In a joint discussion just the day before, Ilmari, Damén, and Mattila had agreed on a budget

that reconciled, as far as possible, the competing demands for results with available resources
and business opportunities. The negotiated 1992 budget for ABB Strömberg Industry Ltd.
was as follows:

ABB’s bonus scheme provided financial incentives to its top Business Unit managers
by rewarding good performance against budget targets. Bonus schemes were generally
designed to be simple and flexible: two parameters—earnings after financial items and order
intake—were generally believed to be sufficient indicators of performance, although
qualitative objectives (e.g., special projects, management development) were often included
in bonus calculations.
Bonus schemes for individual managers were negotiated with superiors as part of the
budget-setting process. Top ABB managers believed that a bonus formula defined in advance
of the budget-setting process would invite “tactical budgeting” by lower level managers who
might attempt to bias budget targets to increase the probability of receiving a favorable bonus
outcome. More importantly, this annual negotiation process—which managers were expected
to take seriously—was a good opportunity to discuss objectives and priorities, and the
intersection of Regional and Business Area interests.
The bonus scheme negotiated for each manager was tailored to the difficulty of the
task. Managers who presented very ambitious targets, for example, usually had their bonus
pay-out geared so that they would receive some financial recognition even if the targets were
not achieved. Thus, the bonus formula for some managers might provide payouts when
results reached 85% of budget, with maximum payout at 130% of budget. In another case, the
starting point for bonus payout may be 95% of budget with an open-ended bonus. A third
manager could receive bonus payouts at 75% of budget with a ceiling on payout set at 110%
of budget targets.
The compensation package for a typical company president within ABB might be as
follows:
Mattila was due to meet the next day with Ilmari and Damén to negotiate his bonus scheme
formula for 1992. He looked again at the 1991 projected results, the original targets provided
by each man, and the final negotiated budget figures. He wondered what formula and payout
levels to suggest at tomorrow’s meeting.

ABB: Accountability Times Two (B)

The way we allocate markets can sometimes cause tensions. Business Area managers
are responsible for two types of allocations. The first allocation is of customer markets
around the world to individual ABB companies. These companies are then responsible for
staying close to their customers in those regions. The second allocation is of productive
capacity to individual ABB companies to achieve economies of scale in production and
economies of scope in technology.
“But conflicts can arise when one ABB company is allocated the rights to produce a
product and another ABB company is allocated the right to market products in a given
country.
“For example, the market for electricity transmission and distribution (T & D) in the
United States is very large. Our ABB companies in the U.S. have a lot of experience in
transmission and distribution projects, and have therefore been allocated the right to serve
this market directly by the Business Area manager responsible for power transmission.
“On the other hand, gas-insulated switchgear is a much more complex product. The
worldwide market is small enough that our Business Area managers have decided to
consolidate all gas-insulated substation component production in Switzerland. This allows us
to focus our technology and achieve economies of scale. As a result, if a project arises to
build a complex substation in the U.S., most of that work will be handled by the company
that I run here in Switzerland.
“But I have a problem. One of my sales managers, who is based here in Switzerland,
has built up excellent customer contacts with U.S. utility executives. By providing technical
support on switchgear installations, he developed a relationship with Hardy Construction Co.,
a construction firm that was actively building power plants in the U.S.
“A power plant project came up for bid in England and Hardy Construction decided to
go for it. The bidding was confidential and my company, ABB Switzerland, provided
technical support to Hardy on the high voltage gas-insulated substation component. Then,
Hardy asked us to participate in the proposal for substations and T & D work. The request to
participate was really due to the personal alchemy between the project manager at Hardy and
my Swiss sales engineer.
“Because Hardy Construction is located in the United States, ABB U.S. was the
company that submitted the formal bid, even though ABB U.S. would do only a small part of
the electrical installation. The majority of the ABB participation related to the gas-insulated
substation; and Switzerland is the only company capable of doing that work.
 “However, to be candid, we didn’t really believe that Hardy Construction would be
successful on the bid. We were investing our effort mainly to build relations for future work
with Hardy.
“But, what do you know, Hardy won the bid. They will be building the plant in
Britain with our substation forming a critical part of the installation. My company in
Switzerland will be supplying the gas-insulated switchgear, protection controls, auxiliaries,
line terminals, and batteries. This is a large job that will form approximately fifteen percent
of my annual revenues for next year
“The problem arises because the plant is being built in Britain: all substation work for British
customers has been allocated to the ABB Swedish company; they are responsible for selling all
substation work into Britain and staying close to British customers. The reason for this allocation is
that, although we produce all high voltage gas-insulated substation components here in Switzerland,
most low voltage substations are produced in Sweden.
“I know that the Swedish ABB company manager will want to follow ABB policy allocation
rules and run the project himself, even though he and his people have not been involved. He will want
us to build the substation components and then transfer it to him using internal transfer prices. He will
then in turn sell it to Hardy for installation in Britain.
“At ABB, market prices are used for all internal transfer pricing. We keep costing and pricing
procedures separate. In transactions between Group companies located in different countries, the
arms’ length principle is applied, regardless of the underlying costs. In this case, we would transfer
the substation to the Swedish company at the contract price less a negotiated allowance for the
administrative work performed by the Swedish company.
“As a result, our net margin on the work will be reduced by 2 to 4 percent and my targets will
be adversely affected. As you know, 50% of my bonus depends on hitting targets for the Swiss
company that I run; 25% is a function of worldwide Business Area goals (which include the
performance of the Swedish company and other similar companies around the world); and 25%
depend on how well I do on my personal goals.
“More important, however, is that I remain responsible for the equipment installation of this
substation. That means that all communication between our people here in Switzerland who are
building the station and the customer must go through a project manager sitting in Sweden.
“One of the tenets of ABB is that the responsibility of each manager in the matrix must be
defined precisely. Therefore, the Swedish company should get the job because that’s what the market
allocation rules say. On the other hand, our whole business is built around being both global and local
so that we can truly excel in both technology and customer orientation.
“As president of the Swiss company, I have a responsibility to my company. I want to say to
the people in Sweden, ‘don’t be stubborn. Don’t give more priority to ABB internal allocation rules
than to our mutual concern with the customer. Let us handle this work directly and you stay out of it.’
“How hard do you think I should push? If they don’t agree in Sweden, should I push it up? To
whom: my Business Area manager or my regional manager? How do you think they will react? You
may have heard the working rule around here:
If two managers cannot agree, escalate the issue up to your bosses for a decision. If you
cannot agree a second time, go to your bosses again for a decision. But if you cannot agree a third
time, both managers will be replaced!
Asea Brown Boveri: The ABACUS System
At 11:00 A.M. on November 12, 1991, Sune Carlsson, executive vice president of ABB Asea Brown
Boveri, picked up his telephone to speak with Ken Blom, business controller:
“Are the ABACUS October reports out yet?”
“The release clearance has not yet come over the screen.”
“Why don’t you phone them and find out when we can pull the preliminary results out of the data
base. I want to see the results on France as soon as possible.”
“The data should be released sometime this afternoon. I’ll check and telephone you back.”
Sune Carlsson was one of eleven executive vice presidents who formed the executive
committee of giant ABB Asea Brown Boveri. Formed in 1988 with the merger of Asea AB of Sweden
and BBC Brown Boveri of Switzerland, Asea Brown Boveri termed itself a “multi-domestic”
company. ABB produced electrical equipment and other technology-driven products in over 140
countries around the world by competing in over 60 distinct worldwide product markets. ABB
employed 215,000 people around the world and generated annual revenues in excess of US$27
billion.
Carlsson, 50, had joined Asea AB in his native Sweden in 1965 holding different positions
such as planning manager in the motor division and manager of the fork lift truck division. In 1977,
Carlsson became executive vice president of Asea responsible for production and later also for power
plants, power distribution, and industrial equipment. In January 1988, with the merger of Asea and
Brown Boveri, Carlsson was appointed executive vice president of ABB responsible for five Business
Areas (BAs) related to power distribution as well as the Business Areas for robotics, motors, and
telecommunications. Because ABB was organized using a matrix structure, Carlsson also assumed
responsibility for specific countries: Norway, France, United Kingdom, Ireland, and Benelux
countries (see Exhibit 1 for a summary of Carlsson’s responsibilities).
Carlsson described how he used the ABACUS system:
With our matrix structure, we always have two people looking at every part of the business.
The Business Area managers take a high level, strategic perspective by managing the worldwide
implications of the businesses they run. The country managers focus on execution at the regional level
by staying close to their customers and markets. The integration of the matrix takes place at the
executive committee where the executive vice presidents are typically responsible for both specific
Business Areas and countries.
I wear two hats: on one hand, I am a segment manager responsible for worldwide
performance of nine BAs; each of these Business Areas will be active in many countries around the
world. On the other hand, I am also responsible for seven countries; each of those countries will have
factories from many Business Areas located there.
I use ABACUS to manage these businesses and countries. When the performance reports
come out monthly, I spend at least one full day reviewing figures. In addition, I spend a lot of time
studying these figures when traveling.
I use ABACUS almost every day. The system has evolved into an excellent data base. I pull
out trend data and search for negative deviations. In most cases, you can see where good figures are
coming from. It is more important to react quickly to bad figures. I can quickly compare the
performance of, say, our six motor factories in Europe to see if we have any problems. A segment
manager has a higher level view than the managers who sit in the six countries where those factories
are located.
Ken Blom, my controller, and I spend a lot of time pulling out specialized information to
focus on specific questions: at any time, it may be cash flows, asset utilization, inventories, or
investments. We both have terminals on our desks and use them a lot.
I like to pick information from the data base before it is published. I focus intensely on orders,
revenues, earnings, and employees by Business Area and by country. I ask Ken to get this information
a little faster every month.
Asea Brown Boveri Accounting and Communication System
The ABACUS system was the “glue” of corporate reporting that allowed the ABB matrix
structure to function. ABACUS was designed around four key objectives:
1. decentralized collection and verification of data with easy data entry by reporting unit;
2. fast and secure transmission and processing of data;
3. high level of flexibility for report generation;
4. immediate availability of pertinent reports.
ABACUS had been designed with special features for input handling, data base management,
consolidation, report generation and information retrieval.
Input Handling : The smallest unit of management at ABB was the profit center. A profit center was
defined as:
Any self-contained unit that is responsible for its own product development, production, and sales as
well as for its own results and asset/liability management. A profit center must be able to measure
performance.
ABB had over 4,000 profit centers worldwide. Profit centers were grouped together to form
Business Area Units (i.e., separate legal entities) which were domiciled in specific countries and
competed in identifiable product markets. For management accountability and oversight purposes,
Business Area Units were grouped into one of 65 Business Areas (worldwide product markets) and in
turn into eight Business Segments (for which executive vice presidents were responsible). For
example,

Business Area Units were located in approximately 1,300 ABB companies around the world.
Each of these ABB companies was provided with Personal Computer (PC) software to input and
verify data to the ABACUS host system.
Access to ABACUS was limited. Two levels of passwords were required to gain access to
the PC ABACUS system installed at ABB companies: a password to sign on to the Corporate
Management System and an additional password to sign on to the ABACUS system. Passwords were
changed frequently.
 The ABACUS system was designed to gather monthly performance data and information
necessary for annual budget preparation and updated forecasts. Performance data concerning orders
received, revenues, gross margins, period costs, net earnings, and headcount were entered in the
ABACUS system by control staff specialists at each operating company within 10 to 14 days of each
month end (see Exhibit 2 for a monthly reporting timetable; see Exhibit 3 for sample data entry
format).
Reconciliation routines within the PC software ensured the internal consistency of data (e.g.,
the computer would not allow further data entry if revenues did not reconcile between Business Areas
and the ABB company).
In addition to numerical data, management comments were required on the progress of the
business and explanations for deviations from budget and forecast. All comments throughout the
world were required to be written in English. Comments were entered separately for each Business
Area Unit within an ABB company so comments could later be consolidated either by Business Area
or by country.
During 1991, approximately 1.4 million items of information (80 megabytes) were reported;
during 1992, this amount was expected to grow to nearly 2 million items of information (110
megabytes).
Once data were complete and reconciled, the PC ABACUS system transmitted the data over
owned and Infonet international lines to ABB’s main data processing center located in Vasteras,
Sweden and, later, on to corporate headquarters in Zurich (Exhibit 4). All data in the ABACUS
system, both numerical and text, were encrypted by a random algorithm generator prior to
transmission to ensure security and prevent unauthorized access.
Data Base Management (see Exhibits 5 and 6 for a schematic overview) : The data
received in Vasteras were decoded (part of the transmission included secret codes to inform the host
computer about the encryption algorithm generated for the transmission) and stored in memo files.
When memo data files from around the world were complete, they were consolidated by Business
Area and country and stored in the ABACUS main hierarchical data base. Transmission from all ABB
companies around the world was coordinated tightly to ensure receipt of all data to meet consolidation
timetables.
The Corporate Control department, located at ABB headquarters in Zurich, Switzerland, kept
a close watch on data receipt on the day that all ABB subsidiaries were due to transmit their data on
ABACUS. On an hourly basis, controllers checked to see what data were still outstanding. By
approximately 11:00 A.M. Zurich time, all data were received and consolidated in the main data base.
During the morning, the telephone was ringing constantly as managers around the world asked when
they could access the data.
At 11:00 A.M., the order was given to begin moving data from the main data base to a second
data base—the report generator. At noon, a message was sent out over the network which appeared on
PC screens at ABB locations around the world: ABACUS consolidated reports were available for
downloading and review.
Report Generation and Information Retrieval : Within hours of releasing the information,
the majority of important users around the world had downloaded reports for analysis and printing.