources. If “our money” really were our money, who knows how well we could deploy it in service of our collective purpose? The tragedy of the commons is that we think we can’t share.
Resources in Action
Zero-Based Zephyr. Zero-based budgeting originated in the 1970s as a way of challenging the inertia of bloated budgets that persist year after year. The idea was to build your budget up from zero, questioning everything as you go. At Morning Star, business units present their plans for the upcoming year and colleagues invest in the ideas they like best using a virtual currency. Inspired by that practice, here’s a valuable exercise that will help you see where the wind is blowing:
Bring your team or company together in a large room where you have the freedom to move around.
Prior to the meeting, collaboratively generate a list of every project, program, and initiative that is currently under way, as well as any fully formed prospective projects that the group would like to see funded and executed in the next quarter. Capture them on large-format note cards or sticky notes and arrange them neatly on the wall or floor.
Give each attendee one hundred virtual dollars. You can use Monopoly money, stickers, or even just pens and an honor system.
Now ask everyone to invest their money as they see fit. What would they do if they were the sole decision maker for this upcoming period?
When all the money is spent, have a discussion about the patterns that have emerged, and allow time for everyone to adjust their investments based on what they’ve learned.
Now you face a choice: will you act on the wisdom of the crowd?
Participatory Budgeting. In New Zealand a group of individuals and companies focused on social impact have organized as a network known as Enspiral. They collaborate; hire one another; and share talent, clients, and, most important, ownership over the ecosystem itself. As the network grew, it faced a conundrum about how to invest its own capital. Because the community is both decentralized and diversified, it was not obvious what projects deserved funding or who should decide. Not surprisingly, a group within the community sprang up and invented a whole new tool, called Cobudget, to solve that problem. The application allows a team or community to propose, discuss, and fund new projects in a transparent and intuitive way. This tool is just one part of a broader social trend called participatory budgeting. Twenty-two cities have adopted the practice to date, giving citizens the power to direct millions of dollars to more than 1,532 projects that matter to them. To get a sense of how it works, invite your team to try something like Cobudget and put your discretionary budget for the next quarter on the line. You’ll see a whole new level of engagement.
Resources in Change
Often there is a desire in teams we coach to reinvent the budgeting process early on. I suspect this is because it is so onerous and time consuming. On the list of what’s stopping us from doing the best work of our lives, it ranks highly. But my team typically cautions against this. The budgeting and planning process is one of the few practices that truly span the organization and, as such, requires a lot of consent to revolutionize. Even if leadership is fully on board, I’ll often start with new ways of working at the team level and come to resources later with more momentum and maturity.
Questions on Resources
The following questions can be applied to the organization as a whole or the teams within it. Use them to provoke a conversation about what is present and what is possible.
How do we allocate funds, effort, space, and other assets?
Are resources deployed annually, quarterly, or dynamically?
Do we use targets, forecasts, trends, and/or tolerances? If so, how?
How do strategy and planning influence resource allocation?
How do we balance resources across the short term and long term?
How do we balance resources across our core business and innovation?
How do we define and measure the performance of our resources?
How does our approach enable us to respond to emergent events?
What does it mean to be People Positive about resources? Recognize that people are not resources, they are people—capable of directing their own time and attention to where they can add the most value. They’re also capable of delivering performance without fixed targets or individual incentives. Let relative targets and a share of the wealth created by the business guide behavior.
