Purchasing and Investments
This article describes how purchasing and investments are handled in Teal organisations.
A New Perspective
With respect to purchasing and investments, Teal organizations exhibit the following general measures:
- Anybody can spend any amount provided the advice process is respected.
- The one who suggested an investment takes the responsibility to conduct and monitor the purchasing process.
- Team investment budgets and purchasing can be challenged by peers.
Employees’ power to make decisions using the advice process is perhaps most evident when it comes to spending company money. In self-managing organizations there are no authorization limits and no procurement departments. Employees or teams do the analysis, create the necessary specifications, visit and negotiate with suppliers, and even secure financing from the bank if needed.
In contrast, purchasing and investments in earlier stage organizations can be characterized as follows:
In the Red paradigm, the boss or owner of an organisation decides generally on his own what to purchase or where to invest. There are typically no formal documented processes. Investments are made opportunistically, even impulsively, based on the boss's preferences.
In the Amber paradigm, purchases and investments are made by dedicated top level resources within the hierarchy following simple, but strict rules. Investments are now less impulsive following medium or long term planning. Purchasing itself could be done at lower levels of an organisation, as long as it follows defined rules. Control mechanisms typically exist ensuring compliance to these rules.
In the Orange paradigm, the strict general rules of the Amber paradigm become more open and fluid. Rules can be questioned or changed to support innovation. Parts of the organisation are empowered to decide on purchasing and investments within a given range on their own. The breakthrough of Accountability is an important step to distribute investment decisions within the organisation (e.g. into projects) to innovate more and faster. Distributed investment decisions are accepted as long as they follow the overall direction formulated by the top management and the teams reach the desired outcome. A frontline manager might be free to spend up to $1,000 but require authorization from his bosses beyond that amount; a unit manager might have spending power up to $10,000 and a plant manager up to $100,000. Whatever the amounts, the purchase order must generally proceed through a central procurement department that coordinates the relationships and negotiations with suppliers.
The Green paradigm decisions about purchasing and investments are pushed more to the frontline workers. The top down planning of Orange organisations is enriched by bottom up processes involving the operational experts. The breakthough Empowerment activates creativity and responsibility of the teams giving enough space to purchase or invest within budget boundaries and within the values system of the organisation. Most organizations still have authorization limits in place. More decentralized or distributed procurement processes (often supported by software tools) should speed up decision processes and enhance the agility of operations teams.
Anybody can spend any amount provide the advice process is respected
An employee who needs a new $50 printer doesn’t have to call the IT department, hope for a green light from his boss, and wait the days or weeks it takes for the printer to arrive. He can simply head down to the specific shop or website and buy a printer. In principle, any person can spend any amount of money, provided he has sought the necessary advice before making the decision; the larger the purchase, the more people are typically involved in the advice process. In hierarchical organizations, when engineers do the analysis and choose a machine model, workers often complain about the new machine and drag their feet when it comes to learning how to operate it. When they have chosen the model, there is no such resistance to change. Organizations might vary in how to conduct the advice process, with some employing formal, written rules while others adopting a more informal, ad hoc process. Whatever specific process finally is chosen, it is based on transparency and trust.
The one who suggested an investment takes the responsibility to conduct and monitor the purchasing process
In self-managing organizations, workers are in charge of the full purchasing or investment process. They do the analysis, write up the necessary specifications, visit and negotiate with suppliers, and secure financing from the bank if needed. It does not necessarily mean that the initiator needs to conduct all steps on his own, but at least he takes the responsibility from start to end.
Peer-based challenging of teams' investment budgets
Especially in larger organisations, a transparent baseline budget is very helpful to let teams monitor whether a new investment can and should be funded or not. Different from non-Teal organisations, investment budgets aren't given or confirmed from higher levels of management. They are created based on realistic assumptions of the teams about what needs to be purchased during a planning period. If the collected numbers are in balance to expected revenues and seem reasonable, the investment budget is set. Any investments fitting into it don't need further investigation as long as the advice process is conducted. Companies like Morning Star do annual intensive budget planning sessions, in which each team presents its investment plans to a panel of peers for advice. Teams that are not performing well are likely to be challenged as to whether spending money is really the best way to fix their problems.
Frequently Asked Questions
Surely money is left on the table if purchases are not pooled? As often, the answer is: trust people to make the right decisions within the framework of self-management. For items where volume discounts are too good to give up, colleagues who buy from the same vendor will choose to coordinate to maximize their buying power. At Morning Star, a tomato processing company, colleagues noticed that lots of people were buying threadlocker, an adhesive that prevents nuts and bolts from accidentally loosening, in dozens of different formats and from different vendors. They were not only losing out on volume discounts, but the uncoordinated purchasing generated unnecessary bureaucracy because regulations in the food industry required workers to painstakingly track every threadlocker format in a Material Safety Data Sheet. At some point, a worker suggested that he could walk around the plant once a quarter and ask colleagues if they wanted to order threadlocker through him. A similar solution emerged for purchasing packaging materials, an area where volume discounts can quickly add up. When there is value in coordination, people simply start to coordinate.
It often makes sense to buy computer or telephone equipment from the same or compatible vendors, for instance. Again, one can simply trust the advice process. A secretary buying herself a new computer, unless she is very well versed in hardware and software specifications, will likely seek advice from a knowledgeable party to ensure the computer will easily fit in with the rest of the IT equipment. In this case, there is no need for a central department to enforce standards. In more complex cases, when standards need to be specified, someone will step up and call together a group that will look into the matter and define the standards.
From time to time an investment might not fit into the budget for some reason. Possibly the investment is based on a sudden event or a valuable opportunity. As with Orange organisations, spontaneous investments should be accommodated under Teal. Again, the advice process is used to handle such situations. If a particular department or group needs an increased budget allocation, they can solicit support from other groups who might be willing to give a piece from their budget. Challenging questions should be asked and answered, but finally there will be a decision driven by the collective intelligence of representatives of the teams.
Self-management heavily impacts purchasing and investments. Every employee is enabled to take action and innovate in his working context. Investments are initiated from where they are needed. The advice process creates a deeper understanding of the impacts of investments. The localized responsibility for purchasing leads to a greater satisfaction about what is bought because the user defines the specifications.
To decide about investments a deep holistic understanding about the inter-dependencies and reach of a decision is necessary. The advice process creates a wide transparency about the impacts of an investment. Especially when it is a bigger amount of money, it is essential to understand the company's financial situation and investment impacts on others as a whole.
One important criterion about investments is whether it fulfills an evolutionary purpose. Distributed investment decisions empower those sensing the organization's purpose to act in a way to serve that purpose.
Concrete cases for inspiration
AES provides its workers a high level of autonomy in their area of expertise which enables them to negotiate multi-million dollar plant investments. Interdisciplinary volunteer task forces supported by a few people from headquarters with relevant expertise collectively do budget planning and auditing.
Like their counterparts at FAVI and Sun Hydraulics, teams at AES were responsible for decisions relating to all aspects of day-to-day operations including investment related budgeting, hiring, training, evaluations, compensation, capital expenditures, and purchasing, as well as long-term strategy and charitable giving. AES is an energy provider, operating thermal and hydroelectric power plants as well as electrical grids. This equipment is absolutely central to the lives of many people and businesses. A front-page article in the Wall Street Journal by reporter Alex Markels illustrates with a story how far teams at AES went with taking on responsibilities typically handled by headquarters:
MONTVILLE, Conn. –– His hands still blackened from coal he has just unloaded from a barge, Jeff Hatch picks up the phone and calls his favorite broker. “What kind of rate can you give me for $10 million at 30 days?” he asks the agent, who handles Treasury bills. “Only 6.09? But I just got a 6.13 quote from Chase.” In another room, Joe Oddo is working on J.P. Morgan & Co. “6.15 at 30 days?” confirms Mr. Oddo, a maintenance technician at AES Corp.’s power plant here. “I’ll get right back to you.” Members of an ad-hoc team that manages a $33 million plant investment fund, Messrs. Oddo and Hatch quickly confer with their associates, then close the deal. … It sounds like “empowerment” gone mad. Give workers more autonomy in their area of expertise? Sure. Open the books to employee purview? Perhaps. But what good could possibly come from handing corporate finance duties to workers whose collective borrowing experience totals a mortgage, two car loans, and some paid-off credit-card debt? Plenty of good, says AES. … “The more you increase individual responsibility, the better the chances for incremental improvements in operations,” argues Dennis W. Bakke, the company’s chief executive and one of its founders. … “And more importantly” he says “it makes work a lot more fun.” Is giving coal handlers investment responsibility risky? Mr. Bakke thinks not. He notes that the volunteer team in Montville does have a financial adviser, and they work within a narrow range of investment choices. They aren’t exactly buying derivatives. What the CEO likes about the arrangement is that “they’re changed people by this experience. They’ve learned so much about the total aspect of the business, they’ll never be the same.” 
At AES, every team established its investment budget once a year. Budgets would be added up at the plant level, sometimes running as high as $300 million in a year. When teams were satisfied with the consolidated budget for the plant, it was reviewed, together with those from all other plants, by a budget task force that would suggest possible changes and improvements (but didn’t have power to enforce changes). That task force was staffed with a few people from headquarters with relevant expertise, but predominantly with people from local units with all sorts of backgrounds - a security guard could sit next to a technician and an engineer. Internal audits were performed in the same way, by volunteer task forces: each plant would be audited by colleagues from other plants.
AES found out that using voluntary task forces instead of fixed staff functions has multiple benefits. Employees find avenues to express talents and gifts that their primary role might not call for. They develop a true sense of ownership and responsibility when they see they have real power to shape their company. Founder Dennis Bakke insists on another point: these task forces are formidable learning institutions. At any point in time, thousands of people would be involved in task forces, picking up technical and leadership skills from more experienced colleagues. It’s a modern-day form of apprenticeship, scaled to a massive level. No classroom training could ever provide the amount of learning that was taking place day in and day out in the voluntary task forces.
Morning Star implemented a strong performance evaluation process, which includes a view on the effectiveness of using company resources and an annual presentation of investment plans to a panel of peers.
At Morningstar, every year in January, teams present a self-evaluation to a group of colleagues, which inludes Chris Rufer (the founder and president) and anyone else who cares to join. They are expected to talk candidly about what went well during the past year and what didn’t, how effectively they used company resources, and what they plan to do in the next year. It’s not a superficial effort; each presentation lasts for a few hours, and teams can expect challenging, sometimes grilling questions from their colleagues. In the course of a month, all teams make presentations; teams that haven’t performed well have received much input from their peers and know they have homework to do 
RHD runs its organization based on self-managing units which are responsible for their entire operation, from defining a strategy to recruiting and purchasing, from budgeting to monitoring results. Investment decisions stay within the units, which are counseled by budget managers who bring in financial expertise.
Each of RHD’s programs is run by a self-managing team, with an average of 20 and at most 40 to 50 people. Units, as these teams are called within RHD, are encouraged to develop their own sense of purpose, pride, and identity. Within the units, there are no job descriptions. Units are responsible for their entire operation, from defining a strategy to recruiting and purchasing, from budgeting to monitoring results. Central staff at headquarters is kept to a minimum. Specialist staff - for instance, the budget managers that support teams in financial matters or specialists in clinical review - can counsel teams, but the final decision is kept in the unit. 
Sun Hydraulics dropped most formalities of project planning, thereby freeing up productive capacity.
At Sun Hydraulics project and investment management is radically simplified. There is no management that wants to understand and control the complexity. Projects happen organically and informally. Engineers are typically working on several projects in parallel. They constantly rearrange their priorities, based on what they sense is the most important, most urgent, or most fun to do. Google has the famous practice of “20 percent time” - engineers are free to decide how to spend their Fridays. Sun and other self-managing organizations basically extend this to the whole week. There is no master plan. There are no project charters and no one bothers with staffing people on projects. Project teams form organically and disband again when work is done. Nobody knows if projects are on time or on budget, because for 90 percent of the projects, no one cares to put a timeline on paper or to establish a budget. A huge amount of time is freed by dropping all the formalities of project planning - writing the plan, getting approval, reporting on progress, explaining variations, rescheduling, and re-estimating, not to mention the politics that go into securing resources for one’s project or to find someone to blame when projects are over time or over budget. When Kirsten Regal, one of Sun’s leaders, was asked about how little their meeting rooms seemed to be used, she quipped, “We don’t waste time being busy.
FAVI implemented a practice of bottom-up planning based on trust towards its teams to come up with realistic budget requests. In case of conflicts, representatives of each team sort out problems on their own.
Once a year, every team at FAVI establishes the investment budget for the next year - new machines, new tooling, and so on. In most organizations, the finance department challenges these requests and ultimately the executive committee or the CEO arbitrates across departments to channel more money in one direction or another. This opens up the can of worms of politics. Everyone jockeys for a bigger part of the pie. For middle managers, the size of the budget is often the yardstick by which their status is measured. They try, as best as they can, to influence the decision makers in the executive committee through any formal and informal channels at their disposal.
At FAVI, there are no middle managers that fight for budgets, and their CEO Jean-Francois Zobrist refused to play the role of the father who would decide how to divide up the candy among his children. Teams know that no haggling will take place, so they don’t throw in inflated numbers to start with; they make realistic requests based on realistic needs. In most years, when the budgets of the teams are added up, the resulting number is reasonable, and all plans get the green light, with neither discussion nor scrutiny. Teams are trusted to do the right thing; if one team were to get itself golden-plated machines, other teams would quickly notice, and peer-pressure would self-regulate the problem away. In those years where the combined projects exceed what would be reasonable, the CEO simply asks teams to sit together and to come back to him with a revised plan. Representatives from each team come together and put all the plans on a table. They look at what is most important and what might be deferred in everyone’s plans. In one or two meetings, the problem is always sorted out.
Like other roles, the traditional purchasing and investments tasks of a manager - budgeting, planning, and controlling - are scattered among various members of a team. A worker at FAVI, might operate a number of different machines, be in charge of ordering supplies for his team, lead a number of continuous improvement actions, and be responsible for recruitment to his team
Notes and references
Alex Markels, "Blank Check," The Wall Street Journal, April 9, 1998) ↩︎
Laloux, Frederic. Reinventing Organizations. Nelson Parker (2014), page 88 and following ↩︎
Laloux, Frederic. Reinventing Organizations. Nelson Parker (2014), page 125 ↩︎
Laloux, Frederic. Reinventing Organizations. Nelson Parker (2014), page 148 and following ↩︎
Laloux, Frederic. Reinventing Organizations. Nelson Parker (2014), page 84 and following ↩︎
Laloux, Frederic. Reinventing Organizations. Nelson Parker (2014), page 77-79 and following ↩︎