Long before a crisis hits;
Long before it shows in the Financials;
Or even in the Parametrics;
The signs are there for those who know.
Harry was a gray man. His hair was gray. His eyes were gray. That day his face was gray. Harry has had a heart attack.
That morning, shortly after a meeting with his lawyers he had a heart attack. Now he lay on his hospital bed in a dark depression of soul and wondered dully if he would live or die. He really did not know if he wanted to live or die.
The meeting with his lawyers was about Chapter 11 protection for Graye-Co. He was CEO of a 100 million-dollar enterprise with 1100 people depending on him.
He wondered if his company was a metaphor for his life. Or perhaps the other way around. Both were now struggling for survival.
He wondered what he had done . . . Not done . . .
You hear them say, from boardroom to shop floor and every office in between, “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 their bankers too: “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 management, to ownership, that a company is faltering, many things have gone a long, long way down. Have taken that company’s competitive value with them.
The heart attack that Harry suffered did not begin with a massive pain in the chest and then his collapse. Neither did his company’s heart attack.
Nor did it begin with the constant ache of angina, something that can hardly be ignored – though Harry did. This might be the equivalent of early Phase III Decline. (See Figure 1)
Nor did it start with the silent blood pressure that can be measured, if someone knows and wants to do it. Harry had been too busy. Think here of mid Phase II Decline. Nor the still earlier buildup of plaque in the arteries.
No, Harry’s heart attack began long before that, in his habits and behaviors, his attitudes and proclivities. And in symptoms that, even though subtle and painless, could be seen. Could be measured. His company’s crisis began that way too. With patterns and behaviors. With symptoms that could be seen and measured. Harry had looked at neither his own nor his company’s.
A corporate decline that ends in chapter 11 or extinction has a progression entirely analogous to human heart attack and death. Symptoms are detectable at every stage, all the way back to the root causes that block arteries and stultify corporate performance. But somehow, even though early symptoms are simple to identify and measure, they seldom are. And when they are, people often ignore them. As did Harry.
The problem with corporate heart attacks, by and large, resides in the focus all managers properly have on The Numbers. Managers know that unless they can measure, they cannot manage.
And so they do: measure what they can measure; measure what they know to measure, what they have been taught to measure.
Most of the factors they do measure of course are necessary. The Financials must be measured; how else would you know how you have done. The Parametrics must be measured, how else would you know how you are doing.
But many of the really important factors are never measured at all: the factors that today are causing, generating the behaviors, that tomorrow will be reflected in the Parametrics and, the day after, reported on the bottom lines.
These are the Drivers of Performance. The human and organizational factors that underlie, cause, impel – and so predict – all corporate performance.
The reason for not measuring the drivers is partially caused by the belief that such factors cannot be identified; partially caused by belief that such factors cannot bequantified; and, if that were possible, cannot be changed. Except by leaders who are gifted or inspired. And most of us are neither. But sadly there is also another reason: The implicit belief that such factors are unimportant; that the operating dynamic of a company has no impact on its performance.
That is not the case. They can be identified. They can be quantified. Most important of all, they can be changed! And anyone watching a great team flounder is immediately aware the pivotal role the spirit of that team played in the result.
The Phases of Corporate Decline
As a company begins its downward journey to financial crisis and eventually death, 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. And each with its own equally unique remedies.
Phase I Decline: The Hidden Phase
Like the silent phase of Harry’s sickness, the Hidden Phase is completely invisible from outside the company; and all too often, not seen or understood by those within.
Because this phase of decline is not visible to the marketplace – nor is it detectable by any traditional due-diligence audits – the “value” expressed in financial terms that is placed on the company does not reflect this erosion. And there is somehow, against all rationality, a belief that if the marketplace does not see it, it is not real. Eventually, of course, the market will see it.
During this hidden phase fully a third of the competitive value of a company is lost. This loss becomes only too 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 acquisitions and mergers – fully 70% by some accounts – are disappointing: Prices are paid for companies that are suffering from internal pathology that can not be seen from outside and have really lost a great deal of their ability and their will to compete. (It is also probable that any company that has been on the block, and sold, and bought, will have suffered this erosion.)
Phase II Decline: The Subtle Phase
The second, Subtle Phase, of decline 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. Harry’s shortness of breath and lack of physical stamina was analogous to this.
Again, while the marketplace can see this Phase II erosion and can address the symptoms in due-diligence audits, it often does a less than perfect job; another reason why so many mergers and acquisitions disappoint.
By the end of this phase, by the time Phase III begins, fully two thirds of the competitive value of the company has been lost. At this stage, the company is an accident waiting to happen – as was Harry.
Phase III Decline: The Overt Phase
Then of course there is the Overt Phase. Typically, the decline of a company is admitted and addressed only within Phase III; as if any erosion/decline that did not show in the financial statements was somehow not real.
Of course, by the time Phase III arrives, trouble is deeply ingrained.
The Measures of Decline
The three separate phases of corporate decline are measured using three different categories of observables:
- Phase I – The Hidden Phase, is measurable only by the Performance Drivers. The others show nothing.
- Phase II – The Subtle Phase, is measured by the Parametrics, with the Drivers also ringing alarms.
- Phase III – The Overt Phase, is measured by the Financials. In this phase the Parametrics and the Drivers are also both sounding alarms with increasing intensity. And – there is an interesting thought here – if the Financials are inaccurate (or faked) the Parametrics and especially the Drivers act as aCorporate Polygraph. (Directors should note.)
Traditionally, many executives have been trained to detect lifecycle stages and changes in corporate performance only in terms of the Financials. This of course restricts their awareness of a developing problem to the very earliest stages of Phase III.
Many, though, seem to become aware only at a still later stage, when cash flow goes negative or the bank pulls their loans. Above Phase III, the Financials ring no loud alarm bells, show no warning signs. Though fully two-thirds of the competitive value of a company has evaporated by then.
The Financials are, of course, understood by all professional managers. They are always measured, so we will not address them here save to mention that they arehistoric, retrospective measures, with little ability to foretell performance. And in those (very limited) instances where they can, their predictive horizon is short.
Some smaller number of managers, when their company has the resources to undertake the requisite analyses, keep a constant watch not just on the Financials but also on a number of other factors – collectively known as the Parametrics. (Figure 1. – middle column.)
Examples of these are: production numbers, market-share trends, customer turnover, time-to-market, staff satisfaction. Potentially, there are hundreds of Parametrics that might be measured. And finding the correct measures for individual companies and their industries can be skilled work. They can also be expensive to measure. However, there are some universals.
Like the Financials, the Parametrics are expressions of performance. They are historic, retrospective expressions. However, they are leading indicators in the sense that they show up earlier than the Financials.
These Parametrics, together with the Financials, are the factors that are commonly looked at in professional due diligence audits.
Yet – again it is worth repeating – by the beginning of Phase II, the competitive value of the company has fallen by a third. Invisible to the marketplace, hidden from its investors, its creditors; and, all too often, from its own management and board.
The Drivers of Performance
Above Phase II, in the Hidden Phase, the traditional measures do not apply: the Financials do not show problems; neither do the Parametrics. But there are observables that can be identified and quantified.
These are the Drivers, root causes of organizational and human behaviors. These are both the generators of performance and the blockers of it. (Figure 1. – left column.)
Because they are the causes, they are very earliest predictors of corporate performance. They warn of problems at the very time they are causing those problems. And they remain visible with increasing intensity through the other phases of decline. In fact, these drivers are visible, measurable, and meaningful throughout all stages of the entire corporate life-cycle.
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.
There are more than one hundred Drivers of Performance: Only a dozen or so are true Generators; but some ninety are Blockers.
Examples of Performance Generators are: corporate decisiveness, accountability, acknowledgment of work. From our experience with more than two hundred organizations, we know that when all three of these are significantly improved, there is an immediate surge in systemic performance within the company, no matter what phase the company is in. Systemic performance shows on the bottom line very quickly.
Examples of Blockers are distrust, bureaucracy, low performance expectations. However, as there are potentially so many of these, any or many of which may conspire to block the generators, a full discussion must remain for another time.
But back to 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.
As companies leave the Stable Stage of their corporate life-cycle, and begin the downward path towards dissolution, there occurs an inevitable evaporation of competitive value. At first this loss of value is invisible to all but the most penetrating investigators. And only if they can look deep into the company, from within the company. External measures show nothing. And the marketplace is blissfully unaware that corrosion has been, and is, taking place. In this Hidden Phase, a third of a company’s competitive value vanishes. Measurement of decline within this phase is only possible using the Drivers of Performance.
Further down the curve the loss becomes visible – to those who know which Parametrics to observe and measure and interpret; and the marketplace of sophisticated investors with their due-diligence audits reflects the loss from there. In this Subtle Phase, another third of the value goes away. Measurement here is by the Parametrics and the Drivers.
Finally, at the beginning of Phase III, the loss becomes obvious, even to those who address the Financials only. The need to prevent this erosion is of course compelling and obvious. But waiting until late in the downward path to attempt a renewal is, at best, only partially successful.
Fortunately there now exist instruments and technologies that can provide very early warnings for a company. These instruments and technologies can identify and quantify the Drivers that need to be changed. They cost next to nothing to apply. They are also profoundly resistant to tampering or disguise. All that is needed is a managing officer with the guts to have the management team look deep within the soul of their company. And not flinch from what they see.