The idea of our hack wants to challenge the highly unconscious, but nothing less dominant dogma of heroic leadership, epitomizing the command and control management model. Our offered solution counteracts this dogma, that the ones at the top are the best, know the most and solely making wise decisions.
We don’t think we need heroes anymore now and in the future. The paradigm shift we propose is to abandon heroic leadership for servant leadership. We need leaders and managers who want to serve and support the organization. Servant leaders serve their employees, so that the employees are able and want to contribute their best to the customers and the organization with their capabilities, engagement and passion. In the approach of beyond budgeting/prediction markets leaders are regarded as social architects.
Empowerment and the abandoning of fixed budgets make enterprises more effective. But this kind of planning is always dependent on recent forecasts. Wisdom of Crowds with it's "tool" prediction markets can provide these data and render the Beyond Budgeting approach even more attractive.
Just how happy are you with your business forecasts after the first few months of the year? Do you again need to adjust your planning because your targets do not reflect reality, and are in urgent need of some more financial resources for investment? If you, too, are up against a system of fixed planning and controlling, you are not alone. Many managers perceive classic budgeting as a pointless ritual that no more lives up to the continually fast-changing parameters – economic crisis, new customer demands, increased regulation.
Such a management approach with decentralised leadership and planning without fixed annual budgets (known as Beyond Budgeting) uses relative, self-adjusting goals. The idea behind relative, self-adjusting goals compared to competitors or peers is quite simple and just wants to absorb today's dynamic and competitive conditions. Because it is more important for a company to have sustainably better results than your competitors than to exceed internally bargained, short-term budget targets. That is how it works in many sports, e.g. high-jump, you don't win if you put the target yourself on 2.30 meter but your competitors jump higher, you can not win with such a method of goal setting. In high-jump if you want to win, the goal must be to beat your competitors, that is exactly a self-adjusting, relative goal compared to your competitors. Even though you have to train very hard, maybe along a plan to get better continuously; maybe you even train more and better with this relative goal; the real champions in sports definitely accept this kind of challenge.
To work with self-adjusting, relative goals in the business context you need a reliable and extremely dynamic planning tool. So-called prediction markets act as measures of tapping into the knowledge of employees more effectively. The information technology company Hewlett Packard, for example, uses this instrument to assess the sales figures of their printers, Siemens Austria to estimate the duration of software projects.
In our view the beyond budgeting approach supported by prediction markets may be a way forward to step into Management 2.0. The figure just below tries to illustrate the contrast between the ‘command and control management model’ or in other words ‘Management 1.0’ and the beyond budgeting management model, regarded as an opportunity to go into ‘Management 2.0’ mode.
Therefore to change from a format of Management 1.0 to beyond budgeting means to transform the management model. To implement beyond budgeting combined with prediction markets is not a tool project. It is a transformational initiative, a cultural journey. The philosophy of Beyond Budgeting as a holistic, coherent management model with twelve principles - 6 for decentralized leadership/organization and 6 for adaptive management processes:
To illustrate the beyond budgeting model a bit more in detail let’s discover the Svenska Handelsbanken case:
The underlying concept behind the Beyond Budgeting leadership/organization principles 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% of Handelsbanken employees have their 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 decentralized network-like organisations need appropriate, coherent management processes to support them. Beyond Budgeting with its management process principles in this respect emphasizes adaptability. The fixed performance contracts, which is nothing else than the rigid budget-targets, are abandoned. It is of critical importance not to set fixed targets in form of budgets in advance, against which to measure an employee's performance. In place of them, relative, dynamic goals help the employees themselves to compare and self-control their performance with the benefit of hindsight against competitors in their markets and peers within the bank. Handelsbanken’s prime corporate financial aim is to achieve a higher return on equity than the average for its Nordic (including the UK) competitors. This kind of goal is an example for a relative, dynamic goal, or in other words, a self-adjusting goal. For the past 40 years, it has always succeeded in surpassing this goal. Bonus payments are distributed to employees in the form of profit sharing, based on the actual achievement of this relative goal. No individual incentives for fulfilment of plans exist. 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 under 50 per cent, which is the lowest among Europe’s largest universal banks. As well as the bank consistently has more satisfied business and private customers than the average of its competitors.
The philosophy of Wisdom of the Crowds and Beyond Budgeting are in an ideal fit, both directly addressing the involvement and engagement of the many (instead of the few) and providing dynamic, flexible management processes with fast and up-to-date information (instead of fixed processes and outdated information).
As an example think of a company that is discussing five different products to be developed for future markets. In the old Management 1.0 structure every head of the product idea would start bargaining with the decision maker to get as many resources as possible for his own idea. All five product ideas would get a designated budget. The decision of the allocation of the resources is dependent on the bargaining capabilities of the product heads and the decision making capabilities of one or just a few decision makers, and therefore definitely suboptimal.
Instead you could use the wisdom of the crowds and ask with the help of prediction markets “How many pieces of product x will we sell until …?”, “What average price will we be able to come up with?” and “When will we be able to start marketing the product?” Just invite all your employees to participate in all markets. You will see that “self selection” is the best way to decide who will answer which question: People who are sure to have good information about question A will try to answer this one, people with knowledge in question B will go there. Just let the “experts” themselves decide where to be an expert. They will focus on those questions where they think to become a winner in the prediction market game.
The reliability of the so-called first-generation prediction markets was based on participant's at least elementary understanding of trading. Second-generation prediction markets do not take this knowledge for granted. The "traders" just enter their actual prediction. These new systems look more like a regular poll, although the participants are always able to adjust their opinion. Algorithms in the background simulate buying and selling by every new prediction that is entered of one of the participants, and calculate the overall forecast based on all "trades".
Furthermore you don’t have to think about the best time for a poll. The markets are open 24/7. Let your experts decide when there is the right moment to contribute. Whenever they achieve information that is relevant to one of the questions, they will go to the markets and change their prediction. The only premise to run a prediction market is the quantifiability of the question. So you can forecast "hard facts" like turnover, pieces sold, or prices reached. You can also forecast operating figures like ROI, produced pieces per hour, or warranty cases per 1.000 produced products.
You can even run a prediction market as a kind of a seismograph e.g. for customer satisfaction. If you use a figure or a grade as the result of your analysis, just ask your staff "what - do you think - will be the result of our next customer satisfaction analysis?" This "market" always gives you insight in the collective opinion of your staff. And, the market reacts immediately on your management decisions. Whenever a management decision has impact on the customer satisfaction, you will see that in moving forecasts for the analysis - positive as well as negative.
Your employees may participate in the prediction markets because there could be a chance to win a price. Or just to gain reputation by being a better forecaster than their peer group. But most of all they will participate because their part of the decision making in the company. Their opinion is finally asked for. So you get a rolling forecast that is always as actual as all the information that is available within the decentralized network. Your employees may participate in the prediction markets because there could be a chance to win a price. Or just to gain reputation by being a better forecaster than their peer group. But most of all they will participate because their part of the decision making in the company. Their opinion is finally asked for.
Both approaches combined allow for a better satisfaction of the demands of the clients and thus the creation of a transparent and flexible enterprise. A perfect example for this suggestion does not exist to date. Pioneers like the financial services provider Svenska Handelsbanken, technology and synthetics specialist W. L. Gore, air carrier Southwest Airlines, construction tools supplier Hilti or the internet concern Google, IT specialist Hewlett Packard (HP), engineering firm Siemens and technology enterprise Hoffmann + Krippner, focus on either Beyond Budgeting or on information markets. We are not completely satisfied with this solution, and, with our proposal, plan to go one step further and to provide an important new approach.
An adaptable organisation, increased customer proximity and employees thinking as entrepreneurs, cannot be decreed by the management. Instead, the companies should part with traditional hierarchical management systems, as postulated by Gary Hamel in his article “Mission: Management 2.0” (see Harvard Business Manager, April 2009). The abandonment of budgets is only a symbol for a fundamentally different understanding of leadership requiring much more individual responsibility from managers and employees.
W. L. Gore, the technology and synthetics specialist mainly renowned for its famous Gore-Tex material used in functional clothing, shows, for example, the significance of a consequential implementation of this approach. The US company has largely done away with hierarchies and formal titles and whoever wants to promote a project must convince his colleagues to support him. Together they are responsible for the success of the undertaking. Top managers are not superiors but so-called natural leaders and sponsors of the projects they support with their advice. For someone to take over the role as executive he needs the trust and advocacy of his colleagues. Fixed budgets and directly linked remuneration do not exist. Everyone obtains a predefined percentage of their salary in the form of company shares. This, too, increases the necessary group dynamic which helps promote individual ideas and projects that contribute to the corporate success and the fulfilment of customers’ demands.
The members of such a networking organisation, of course, do not act independently. They also have to know of customer demand for their products, allowing them to purchase the right amount of goods for production and marketing. Beyond Budgeting does not imply an end to planning, but planning with other means and targets.
But from where do the necessary and, more importantly, reliable data originate? They are provided by prediction markets as shown by the example of Hoffmann+Krippner. The medium-sized technology enterprise from the German Odenwald region produces membrane keyboards that also function in damp or dusty environments. The management has created a prediction market to enable a quick reaction to changes and to evaluate price trends and sales volumes. In this market, the employees trade with virtual shares representing certain expectations about prices. The share certificate A, for example, can reflect the expectation that the new keyboard for dental practices will reach a higher price than expected; share certificate B represents the view that the prices will be lower. According to the expectations in the development of prices, the employee will buy or sell share certificates A or B. Should many of them assume that the proposed prices are too difficult to implement, the value of share A will fall and the market value of share B will rise.
In this way, the management of Hoffmann + Krippner can quickly perceive how the staff assesses the price trends. These forecasts are amazingly reliable because the prediction markets pool the knowledge and collective intelligence of all the parties involved remarkably well.
Where rigid periodical budgets have been given up managers and staff have constantly to adapt their planning. Every plan is only as good as the information on which it is based. The more people contribute their knowledge, the better. But classic instruments and procedures fail to function in a rolling planning process. Therefore, prediction markets are an ideal complement to Beyond Budgeting because they can provide fresh daily forecasts with little effort. At the same time, these markets reinforce the individual responsibility of the workforce because they realise that its knowledge is in great demand and that their opinions matter. This, in turn, boosts the Beyond Budgeting approach based on individual initiative and entrepreneurial action instead of hierarchical management.
Instead of the fixed plans for one year, bargained as budgets in the budgeting process, in a Beyond Budgeting context planning becomes dynamic, e.g. to plan every quarter of a year always for the next five quarters ahead. And the information that goes into this rolling plans are based and supported by the know-how of the many through prediction markets on whatever crucial planning figures it is needed, e.g. market share, revenue development, cost development, project duration etc. And whenever it is needed and whoever requires it.
As a result this kind of planning addresses three interrelated, fundamental requirements in today’s conditions:
- It is dynamic. You plan in a rolling mode (e.g. every quarter or event driven) and you don’t’ plan against a ‘wall’, the wall of end of year. Instead, you continuously plan with a constant time horizon in front of you, e.g. five quarters of a year. As an analogy you have stable headlights to move forward (in contrast to ever shrinking headlights within a traditional budgeting context moving against the year end wall, with an ever shrinking time horizon in form of the imposed budgets.
- The quality of planning data is high because it is an inclusive process by involving the intelligence of the many through prediction markets.
- It is unbiased, because nobody is incentivized on fulfillment of plans ('no carrots in front of the mouth').
In addition, the prediction markets increase the transparency within an enterprise because all partners involved are in possession of the same information and there is no longer distinction between different levels in the company.
In this way, the markets also help to increase customer orientation. Should some of the virtual shares represent the outcome of the next study on customer satisfaction; this will have a self-enhancing effect. The placing of such shares shows the employees the importance of customer satisfaction. They will increasingly and more intensively deal with the question of what customers think and want. It is only in this way, that from their point of view can they buy or sell the appropriate shares. Like this, the knowledge of customers can be enhanced - a prerequisite for fulfilling their requirements.
The combination of Beyond Budgeting and the information market approach opens up encouraging possibilities of making an enterprise an engaging place to work for and more adaptable, and sustainably successful. Precursors that profit from this management innovation are now in great demand.
To start with beyond budgeting combined with prediction markets you don’t have to start on company level. It is possible to initiate a transformation towards the beyond budgeting principles in every organizational unit, with a management team of that unit which is truly willing to do it and to engage actively. Size of the organizational unit does not matter. The most important factor is to apply it consequently within the unit. Consequently especially means: coherently with a holistic, full vision in terms of the transformation. Just to pick and mix parts of the concepts which are most attractive does not work, as we have experienced already with the beyond budgeting model. You would build an incoherent system, which would not be viable, as an analogy you may take the saying‘you can’t be half pregnant’.
To possible higher levels, of course, you still deliver what is demanded. This is absolutely possible in a beyond budgeting/prediction markets context of your own organizational unit. In other words: Upwards you report classically (command and control) downwards or maybe better within the organizational unit you apply beyond budgeting/prediction markets.
For example one avenue you could consider is setting up a "management experiment," with an experimental unit and a control group (which could be a similar unit not exposed to beyond budgeting/prediction markets). You could then observe and judge differences in terms of engagement and satisfaction of participants, customer enthusiasm, quality of decisions, innovation ratio—and surely draw some pretty stark conclusions. Being successful in an organizational unit with such an experiment, making further experiences and adjust for improvements down the road, it will be the fundament for scaling the philosophy company-wide. So these are the steps:
- Figure out your Key Performance Indicators
- Stop all complex Budgeting Processes
- Implement Prediction Markets on KPIs
- Use the date of your wise crowd for rolling forecasts
- Become much more flexible and therefore competitive