Making organisations work: Part 2

by Isabel Wu

Perhaps because my first tertiary qualification was in marketing, one question about working in organisation development has continued to nag at me over the years.  If the organisation is the most significant contributor to business success then why are the professionals who design, develop and manage them, and those who manage the people who make them up, so poor at articulating their business impacts?

Instead of quantifying their results, they quantify the people who provide them.  Instead of using real measures (financial performance) we demonstrate our value using ‘indicators’.  With knowledge workers, the task of measuring personal performance has become impossible, so they create measures for inputs (such as initiative) that do not necessarily link to the desired outputs.  The equivalent would be HR using the revs of the engine to measure speed while finance uses the speedometer.

Patrick Lencioni in his 2012 book, The Advantage: Why Organizational Health Trumps Everything Else in Business, argued that companies that are consistent and complete will outperform their competitors.  The question of the role of the organisation in the success of the business has been the topic of years of research by McKinsey & Company, who share their findings in articles such as, Organizational health: the ultimate competitive advantage, and The hidden value of organizational health – and how to capture it.  In these studies a clear relationship is drawn between the qualitative aspects of management and above-average financial performance.  The question is, why do we persist with measuring things that should not or cannot properly be measured and baulk at using the measures that matter?

Maybe the answer is as simple as the need to justify our existence.  Shareholders and boards want results they can see.  If we do not know how to link our work to financial outcomes, we need to find some other way to justify our activities.  These become our organisational performance indicators.  A consulting firm based in Europe has identified that there are 29 organisational key performance indicators (KPIs) to monitor organisational performance, but do not go on to connect their relationship with corporate performance, such as earnings per share or EBITDA.

“The fundamental paradox of any corporation is that even though it competes in the marketplace, it uses nonmarket instruments – plans, commands, controls – to accomplish goals,” is how James Surowiecki explained it in his 2004 book, The Wisdom of Crowds: Why the Many are Smarter than the Few.  The irony is because the connection between organisational management and business results cannot be shown on a spreadsheet, we identify measure that can be shown but do not necessarily link to the business results.

How do we improve our ability to connect the work we do to improve organisational quality to long-term financial performance?  It’s a well-established truism that we do what we measure, so measuring KPIs that do not statistically link to business results may look good but wastes time and can be harmful.  Measuring payroll increase, for instance, is fruitless if it means we have lost experience and company intelligence to lower skills and less experience.

It has taken me twenty years of working with clients to see that – at least part of – the problem is there are no good models or frameworks that help us to direct and measure our efforts effectively.  Several years of thinking and developing later, I have created a model that may help connect work – not just the physical components – to results.

A changed approach begins with how success is achieved in the market – alignment of your customers with your brand promise, and the ability for demand to meet supply.  Typical measures of these activities would be operating profits or EBIT (earnings before interest and tax).

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At the core of alignment is consistency in values.  This means the answers to these questions are never in conflict, no matter which part of the business they are applied to:

1. What does the organisation value? purpose, mission, values, performance, culture, etc.

2. How does it value others? employees, supplier agreements, fairness, reward, remuneration, etc.

3. How does it offer real value through what we deliver? products, service, experience, brand, etc.

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Aligning business activities with values ensures the business delivers consistent results and this is reflected in measures such as the balance sheet and company’s book value.

The organisation connects people to the business.  We who manage organisations are responsible for optimising outcomes for the business and the people engaged in its enterprise.

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This link between the business and the organisation looks like this:

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We develop and manage:

  • The strategy to set the direction and aspirations of the business
  • The structure of the organisation needed to deliver on the strategy
  • The systems that are needed for the business to operate

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The Total Business Value or Market Capitalised Value is the sum the business would realise if it was on the market.  Most companies’ Total Market Value today is close to 80 per cent intangible assets and 20 per cent physical assets.  The S&P 500 currently values it at 88 per cent intangible assets and 12 per cent physical assets.

All intangible assets are produced by the organisation.  They are either ‘products of the mind’ (intellectual property, market research), or ‘products of the people’ (such as know-how, relationships and reputation).  Management of organisations, therefore, is responsible for the production and utilisation of the company’s intangible assets.

The model now shows the activities the organisation carries out on behalf of the business to grow the value of the company’s intangible assets:

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We develop the IAV (intangible asset value) further through:

  • A culture in which the desired norms and behaviours benefit the business
  • Performance that leads to outcomes for business and people
  • Business core competencies that become its strategic advantage

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IAV is difficult to measure, however as we move further away from the industrial economy into a value economy, we need be letting go of outdated priorities.  The assumption today, in the same vein as ‘careful what you wish for – you might get it’, is careful what we measure.  We need to remember that KPIs are only that – indicators – they are not measures of performance.  We need to get used to longer term measures based on numerous sources of value generation within and from outside the business.  Many diverse sources of value generation is only possible when the organisation lets go of its 1900s approach of homogeneity and reductionism.  Standardisation should only apply to process, not to people, not to to jobs, and as technology-facilitated personalisation becomes cheaper, not even to product and service.

The businesses that are serious about their sustainable profitability and growth will need to move on from quantifying inputs and outputs so that the activities that lead to quantifiable outcomes can be achieved.  When the majority of these are produced through the organisation creating intangible asset value, it makes it clearer where we should be concentrating our efforts and how we become more accountable to the business’s results.