Enhancing long term sustainability through 2.0

Sustaining corporate performance is a challenge to most businesses. Many senior executives find it hard to shift their attention away from today’s share price and the next set of results. Fluctuations in exchange rates, rising interest rates, the demands of shareholders, Eskom’s load shedding and the talent crisis has intensified the pressure to focus on short-term performance.

In a series of articles written by McKinseys¹, they describe the way companies could take steps to ensure that they perform well in the years to come. Underlying these actions is a mental discipline which they express using the metaphor of human health, which improves when cared for and deteriorates when neglected.

Mental minefields

McKinseys describes three sets of impediments block the way to nurturing health in a corporate context.

The Mindfulness Trap

This is the tendency to be pulled back into a short-term performance perspective by the pressure of daily business.

The Cognitive Trap

This is the preoccupation with the belief that organisational health is soft and intuitive and therefore lacking the tough rigor and precision needed to drive performance. Another cognitive trap assumes that corporate health problems will arise in the unknown future rather than taking hold in the present.

The Self-Knowledge Trap

This is our tendency to say and believe one thing and do another. Managers often see themselves as strategic visionaries, although in practice they spend a remarkably small proportion of their time on anything related to strategy.

Attributes of health

What characteristics must companies have to be truly healthy? It’s important for executives to develop a clear picture of what sound health looks like before they try to embed healthy thinking in a company’s processes and people.

McKinseys identifies 5 characteristics of business health: resilience, execution, alignment, renewal and mutual reinforcement.

These 5 characteristics are not isolated from other influencing factors, such as the macroeconomic environment, the attractiveness of different industries, or luck. They represent a coherent and interrelated set of ideas.

Resilience

Markets can be tough, clients capricious and competitors relentless. Managers must contend with unpredictable disruptions such as financial-market fluctuations, inflation and crime. Healthy companies are practiced at spotting and managing key risks, and they build mechanisms and have the resources — cash reserves or backup IT systems — to get through difficult periods.

Execution

Even as companies hedge against external shocks, they need to make good decisions, and perform essential tasks. Brilliant products, clever promotions, or surging markets can obscure sloppy execution for a while. But sooner or later this kind of fragility will be exposed.

Companies that execute well share certain attributes: distinctive capabilities, the ability to make sound and timely decisions, strong forecasting skills and employees who understand their roles and responsibilities.

Alignment

Healthy companies, achieve a cohesive purpose because they have a compelling vision of the future shared by everyone connected with them. They articulate a shared identity that rises above individuals, functions and business units; reflect stakeholder concerns in corporate values; and reinforce the sense of common purpose with formal mechanisms, such as performance contracts.

Renewal

Healthy companies invest in their future by expanding into markets where existing assets and competencies provide real leverage, usually with the help of a winning formula that has been honed from experience and facilitates smooth integration across the entire value chain and the efficient extraction of synergies.

Renewal requires attention to softer issues, such as the ability to attract and retain talent, innovate and adapt to change, both culturally and strategically. Markets and industries move quickly; most companies do not. 

Mutual Reinforcement

Organisational practices, such as hiring policies, training programmes, and consistent and mutually reinforcing behavioural incentives act in concert to deliver on the strategic objectives of healthy companies.

Effective communication and collaboration are crucial to ensuring that assets, processes, relationships, and management practices act in concert. Typically, information flows across the organisation, as well as from top to bottom, tapping into social networks beyond the formal organisational structure. Web 2.0 based IT platforms reinforce this kind of communication.

Healthy actions

The discipline of managing tensions among the different characteristics of health requires willingness by the organisation to view the performance system in its full complexity. Vital corporate and individual processes are highlighted by breaking down a company’s resources into separate performance and health components, ensuring a balanced portfolio of strategic and tactical initiatives, integrating that approach into planning and budgeting, identifying metrics for assessing health, and building health into formal performance mechanisms. This will help an organisation to focus routinely and instinctively on the health imperative.

Monitor the way you allocate resources

McKinseys recommend that organisations break down resources into two categories—those devoted to driving performance and those devoted to deriving health. One easy indicator is labour costs: executives should know how many of their employees work on delivering the current operating plan as opposed to looking after the underlying health issues. That way, they can have well-informed conversations about whether or not they are investing resources in a balanced way.

Another indicator is financial spend, by taking all the money going out of the business during a quarter and splitting it into two piles: payments for current operations (expenses necessary to generate that quarter’s revenue) and payments for everything else. The first stack can be defined as performance related; the second represents longer-term investments, excluding in-kind capital replacements. Regularly making these calculations allows executives to see how much IT expenditure, goes toward innovation and R&D (health) and how much toward improving labour productivity (performance). It also allows them to compare the company’s investments in health-related activities (such as brand building, lobbying, and community outreach) with the cost of outsourcing operations to boost profitability (performance).

Balance the strategic portfolio

Companies can keep an eye on their health by regularly assessing their business ideas and new initiatives — projects or programmes to change or improve something in the business. They evaluate these projects both by mapping the point when each would be likely to create the greatest value and by looking at whether a project involves familiar, routine work that plays to their strengths and experiences or is a novel departure, which could be riskier and consume additional resources. Healthy companies keep a balance between the two and know that investing for the long term means action today.

Integrate into core processes

Extending health-oriented strategic thinking into detailed planning and budgeting processes is the next step; an analysis of the underlying health of cash flows should inform traditional budget reviews. Initiate, as a formal part of the performance-management process, a health dialogue that touches on the relevance of investment priorities or the product pipeline to a company’s future performance. Review human-resource allocations and the way executives spend their time .

Have the metrics to match

Many businesses make a religion out of counting their new customers, the growth of their revenues, their financial ratios. But these metrics don’t necessarily measure corporate health, so executives should develop a number of health variables for each of the attributes vital to the health of the business. Resilience, for example could be tested by tracking credit fraud volumes or customer lifetime values. Execution skills could be measured by determining the turnaround time. A company can monitor its alignment by calculating the proportion of its senior managers who disagree about strategies and corporate priorities. To concentrate the minds of its executives, it can test its capacity for renewal by tracking the share of its revenues from new markets and new products and its mutual reinforcement by calculating how much of its revenues come from products and services that span business units and from integrated solutions, or by understanding which policies are counter productive to strategy. In South Africa , we often see a commitment to BEE undermined by a policy of employing internally first before going to the market. This policy maintains the status quo and doesn’t engender diversity and change

Reinforce through performance

Once a company has redesigned its regular strategic, budgeting, and planning processes to inject a strong dose of “healthy” thinking — and appropriate metrics are in place — executives must embed health in formal people-management mechanisms, including performance contracts, incentives, career path planning, and staffing decisions. Managers at all levels should know the expectations set for them. Companies should use the metrics discussed earlier to structure evaluations ensuring that employees reap rewards as much for doing health-building work as for enhancing performance.

The precise weighting of targets depends on the situation of the individual company and the extent to which it already has struck the right balance between performance and health. The early — and full — involvement of managers in any discussion about adopting this approach is a key prerequisite for success.

Implement and Enterprise 2.0 architecture

Enterprisearchitecture is the practice of applying a comprehensive and rigorous method for describing a structure and behaviour for an organisation’s processes, communication, IT systems, personnel and organisational structure, so that they align with the organisation’s core goals and strategic direction.

Web 2.0 is a trend in the way we design technology that changes the way we use the Internet to facilitate creativity, information sharing and transparency through collaborative processes and communication. These tools ensure that everyone is exposed to the organisation’s vision, thinking, perception of risk and experience. This mutual understanding leads to greater organisational resilience, execution, alignment and renewal, which in turn leads to healthy organisations which can sustain their performance.

Notes

¹ Robert L. Cross, Roger D. Martin, and Leigh M. Weiss, “Mapping the value of employee collaboration,” The McKinsey Quarterly, 2006 and Robert L. Cross, Salvatore Parise, and Leigh M. Weiss, “The role of networks in organizational change,” The McKinsey Quarterly, April 2007.