When leaders need innovative ideas to grow their company, they often turn to their direct reports for guidance. But this group, by design, represents the current operating units and functions, which often have a status quo to defend.
So when you need creative thinking, try forming a leadership circle, a diverse, ad hoc team of 15–18 people from throughout the company who can work together for about six months.
The circle should focus on the future, not the past, and healthy debate should be encouraged. Within the circle, each member should hold equal status and should not feel that he or she is being asked to represent the point of view of accounting, sales, shipping, or whatever their home department is.
Most important, whatever ideas come out of a leadership circle should be handled in the same way they were generated: They should be rigorously and systematically discussed, debated, and explored.
The budgeting process can be laborious and it may also fail to give you the results you need. In this paper Anders Olesen explains how you can move beyond budgeting – and provides case studies.
The budget is generally regarded as an indispensable management tool. The process typically provides a detailed plan for the first year in the company’s strategic plan. The budget produces targets for the coming year, a financial forecast, and an allocation of resources. The thorough process ensures coordination throughout the entire company. The budget provides management with a “stick in the ground” and a sense of control.
In this paper, I would like to demonstrate that it is possible to achieve all of the above with fewer resources and with higher quality than is possible in a traditional budget process. One of the tricks is to separate the all-inclusive budget process into several separate sub-processes.
When combining such new processes with appropriate leadership principles to form a coherent management model, it is possible to unlock the organization’s full performance potential. This is what we call Beyond Budgeting.
When asking companies about the reasons for budgeting, they almost invariably mention the following purposes of the budget:
The budget sets targets in line with the corporate strategy.
Targets are broken down by division, BU, region, team, etc.; thus enabling everyone to see how they contribute to the corporate strategy.
Targets are used for the annual bonus plan.
The budget provides a financial plan for the coming year.
Such financial plan – including P&L, balance sheet and cash flow – is often required by shareholders and lenders.
The budget provides managers with the allowed maximum spending; in monetary terms and often also in terms of headcount.
The budget is thus supposed to do many important things for us. Most will agree that the above mentioned purposes must be addressed in order to manage a company and stay in control.
A key problem with the budget process, however, lies exactly in these purposes: they are all important, but they are different and even conflicting in nature.
There is for example an inherent conflict between target setting and forecasting:
A target is what you want to happen.
A forecast is what you think will happen.
A target should be ambitious; it should provide direction and inspiration for the organization to reach the desired outcome.
On the other hand, a forecast should show the expected outcome. It should provide decision makers with information about where the company is heading, whether they like what they see or not. To enhance the quality of decisions, such information must be unbiased and sufficient (without drowning in details).
When combining conflicting purposes in ONE process, it is impossible to solve all of the purposes equally good. Accordingly, the traditional budget process is by default flawed.
This insight leads to the natural conclusion that the budget process should be separated into different sub-processes that are directed at each of the important purposes, as illustrated below:
There are more problems with budgeting than the inherent conflict between target setting and forecasting; some of these are reviewed in the following.
Fortunately, experience shows that when companies separate their budget process into sub-processes this also makes it easier to address the other budget problems.
Problems with traditional budgeting
Most leaders know that the budget process has its problems; I have yet to meet anyone who claims the opposite.
Multiple studies show, for example, that the validity of the budget is relatively short. Typically, some 20- 30 % of the companies interviewed will answer that the budget is obsolete even before the budget year begins. And very often, some 60-70 % will answer that this happens during the first half of the year.
The level of waste as expressed by these figures is horrifying; where else is such waste accepted year after year?
Some of the typical problems with budgets are that:
the link to strategy is often weak;
they are very time-consuming
decisions are made too early and at too senior a level;
assumptions are quickly outdated;
they can prevent value-adding activities;
they create an ‘accordion’ forecasting horizon; and
they are often a bad yardstick for evaluating performance.
Often weak link to strategy
The budget is supposed to be the detailed plan for year one in the strategy period. However, experience shows that very little of the budget work has anything to do with strategy. Very quickly, the budget process is reduced to a fight for less ambitious targets and more resources. This has much to do with the relatively short (one year) budget horizon and is often due to the link to bonuses.
Decisions made too early and at too senior a level
Many decisions are made during the budget process: prioritization of resources, for example. Due to the nature of the traditional budget process, we very often find that people high up in the hierarchy and far away from the situation settle disputes over resources. This can affect the quality of decisions negatively.
This means that companies – simply because of an internal process – force themselves to take decisions much earlier than necessary. And since the best decisions are made with the latest information at hand (i.e. as late as possible) this too means that the quality of decisions will suffer.
Prevents value adding activities
When considering an expense or investment, this question is too often asked in budget environments: “Is it included in the budget?” If so: go ahead. If not: no go – wait for next year’s budget.
During the year, new and unexpected threats and opportunities will appear; things that were not – and could not – be foreseen when preparing the budget.
Despite all good intentions in the budget process, sticking to the budget will inevitably lead to a less than optimal use of resources simply because it is impossible to foresee what will happen.
“Accordion” forecasting horizon
Logically, one should think that a company’s forecasting (or planning) horizon was determined by the nature of the company’s industry and that it, accordingly, would be relatively stable over time.
However, in a normal budget environment, the forecasting horizon lasts to the end of the budget year. This means that the forecasting horizon – and hence, the focus of the organization – will vary significantly during the year: from roughly 3 to 15 months. This is purely driven by the financial year-end focus and has nothing to do with the underlying business needs.
A bad yardstick for evaluating performance
In a budget environment, you are a success if you reach your budget, and this often comes with a bonus. On the face of it, this sounds fine, but it has several negative side effects:
rational managers will fight for relatively unambitious targets; thus increasing their chances for personal success;
since conditions (and budget assumptions) always change during the year (currencies, oil prices, interest rates, etc.), it can be impossible to determine what success will look like beforehand;
even if the cost budget is met, this is no guarantee for the most optimal use of resources. Some parts of the organization could probably have managed with less, and others may have under-spent and missed opportunities;
even if the revenue budget is met, this is no proof of success; maybe the competitors did even better and the market share came down.
Why most companies still budget
Very few disagree that the budget has the above-mentioned problems, yet most companies continue to prepare annual budgets. Why is this? Well, we can only find two explanations; either:
Managers do not know what to do instead – what is the alternative?, or
Managers consider the problems too small to justify a change
In the former case, the good news is that an alternative exists – as explained in this paper.
Concerning the latter, we disagree that the problems are too small to justify change. The budget is meant to support and enhance performance but is actually doing the opposite, and when the budget is more of a barrier than a support for good performance then the problem is indeed very serious and worth changing.
Will performance suffer without the traditional budget?
No – quite the contrary. It is our experience that the separation of the budget process into sub-processes has a positive impact on an organization’s performance. Simply by changing the process, you will achieve better and more meaningful targets, more relevant and timely financial forecasts and an improved use of resources… with less effort.
The largest Norwegian business school recently conducted a research project within the Norwegian banking industry. The purpose was to identify relationships (if any) between financial performance and management tools applied by Norwegian banks. For most of the analysed tools, the researchers could not prove a significant link between tool and performance. However, concerning the budget, the study had a remarkable result: the financial performance (measured over a long period) of the banks without traditional budgets was significantly better than that of the other banks.
The Beyond Budgeting principles
One of the great advantages of separating the budget process into sub-processes for target-setting, forecasting, and resource allocation is that this opens up for significant process improvements; improvements that are impossible to achieve with one common budget process.
When you address the target-setting process, for example, and start thinking about how to design the optimal process, new and interesting ideas – that were unthinkable in the one-process-environment – will appear: What is actually the purpose of the target? How is this best achieved? What kind of targets should we have? How about non-financial and relative targets? Must there be a date linked to every target? Who sets the targets? How often?
Another significant advantage is that the new processes invite to and can facilitate the implementation of leadership practices that can further enhance performance improvement. Accordingly, and based on the practical findings of our network, we have developed the Beyond Budgeting Principles – see box – that address both the processes and the leadership aspect.
The focus of this paper is on the process side. However, organizations must address the leadership aspects as well. For employee motivation as well as management credibility, it is crucial that management processes and leadership principles are aligned.
12 LEADERSHIP PRINCIPLES
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
4. Teams – Organise around a network of accountable teams; not centralised functions
5. Trust – Trust teams to regulate and improve 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 negotiated targets
8. Rewards – Base rewards on relative per formance; not 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 on budget variances
Some practical examples
To illustrate how the separation of budget processes can work in practice, you will find some examples in the following. The examples are from successful – but very different – companies that have combined their management processes with strong leadership principles to form coherent management models.
As you will see, the specific solutions and processes adopted vary between the companies. There are, however, also several similarities:
The companies place great emphasis on values and purpose (ref. principle 1 and 2) and transparency (principle 3).
Some of the companies are organized as decentralised teams (principle 4 and 5); and others have implemented the new processes as part of an effort to increase the responsibility and accountability BU’s.
Several of the mentioned companies have introduced profit sharing schemes instead of individual targets and bonuses (principle 7 and 8).
CASE STUDY – Alfa Laval
Alfa Laval is listed on the Stockholm Stock Exchange and is a leading global supplier of products and solutions for heat transfer, separation, and fluid handling. 2014 revenues stood at approx. GBP 2.6 billion. The company has about 18,000 employees and activities in 100 countries.
In 1998, Alfa Laval abandoned traditional budgets and introduced a new system of financial management whereby each of the budget purposes are handled in separate sub-processes.
The reasons for the change was very similar to that of other companies: conflicting purposes inherent in the traditional budget process, budget outdated early in the year due to inevitable changes in budget assumptions, too much time and energy spent on irrelevant details, weak link between planning horizon and the business cycle, etc.
In addition, the old budget process delayed the decision and implementation of important business initiatives as many of these were not foreseen when preparing the budget (principle 9-11).
Over the latest ten years (i.e. including the recent financial crises), Alfa Laval’s EBITDA-margin has been in the 15-22 % range; which is extremely good for its industry. One of the key elements behind this strong performance is a drive for continuous improvement (principle 2 and 6).
CASE STUDY – Statoil
Statoil is an international energy company with approximately 23,000 employees worldwide and operations in 36 countries. Headquartered in Norway, Statoil is listed on the New York and Oslo stock exchanges.
Ten years ago, Statoil decided to go beyond budgeting and they have since then developed its coherent management model also referred to as “Ambition to Action”.
Each division/BU/team has its own “Ambition to Action”; Statoil’s version of a balanced scorecard. All of these are transparent to everyone in the company, and teams can anytime during the year change their own targets, KPI’s, priorities, etc. (principle 3-6 and 9-10).
Like Handelsbanken, Statoil measures its success relative to its peers. Accordingly, they have two corporate financial targets: above average on Total Shareholder Return, and first quartile Return on Capital (principle 6-7).
Statoil has developed a dynamic forecasting model, which asks units to update their forecasts when something significant has changed (principle 9-10).
The company practices a dynamic resource allocation process (principle 11), whereby new projects can be proposed at any time, and are approved or rejected dynamically based on project quality and on financial capacity available from the dynamic forecasting.
Another key principle in Statoil’s model is a holistic performance evaluation (principle 6 and 8), which includes “pressure-testing” of measured KPI performance before any conclusions are drawn, as they see KPI’s as “Indicators” only. This involves applying hindsight insights, and using information not picked up through measurement. Values and how results are achieved are also emphasized, and counts 50 % in the final evaluation.
CASE STUDY – Handelsbanken
Handelsbanken is a full-service bank with nationwide branch networks in Sweden, the UK, Denmark, Finland, Norway, and the Netherlands. Listed on the Stockholm stock exchange, Handelsbanken has more than 11,000 employees in 25 countries.
Handelsbanken has one financial target: to achieve a shareholder return that is above the average of its peers. This target has remained unchanged for 42 years; i.e. the bank spends no time on target setting. The bank has reached this target every year since it was established.
In the same 42-year period, the bank has not prepared annual budgets and it does not even prepare financial forecasts. Yet it remains in full control and it is the most cost-effective listed full-service bank in Europe. Based on five different financial measures, including financial strength, the ability to manage risk and cost efficiency, Bloomberg recently ranked Handelsbanken as the strongest bank in Europe. During the recent financial crisis, the bank did not need help from governments or shareholders; contrary to almost all other banks in Europe.
Handelsbanken is a prime example of a company that has also addressed the leadership principles. A key component of the bank’s successful and coherent management model is a highly decentralised organizational structure and a high level of transparency; the latter also enables fast and frequent feedback (principle 12).
CASE STUDY – Mainfreight
Mainfreight is a global supply chain business headquartered in Auckland, New Zealand and it is listed on the New Zealand stock exchange. The company currently has more than 240 branches around the world. In 2014, it generated NZD 1.9 billion in revenues and it employs almost 6,000 team members.
Mainfreight’s success is underpinned by its unique performance management system. This supports a strong can-do attitude (principle 1 and 2) and excludes traditional budgets. As Mainfreight expands, it removes budgets from the companies it acquires and introduces its own performance management system.
One of its key principles is to avoid centralized control processes, budgets, and bureaucracy (principle 3-6). These are regarded as ineffective and time-consuming and take managers’ attention away from the business. To illustrate this, here is a quote from Mainfreight’s latest Annual Report: “As we grow our global business we continue to resist bureaucracy and corporate bull$#@t! It is a credit to our team of 5,771 people that we still think and act like a startup.”
CASE STUDY – The Maersk Group
The Maersk Group is a worldwide conglomerate and operates in some 130 countries with a workforce of more than 89,000 employees. The annual revenue is approx. USD 48 billion (2014).
With the objective of creating a stronger link between strategy and action, Maersk has implemented a new management model based on the following design criteria: visibility, agility, control, and simplicity. A key element of the new management process is the separation of processes for target setting, forecasting, and resource allocation (principle 7, 9, 10 and 11). This has resulted in significantly improved sub-processes for each of these very important planning elements.
They also now have a more holistic view on value creation (principle 6) which is now evaluated against internal as well as external benchmarks.
Rolling forecasts combined with a new performance review process have improved Maersk’s ability to react to rapidly changing market conditions.
CASE STUDY – Coloplast
Coloplast develops products and services that make life easier for people with very personal and private medical conditions. Their business includes ostomy care, urology and continence care, and wound and skin care. Coloplast operates globally, employing more than 9,000 people.
In 2009, following a year with four downward adjustments to the stock market, management realized that changes were needed. Coloplast wanted a new process to support its very ambitious performance improvements. This meant a farewell to the traditional budget and the introduction of new sub-processes: target setting, rolling forecasts, and a flexible resource allocation.
The new processes have helped Coloplast reach more ambitious targets, and provided the company with more agility. The absence of cost budgets has actually helped increase cost consciousness (principle 11). Financially Coloplast is now outperforming its peers. The EBIT margin, which stood at 12 % in 2008, was five years later at 32 %; far ahead of its peers.
CASE STUDY – Timpson
Timpson is a retail service business with more than 1,300 outlets in UK and Ireland. Timpson offers shoe repairs, key cutting, engraving, watch repairs, dry cleaning and mobile phone repairs – its biggest service is photo processing.
Timpson applies a unique management model where the people who front the customers are the ones that run the business – everyone else (without exception) is there to help them do their job. This is what Timpson calls Upside Down Management.
There is no headquarter; a small team supporting their colleagues in the shops provides central services.
Timpson “does not waste time trying to predict the future”, as John Timpson (the company’s chairman) writes on his blog; i.e. the company is not managed through budgets; they actually don’t even prepare targets or forecasts – and they manage very well.
Timpson often features on the Best Workplace lists in the UK and across Europe, which has very much to do with its leadership (principle 1-6).
Getting started / next step: For more information or help to get started, please feel free to contact the Beyond Budgeting Institute. bbrt.org
I hope that this paper has demonstrated the benefits of separating the traditional budget process into sub-processes. Hereby, the quality of the company’s planning efforts can be significantly improved with the same or even with fewer resources.
To achieve the full performance potential of the organization, it must also address its leadership processes. The true strength lies in the combination of the two, thus forming a coherent management model.
For established organizations to get started on a Beyond Budgeting journey, we generally recommend to start with a separation of the budget process, and to address the leadership principles subsequently.
Definition: In this article, the word “budget” refers to the corporate budget that is prepared through an annual corporate-wide process, not the personal budget or a project budget or any other variety of that which generally refers to planned income and expenses.
Anders Olesen is Director at Beyond Budgeting Institute
In order to power growth you should aim for an adaptive and empowered organization, that:
Responds rapidly to threats and opportunities.
Adaptive organizations operate with speed and simplicity by giving managers the scope to act immediately and decisively within clear values and strategic boundaries. Making strategy an open, continuous and adaptive process is the key. It enables the firm to react to emerging threats and opportunities as they arise rather than being constrained by a fixed and outdated plan.
Attracts and keeps the best people.
It is no coincidence that Adaptive Organizations such as Google, Handelsbanken and W.L. Gore regularly appear in the lists of “best companies to work for”. The reasons are obvious. From the employee perspective, talented people want to learn and develop; they value time to think, reflect and try new ideas; they want decision-making responsibility and they want a friendly, collegiate culture. From the employer perspective, they want people who have the right attitude, have ideas and can add value, want to participate in decision-making, are good team players and have the talent to become leaders at any level.
Enables and encourages continuous innovation.
Innovation is about thinking and acting differently whether it is about strategies, business models, processes, or management practices. In adaptive organizations, people work within an open and self-questioning environment. Clear governance principles set the right climate and builds the mutual trust needed to share knowledge and best practices. This is also encouraged by the move away from individual rewards based on budgets and toward team rewards based on business unit or group performance.
Drives operational excellence.
Adaptive organizations have lower costs. Not only do they connect the work that people do with customer needs, but they also align products, processes, projects, and structures with their strategy. Operating managers also challenge resources used rather than seeing them as ‘entitlements’. Just asking the question, “Does it add value to the customer?” is often sufficient to ensure that unnecessary work is eliminated.
Leads to loyal and profitable customers.
Adaptive organizations know how customers want to conduct business with them. Key issues are whether customers just want the lowest-cost transaction, added-value services, or customized solutions. Under this “outside-in” approach, firms know how to satisfy customers’ needs profitably. This means not only knowing their needs, but also their net profitability.
Support good governance and ethical behaviour.
Adaptive organizations are held together by strong values and inviolate principles. However, it is not a soft option. It exposes nonperformers. It challenges people all the time. You cannot just agree on a number. You have to show people that you can actually achieve real performance improvements, and must always be prepared to be judged against others with similar problems and opportunities.
Leads to sustained value creation.
Leaders in Adaptive organizations focus their attention (either explicitly or implicitly) on creating wealth over the longer term. In particular, they focus on setting high performance expectations and stretching people’s ambitions. Those companies that operate this way tend to beat the competition not just this quarter or this year but year after year.
Clearly adapting in these ways the organisation that will emerge will replace the 20th century industrial age command and control management model that is no longer ‘fit for purpose’.
A viable alternative* that will provide a sustainable basis for high performance.
*BBRT.ORG will assist you on this journey as it has done alongside so many leading organisations (see website)
In only nine years, Buurtzorg has grown from a great idea to a very successful neighbourhood nursing organisation with almost 10,000 employees in the Netherlands. At the core of this remarkable success is a unique leadership philosophy.
Buurtzorg (‘neighbourhood care’ in Dutch) is a wonderful example of the Beyond Budgeting principles in action.
With this case report, the Beyond Budgeting Round Table (BBRT) shared with its members a great example of the extraordinary levels of competitive advantage and performance an organisation can achieve, solely due to its innovative management model.
Background and the case for change
To describe Buurtzorg, we have to start with its founder Jos de Blok. Originally, Jos studied economics but shortly after, he decided to follow his vocation and educate himself to become a nurse. For 15 years, he worked as a nurse; first at a hospital and later as a district nurse in the community. For reasons that I come back to shortly, he quit this job and went on to work in the health administration in various leadership roles. This lasted for about 10 years, when in 2006 he decided to establish Buurtzorg.
To start with, Jos found his work as a district nurse in a local community to be very inspiring. The job obviously involved a lot of contact and interaction with patients, it included a large variety of activities, and work was coordinated in a team of local nurses. This, however, ended in 1993 when Dutch politicians decided to ‘professionalise’ community care. Jos refers to this as a disaster. The local teams became integrated parts of much larger organisations, managed by managers. Instead of focusing on delivering solutions for people, nurses were now delivering products. In order to become more efficient, the many different activities were detailed, coded and time measured. Nurses had to specify their time spent with patients in a wide range of product categories; this created confusion and took away time and focus from patients. Many nurses found these new working conditions degrading.
With the specification also came specialisation, which was an even bigger disaster for patients than it was for nurses. Some patients experienced having up to 40 different health care workers in their house every month; all of whom asked the patients the same questions about their situation… i.e. not a very human way to treat people who are already weak and insecure. This also meant that the personal relationships between patients and nurses were lost, to the extent that nobody felt responsibility for the care of the individual patients.
Buurtzorg at a glance
Nine years after its foundation, this is Buurtzorg:
• Highest client (patient) satisfactio
• 40% lower costs then peers
• ‘Best employer’ prize 5 years in a row
• 9,700 nurses taking care of 75,000 patients in Holland
• 850 self-managed teams, freed from admin and intervention
• Minimal bureaucracy
Like in many other countries, the Dutch system was inspired by the apparent efficiency gains in companies and industries of mass production. This is sometimes referred to as ‘new public management’. More and more managers took over the profession, and consequently (albeit with the best of intentions), hierarchy and bureaucracy increased significantly. Focus decreased on the employees who actually did the work, not to mention the patients. This is a classic example of the separation of decision making from work, which leads to poorer performance.
Much to the surprise of legislators, the ‘new public management’ had exactly the opposite effect of what they expected: In 10 years, costs doubled and quality decreased dramatically. However, instead of challenging the obviously flawed assumptions about the new way of managing, more of the same was practiced: Nurses were, for example, provided with even more specific plans that had to be adhered to, and deviations had to be explained to managers. Consequently, this created even more dissatisfaction with the system and further reduced the time available to patient care. Not surprisingly, costs continued to rise and quality to go down.
Buurtzorg: the foundation and rapid expansion
In 2006, Jos and a few friends decided to do something about the deteriorating situation. Based on their experience from the 1980’s, they knew that this could be done in a much better way. Therefore,they established a not-for-profit nursing organisation based on principles of trust and self-organisation.
In early 2007, it started as a bit of an experiment with only four nurses, but it soon picked up and more teams were established. After a few months of operation, the same thing happened again and again: Small teams of nurses developed networks with hospitals, doctors and pharmacies etc. in the local community. They worked and organised themselves according to the new principles and within months they had so many patients, that they had covered their initial costs and were profitable. Many nurses wanted to work for Buurtzorg, and by the end of the first year, they had nurses working in 10 different locations.
The teams were more profitable than intended and this provided a sound basis for the expansion, which went very fast. From 2008, they established 10-20 new teams of nurses every month. And by November 2015, when we conducted our interviews at Buurtzorg, the number of nurses working for them in the Netherlands stood at a staggering 9,700.
Jos explains: “We didn’t have problems to manage the growth since the teams were managing themselves. Another contributing factor was that we have always avoided any kind of bureaucracy.”
Buurtzorg is a remarkable success story that has gathered a lot of attention from both inside and also outside the Netherlands. It needs to be told and widely copied in the opinion of this curator.
Below are highlights of their achievements:
• Buurtzorg has highest client (or rather: patient) satisfaction in the country.
• Despite the fact that Buurtzorg has higher educated nurses than peers, their costs are far lower: Compared with peer organisations, they spend some 40% fewer hours of care per patient because their patients need care only about half as long; they heal faster and become more autonomous.
• Buurtzorg patients use far less medicine, which is a great benefit to both patients and the Dutch government.
• Buurtzorg has ranked at the very top of the ‘Best Employer’ list for the last 5 years in a row.
• Buurtzorg has also shown to be very profitable. This was not the intention, but it has made it easier to fund growth, experiment and develop the organisation.
Buurtzorg’s management model
In the following, we review some of the key elements that make up Buurtzorg’s unique management model. Readers familiar with the Beyond Budgeting principles will find a great resemblance between these and the elements below. As you will see: Buurtzorg is a great example of the Beyond Budgeting principles in action.
A key element of their successful model is a clear purpose that ties the whole organization together. In this case, the purpose is in line with nurses’ natural vocation: Helping patients lead better lives. The task of the teams of nurses is thus to take the best possible care of their patients, which translates into helping them recover their ability to take care of themselves as much as possible. It is up to each team to figure out how this is best done for each individual patient.
Every Buurtzorg employee knows what good performance looks like and what is expected of him/her. Experience shows that clear and noble purposes are far more powerful than strategy plans and financial targets to inspire people and drive performance. One of the reasons is that purpose comes without the negative side effects of plans and targets.
Buurtzorg believes in the power of sharing information; also because this makes it a learning organisation. For this purpose, and to support the local teams of nurses in their daily job of taking care of patients, they have developed their own unique IT-system. This has many purposes and features:
• It provides teams with confidential patient information, and nurses are responsible for continuously updating this.
• It is a platform for sharing ideas, news and other information; as well as for seeking advice.
• Planning and scheduling work. This also provides a basis for statistics about capacity utilisation etc.
• The system provides teams with their actual performance metrics. Performance data are shared for the purpose of self-regulation and learning
In building the system, Buurtzorg deliberately split the administrative process from the professional processes, so that all the administrative and bureaucratic work is done without interfering with the day-to-day job of the nurses.
In order to give maximum attention to their patients, Buurtzorg avoids activities that do not support the purpose of taking care of patients. This means deliberately avoiding the introduction of a lot of the elements associated with traditional management: strategy, budgeting, targets, forecasting, business reviews, management meetings, variation analysis, rules and regulations, etc..
Small organisations that want to grow usually copy such management tools from the more established ones. Sometimes such tools are introduced with the help of consulting companies and / or inspired by business schools. The result is usually the same: as the small company grows, it loses the agility, spirit and benefits of being small – and very often it becomes rigid, bureaucratic and in some cases even a sad place to work.
Not least due to the founder’s own experience from before the government introduced its disastrous way of working, Buurtzorg has resisted all attempts and pressures to go in this direction.
Trust and autonomy
These are also central elements in Buurtzorg. The teams of nurses are completely self-managed. They are not just empowered by Jos or the hierarchy; they have power because there is no hierarchy with any decision-making power over them. When shown such trust, nurses take on the responsibility of taking the best possible care of their patients. The concept of self-management is a great way to avoid one of the main problems of traditional management; namely the separation of decision making and work. This also contributes to making it a very attractive work place:
Five years in a row, Buurtzorg has been at the top of the ‘Best Employer’ list in the Netherlands.
Customer / patient focus
The above-mentioned purpose has naturally created a very strong customer / patient focus. At Buurtzorg, nurses generally spend a lot of time together with new patients to get to know their situation, needs, background, etc. Based on this, the nurses have complete freedom to come up with individual solutions for patients.
A very interesting (but also obvious) finding is that this way of working leads to far less hours needed in patient care. Why? Because patients become better much faster. Over time, Buurtzorg spends approx. 40% less time together with patients than their peers; this is a massive efficiency increase and it even comes with much happier patients!
With small and dedicated teams of nurses working with and around a clearly defined group of patients, it is no wonder their patient satisfaction is very high; it is by far the highest in the country.
“In Buurtzorg, we don’t use organisational charts,” says Jos de Blok. They have a simple structure that makes such charts redundant. The organisation has three parts: Teams of nurses, coaches and the head office.
The core consists of self-managed teams of educated nurses that work out of a small office in their local community. Each team has some 10-12 nurses, which means that there are now a little more than 850 teams across the country. Even though the teams are self-managed, there are times when they need support, so they have some 20 coaches (approx. 45 teams per coach) that help teams in several ways; primarily coaching about how to make teamwork work. The coaches are not managers; they have no say on the actual work of the teams and are not responsible for the teams’ results.
The modest head office with 40 people is located at the outskirts of Almelo, a small town in the eastern part of the Netherlands. The role of the head office is to act as a service centre for the teams and the coaches; i.e. help them do their work better. In addition, the head office takes care of those activities that they have found made sense to centralise and standardise. The latter includes support and admin within accounting, IT, sales contracting (customers are insurance companies and municipalities), salary administration and housing (agreements re. each team’s local office). These limited staff functions are also organised in teams with a minimal level of managerial hierarchy.
The head office can provide guidelines but they have no decision-making power; they are truly a service centre. As mentioned above, there is a small team that takes care of salary administration (contracts and salary payments); but there is no HR department. Those other tasks that usually belong in a HR function (like recruitment, training, development, feedback and communication) are either performed by teams locally, by Jos or not at all.
Except for Jos de Blok (founder and CEO), no one in the organisation has a management title. Further, there is no management team, and there are no fixed meetings. This frees up time to focus on how to become even better at helping patients and solving problems. Meetings are only held when there is a specific need; not because they have been scheduled.
Buurtzorg and the Beyond Budgeting principles
If you compare Buurtzorg’s management model with our 12 principles, you will find a striking resemblance. We cannot claim that Buurtzorg was inspired by us. But what is very encouraging and much more important, is that an increasing number of organisations, independently of each other, are finding new and better ways of managing their businesses; ref. also Frederic Laloux’s great book: Reinventing Organizations, 2014.
Why is this? Because command & control is failing; and because there are better ways to design and manage work.
Buurtzorg is a great example of a company that has managed to find such a way.
This organisational model ensures optimal coordination, and with no bureaucracy on top of it, it becomes both very effective and efficient.
In general, management processes are kept to a bare minimum. Only the ones that support the core decentralised service delivery and those required by law (compliance) are done. Everything else is regarded as potential waste that should be avoided. This means that Buurtzorg’s process are carried out dynamically based on the underlying (continuous) rhythm of patient activities; adjusted for events as they happen. Buurtzorg does not have the calendar year as the default basis for its management processes, as is found in most organisations.
Guidelines instead of targets
At Buurtzorg, they know that short-term financial targets come with significant negative side effects. Accordingly, they do not use such measures.In order to assist teams when making certain decisions and when assessing their performance (which is what targets are often used for), they have developed a number of guidelines. One such measure is the percent of nurses’ available time that is spent with patients. Based on analysis, they know that good financial performance is achieved when this figure is at a level of 60%.
Accordingly, teams are measured on this parameter and their performance is visible to all. When a team is significantly above or below this level, such information is addressed by the local teams of nurses and is part of their ongoing (self-regulating) considerations and prioritisations.
Another example of a financial guideline is the amount available for new teams to establish their offices, for training, etc.. Teams can deviate from the guidelines; these are only there to help – not to be followed rigorously. By treating teams with such trust, teams respond by acting responsibly… so what we find is improved performance because of trust and the absence of detailed targets and management intervention.
Achieving more with less… brilliant!
A team of eight people at the head office handles all financial administration for Buurtzorg. Two of these employees are responsible for preparing sales invoices and two others are responsible for checking purchase invoices. The rest of the team (four persons) handles bookkeeping, accounting, controlling and reporting. On a monthly basis, the team prepares a simple set of financial statements including profit & loss and a balance sheet. The P&L is broken down per team of nurses and they receive their results in the before-mentioned common it-system. Teams are measured on what they can influence. For example: As the teams are not responsible for sales or negotiating terms with customers (the commercial agreements are handled by a small team at the head office), Buurtzorg’s total income is averaged out and divided between the teams based on number of hours together with patients. This way, the teams’ focus remains on patient care and efficiency, which they can influence locally. To nurture teamwork and the sense of belonging, everything is done to help teams perform better as teams. So, even though data is available about the efficiency of individuals, this information is not used. The purpose of the internal financial reporting is learning for continuous improvement. Therefore, the information is provided and transparent to ensure teams know how they are doing; also compared with others. Deviations are regarded as learning points, and are not subject to (traditional) managerial scrutiny, control or variation analysis. Buurtzorg does not ask its teams of nurses and coaches to spend any time preparing financial forecasts, budgets or the like. They simply do not see the need. At head office level, they now and again make limited high-level financial forecasts in order to balance cash flows, which during the rapid expansion has sometimes been under pressure. This view on financial management is sometimes referred to as “sense and respond” as opposed to (traditional) “predict and control”
It will probably not come as a surprise, that Buurtzorg does not make use of any incentives in the form of bonuses or the like. Every employee has a fixed monthly salary. For the nurses, the salary level is slightly above that of nurses employed in the public sector.
Humanity above bureaucracy
Buurtzorg’s management model has been very successful on all of the above mentioned parameters.
In addition, it is also extremely beneficial for society, which is why the Dutch political parties now support the spread of this way of working throughout the country. Ernst & Young has estimated that the Netherlands could save € 2 billion annually if all care organisations were as effective as Buurtzorg… not to mention the benefits in terms of increased quality of life for both patients and nurses.
Talking about the achievements Jos de Blok says: “Just by doing nothing, we achieved all of the above. We don’t have an HR department, and we do far less of the traditional management stuff like controlling and commanding people what to do, and this is how we get far better results.”
Buurtzorg is a fantastic story about how a simple coherent management model that serves a very noble cause can also be extremely effective.
Ref, W.E. Deming: Out of the crisis, 1982 and John Seddon: Freedom from command & control, 2003
Patient focus – avoid bureaucracy
The focus is on the patient – and to take the best possible
care of the patient. Everything that does not help the patient (i.e. waste) is avoided.
A White Paper from Beyond Budgeting Institute : bbrt.org
There are several compelling reasons why you should take my friends at Beyond Budgeting Institute seriously!
Below you will find 10 reasons why budgeting and traditional performance management practices cause significant problems and therefore should be replaced.
Did you know that:
Budgeting prevents rapid response. You need to respond rapidly to unpredictable events but the annual budgeting process was never designed for this purpose.
Budgeting is too detailed and expensive. Budgeting is highly bureaucratic and very expensive (often absorbing 15-20 percent of management time).
Budgeting is very quickly out-of-date. Many of the key assumptions change frequently (such as commodity prices, exchange and interest rates and of course customer demand) causing confusion and much rework.
Budgeting is out-of-kilter with the competitive environment. Today’s drivers of success are concerned more with fast response and continuous innovation than managing people and budgets.
Budgeting is divorced from strategy. Budgets are based on functions and departments rather than strategic themes. The chances of the goals and plans of many disparate functions and department being aligned with a coherent corporate strategy are often negligible.
Budgeting stifles initiative and innovation. Budgets tend to support an authoritarian management regime that stifles innovation
Budgeting protects non-value-adding costs. Cost budgets are usually compiled and agreed based on prior year outcomes. There is little time or incentive to understand and challenge the root causes of costs allowing huge amounts of waste to fester and grow.
Budgeting reinforces command and control. Budgets were designed to enable functional leaders to manage the organization from the center thus local decision-making is usually delegated within strict budgetary controls.
Budgeting demotivates people. When starting a new job most people are highly motivated to maximize their performance. But soon they learn not to fight the system but to ‘go with the flow’. This means doing little more than their job description specifies and the minimum to achieve their targets. Budgets are aligned with McGregor’s Theory X. The assumption is that people will only do the minimum required unless there is an additional incentive to do more.
Budgeting encourages unethical behaviour and increases reputational risk. Aggressive targets and incentives drive people to meet the numbers at almost any cost. This can lead to unethical selling and ‘creative’ accounting placing the CEO’s (and the company’s) reputation in jeopardy
It turns out that intuition is not really intuition at all.
Just like the invisible, inseparable quarks that underlie the protons and neutrons in the nucleus, rules of thumb (ROTs) are the fundamental, sometimes invisible, particles of CEO decision-making. They are the building blocks that underlie what CEOs describe as “intuition” or “gut feel.”
Ask an experienced CEO how she/he made a major decision and their typical response is “intuition” or “gut feel.” Yes, analysis also plays a role, but intuition was found to be a major or determining factor in 85% of thirty-six major CEO decisions that we studied.
Some were good decisions, some were not, but regardless, intuition seemed to always rule the roost.
But what is it?
After persistent and deft questioning, CEO’s will identify, sometimes to their surprise, judgmental heuristics — ROTs — that go a long way towards explaining their major decisions. It is these building blocks that we must examine in order to discriminate between “good” and “bad” intuition.
After CEOs identify a few ROTs, a torrent of supplementary ones often follows. Some CEOs argued, however, that they use values for guidance, not ROTs. But values alone don’t provide clear guidelines. Only when they are operationalized into ROTs do they serve as decision-making tools.
At Odebrecht S.A., a large ($22B) Brazilian conglomerate, the CEO and founder’s grandson, Marcelo Odebrecht and the rest of the company’s leadership are dedicated to upholding the company’s core values: trust and partnership. But when it came down to actual decision-making it became clear, after considerable probing, that the company operated with four basic ROTs derived from these overarching values and passed down from generation to generation of Odebrechts:
1. Decentralize operations
2. Decentralize strategy
3. Promote only from within
4. Partner with your customer
These ROTs guided CEO Marcelo Odebrecht when, despite serious misgivings, he decided to support his Brazil Director’s call to take over the construction of the Pan American Games facilities in Rio de Janeiro from another contractor. Marcelo did not interfere in his Director’s decision because of his commitment to his ROTs (#1 and #2) and because the director was a long-term employee who had “drank the Odebrecht Kool Aid” (ROT #3).
Business leaders ignore their intuition at their own peril. When Gustavo Cisneros, the CEO of the Cisneros Group, was considering a 50/50 partnership with AOL to establish AOL Latin America, his board, his family and his management team were united in endorsing the deal.
On the other hand, Cisneros had a gnawing feeling that Latin Americans were different from U.S. customers, and they would not pay a subscription fee to use the internet. But because everyone, including AOL’s intense and charismatic leaders — Steve Case and Bob Pitman — saw it as a great deal, Gustavo sublimated his intuition. Five years later, after a bankruptcy filing and nearly a billion dollars in accumulated losses, Gustavo regrets not having paid more attention to his “intuition.” Now Gustavo has a new ROT: “Never make a deal if it doesn’t feel right with your intuition.”
Bill Amelio, former President and CEO of Lenovo, learned the same lesson, even though he’d deliberately produced his own set of personalized rules of thumb, after taking on the challenge of merging Legend Computer and the IBM PC division into what we now know as Lenovo.
Here’s Bill’s list (amended following the merger, as described below):
1. Identify and concentrate on the critical few decisions.
2. A call is better than no call.
3. Give your decisions a short leash. Quickly pull back in case of mistake.
4. Trust your intuition.
1. Communicate the critical few decisions effectively and repeatedly.
2. Don’t tolerate jerks.
3. Build a team of people you can trust and rely on.
4. Trust your intuition.
1. Get feedback early and often and act on this feedback.
2. Earn the trust and confidence of others.
3. Demonstrate vulnerability to gain credibility.
4. Play to your strengths.
5. Trust your intuition.
To build a new management team he could rely on (ROT — People #3), Amelio demoted a man who had contributed much to the development of Legend, someone the Chinese refer to as a “made man.” Bill went through the right process and got his Chinese Chairman to sign off. But he ignored his intuition and the body language of the Chairman when he responded cryptically that as CEO he had “full authority to decide.”
The result was a major debacle in which Bill was faulted for ignoring the values of Chinese culture and caused a significant loss of trust. Amelio consequently added “Trust your intuition” (ROT — Self #5) to his rules.
Discovering, and continuously updating, rules of thumb is an important task for every CEO. It is a fundamental element of self awareness. Yes, values and beliefs are important, but it is really ROTs that operationalize and bring down to earth what really guides CEO decision-making. These rules can then be identified, challenged and adapted as circumstances change.
As we look at things that impress us technologically we also have a certain trepidation, because we’re told that robots are going to take our jobs. “Yes, the internet is wonderful,” we may say, “but robots, I don’t want those.”
I don’t mean to make light of this because robots are going to take a lot of jobs. They’re going to take a lot of blue collar jobs, and they’re going to take a lot of white collar jobs you don’t think they can take. Already there are robots that can dispense pills at pharmacies. That’s being done in California. They have not made one mistake. You can’t say that about human pharmacists, who are now free to be up front talking to you while the robot fills the prescription.
Much of this is discussed by author Kevin Kelly in his new book The Inevitable, with the subtitle Understanding the 12 Technological Forces that Will Shape Our Future. It’s incredible what robots can do and what they will be able to do.
Automation Really Is Taking Our Jobs
To me, just the fact that one of Google’s newest computers can caption a photo perfectly — it can figure out what’s happening in the photo and give a perfect caption — is amazing. Just when you think “a machine can’t do my job,” maybe it can.
What kind of world is this we’re moving into? I understand the fear about that. But, at the same time, let’s think, first of all, about what happened in the past.
In the past, most people worked on farms, and automation took away 99 percent of those jobs. Literally 99 percent. They’re gone. People wound up with brand new jobs they could never have anticipated. And in pursuing those jobs we might even argue that we became more human. Because we diversified. Because we found a niche for ourselves that was unique to us. Automation is going to make it possible for human beings to do work that is more fulfilling.
How is that? Well, first let’s think about the kinds of jobs that automation and robots do that we couldn’t do even if we tried. Making computer chips, there’s no one in this room who could do that. We don’t have the precision and the control to do that. We can’t inspect every square millimeter of a CAT scan to look for cancer cells. These are all points Kevin Kelly is trying to make to us. We can’t inflate molten glass into the shape of a bottle.
So, there are many tasks that are done by robots, through automation that are tasks we physically could not do at all, and would not get done otherwise.
Automation Creates Luxuries We Didn’t Know Were Possible
But also automation creates jobs we didn’t even know we wanted done. Kelly gives this example:
Before we invented automobiles, air-conditioning, flat-screen video displays, and animated cartoons, no one living in ancient Rome wished they could watch pictures move while riding to Athens in climate-controlled comfort. … When robots and automation do our most basic work, making it relatively easy for us to be fed, clothed, and sheltered, then we are free to ask, “What are humans for?”
Industrialization did more than just extend the average human lifespan. It led a greater percentage of the population to decide that humans were meant to be ballerinas, full-time musicians, mathematicians, athletes, fashion designers, yoga masters, fan-fiction authors, and folks with one-of-a kind titles on their business cards.
The same is true of automation today. We will look back and be ashamed that human beings ever had to do some of the jobs they do today.
Turning Instead to Art, Science, and More
Now here’s something controversial. Kelly observes that there’s a sense in which we want jobs in which productivity is not the most important thing. When we think about productivity and efficiency, robots have that all over us. When it comes to “who can do this thing faster,” they can do it faster. So let them do jobs like that. It’s just a matter of — so to speak — robotically doing the same thing over and over again as fast as possible. We can’t compete there. Why bother?
Where can we compete? Well, we can compete in all the areas that are gloriously inefficient. Science is gloriously inefficient because of all the failures that are involved along the way. The same is true with innovation. The same is true of any kind of art. It is grotesquely inefficient from the point of view of the running of a pin factory. Being creative is inefficient because you go down a lot of dead ends. Healthcare and nursing: these things revolve around relationships and human experiences. They are not about efficiency.
So, let efficiency go to the robots. We’ll take the things that aren’t so focused on efficiency and productivity, where we excel, and we’ll focus on relationships, creativity, human contact, things that make us human. We focus on those things.
Automation Really Does Make Us Richer
Now, with extraordinary efficiency comes fantastic abundance. And with fantastic abundance comes greater purchasing power, because of the pushing down of prices through competition. So even if we earn less in nominal terms, our paychecks will stretch much further. That’s how people became wealthy during and after the Industrial Revolution. It was that we could suddenly produce so many more goods that competitive pressures put downward pressure on prices. That will continue to be the case. So, even if I have a job that pays me relatively little — in terms of how many of the incredibly abundant goods I’ll be able to acquire — it will be a salary the likes of which I can hardly imagine.
Now, I can anticipate an objection. This is an objection I’ll hear from leftists and also from some traditionalist conservatives. They’ll sniff that consumption and greater material abundance don’t improve us spiritually; they are actually impoverishing for us.
Well, for one thing, there’s actually much more materialism under socialism. When you’re barely scraping enough together to survive, you are obsessed with material things. But, second, let’s consider what we have been allowed to do by these forces. First, by industrialization alone. I’ve shared this before, but on my show I had Deirdre McCloskey once and she pointed out that in Burgundy, as recently as the 1840s, the men who worked the vineyards — after the crop was in, in the fall — they would go to bed and they would sleep huddled together, and they basically hibernated like that for months because they couldn’t afford the heat otherwise, or the food they would need to eat if they were expending energy by walking around. Now that is unhuman. And they don’t have to live that way anymore because they have these “terrible material things that are impoverishing them spiritually.”
The world average in terms of daily income has gone from $3 a day a couple hundred years ago to $33 a day. And, in the advanced countries, to $100 a day.
Yes, true, people can fritter that away on frivolous things, but there will always be frivolous people.
Meanwhile, we have the leisure to do things like participate in an American Kennel Club show, or go to an antiques show, or a square-dancing convention, or be a bird watcher, or host a book club in your home. These are things that would have been unthinkable to anyone just a few hundred years ago.
The material liberation has liberated our spirits and has allowed us to live more fulfilling lives than before. So, I don’t want to hear the “money can’t give you happiness” thing. If this doesn’t make you happy — that people are free to do these things and pursue things they love — then there ain’t no satisfying you.