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 / Winter 2003 / Issue 33(originally published by Booz & Company)


Best Business Books 2003: Management

Hoopes’s yardstick for democracy is Thomas Jefferson’s agrarian idealism, an unrealistically tough standard against which all political institutions, past and present, let alone corporations, would fail to measure up. However, he does make a strong case that attempts to endow managerial power with social legitimacy on the basis of the processes it uses — notably by Peter Drucker — are unlikely to succeed. If, as Hoopes suggests, we need democracy to make us free and managerial capitalism to make us rich, then the only legitimacy for managerial power can be its superior performance. Given the problems in measuring such performance, any such legitimacy must always be of the “show me” variety — retrospective and provisional. Hoopes has no suggestions to make, either on this issue or on the broader issue of corporate governance. Many would argue that only power can control power and that the appropriate checks and balances on the continuing global growth in corporate power remain to be discovered.

Power and Performance
Managers usually say that they employ power only in the cause of improving organizational performance. The primary tool for performance management at most organizations is the budgeting process. And the control of this process, and through it the allocation of resources, are themselves potent sources of managerial power. Unfortunately, as many employees know, the preparation of budgets is often a dysfunctional ordeal — a performance trap and a tool for repression. In Beyond Budgeting, management researcher Jeremy Hope and consultant Robin Fraser show managers how to abandon budgeting and improve the whole performance management process.

As every critic of budgeting knows, the traditional approach confounds two incompatible organizational purposes — the forecasting of results and the management of performance. The contradiction between these two aims has been dramatized by the change in the business environment from one of relatively steady, continuous change, where financial capital dominated, to one of unpredictable, discontinuous change, where intellectual capital rules. Traditional budgeting, with its emphasis on lockstep incentives geared to fixed targets projected into the future, has led to bizarre payouts and increasingly aberrant behavior on the part of executives, ranging from widespread gaming of the performance management system to outright fraud.

The authors emphasize that their proposal is not about new metrics but about a whole new management model that leads, at a minimum, to more adaptive processes within the organization and, at a maximum, to a radical decentralization of managerial power. Every change agent knows that resistance to change escalates rapidly any time one talks about changing an organization’s power structure, so we have been warned!

The authors make two key recommendations: The first is for firms to move from future-oriented, absolute performance contracts to arrangements whose payoff depends on a retrospective assessment of performance relative to benchmarked key performance indicators (KPI); the second is to take care of the need for solid numbers with rolling forecasts. Thus managers set stretch goals based on external comparisons — with industries or competitors, for example — rather than internally negotiated targets. These targets are not connected directly to incentives. Rewards are based on the relative success of the team or group and are decided after the fact, which discourages gaming and encourages managers to focus on continual value creation, cooperation across business units, and timely, open communication and feedback. In short, it creates the conditions for learning within the business context.

Hope and Fraser make it clear that radical decentralization is essential if the full potential of their model is to be realized. They show how the centralist tendencies of the budget model can undermine tools, such as the balanced scorecard, benchmarking, and customer relationship management, that are designed to support the frontline troops. Such decentralization demands a new governance framework that has clear principles and boundaries to guide local decision making, a high-performance climate, freedom to decide at the local level, an open and ethical information culture, and so on.

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