VSM and Financial

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30 Νοε 2013 (πριν από 3 χρόνια και 6 μήνες)

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VSM and Financial

Steve Morlidge

Who is talking to you?

Steve Morlidge

Unilever 1978

2006 roles include:

Controller Unilever Foods UK ($1 billion turnover)


Bestfoods Integration Leader


2006 Leader Dynamic Performance Management Change
Project (part of Finance Academy)

Outside Unilever

Chairman of Beyond Budgeting Round Table 2001

BBRT Associate 2007


Founder Director Satori Partners Ltd,
(wis) Ltd


PhD Hull University (Management Cybernetics)

Characteristics of a Budget

it estimates the profit potential of the business unit

it is stated in monetary terms

it generally covers a year

it is a management commitment. Managers accept
responsibility for achieving budget objectives
(responsibility centres)

the budget proposed is reviewed and approved by an
authority higher than the budgetee

once approved the budget can only be changed under
specified conditions

periodically actual financial performance is compared to
budget and variances are analysed and explained

Anthony 1995

Beer’s Perspective

‘managers and ministers have become
hopelessly entangled in immensely high variety
estimations about performance in future
epochs that are arbitrarily selected…[and]
consists mainly in rationalising and updating
plans which have been constantly falsified by
unfolding history’.

Sources: ‘Brain of the Firm’ ‘Heart of the Enterprise’

Ashby’s Law of Requisite Variety

V(c) ≥ V(e)/V(g)

V = the number of distinct states a system can be in (a
measure of complexity) in a given period of time

g = system goal(s)

e = the environment

c = the control system

‘The smallest variety cannot be less than
the quotient of the number of rows
divided by the number of columns’

‘Only variety can destroy variety’

W Ross Ashby

Generalisation of Shannon’s 10th
Communication Theorum

The VSM and financial management

Focuses on:


an effective system of constraints




Goal setting



Financial soundness as a prerequisite for viability

Financial resources as an engineer of variety

The importance of time



‘Profit Potential of a unit’

financial soundness expresses no more than a constraint
on the system

ROI does not have requisite variety

’has elastic definitions that can easily be manipulated

The control target of steady response, which entails
steady profit making and steady growth, can be achieved
only relatively. The important outcome of regulation, as
we have learned from our study of homeostasis, is to hold
critical variables within


Covering a period of a year

orthodox management procedures appear to rely wholly
on ‘snapshot’ accounts of the situation. It is strange and it
is dangerous

there are no crucial dates in the development of a firm
except those provided by convention

there may be sluggish response to certain types of fast
varying input

because of the complexities of the
systems which damp down oscillation. There might also
be amplifiers in the system which increase the amplitude
of dangerous oscillations which should be damped

Representing a management
commitment…only changed under
specified conditions

any rigid plan, however well conceived, will not
produce the goods unless it is continuously
modified…because the operation is subject to
continuous perturbation as well as the
perturbation of it’s own basic input

Plans should ‘
continuously abort

Subject to review and approval by an
authority higher than the budgetee.

Power should be….
’derived from concatenations
of information not from the allocation of

Management should ‘
make minimal use of the
variety attenuators in the downward direction

Periodically compared to actuals
for analysis and explanation

Information: ‘
that which changes us

when a
fact is recognised and is susceptible to action
’ and
a manager is the ‘
metasystemic administrator of
Ashby’s Law

Traditionally we ‘
insert amplifiers on the wrong
side of the variety equation
’ and have a

managerial emphasis on error correction rather
than error exploitation

Ashby’s Law explains regularities
observed from the application of
budgetary control


reduction of control variety to a
Target/Single Plan (Rewards attenuate Goal Variety)

Gaming behaviour

informal increase in control system
variety/behaviour to cope with low variety targets, high
variety environments


inadequate control system variety, failure to deal
with leads/lags


‘variety’ perspective explains many of
the reasons for dissatisfaction with existing practices

Implications for the Design of
Performance Management Systems…





Externally reference, limit to those salient to the purpose of
the organisation, or sub systems, and be clear about (range
of) acceptable states

Match environmental variety where salient to the goals of the
organisation, reduce variety where impact is limited

Identify variety relevant to goals (‘signals’) including ‘non
financial’, eliminate variety (including noise) with limited impact.

Decide at the right time (taking into account lead/lags) and
differentiate between high (investment) and low (maintenance)
variety interventions

….and the Organisational Context




Definition of Success


‘Cells’ of self managed teams at all resolutions. Maximise
empowerment consistent with the need to maintain
cohesion and extract synergies

Establish boundaries (constraints) based on Strategy, Purpose and
clear definition of roles/responsibilities.

Achieved through high variety interventions

Externally defined

related to viability

High variety, system wide, after the event.

The Chasm Model

The visionaries

interested in
the possibility of
something new
and wonderful.
Listen to
of innovators.

The pragmatists

want to fix
a broken mission critical
process. Interested in
effectiveness, reassured by
endorsement of peers.

The conservatives

interested in efficiency/cost

The sceptics

see all the
downsides. Will
only change if
there is no

The anoraks

interested in
anything new

for its own sake.
They will find

Key messages

We are like fish who don’t know what water is: we
are blind to, and blinded by our current performance
management paradigm

It no longer works

There is an alternative

based on systems

It ‘explains’ scientific findings/alternative management

There is a once in a generation opportunity to
engineer a paradigm shift