A banking industry leader like Handelsbanken has built
new management models.
Conditions today are tough. Managers have to respond fast, the pace of innovation is accelerating, prices are driven by markets, customers are fickle, employees easily change their jobs and shareholders always demand more. Yet, while there is constant discussion of these forces and the need to raise company performance, organisation and management processes remain set in another age. Fixed strategies and budgets inhibit rapid responses, bureaucracy strangles innovation, functional organisation creates barriers to customer service and command and control demotivates employees.
To compete more effectively, organisations have to transform their hierarchies into networks of units with a high degree of local autonomy. Serving customers better must over-ride issues of hierarchy and internal power politics, and rigid management processes that create fixed performance contracts (such as budgets) must give way to more adaptive management processes. These are the main changes needed to build a coherent, systemic management model – also known as the beyond budgeting model – to enable whole companies to achieve sustained superior performance.
This model is now substantiated by the sciences most relevant to management today, complexity theory and behavioural science. A practical expression of the model is embodied in beyond budgeting’s twelve principles of devolved leadership and adaptive processes.
The underlying concept behind the new model is radical decentralisation. The organisation revolves around the customer and no longer around products and shifts away from static hierarchies to a flexible network of highly autonomous units. The consistently high profitability of Nordic bank, Svenska Handelsbanken, is the result of it focusing, for example, on customer satisfaction instead of product volume and market segment targets. There are no centrally organised product campaigns. The bank does not measure the profit or loss of its products, but instead focuses consistently on customer-profitability.
Derived from this strong customer orientation, the leadership and organisation is based on empowerment and responsibilities are distributed deeply throughout the organization. Decisions are taken as close as possible to the customer (i.e. in branches), which means they are made quickly, competently and at low cost. Over 50 per cent of Handelsbanken employees have individual lending authority. Internal suppliers of services have to live up to their customers’ requirements – and not follow some functional hierarchy. As a result, the organisation becomes even more decentralised.
Highly decentralised network-like organisations need appropriate management processes to support them. Beyond budgeting emphasises adaptability. The fixed performance contract is superseded by a relative performance contract. It is of critical importance not to set fixed targets or budgets in advance, against which to measure a manager’s performance.
In place of them, relative goals help managers to compare their performance with the benefit of hindsight against competitors in their markets and peers within the bank.
Handelsbanken’s prime corporate aim is to achieve a higher return on equity than the average for its Nordic (including the UK) competitors. For the past 35 years, it has always surpassed this target. Bonus payments are distributed to employees in the form of profit sharing, based on the actual achievement of this relative goal. No fixed annual plans are made, because, instead of a static budget, planning is a continuous rolling process, which allows dynamic coordination and the use of resources according to need.
This management model, in Handelsbanken’s opinion, is the key to its sustained success. Its cost to income ratio has long been in the 40 to 45 per cent range, the lowest among Europe’s largest universal banks. In Sweden, its largest market, the bank consistently has more satisfied business and private customers than the average of its competitors.
Source material: bbrt.org
Trevor Lee – EP International
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