FSN: Tying the strategy knot!

Tying the strategy knot!

27th July 2007
Most companies appreciate the importance of strategy in determining their future prospects but how many are able to communicate it throughout their organisation and ensure that it is delivered? It's a common dilemma and even the most skilfully crafted strategies are doomed to failure unless the business is organizationally aligned. New research from Deloitte and CFO Research Services which explores some of the world's most successful companies re-enforces this view and presses for a more joined up approach to performance management. Gary Simon , FSN's managing editor reviews the research to see what lessons can be learned.

A clear focus on how businesses generate value appears to be the best place to start the strategy development process. It may seem surprisingly obvious but it is amazing that many companies fail to grasp exactly what drives value creation. Refreshingly, the Deloitte research does not emphasise a particular ‘brand' of methodology. “ No single concept of value dominates the top performers in this study. But the concept of how the company generates value emerges as an important organizing principle for crafting strategy and managing performance,” says the report.

It seems that identifying the correct value drivers is more important than the particular methodology used to identify them. In a world that is often influenced by the latest management fad or business school guru it is reassuring to learn that a ‘one size fits all' approach is no guarantee of success.

The next step in an integrated approach is to communicate the value drivers to the rest of the organisation. Deloitte point out that finance teams have a critical role in “carrying this value mindset” to the rest of the organisation as supporters, partners and leaders of business planning.

There is no single technique or recipe for effectively communicating the messages. What works culturally and organizationally in one business would not necessarily work in another setting. Collaboration seems to be the watchword that underpins most successful approaches, but finance also needs to retain sufficient independence to provide effective challenge to the business. One bank reports that it operates finance as a centralised function that works in the business. By reporting to finance rather than the business itself the model ensures that finance personnel remain independent and are perceived as partners.

To some professionals the ‘finance' label in their title is unhelpful when trying to project a more strategic role. One respondent to the Deloitte survey points out that collaboration extends far beyond finance executives' role as quantitative technocrats who produce spreadsheets that no one else is willing—or able— to make. He says, “When crafting the company's three-year outlook my feeling is that it's not so much a financial exercise as it is really a strategic thinking exercise that focuses on what we are going to do differently with customers, geographic markets, acquisitions, and products. It's a lot more about how are we going to grow the business.”

Interestingly nobody seems to acknowledge the importance of technology is assisting the sort of collaboration envisaged. Whilst software vendors tend to overplay the significance of technology there is clearly a place for modern web based budgeting, planning, forecasting and scorecarding systems which help to oil the wheels of the process with workflow and other collaborative capability around document exchange.

However, commenting to FSN, Nick Groves a Deloitte Director said, “ Technology has an important role to play in embedding performance management into the day to day operations of a business and we are seeing organisations increasingly strike up strategic partnerships with the performance management software providers.”

“The report identifies some common themes and steps that can be taken as a precursor to a technology deployment. Couple these with the appropriate technology and you can really harness the benefits of performance management software, not to just drive improvements in cycle times but to take a big step forward in your ability to achieve your business goals.”

Once the organisation is ‘on message' most modern organisations will develop targets and measures. The problem for many businesses is an overabundance of performance measures or KPIs. Sorting the wheat from the chaff is essential to delivering a strategy. But not all metrics are equally useful. Executives quoted in the report say that as the number of metrics increases, information clutter and mixed messages can interfere with high performance. Sources call for simplicity and clarity in financial and operating performance measurement.

“By measuring the business—both operating activities and financial results—in ways that are explicitly linked to business strategy, executives are able to navigate their strategic path and make course corrections quickly enough to reach their performance targets,” says the report.

Nonetheless, when results fall short of expectations—and inevitably, they sometimes do—finance teams at companies in the Deloitte study renew their personal engagement with managers. More analysis and planning, say sources, is seldom the solution to performance shortfalls. Rather, companies reallocate resources dynamically to fix a problem or to stem the flow of good money after bad—or they alter the performance objectives of other units to ensure the enterprise as a whole meets its value creation targets. Perhaps most important, say sources quoted in the report, is the ability to do so quickly, while there's still time to overcome near-term shortfalls.

Perhaps the most controversial aspect of a performance management system is the extent to which performance management regimes ought to be linked to remuneration policy. Every organisation knows the dangers of game playing as business managers seek to mange their bonuses in the setting of performance targets. Reward systems can bring out the very worst aspects of management and encourage dysfunctional behaviour between departments. For example, a purchasing manager bonused on driving down prices may be encouraged to buy higher volumes, whereas an inventory manager may be rewarded on keeping stock levels to a minimum.

However, the Deloitte research confirms that linking remuneration to performance is a winning formula. It says, “ There's little question that paying for performance drives managers to work harder than they would otherwise. And if well equipped with knowledge and information—with value principles and sound metrics of performance—their performance and that of their organizations will rise.”

The research is not that startling – but it usefully re-emphasises the importance of getting back to basics. If businesses identify the factors which influence performance, communicate these effectively, measure their attainment and reward employees accordingly then good results should flow naturally. Everybody knows that such an integrated approach makes sense but delivery is still elusive. Keeping it simple seems to be the key to success.

Deloitte's Groves adds, “ For me, the biggest take-away from the report is that successful companies are addressing how value is created first rather than diving into specific parts of a process looking for efficiency gains. This sheds new light on the potential for performance management. Instead of viewing it as a series of resource heavy finance processes, ripe for pruning, successful businesses are beginning to see it as an opportunity to drive revenue growth and innovation. I believe this far more exciting prospect will drive the performance management agenda of the future.”

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