Frank Buytendijk Blog

My colleague John O'Rourke was recently quoted in an article about Sustainability Reporting.

One of the questions the article raised if sustainability reports can really help managers make better decisions. John's response was very clear: it helps opening up managers' eyes to important environmental and social topics. Management guru Michael Porter goes even further, he states that sustainability can lead to competitive advantage. Making sustainability part of your value proposition, in terms of environmentally friendly products or transparency towards stakeholders, can lead to strategic differentiation.

If you are a regular reader of this weblog, you know I like to approach strategy and management from a stakeholder theory perspective, and this goes for this topic even more so. In order for Performance management to add to sustainability, it should not only take your own objectives into account, but also those of your stakeholders. As I like to stress, every stakeholder offers contributions. Customers offer their business, partners and employees their skills, shareholders offer capital, regulators fair competition and society offers the infrastructure to do business. And in my book, you can only benefit from stakeholder contributions, if you are also willing to contribute to their requirements as well. Reciprocity is the key.

Let's look at a very simple way on how to visualize decision-making and establish if managers make sustainable -- and, in my view, thus better --decisions.

Step 1

For every strategic decision, create a graph with two dimensions. On the horizontal axis the internal (business) performance is measured, going from "as is" to "to be" (obviously the "to be" is higher business performance). On the vertical axis you place external performance, which is the performance of your stakeholders. A hot topic here is environmental or social performance.

Step 2

Distinguish four quadrants. The quadrant top-left describes what happens if you give too much away, at the cost of yourself. This is not sustainable by nature. Bottom-left describes the situation where no one benefits, also not a good place to be. Bottom-right is where you benefit, but not other stakeholders. Top-right marks top performance for both you and other stakeholders.

Step 3

Plot the expected outcome of your decision in the graph as a line, going from the "as is" to the "to be" situation. The figure shows three possible examples (theoretically the line could go from right to left, but it is usually not expected that a good business decision decreased internal business performance).

Now we can assess the sustainability of the strategic decision:

• If the arrow goes flat, internal performance improves, but no change to the external performance. This is sustainable, it adds value, but the stakeholders are not impacted. In Porter's terms, this is not very differentiating. You won't make a strategic difference, other than improving yourself.
  
• If the arrow has a negative angle (goes down), your decision improves your own performance, but at the cost of others. This is not sustainable as you extract value from your stakeholders, instead of adding value.
  
• If the arrow has a positive angle (goes up), your decision is sustainable, and is differentiating. You're benefiting not only yourself, but also increasing external performance. This is adding value for yourself as well as your stakeholder environment.

If you only assess the internal business performance for strategic decisions, you can't see if the improved performance is based on adding value or extracting value. Using this simple visualization shows how taking stakeholders into account, managers indeed take better decisions. By including external performance, it enables a discussion on how to differentiate from the competition in providing a certain added value for your stakeholders.

John O'Rourke came up with the perfect term for this style of thinking: he called it Sustainable Performance Management.

--frank

-- The telecom company had to come back twice to fix your triple play installation (telephony, internet, cable television), yet the telecom company proudly publishes very high service levels and customer satisfaction.

-- You complain about the service or the cleanliness in a public facility and they point you to a sticker providing you with a 1-900 number for "suggestions and ideas," $0.49 per minute.

-- The agent in the centralized call center of the police doesn't recognize the name of the street where you report an accident in, and also doesn't know about the roadworks that make it hard to reach the place.

-- The helpdesk reports high effectiveness rates, 80%+ of all inquiries are solved immediately, and tickets can be closed again. At the same time, the employee satisfaction survey show a high dissatisfaction with IT.

-- The hospital informs you that you are on the waiting list for the waiting list?!?

-- . . . and you recently received an email survey asking you how satisfied you were with the previous satisfaction survey.

These are all actual examples of what happens if performance management drives too much efficiency.

In the last twenty years, most public and private organizations have gone through multiple rounds of reorganization, squeezing cost out while aiming for operational excellence. Governments have privatized healthcare and social services, to be more run as a business, and have introduced competition. Companies have outsourced business processes to shared service centers that offer economies of scale and strict division of labour. Although the cost structure has improved significantly, there are adverse effects.

Now, on top of the requirements for even more increased efficiency and operational excellence, organizations are faced with the need for being accountable as well. If not addressed well, it can lead to dysfunctional behaviors, running the numbers instead of running the business. This effect is documented very well. The police station doesn't want to get called directly anymore, because then calls are not registered in the central system, that is needed for reporting. Hospitals create an unoffical waiting list before you get on the actual waiting list, because the official waiting list counts for the statistics. Every department of the telecom operator claims to have 95% success rate, but as a value chain it scores 0.95 x 0.95 x 0.95 x 0.95 x 0.95 = 77% success.

At the same time, optimizations led to a high level of specialization. Management guru Mintzberg explains how modern enterprise often traded in "mission goals" (what do we like to achieve) to "system goals" (how can we manage our process). Another way of saying this is that organizations focus on accountability, instead of responsibility. Accountability focuses on displaying what you do. Responsibility on what you achieve for your stakeholders, such as your customers, your partners, your investors and society at large. In organizations that are highly optimized towards specific activities, instead of in charge of a complete process, it is even very hard to take responsibility, every department is simply a small link in the overall chain. Then accountability is all what is left.

If you are not in touch anymore with the end result for consumers or citizens, all you can do is set goals for your own part in the process. All you can do is measure your input and your output, but not your effect. All you can do is create controls to optimize your performance and minimize your cost. And no one is responsible anymore for the overall result.

Don't get me wrong, I am not opposing accountability. However, I am against playing games with performance indicators. We should organize ourselves so that we can take responsibility for what we achieve. And that is not that hard to do, if we let go all kinds of organizational "best practices" and start thinking for ourselves. So not only measuring our own stuff, but also what we achieve for other. And most of all, let's not talk about "internal customers" anymore, but call them what they are: colleagues, with the same objectives and the same customers. And one last piece of advice: if you notice that performance indicators stand in the way of doing the right thing,  it would be great to take responsibility and do the right thing, never mind the performance indicators.

--frank

The newspapers report on it almost daily. Activist shareholders such as hedge funds build up a small percentage of shares and sends the board a letter, sharing their ideas of a new strategy. Splitting up the company as the divisions independently are worth more than the total company.

No wonder, the way how we typically organize ourselves as a multidivisional company may easily lead to that situation. Divisions or business units are seen as a portfolio. Each of them need to be profitable independently (in Dutch we call this "need to be able to hold up their own trousers"), and usually they are managed from a certain distance, based on financial results. Most performance indicators measure the business unit's contribution to the group.

Although we can't justify the existence of business units that totally depend on others (they would be service units then), I think managing based on contribution, the portfolio approach, has gone too far. What's the value of being part of a multidivisional company as a totally independent business, just contributing profit? I would say the value is negative, it doesn't justify the cost of the holding. There should be synergies, or leverage. Of course this starts with some economies of scale of shared IT, shared finance and HR, but ultimately synergy is not about costs, but about opportunities.

I think we need a new control model, not based on measuring contibution, but measuring leverage. What cross-sell opportunities did it create? What innovative techniques did it share? What markets did it open for others to leverage? How did it optimize its planning not for its own sake, but for the benefit of the group (think about this one really hard)? This all justifies being part of the group. And this is what a balanced scorecard really should be about.

In a world of hypercompetition, we need all the collaboration we can get. If we don't cross-sell, we leave money on the table. Local optimizations have a overall negative impact on the companies margins. If we don't innovative across the board, someone else overtake us. Pretty tangible business cases. But perhaps the most important business case is somewhat intangible of nature. In a global economy, organizations need to be authentic, need to stand for something in order to be recognized, need to speak with one mouth. A "bunch" of business units, each contributing to maximize profit, are an unlikely structure to do so.

--frank

Mariska Bulten sent a very interesting email, reacting to my blog on intercultural management. In her reaction, she writes:

National cultures may no longer be leading in intercultural management. Every company has its corporate culture and is becoming more and more international. If we work with 50 nationalities in our company, do we have to make one version of Performance Management for each culture? Or do we use our corporate culture as an indicator?

She touches on some very important points. In general, I believe corporate cultures are strongly US-dominated, or at least US-influenced, as I've been writing before. This may soften the culture shock a little, as we are used to certain business practices around goal setting, feedback and rewards. Founder-based cultures often are also very deeply rooted in a national culture. Volvo and IKEA are very Swedish companies, and Toyota's business system is very Japanese. These multinationals have found powerful ways how to create a somewhat homogeneous culture on a global scale. At the same time, research in the field of intercultural management shows that when push comes to shove, people's behaviors can better be explained by national culture than by corporate culture, in other words national cultures root deeper (although I am sure there is also research that points out the opposite). The bottom line remains that different companies have different cultures, impacting EPM implementations.

"The numbers speak for themselves" is unfortunately still often the credo in performance management. But they don't. In different companies, in different countries people react differently to performance management and performance indicators. I rarely see EPM implementation project plans that have a chapter on cultural issues, it stops after implementing a new process and system. But in a culture where your position is based on your social background and past achievements, you are bound to create problems implementing strict quarterly goals. And openly sharing feedback on personal performance in a highly group-based cultures will not work as well.

Mariska rightfully points out you can't have a separate EPM implementation per culture. But per culture it is important to find out how people are going to react. If negative reactions can be predicted, they can be countered. Perhaps we need to implement the same performance management program and performance indicators world-wide, but locally we need to figure out how. Performance is not in the numbers, performance is in the people. We shouldn't forget that.

--frank

I recently sat in a presentation about supercomputing. They showed an application that helps Formula 1 teams prepare visits for the windtunnel and helps to analyze the results. Formula 1 teams need to comply with strict rules and need to find ways to optimize their results within an elaborate set of regulations. The presentation also described how to drive the fastest round. Did you know that Formula 1 cars can drive as fast as 400 km/h, but usually don't go faster than 360 km/h? The reason is that if you go too fast on the straight end, you need to brake more in the curves, and the race is won in taking the curves in the right way. Coincidentally, a few days later I read an interview with a Formula 1 driver. He said that winning is not only in being a good driver, but also in being a good communicator. While test driving, you need to tell the team in the pit and the design crew how the car "feels." I'm just making this up, but telling the crew that it feels a bit "itchy in the left middle of the center-back" must mean something to the crew. This only happens if they are tuned in to each other.

I realized that this is almost the perfection description on competitive advantage in business as well. Every organization has the same access to critical data. The key question is what you do with it. Being a little bit faster in seeing correlations, having just a little deeper insight in what certain patterns mean, being simply a little bit smarter than the others. At the same time, speed is not the differentiating factor, it's agility. You can have the fastest, leanest, meanest business process in the world, you're just not gonna win if you can't quickly translate new insights into how to modify your processes. Lastly, organizations don't stand alone, they interact with their stakeholders all the time and, like a formula 1 driver and the crew, they need to be tuned-in to each other, they need to be aligned.

Being smart, being agile, being aligned are the key competitive differentiators for the years to come. The EPM promise is to enable that.

--frank

Check out Ron Dimon's blog at http://businessfoundation.typepad.com. He's a good friend, and a former colleague at Hyperion Solutions. He regularly posts on the specifics of EPM in various industries, including interesting insights and good articles that he's found. Good stuff!

--frank

I recently had a very interesting discussion about the role of IT management. It is the current best practice to define the role of the CIO as a change agent within the organisation. He/she needs to help the organisation to use information, particularly performance information, to gain competitive advantage by leveraging the information asset to improve decison making at all levels in the organisation, from the strategic level right down to all operational levels of the organisation. This is partly about technology, but much more about organisational change -- about governance and about enabling new business models.

Traditionally, a CTO's focus is much more narrow, and focused exclusively on technology. How do I optimise the technology we own? How do I drive cost out of our technology platform? What hardware and networks do we have? Who should be our strategic suppliers of technology? How do I improve the reliability of our technology?

However, I am not sure if I think this is the right way forward. In my opinion CIOs would do good to become more of a CTO for the coming years. Here's why:

--frank