Are you manager in a company in which the prioritisation between short-term efficiency improvements and long-term competitiveness is a dilemma, and in which there is sometimes a lack of transparency between the strategic decisions and the operational initiatives and results? Then you are not alone.
The toolbox is filled with well-proven tools for driving organisations. So why do we still see so many struggle with optimising companies and strengthening competitiveness?
The answers are many, but one of the strong tendencies we see in the market right now is a lack of ability to create end-to-end cohesion. In other words: We manage, direct, set targets and follow up in silos. Our managers have functional focus, and our management does not support end to end, which is why we are creating suboptimisation and consequently poorer business results.
A couple of symptoms we often see include the following:
Extremely well-developed and complex internal trading policies and systems. A negative consequence of a well-developed system for transfer pricing, which is used for management, is that all functions are made into profit centres, and even administrative departments have a top line and an EBIT ratio. This type of management information does not exactly produce the most relevant discussions.
Another characteristic symptom is the ability of Danish companies to manage and optimise working capital. With a practically non-existent cash culture, management and optimisation of working capital often gets placed at the bottom of the managers’ list of priorities, and if the issue is taken seriously at all, it will be often be dealt with as a financial theme. But it is not, it is an OPERATIONAL theme.
The above examples are not based on any scientific analyses, but they are examples of situations which we often experience with many of our major national and international clients. All examples point in the direction of managerial and directional challenges in creating cohesion in the value chain and processes.
If this is the case, it means that, by having the right focus on our business processes, we will be able to achieve the best delivery at the cheapest price = competitiveness.
Our experience shows that efficiency improvements and transformations succeed when functional targets are part of and are coordinated with the end-to-end targets of our value chain. This means that our management and financial model should support value chain and value stream optimisation and not just functional departments.
If market understanding and strategy are known and defined, there are four tools to be used for ensuring both short-term efficiency improvements and long-term competitiveness:
- Ensure the right change management focus
- Ensure translation of strategy into operational projects and activities with clear KPI targets
- Work with continuous process improvements at all levels of the organisation strategically, tactically and operationally
- Set up a performance management system to create cohesion using the tool visual value stream performance management
I will now focus on performance management as this is an over-exposed word which is used randomly. Let me therefore begin by making our definition of performance management clear.
Performance management is the discipline in which we plan, report and follow up on our business-critical success factors. The prerequisites for a value-creating performance culture are robust, relevant data, a frequent follow-up process and participation from relevant decision-makers.
We work with three definitions of performance management to ensure cohesion in our value chain as well as vertical cohesion. In short, we must ensure connection between the three performance disciplines and take all three disciplines into account in the management of our overall value chain and supporting value streams and processes:
- Business Performance Management (BPM) handles the follow-up on our business targets, typically financial, and market KPIs
- Process Performance Management (PPM) is the follow-up on the drivers and KPIs which have a direct or indirect effect on our business performance. This is where we create our business results. A method already used by several leading Danish companies is visual value stream performance management, building bridge between business and process performance and thereby creating the exact process focus needed
- Individual performance management (IPM) handles follow-up on individual performance, including bonus programmes, talent, careers, etc. Unfortunately, we often see that this very discipline is handled decoupled from the others, which often results in the directly opposite effect. We would for example like our managers to set ambitious targets, but we reward them for reaching their budgets. This drives the exact opposite behaviour than the one we want and undermines our business objectives. We want to drive behaviour using individual performance management. It is not exactly a discipline which economists are known to master, and we very much need to utilise the competences of our HR departments to a higher degree.
The above is not a project but a long-term management philosophy ensuring a robust and competitive company in both the short and long term. The execution can be approached in several ways, typically depending on the strategic context. It is critical, though, that the process is adapted specifically to your company.
Good luck with the work.
Originally published in Børsen Ledelse.