Conflict Resolution: Sacrificing Control to be Successful

Tony Hope, Professor, Manchester Business School

 Many years of teaching, writing and discussing the world of accounting with senior managers had left me a little bemused – until recently. I have watched closely the birth, growth, and in many cases, demise, of a variety of performance improvement techniques, of which EVA, ABC, ABM, TQM, and BPR are but the more well known. And yet it has always seemed that something was missing from this alphabetical armoury – somehow their arrows contrived to miss the target. Improvement was rarely permanent, as proponents had promised and, according to my management students, sometimes there was no improvement at all. And then I realised the problem – perhaps the arrows had been aimed at the wrong target.

The realisation was largely historical. During the Iberian campaign of 1812, the Duke of Wellington, frustrated with the Whitehall bookkeepers’ tiresome demands, wrote a note back to England: ‘Each item and every farthing has been accounted for with two regrettable exceptions. Unfortunately the sum of one shilling and ninepence remains unaccounted for in one battalion’s petty cash, and there has been hideous confusion as to the number of jars of raspberry jam issued to one country regiment… This reprehensible carelessness may be related to the pressure of circumstances, since we are at war with France, a fact which may come as a bit of a surprise to you gentlemen in Whitehall. This brings me to my present purpose, which is to request elucidation of my instructions from HM Government, so that I may better understand why I am dragging an army over these barren plains. I construe it must be one of two alternative duties, as given below. I shall pursue either one with my best ability, but I cannot do both. (1) To train an army of uniformed British clerks in Spain for the benefit of the accountants in London, or perchance (2) to see to it that the forces of Napoleon are driven out of Spain.’

My student ‘Wellingtons’ were attempting to defeat their analogous Napoleons, while simultaneously dealing with a control system that demanded a detailed explanation of their missing one and ninepences. In other words, their control systems were totally divorced from their strategy. As they explained, their most significant and time-consuming measurement questions were less concerned with the external enemy (the competition), than the internal one (the budget). The balance was wrong. The accountants and the strategists had different goals. They weren’t communicating, and their company was the loser.

Moving with the times
Now admittedly it requires a leap of the imagination and some poetic licence to place the problems of 1812 in a contemporary context. But recent quotes also suggest that traditional budgeting systems may fit uneasily in today’s business environment, which, I believe, is characterised by four significant factors. Organisations must, in the changing marketplace they inhabit, recognise that:

• Innovation must be more radical, and less incremental
• Speed should emphasise faster learning rather than faster working
• Customer focus should switch from selling products to the pursuit of satisfaction and loyalty
• Knowledge-sharing should accentuate the use of talent, rather than physical or financial capital

What do we glean from these assertions? To quote the strategy guru Gary Hamel, writing in the Financial Times about the necessity of developing a venture capital spirit in larger companies, ‘most management processes in most companies were designed to support the efficient replication of what we’ve always done. We’re talking about redoing the plumbing.’

Think of it this way. The business world is fast becoming one of ‘sense-and-respond’ – that is, anticipating customers’ demands and meeting them quickly. The world of yesterday is a world of ‘make-and-sell’. Beneath these somewhat terse descriptions lies the need for completely different measurement structures.

Sense and respond
Yesterday’s model – the old economy model – views the organisation’s aim as making and selling as many products as possible, so as to recover its fixed costs and make a profit. It is an ‘inside-out’ world, assuming passive customers, employees and shareholders, markets defined by products, and an incremental approach to strategy – which typically emerges as a result of the annual autumn ritual.

If a problem arises within this model, the most usual reaction is to fix it at the point of impact. Thus appears the consultant with his bag of acronyms. But the annual budget exercise, and indeed the budgeting system per se, is seldom a candidate for thorough overhaul. Nor is it difficult to see why. Budgeting is the very heart of the ‘plumbing’. But what if the conventional ‘plumbing’ has served its useful life? In fact what if the future of the business is imperilled by its current system of plumbing?

Of course that is exactly what some observers believe is now happening. The smart, successful companies of today are all ‘sense-and-respond’ organisations. Their perspective is to find and keep as many loyal and profitable customers as possible. They view the world as one of continual and discontinuous change, in which markets are defined by customers, and new measurement systems follow the new strategy. In effect, new plumbing is introduced. The control-focused budget is replaced by the sort of information that’s needed to sense-and-respond to customers, perhaps termed the ‘outside-in’ mentality.

The emphasis in the ‘sense-and-respond’ model is on continuous planning, anticipating changes in the marketplace, forecasting ahead for up to eight quarters and regularly updating these forecasts. Some ‘sense-and-respond’ companies, such as Cisco and Alcoa, are now committed to managing on a real-time basis – by, for example, making decisions on the basis of accurate live information; eliminating unnecessary filters and resources; producing to actual demand; and closing the books within one day.

But not all companies can be Ciscos or Alcoas. There are other compelling reasons for challenging existing budgeting systems. Recent studies show that up to 90% of firms are dissatisfied with their systems. A few of the reasons for current dissatisfaction include the sheer amount of management time taken up with the innumerable iterations of plans and budgets necessary to fix next year’s figure in stone, the high levels of game-playing by self-interested departmental heads, and perhaps most worrying of all, the swift obsolescence of the agreed targets, brought about by rapidly changing markets. On top of that, Kaplan and Norton have suggested that up to 85% of executive teams spend less than one hour a month discussing strategy. This may have been permissible in the days of supine customers and unchanging markets, but today it is a recipe for disaster. You cannot manage strategy with a management system built around the annual budget.

Losing control
Nor has this message been totally lost on organisations. Many companies have begun, to a greater or lesser degree, to challenge, change and abandon their old systems. Companies such as Svenska Handelsbanken (the most profitable international bank in Europe), IKEA, Volvo Cars, Ericsson, Borealis (the largest petrochemicals company in Europe), Boots and Diageo, for example, have all made commitments to radically new measurement approaches that involve the replacement of the old department-focused control systems.

Each of these organisations, and more, are developing mechanisms needed to address more flexible strategies. Common threads are: the advocacy of rolling forecasts, with the intention of disconnecting targets and rewards, thus encouraging the estimates’ impartiality (thereby eliminating the necessity for the gaming rife in traditional systems); encouraging employees to beat the competition rather than the budget; the espousal of business unit and company-wide rewards in place of individual rewards; the elimination of automatic increases over previous years’ cost levels and the challenging of all major costs and risks; and, underlying all of the above, the promotion of high levels of trust, which obviate the need for detailed variances and their explanation. The Beyond Budgeting Round Table is in the vanguard of researching these changes (www.beyondbudgeting.org).

All of this might lead the uninitiated observer to wonder if, without the traditional financial control mechanism, imperfect though it is, the result for these companies may be anarchy. Well, perhaps we can take heart from one of Shell’s managing directors. In an interview with writer Richard Pascale, Steve Miller (group MD of Shell’s oil products business), explained his changed managerial style as follows: ‘In an effort to gain the organisation’s attention, I re-allocated more than 50% of my calendar to work directly with front-line personnel’. Miller went on to explain that: ‘The scariest part is letting go. You don’t have the same kind of control that traditional leadership is used for. What you don’t realise until you do it is that you may, in fact, have more controls, but in a different fashion. You get more feedback than before, you learn more than before, you know more through your own people about what’s going on in the market place, and with more customers than before.’

A compelling analogy can be drawn from Miller’s work. By challenging and even eliminating the traditional system, managers need not be deprived of vital control information. But there is a change of emphasis. To succeed in the ‘sense-and-respond’ world, what is needed is not so much (often antiquated) financial control systems, as effective controls. And there is a world of difference. Financial control systems imply compliance with rules. They are an integral part of the command, control, and compliance culture. On the other hand, effective controls mean knowing what is really going on and interfering only when necessary. And that, surely, is an inseparable part of the world of tomorrow.

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