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Searching for a new future of Russian PE: What we should do in the fog?
Alexander Abolmasov Managing PartnerNRG www.nrgc.com C5 Private equity conference
2014 09 - 10 April 2014, Moscow,
Russia
February 13, 2014
TOP 100 Russian Banks profit
Just in February everything looked so positive…
Let’s focus on more positive issues
Main sources of value growth in Russia
1994-2007: Russian Economy
2007-2012: Specific niches/unique business models
2012-…: Effective management
Problems cannot be solved at the same level of awareness that created them.
Albert Einstein
The General Motors Management Style (1920s - …)
Strategy• Centralized operational decisions, but decentralized divisional
organization
Financial management• Control by setting quantitative targets for the divisions and
reporting back performance metrics• Decision making was based heavily on analysis of reported
managerial accounting data• ROI is the king
People Motivation • Performance based bonuses
Effective enough in a growing economy, but less effective in the crowded or low-growth marketplaces
What is effective management?
• Effective management system – keeps organization adjusting to unpredictable, dynamic conditions and satisfying customers
• Behavioral routine (skill), which helps to handle unpredictable and uncertain situations with confidence and effective action – competitive advantage
Startup management
• Need practices and principles geared to the startup context of extreme uncertainty
• In a startup, the product and customer are unknowns. We need a new definition of value for startups: validated learning about customers
• Case study: Begemot, Sovcombank
Traditional model(centralized functional hierarchy)
New model(decentralized leadership
network)
Changing leadership and structure
+ ROI-based decisions+ Mistrust and control+ Extrinsic motivation
+ Improvement Kata+ Employee development+ Intrinsic motivation
Change to what?
There are two different ways of working on the model – evolution and
transformation
Foundation
Time scale: organization's age
Low degree of decentralization/ empowerment
Differentiation phase
Integration phase
High degree of decentralization/ empowerment
Sustaining and deepening of the decentralized model, through generations
Pioneering phase
Bureaucratization through growing hierarchy and functional differentiation
Evolutionwithin the decentralizedmodel (culture of empowerment and trust)
Organizations with traditional models must eventually
transformthemselves
Transformation through radical decentralization of decision-making
Stagnationwithin the tayloristic model
Current Condition
Challenge
Vision
Toyota Kata Toyota strategy: “Survive long term as a company by improving and evolving how we make good products for the customer”
Non-Toyota thinking: normal daily management + improvement
Toyota thinking: normal daily management = process improvement
The Improvers
Process
The Improvers
“Everything deteriorates over time”
The second law of thermodynamics
Process
Success depends on your challenge
Shinichi Sasaki, former Toyota CEO
Toyota’s Vision for ItsProduction Operations
Zero defects 100 percent value added One-piece flow, in sequence, on
demand Security for people (no injuries)
“If you think it can be done or if you think it can’t be done, you will
be right!” – Henry FordChallenge
Mindset
“It can be done!”
Why?
Positive line of argument
Search for solutions
High probability of
success
“I told you: it can be done!”
“It cannot be done!”
Why?
Negative line of argument
Search for problems
Low probability of success
“I told you: it cannot be done!”
.
Brains are learning organs, so they reward us with joy when we learn
(for example by means of serotonin)
Brain activity measured using computed tomography, presented by Prof. Gerald Hüther at Production Systems 2009
“It cannot be done!”
“It can be done!”
Through frequent practice more electrical impulses are fired and synapses are
‘trained’ to perform better
Untrained synapse
Trained synapse
High electricalresistance
Low electricalresistance
changeable chemical bond
Regular Kata practice and coaching can change a conservative mindset into an open, ‘explorative’
attitude
Certainty Certainty
Explorative attitude of a kata novice
Conservative attitude (the norm)
Certainty
Explorative attitude of an experienced
kata practitioner
“I avoid it!”
“I’m OK
with it!” “I
like it!”
We are what we repeatedly do. Excellence, then, is not an act but a habit.
Aristoteles
Financial management
Traditional Budgeting Has Many Weaknesses....
Promotes centralization of decisions and responsibility
Motivates gaming the system• Conflicting purposes − target setting versus financial
forecasting• Not only a ceiling − also a floor for costs
Ineffective • Inflexible to changes in planning assumptions• Absorbs significant resources across the organization• Tends to make financial control an annual autumn
event
We Have Separated Performance Measurement From Financial ForecastingBroader Performance
Measurement
Balanced Scorecard
-Financial KPI’s-Non-financial KPI’s
+
Rolling Financial Forecast
-Rolling 5 quarters
-High level, few details
Better forecasting with less resources
Financial Budgeting
ToFrom
We Can Achieve What the Budget Did in a Simpler Way
The budget was used for: We achieve the same through:
High level financial and tax planning
Target-setting
Controlling fixed costs
Prioritising and allocating investment/project resources
Delegation of authority
Rolling financial forecasts
Balanced Scorecard
Trend reportingCost targets where and when neededActivity approachSmall projects - trend reportingMedium - Varying hurdle ratesMajor strategic projects - Case by case, the budget was never a tool ....Use existing mandates/authority schedules
The New Tools Cover What the Budget Did, but Also a Lot More
Controlling fixed costs-Activity accounting and product costing
- Improved cost understanding
- Product and customer costing
- Annual outlook
Balanced scorecard- Non-financial targets& measurements
- Link to strategy- Financial targets relative to
market
- Financial targets
& measuremen
t- Limited cost understanding
- Annual plan
BUDGET
Rolling Financial Forecast- Quarterly update- Rolling 5 quarters outlook
- Annual outlook
Investment management-Trend reporting & 5 quarter outlook
- Decentralised decisions
- Frames if needed
How Does the Manager’s Job Change ?
High degree of freedom in how to achieve challenging relative targets No detailed pre-approval of costs through a budget
Cost reports focusing on trends, projects and total cost levels. Less focus on the calendar year as reporting periodIncreased measurement of non-financial indicators supporting our strategy
No heavy budget process in the autumn, but more focus on costs and performance throughout the year
Increased responsibility and decision-making
More relevant cost information
Better but also tougher performance measurement
Better use of your time !
Motivation
1. Rewards PunishIncentives are ManipulativePunishment and Rewards are Two Sides of the Same Coin
2. Rewards Rupture RelationshipsForces People to Compete For RewardsDamages Relationships Between Managers and Employees
3. Rewards Ignore ReasonIncentives Are Easy Fix for Problems – Band Aid
4. Rewards Undermine InterestLimits CreativityIntrinsic Vs. Extrinsic MotivationPay-For-Performance Lowers Enthusiasm
Rewards Punish. Punishment blocks creativity.
What do you enjoy about work?
Typical answers given during brainstorming sessions:
- Overcoming challenges- Learning- Variety, trying new things- Team spirit, constructive exchange of ideas, sense of
belonging- Recognition and praise, celebrating successes- Seeing progress, improving, making a difference- Helping other people in their work- Scope for development, personal responsibility- Etc.
Pay Is Not A MotivatorEmployees Value Pay Less Than Most ExpectPaying More Does Not Mean Better Work
There is no combination of outcome metrics and incentive systems that by themselves will generate continuous improvement and adaptation.
And how could it? The people trying to achieve the quantitative targets are not taught or guided by any sort of improvement kata.
Mike Rother, author of Toyota Kata
READING RECOMMENDATIONS
http://www.flickr.com/photos/sfupamr/4579103337/
"Learning should be ajoy and full of excitement.It is life's greatestadventure;it is an illustratedexcursion into
the minds of
wonder