Principles

Principles vs. rules

It is crucial to Beyond Budgeting that it is not based on rules. But on principles. Unlike other management concepts, Beyond Budgeting is neither a tool, nor is it a one-size-fits-all solution. It is a model, and a mindset.

The difference between rules and principles is that for setting up rules, you need to analyze every possible situation before formulating it. Rules are based on an “if-this-happens-do-that” logic. Whenever an unknown situation occurs, however, rules fail. They just do not support you in finding good solutions to never-before-thought-of problems, as they occur regularly in our everyday work lifes and businesses.

Principles, by contrast, do not just apply to known problems. You do not need to be aware of all possible situations. You apply them within whatever situation as they it occurs. Principles are like guidelines that help you test whether your actions are aligned with your beliefs and values, or not. If not, you have to search for another way to solve the problem. Understanding this difference, you are able to adopt Beyond Budgeting principles to your firm or to situations you encounter at your work – anywhere, at all times.

Still, we have learned that it needs some practice to understand the combination of the principles of the Beyond Budgeting model. This is because the model is based on a set of 12 coherent, and interdependent principles. Thus, only applying the full set of principles will reward your organizations with the superior results the model offers.

Coherence

The 12 principles of the model articulate a coherent new management model that is opposed to the command-and-control management model which thought leaders like Frederick Taylor, Alfred Sloan, or Henry Ford developed about 100 years ago.

The principles of the model are not a salad bar to choose from! Only by applying the full set of the 12 principles, organizations are rewarded with the superior performance the model has to offer. Lennart Franke, CFO of Svenska Handelsbanken, was often asked, if the Handelsbanken model, today known as the Beyond Budgeting model, could be applied partly, in bits and pieces, and he replied: "Imagine Great Britain would change from left-side traffic flow to right-side traffic as practiced on the European continent. And imagine that we then say: "Ok, but to us English that appears too radical and too complex to be done in a rush. Let´s therefore start next week with the busses and the trucks only." It is just the same with Beyond Budgeting."

The 12 principles of the model

Since 1998, the Beyond Budgeting Round Table, and then the Beyond Budgeting Transformation Network, or BBTN, have drawn upon case study-based research to conclude that companies with a contemporary view of human nature don't control them with plans and fixed targets, but that they aim for "relative" performance contracts with them instead. The 12 central principles of the management model based on "relative performance contracts", contrasted against the assumptions of fixed performance contracts, are shown in the next figure.

Relative performance contracts are based on the assumption that it is unwise to set fixed targets for managers and teams and then to control their behavior and activities in terms of these targets. The implicit agreement is that management's task is to provide a challenging and open work climate within which employees agree to aim for continuous performance improvements. Managers and employees must use their knowledge and their own common sense to adapt to changing conditions and environments.

Under this performance contract, decisions are not made at the top. Instead, they are distributed, decentralized, and devolved as far out as possible. This type of performance contract is based on mutual trust. Increased transparency and higher expectations (compared to competitors or their equivalent)provide a permanent challenge, which either has to be matched to or whose failure will lead to equally transparent negative consequences. Responsibility for erformance and decision-making are gradually shifted away from the center of the organization towards the periphery.

Devolved Leadership Principles

Description of Devolved Leadership.

1. Customers
2. Organization
3. Autonomy
4. Responsibility
5. Values
6. Transparency

Adaptive Management Process principles

7. Goals
8. Rewards
9. Planning
10. Controls
11. Resources
12. Coordination

Clusterization of Principles

Instead of clustering the Beyond-Budgeting-Principles into princuples for devolved leadership an adaptive processes, some have tried to cluster the principles furthermore, e.g. into:
Principles that correspond to the dynamics and complexity of the market. Principles that reflect the status quo. Principles that reflect the control form the market. Principles that foster ongoing improvement. Principles that foster an ethical and responsible behaviour.
The idea of clustering seems to appear to many people - and is probably a result of trying to grasp the complexity of the model. And you may try to cluster it in any way, if that helps you. But clustering or sorting will never be "true" - simply because the individual principles are systemically interdependent, as stated above. The interdependencies, as you will learn, are so strong between the principles, that any clustering will remain a rather lame attempt at describing those links and dependencies.