The Corporate Polygraph
by Tom FitzGerald & Tom Horne

Long before a crisis hits.
Long before it shows in the Financials,
Or even in the Key Performance Indicators.
The signs are there for the Board to see.
And they can't be faked.

Harry's stomach sent him the signal first. A rumble, a mere rumble.

His was a large stomach, a faithful stomach. One he had lived with a long and trusted time, one he listened to when it spoke. Now it had. A rumble, a mere rumble. But he had heard.

Harry was a Board director, had been for several years. He was also, for the last two, the non-executive Chairman of Graye-Co. And he took his job seriously; for Graye-Co was a 100 million-dollar enterprise with 1100 people. And they were depending on him.

His job, he knew, together with his fellow Board directors, was to oversee, guide and evaluate management. Now, having listened to a presentation of the financials by the CFO and a discussion of the key performance indicators (KPIs) - by the CEO, his stomach was sending a signal. It was just a rumble, a mere rumble. But he was listening.

The news had been good. All was well. No need to be anxious. And yet! And yet!

He had queried the financials closely. George their CFO assured him they were correct. And footed and ticked them just to show. The CPA audit partner explained how their report was prepared and what it said. And Frank their CEO, recently up from sales over Harry's misgivings, explained how the future looked good too; had the KPI numbers to show.

Harry beamed his congratulations. Shook everyone's hands. But he knew, with a moral certainty, that it was time to look deeper, look into the company's soul. Look now, before whatever it was his stomach warned about grew worse. He would never have a better time than now. In matters like this, later was never better.

Anyway when he had been appointed Chairman two years ago, he had talked of such an "audit" and made it clear that no one need feel targeted or especially distrusted. It was just good business. They thought he meant a "climate study." And he was willing to have them think so for the moment. But he meant something more.

Harry knew a couple of things about corporate growth and decline, and the things that really drive performance.

He would have his way.

You hear them say, from investors to union stewards, "They should have known ... the writing was on the wall. They should have done something."

You hear them say, from CEO to COO, and all the managers most responsible and, of course, the Board, "How could I know? How could I tell that things had gone so far? Would move so fast? How could I know?"

You hear them say it every time a company falters. And strangely, all are right: They are guilty; they are innocent; both.

Sadly, by the time it becomes obvious to the Board, that a company is faltering, many things have gone a long, long way down. Have taken that company's competitive value with them.

THE PROBLEM

The problem with corporate decline, by and large, resides in the focus all managers, and of course the Board, have on The Numbers. Managers know that unless they can measure, they cannot manage. Likewise, Boards know that without the measures they cannot evaluate or guide or counsel. And so they keep a close eye on the numbers.

Of course those numbers are measures of the things they CAN measure; the things they KNOW to measure; have been taught to measure.

Of course, most of the factors they do measure are necessary. The Financials must be measured; how else would you know how you - have done -. The KPI's must be measured, how else would you know how you -are doing.

But many, perhaps even most, of the really important factors are never measured at all: the human and operational factors that are the real wellsprings of all performance; that today are causing, generating the behaviors, that tomorrow will be magnified in the KPI's and, the day after, writ large on the bottom line.

These are called the Drivers of Performance. And because they cause performance - they in fact predict it.

The reason for not measuring the Drivers is partially caused by the belief that such factors cannot be identified; partially by the notion that such factors cannot be quantified; and, if that were possible, cannot be changed. Except by leaders who are gifted or inspired.

Of course, that is not the case. They can be identified. They can be quantified. Most important of all, they can be changed!

But sadly there is also another reason: The implicit belief that such factors are unimportant; that the very operating dynamic, the spirit, of the company has no impact on its performance. Anyone who has watched a great sports team unexpectedly flounder (or a poor one suddenly triumph) is immediately aware the pivotal role the spirit, the operating dynamic of that team played in the result.

So now let's talk a little corporate life-cycle theory. And because we are here dealing with Graye-Co we will do it on the down side of the curve.

THE PHASES OF CORPORATE DECLINE

As a company begins its downward journey to financial crisis, it goes through three clearly identifiable phases of decline: The Hidden Phase, The Subtle Phase, The Overt Phase. Each phase with its own clearly defined symptoms, its own characteristics, its own measures.

Phase I Decline - The Hidden Phase - is completely invisible from outside the company. All too often the Board finds itself outside the company, as far as Phase I and its symptoms are concerned. But even if the directors are aware of the symptoms, they often are not aware of their consequences. A lot of the time management is in the same position.

During this hidden phase fully a third of the competitive value of a company is lost. This loss becomes very obvious when an attempt is made to mobilize the company's internal resources to confront an unexpected challenge. Or create a new momentum.

This hidden loss is a major reason why so many Boards are completely blind-sided by the decline of their companies.

Phase I Decline is measurable solely by the Drivers, the Predictors, of Performance. They remain visible with increasing intensity through the other phases of decline. In fact, these drivers, being root causes of performance, are visible, measurable, and meaningful throughout all stages of the entire corporate life-cycle.

Examples of Drivers are performance management, lean operations, corporate decisiveness. There are many others. Collectively these Drivers of Performance, when identified and their intensity measured, show the - innate trajectory - of the company; independent of the economy; independent of the competition. If this trajectory is strongly down, there is already trouble.

In this phase the Financials show nothing; the KPI's show nothing.

Phase II Decline - The Subtle Phase - is visible from outside the company as well as from within. However, it is visible only to those who know where and how to look and interpret what they see.

Again, while a Board (and the marketplace) can see this Phase II erosion and can address the symptoms, it often does a less than perfect job.

By the end of this phase fully - two thirds of the competitive value of the company has been lost. At this stage, the company is an accident waiting to happen.

Phase II Decline is measurable by the KPI's and also by the Drivers which show increasing distress. (While the Drivers are the causes of performance, the KPI's are expressions of performance - but show earlier than the Financials. In Phase II the Financials still show nothing.)

Examples of KPI's are production numbers, market-share trends, customer turnover.

The KPI's are prepared by a relatively small number of staff and the potential for "spinning" must always to be considered by the Board.

Phase III Decline - The Overt Phase - is usually when the decline is admitted and addressed. Of course, by the time PHASE III starts, trouble is deeply ingrained.

Phase III is measurable by The Financials (these are historic, retrospective measures) with the Drivers and the KPI's sounding ever-louder alarms.

Because the financials are prepared by a small number of staff, there is a danger that they can be falsified. This, of course, is every director's nightmare.

The take-away on the Drivers: That which is important to know is:

  • Because they are the causes of behaviors, they are the true predictors of performance - long range and short.
  • They can be identified easily.
  • They can be quantified easily.
  • They can be transformed easily.
  • Because of the way they are measured, they can't be faked by a few people.

But back to Harry:

He knew about the hidden phases of decline and he also knew that a study by the London School of Economics (LSE) and McKinsey had shown (what his personal experience going back 30 years had told him) that a 20% change in just three of these drivers, translates into a 40% shift on the bottom line. For better or for worse. For richer or for poorer, as he whimsically thought it.

Of course Harry had his way, it just made so much sense. And when he showed the results of the LSE-McKinsey study, all opposition faded.

  • The Accounting Department prepared the financials; the outside auditors confirmed.
  • Management of the various functions prepared the KPI's; Accounting approved.
  • Now Human Resources would audit the Drivers of Performance; and management would examine.

It took only a week. Every manager and supervisor was sent an email, giving a web address and a password. The Board too; Harry did not play favorites. This provided access to a survey, The Corporate 360 that addressed some hundred factors.

Another couple of emails gave them the time frame, explained the survey could be done a few questions at a time, encouraged candor and commentary. And the need the company had for their indispensable viewpoint on what reality was - for them. Collectively, they were the company.

The survey was substantial, but it took only thirty or forty minutes all told to respond to - except for the inevitable few who had to agonize.

Harry and the CEO got the first private heads-up on the findings.

Then the entire management team, together with the Board (this last was Harry's idea) began their review of the drivers of performance; the expectations, attitudes, motivations, that were driving behaviors; which would show next in the KPI's and then in the Financials.

They sat, without tables to hide behind, in an arc of chairs, and began:

First with a brief review of the financials; they all expressed familiarity with these. Then with the KPI's; again all said they understood. That took perhaps twenty minutes or so and served to get everyone relaxed and talking.

Then Harry got them talking in terms of the financials as the rear view mirror. And the limited use a rear view mirror had in driving a car, in predicting their future. There was some laughter here and nods all round. Then the KPI's as the side window - which looked out at the currently passing scenery. And the limited usefulness of that.

Then they addressed the Drivers.

Looking at the large projector screens on which their responses were displayed, each member of the team (and Board) knew where his or her answer was. The system had provided them with that information - each privately. Each also knew where the subordinates teams' answers were.

Mirror, Mirror, on the Wall!

It was not pornography. Well not exactly, though it did fascinate. It dealt with core motivations, potency, and creation. It did inspire guilt and caused each of them a kind of embarrassment that others should see them looking, like voyeurs.

No it was not a dirty picture. Just a sad one. But they sat there, fascinated, silent and embarrassed, just staring . . . Harry did not speak. He waited.

George the CFO said, a little hysterical, "But it can't be that bad. We're doing all right. Look at the numbers." He would say it at least ten times that morning . . . The silence stretched.

Eventually, Frank spoke again, "This must be who we are. God help us!" A sentiment that Harry shared. He had said much the same, but more colorfully, the week before as he studied the picture.

There it was, staring them in the face, writ large upon the wall. Not deniable now; for they had tried repeatedly that morning to deny it to themselves and they had failed.

They were an accident waiting to happen. Harry privately thought it was an accident already happened. But he held his peace.

They were looking at their company, as they had never seen it before; never so completely nor so clearly; in the cold, implacable mirror of their own answers, their own words. It lay naked, without disguise; everything on shameless view. Its demons, its drives, its motivations, its strengths -the very wellsprings of its performance - the secrets they had known, and secrets they had not known, all on view.

They were an accident waiting to happen. They really were. They had said so. Everyone except George who said, more desperate now, "We're making money!"

Quietly now Frank took over, impressing Harry who had feared he might not. Many things would need to be fixed. From the Drivers alone, they could see the corporate trajectory was steeply down.

Three key Drivers that Harry had identified as critical were in disgraceful shape. Decision-Making - it took forever and all agreed. Performance Management - no accountability was required, and all deplored it. Lean Operations - not really, once they talked about it. More too, much more. But those three could cause a 40% drop in bottom line.

It seemed possible that they were in such difficulties they must be in Phase III Decline. Whatever the financials said.

Once the dam of denial broke, it seemed that the KPI's were suspect too. People said this or that seemed worse to them. Perhaps it was time to have another audit firm take a look.

From long and bitter experience, Harry knew the issues they were looking at would not change themselves. They would not go away by ignoring them or by giving them more time. Actions would need to be specifically taken to change them to something better.

It would have to be done, Harry knew, by management. He could not do it for them. Above all, it would have to be done now.

And it was.

Not too surprising the auditors were changed. In the fullness of judicial time, George went to jail. But only for two years; nothing compared to the damage he had caused.

But they survived. In fact they made a full recovery; the 40% bottom-line improvement promised by the LSE Mckinsey study for changing three Drivers of performance was bettered - they changed ten. Frank went back to being EVP of sales. A new CEO was found.

As Harry knew, all that was really needed was a Board with the guts to look deep within the soul of their company. And ensure that management did not flinch from what they saw.

They audit the Drivers now, every year. And the KPI's. Along with the Financials. And look to see that they correlate. Harry still presides at Board meetings. And listens for the rumble.


Tom FitzGerald is president of FitzGerald Associates (1976) - www.ManagementConsultants.com. They specialize in prediction, preemption and turnaround of corporate performance. He can be contacted at info@ManagementConsultants.com.

Tom Horne has been for thirty years a Board Director of several companies and organizations, including charitable groups. He was Chairman and CEO of Guernsey Dell, Inc., an international manufacturer, for twenty-four years. He was most recently a Board Director of Executive Resources Network. He is currently a Director of the Business Performance Council.

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Copyright 2005 by Tom FitzGerald and Tom Horne. All rights reserved.

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