Most of us in western cultures will immediately leap to ‘rational thought’ being the work of the brain, but that is not true.  We have this big cerebral cortex where rational thought occurs right?  Wrong.  Our cerebral cortex is proportional for the size of our brain.  Elephants have a larger cerebral cortex than we do but it is proportional to their overall brain size.  Smaller primates have a cerebral cortex in proportion to their brain size.  The cerebral cortex is not exclusively for rational thought and we are only rationally thinking a small part of the time.  

So what are our brains doing?  In the words of neuroscientist Lisa Feldman Barrett, our brains are managing our “body budget” balance.  When our bodies are in balance it is called Allostasis.  This is why we have brains.  (a budget theme emerges)

Our brains are managing our energy deposits and expenses internally and with the external environment.

There is a lot going on inside our bodies.  We need to get glucose, protein, salts, hydration, and oxygen to every cell.  Our heart rate speeds up or slows down as needed.  We feel thirsty or satiated..  Our immune system needs to be on constant vigilance against intruders.  Our brains are helping our organs and cells to maintain this balance and according to Barrett there is a huge amount of stuff going on.  Most of this is going on beneath our conscious awareness and a good thing too, because it would be very distracting if we were aware of it. 

Communication within our bodies is not one way.  Our organs are communicating with our brains and back and forth.  Our brains are working in service to our bodies.  Helping to maintain balance in our interior world.

To maintain our body budgets efficiently our brains also work with the information from the external world as prediction machines. Being on high alert is biologically expensive but sometimes necessary. Feeling fatigued is a way our brains signal to us that resources are depleted and we need to slow down and conserve.

Our brains don’t think rationally ‘oh there is a rustling sound behind that bush it might be a lion or it might be the prey we have been tracking, which option is more likely? What should I do next? hmmm.  

This would take too long.  Approximately 0.5 – 1.5 seconds which is a lot of time.  If we thought rationally about this we would either miss our lunch or be someone else’s lunch.

Instead our brains were already continuously predicting (situationally dependent) scenarios, taking in information and comparing it to the scenarios our brains predicted, then based on the differences making new predictions, over and over.  All of this happens without us being aware.   Because of past experience (or shared experience passed down through language, ghost story around the campfire anyone?) we were already on the lookout for lions, zombies, or other dangers and opportunities (smores?).  In this type of situation our brains would have already boosted us with some adrenaline, (or in the case of smores our salivary glands have begun to run).

We are on alert (which is biologically expensive so we only do this when expedient).  We hear a sound and compare it to the sounds of threats we have been anticipating, or the prey we have been tracking.  If it is a close match based on past experience our brains immediately send action signals to our muscles to get us moving and boost our adrenaline further.  We feel this adrenaline boost.  In a different situation we might feel this very same adrenaline rush as an amorous feeling but in this situation we label it as fear or excited anticipation of the hunt.  Our rational selves catch up much later when we are either 50 yards away, yelling at the top of our lungs, and still running as fast as we can, or when we have run forward and already thrown our spear into our prey.

Notice we were predicting and looking for dangers and opportunities according to the situation.  If we were safe in our camp with our group around us, the same rustling sound would not have evoked the same response.

Our brains are prediction machines creating and matching concepts based on past experience to prime us for the most efficient response.  When our friend who was rustling the bush with a long stick jumps out and yells boo! Our brains without any rational thought at all, readjust our concept of current reality.

So our brains are here for budgeting purposes and to do that effectively in the external environment they are prediction machines.  What can we learn from our biology and apply to our company’s planning and budgeting processes and how we hold people accountable to meet those budgets?  A lot!

Notice our brains were managing two things.  Our internal body world and our external sensing and responding.

The internal world is a lot like a corporate budget.  We intend to consume X amount of capital (calories) this year, get this many hours of sleep, walk this many miles, produce this quantity of widgets, etc.  

Predicting the external environment is like a strategic plan in the moment.  

Are our corporate budgeting systems situationally dependent?  Are they flexible?  Do they respond quickly?  Are we constantly aware of our surroundings and comparing what we are sensing, to what we are anticipating?  Are we rapidly making adjustments and communicating changes based on new information?  Uuuh.. that would be a no.

“Making a fixed promise that is subject to high levels of uncertainty and then requiring people to meet that promise at all costs is like putting the performance cart before the horse. The result is likely to be the distortion of profitability over time and, in exceptional circumstances, outright fraud.”

JEREMY HOPE, BEYOND BUDGETING

Our companies spend a lot of time doing strategic planning and budgeting.  An offsite strategic plan can take management a week to complete.  A lot of time before the meeting is spent gathering info on customers, the competition, the marketplace and other possible variables. Outside experts and consultants are hired.  (McKinsey Associates) Reports are generated that are ‘supposed to be’ read before the meeting.  

The plan gets hashed out. People getting paid hundreds of dollars an hour sitting around and guessing.

It then takes even more time and internal marketing to communicate this plan to everyone.  We then hold fast to it come hell or high water.

Budgeting takes the full time and attention of the accounting department.  What happened last year, did you meet the budget you ‘agreed’ to under pressure?  What cuts can you make (what can we pressure you into agreeing to) this year?  The old negotiation process with the managers and the games that get played.  The monthly or quarterly budget reviews to keep people on track. The elegant elaborately crafted excuses.  The old “It would have worked out except for this one time thing” argument.

These are expensive processes to run.  We do it every year so the expense is compounded again and again.  There is also a human cost to budgeting.  Running all these games and holding people accountable for things that are not really under their control is demoralizing.  No one enjoys any of it. It encourages unethical behavior. (Enron)

In “Beyond Budgeting” Hope and Fraser point out all these problems.  They also present solutions and examples of companies like Handlesbanken, who have gone “beyond budgeting” a long time ago.  I am not going to go through these examples.  If you want to read detailed examples about these companies’ journeys, please pick up the book.  It is an easy read.

I will share their conclusions.  From page 198 of 208. “In the long term, the objective is to reduce complexity and allow front-line people to use the knowledge at their disposal to make effective decisions.”  

P 199: “The finance people who were previously under pressure to produce monthly accounts and explain variances are now able to spend more time understanding and supporting the needs of hard-pressed front line managers.”    

Organizations need to be “adaptive” and “decentralized”

Essentially self organizing self directed teams are the way to go.  Oh and that is exactly what we humans are really good at when obstacles are removed. It’s how we ran at Watson.

For people at the front lines to make good decisions they need to know the overall intent of the company.  Both in the long term (company Purpose) and in the shorter term (how we intend to enact the purpose and intent today in our subgroup)  This serves the same function as the strategic plan but we don’t need to do it every year because it does not change very much over time.

We know what happened last year, month, week, yesterday, and we use that to generate predictions on what is likely to happen today, this week, this month, next month, and the rest of this year.  This is like the brain using past experience to generate concepts of our present situation and use that to predict the future.  The future will be different from the predictions but it is still more effective to have a prediction and make adjustments continually as we go along.

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Sales and marketing keep us informed about what is happening in the external world.  This customer is launching this new product and discontinuing that one.  This market segment is expanding rapidly and that one is contracting.  This is not a once a year thing. This is continuous whenever ‘significant’ new information comes in.  Just like our neurons synapsing or not, a few bits of minor info may not cause information to pass through the synapse but a big piece of information, or a lot of little ones, will tip the balance and information jumps the synapse and moves along the channel.  

People everywhere in the company need access to actionable information.  The new job of accounting is to gather and provide this relevant information on the functioning of the internal systems not to “hold people accountable” but so that people can make adjustments to their shared view of the current state of the company and their smaller part of it, and make good decisions quickly.

How this looks day to day. 

We needed to get actionable information to production employees.  I wanted them to know how much an hour of time on a machine was worth.  

I took all of the expenses for a department and tallied them up.  I took a proportion of the total overhead relative to that department’s size and added the department cost and the overhead cost together.  I divided that total by the number of machines in that department and the number of hours each machine ran.  I shared the cost per hour per machine with everyone. 

We set up a stand alone computer system (using Microsoft Access and Excel) so that anyone could enter in the formula code, the time used, and quantity of the product they had just made.  The computer then pulled up the raw material costs and took into consideration the time it took, the cost of that machine per hour, and based on the average selling price of that product over the last few months told the operator right then how much ‘profit’ we had just made.

With this information operators could experiment with things they could do to improve their numbers.  Teams of operators made some amazing improvements just because we shared this information openly.  Initially accounting was appalled that I was sharing profit information with the people making the product.  Accounting thought this needed to be secret info, for management eyes only.  This shows a decided lack of trust.  Eventually they mostly got over it.

What we found out is that we were selling some products at a loss.  No matter what an operator did there was no way to make money on it.  We made pricing and accounting aware of this.  We also found some products that were fabulously profitable.  We shared this information also.  Frequently it was much easier to make a great product awesome than to make a bad product marginally less worse.

Now (just like in our brains) information is going both ways.  Management is learning from the production floor.  Management’s job is starting to tilt towards support of operations instead of exclusively the other way around.

We held open process improvement meetings.  We used these to dive deep into a process to see if there were things we could improve.  Information from previous production runs from the data the operators entered into the system was examined.  If we adjusted the temperature could we run it faster?  Operators, supervisors and R&D normally participated in these meetings.  

Sometimes purchasing or accounting would join us.  Sometimes a particular supplier’s raw material ran better than another vendor’s material and this was a chance to let purchasing know, and quantify the effect.  Hopefully they would buy more of the good stuff.

In one case a raw material came in three packaging types depending on the supplier.  It came in bags, boxes and small drums.  (sounds like Christmas in Whoville) Purchasing was aware of the cost from each supplier.  

What they did not know was that bags were cut open and loaded into the equipment easily, boxes were a bit more difficult and the drums were by far the worst. About 25% of the production time was just opening bags and loading the batch.  The drums took three times longer.  The drums had twisted wire closures on them sealed with lead seals pressed onto the wires.  QA very sensibly did not want the risk of lead seals falling into a batch of food product.  Therefore when loading drums of raw material we had to first cut off and discard all of the lead seals and wires outside the production room.  Only when QA had inspected them could we bring them into the production room to open the drums and load the product.  This more than tripled the loading time.  Purchasing and accounting were unaware of this.  The cheapest raw material (which was the budget purchasing was being held accountable for) was really the most expensive when we took the loading time into the overall equation.

In a normal company purchasing would have gotten in budgeting trouble for buying the more expensive material.  Production would have got in trouble for reallocating people from the sanitation department to help open the drums.  But when viewed as a system, accounting was all behind buying the more “expensive” material because it paid for itself in time saved.  

When new information from sales about increases or decreases to requirements or marketing info about changes in the market place came to light we would hold “Open Space Meetings” to share that information with everyone and act on it.  The information was shared and we gathered ideas on how to adjust to the new information and people went ahead and just made the changes.  (No internal marketing expense or delay in distributing the new strategic plan. People created the plan so they already knew what it was and were already doing it.)

“Fostering relationships across the organization is seen as the important element in creating coordinated actions. A strong commitment to a common set of values provides the framework for this process. Everyone thinks about the customer. Product”

JEREMY HOPE, BEYOND BUDGETING

Before we ran a series of batches of a product a team of operators and supervisors would gather and review the information and lessons learned from previous runs and talk about what we wanted to try differently this time.

In summary;

How often does the plan or the budget ever work out?  Traditional budgeting and strategic planning is energy and resource intensive and provides little benefit and a lot of downside.  It is dispiriting, demotivating, and can lead to unethical behavior.  (BTW bonuses are also demotivating)

We would be a lot better off to take lessons from the efficient brain operations that evolution gave us.  

Based on our company’s purpose or intent:

Management’s job is to help everyone in the organization (all the cells in the body) to maintain a body budget balance (allostasis).   Management does this by freely and continually sharing information from the internal world of the company and the external environment with everyone.

Everyone in the company is responsible for sensing and responding to what is happening in the local external and internal environment and communicating their observations and intended responses with each other as needed.   

One last thought

Everyone is also responsible for each other.  As Barret says, as a social species, “we regulate each other’s bodies”.  The best thing for a human to maintain a “body budget” balance (Allostasis) is another human.  Someone we can depend on and an occasional high five or a  hug can do wonders.  Potentially the worst thing for a human for maintaining a “body budget” is another human who disrespects us and is only acting in their self interest.  

Our companies are only as strong as our people are.  We need to maintain the health of the human system.  Management sets the tone for this but all of us are responsible for it.

“Culture eats strategy for breakfast!”  Spend your time on culture and when that is done (and it is never ever done) then when you have retired, if it’s your thing, spend time doing a traditional budget, just for fun, as a game, nothing serious, just to see how it works out.  (how could you take it a traditional budget process seriously in a complex world) 

Lisa Feldman Barrett interview.  This is almost 2 hours long and in my view, well worth every minute of it.  In the first half they get the concepts sorted out, in the second half they have a great conversation with some deep personal reflection and sharing.

Cheers for Friday,

Gavin Watson, Chair, Conscious Capitalism Connecticut Chapter

Gavin Watson & Associates

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