So critical is the Operating Dynamic
To corporate performance
That improving it by just 20% improves the bottom line by 42%
Comparable to an increase in staff of 25%*.
It can be thought of as the Will to Compete.
It is the root cause and driver of all performance.
Yet, it is almost never addressed by management.
It is entirely within the purview of HR.
They had survived. Harry, Dan and Alice were looking at the numbers. Harry was the CEO, Dan the CFO. Like a dark tide the recession was ebbing, the ground of the economy growing firm. It was time for the company to create its new enterprise, to make its long promised new thrust into the marketplace.
They had the financing. With the competitors still running scared, they had the opportunity. They had the will – at least the CEO had. They had the people.
But questions remained.
During the recession, during the cutbacks, and the downsizing, and the survivor-guilt of farewells, had the innate courage of the company been damaged? Had its competitive spirit, that cohesion and mobilization of organizational forces, been wounded?
For it is this spirit that is the foundation of all corporate performance.
Would it be strong enough? Would they be able to tell? Would they be able to renew it, transform it? Dan and Harry knew, with a certainty, that it was necessary to look deeper, look into the soul of the company. The appraisal had to look at something else.
Both Harry and Dan turned to Alice.
Alice was the CHRO, the chief human resources officer. Just as the financials were the jurisdiction of the CFO, the spirit of the company was the purview of HR. How would she measure it?
Would it be strong enough? Would they be able to renew it, transform it, if that were needed?
The Will to Compete
When one looks at the root causes of corporate performance, the eye is drawn first to strategies, processes, procedures, machinery and such. However, a moment’s thought shows that the effectiveness of all of these is driven by something else: the management systems the company uses. If we look even deeper, we see that the effectiveness of these is caused, in turn, by something else again, something that might be termed The Operating Dynamic of the organization. Or, its Will To Compete. In this paper we shall use these terms interchangeably. We are talking of the “people” end of the business; its human resources; the soft stuff that is not supposed to be measurable; the stuff that only inspired leaders could deal with. But here we are not talking about individuals.
Napoleons first strategy of war was to have an army, mobilized and motivated to confront the enemy. He called this esprit, the Will to Combat. Creating it, shaping it, renewing it, was the fundamental work of all his commanders. If a general could not lead it, if it were weak or wayward – and indeed it can be – the enemy would win.
While business is not exactly war, it does have an equivalent to the Will to Combat: It is the Will to Compete. Though it almost never clearly articulated, in the final analysis, managing it, strengthening it, restoring it, is the work the CEO was really hired to do; everything else is secondary. (The terms “culture” or “morale” are entirely inadequate to describe this; they are as close to Operating Dynamic as accent is to the human soul.)
This Will to Compete is the ground and root cause of all corporate performance. Its effect can be great or small, positive or negative. It drives success, or stagnation, or failure.
In well functioning businesses it is, of course, positive. But almost always it is much less, much weaker, than its potential. However, in some instances it can be great; vastly more powerful than the sum of the leaderships of its managers; a powerful synergy is evoked.
When that happens, you have a world class company, one that succeeds in hard times and flourishes in good. In such a company managers perform beyond anything they could be expected to do elsewhere.
But when the Will to Compete turns negative and stays that way, it destroys the company.
Almost all companies have now been shaken by the recession. A great many will have received injuries to their souls, their intrinsic ability to compete. Some will not know that that has happened. And few will know how badly.
Alice’s concern was to measure and evaluate in depth this Will, this Operating Dynamic. And to fill the black hole in what they really knew about their company.
The Operating Dynamic
The Operating Dynamic can be defined as:
- The resultant leadership available to guide and drive a company when all internal, organizational forces, both positive and negative, are accounted for.
It is the invisible elephant in the boardroom. It has its own persona, motivations and energies, distinct and different from those of the individual managers, even the CEO’s. If it remains invisible, it is more powerful than even the CEO.
Everyone has seen instances where excellent individual managers collectively flounder, and instances where average managers who, as a team, perform excellently. Unless the elephant is brought into the open and understood, it dominates the ambitions, the thinking, the actions and, finally, the results of the company.
Let’s take an example: Imagine for a moment that an executive has just taken over an organization, become responsible for its success or failure.
He has the financials and KPI’s at his fingertips. These, of course (as Dan is tired of saying) are the rear view mirror of the company. However, the new executive has no information about the cause of performance, that which is generating profits and value; that which is, in the present, laying down the future.
He has to GUESS at this, the driver of all performance.
He has limited – perhaps very limited – time to grasp it, own it, transform it. If he cannot, he fails and the company loses. This, rather than incompetence, is the major reason why 50% of all new executives are gone within 18 months, why another 20% are privately deemed “disappointing” by the board. In large companies the loss of a senior executive is estimated to cost $1,000,000. Some would put the imputed cost much higher.
Without explicit and detailed information, taking control of the Operating Dynamic is difficult and time consuming. And the time available to do so is short; during economic downturns, it is very short indeed.
This Operating Dynamic, this Will to compete (being an attribute of the organization) functions at the unit and enterprise level – not at the individual level. Because of this, it needs to be measured and analyzed at the unit and enterprise level, in much the same fashion as the financials depict the results of performance, and with the same level of detail. (It is in the details that the devil – and the power of corporate transformation – resides.)
While the financial statements are
The rear view mirror of the company,
Measures of the Organizational Forces
Show its trajectory,
Show its future.
First let us identify the organizational forces comprising the Operating Dynamic.
In all, there are more than a hundred, each of which can have a positive or negative impact, like line items on the financials. However, in practice, they break into fifteen key forces. In turn, these are grouped into two major categories: the Critical Functions and the Generators/Blockers. When measured, these can be expressed in terms of a Balance Sheet and P&L. But, while the financial statements deal with the past, these statements deal with the causes, they show which way the company is headed.
When known in detail, they can be easily altered, easily improved. As they are entirely within the control of management, it costs virtually nothing to change them. This can happen quickly. Changing the Operating Dynamic even a little, profoundly changes the performance of the company.
Longitudinal studies by McKinsey and the London School of Economics, now of more than 4,000 companies, have shown that changing just three of the Critical Functions by 20% improves the bottom line by 40%. And this happens for high performing companies as well as troubled. This level of profit improvement is something no strategic change, or the most draconian of retrenchments, can provide.
In alpha order, the Critical Functions are:
- Customer Orientation
- Lean Operations
- Performance Management
- Profitable Growth Orientation
- Talent Management
Some of these, of course, are more important than others, depending on industry and company size, and each is comprised of sub-elements. When measured and weighted, they provide the Balance Sheet for the effectiveness and impact of the Operating Dynamic. Each sub-element can have a positive or negative value. If positive, that organizational force is driving the company towards success; if negative, it is weakening it. The bottom line shows whether the entire Operating Dynamic is driving the company up or down.
This Balance Sheet shows the innate trajectory of the company. It is forward looking. Its predictive horizon is far greater than any anything that can be provided by financial models.
While the six Critical Functions are the proximate drivers of corporate performance, how well they work is driven in turn by nine Generators / Blockers. It is worth mentioning again that these are entirely within the control of management; changing them is easy and costs virtually nothing.
These are also the major avenues to changing the Critical Functions, and through them the bottom line performance of the company.
The Generators / Blockers are, in alpha order:
- Acknowledgement of Work
- Commitment of Management
- Corporate Assertiveness
- Corporate Decisiveness
- Internal Competition / Cooperation
- Openness of Management
Each of these is comprised of numerous elements. When measured and weighted, they provide a Growth and Loss (G&L) statement for the Operating Dynamic. This is the full analogue of the financial P&L.
To summarize: Measurements are at the unit and enterprise level. The Critical Functions are the proximate drivers of performance; these are shown on the Balance Sheet. The Generators / Blockers are the drivers of the Critical Functions; they are shown on the G&L. The Balance Sheet provides the trajectory of the company. The G&L shows the trajectory of the Balance Sheet. Improving the Critical Functions (Balance Sheet) by 20%, improves the bottom line by 40%. The way to improve the Critical Functions is through the Generators / Blockers, the G&L.
Hard Numbers for Soft Issues
As we look at the organizational forces that drive the company, it is readily apparent that measuring them should be the normal job of HR. But for various reasons this is seldom the case. In great part it is because the entire Human Capital industry – and HR training – has looked at productivity gains and organization development in terms of improvements to the performance of individuals. As Alice knew, this does not have to be so.
But how does one put hard numbers on the causes of performance or, as they are often mislabeled, “soft issues?” One way, of course, is to interview extensively in terms of the fifteen drivers. This was our initial process begun in 1980. But it is cumbersome and fraught with error and spin.
When Perception is Reality
Since 1985 we have used a survey called The Corporate 360°; this is now on the web. It asks managers and supervisors (it is not designed for workers) in sixty different ways, for their perceptions of the organizational forces that are at work within the company. It takes only about five or ten minutes.
Because perception is reality when it comes to organizational forces and human behaviors, managers will act and react as they perceive these forces to be. They respond to the survey in the same way. Their opinions are de facto accurate. And it is our experience that the managers seldom lie. Certainly, front line supervisors – caught between the rock of senior management and the hard place of reality – want their perceptions known and their opinions heard. They answer truthfully.
The individual responses are passed through a model that generates a report of about thirty pages that surrounds a Balance Sheet and a G&L statement. Each line item is scored in numeric and, for simplicity, in alpha terms. Each line item is then expanded with definitions and expressed in ways that essentially elicit statements of corrective action when that is needed.
Changing the Operating Dynamic
Once detailed measures are available, the elephant becomes visible in all its parts, and it is extraordinarily simple to change those parts, to transform the company’s Will to Compete. As the component forces are entirely within the control of management, changing them is easy. When you think of the bottom line improvements that are possible, the ROI’s are extraordinary.
Managers, looking at this can really see what he is buying, and what he should pay.
But it is also simple to change those parts, to transform the company’s Will to Compete. As the component forces are entirely within the control of management, changing those costs virtually nothing. When you think of the bottom line improvements that are possible, the ROI’s can be extraordinary.
All that is needed is for the management teams to input their opinions; for the CEO to call the management team to confront the data; and for each line item deemed negative or inadequate, get commitments to specific action steps to correct or improve them. In our work, we enter these commitments directly into the report, with names and due dates. In the course of a day, the report becomes the plan of transformation. Facilitating is a natural role for the CHRO.
While we are speaking here about a single intervention, the process described above can and should be done periodically. The McKinsey/LSE study indicates that a 20% improvement generates a 40% improvement in financial returns. And that this is available to high performing companies as well as troubled. H R could manage the survey and the CEO could lead the one-day planning.
An interesting exercise for senior managers is to ask what (even) a 10% improvement in profits would do for their company. And what they would have to do to get it.
Harry, Dan and Alice were again looking at the numbers.
Dan placed the financial statements on the table. The company was profitable, at least it was last month. Next to them Alice placed the Balance Sheet and G&L for the Operating Dynamic. They could immediately see it was deficient in three specific areas: Performance Management, Accountability, and Corporate Decisiveness. These were damaged enough to guarantee the new thrust would fail – unless they were changed.
That was the bad news.
The good news was:
They could also see precisely and in detail what was wrong, what to do to improve them and who would do it It could be done quickly; and that it would cost virtually nothing except their determination to do it.
It was time to create a new beginning.