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Tag Archives: Performance Management

Digital Transformation: 2 Distinct Models to Manage Key Talent

20 Oct

Traditional Talent Management practices fail to meet the high-potential talent requirements imperative to compete in the digital world today.  In fact, they disappoint the key talent available in the market.

A 2016 Digital Business research by MIT Sloan Management Review and Deloitte on 3700+ executives reveals attracting and retaining talent as the most pressing concern for organizations large or small.  The study indicates that organizations that are still using traditional approaches to manage Talent face a number of pressing challenges, including:

  • Building new competencies within limited resources.
  • Alignment of culture, strategic initiatives, human capital, and hierarchies with organizational objectives.
  • Attracting, selecting, and retaining key talent.
  • Creating robust Performance Management, compensation, and benefits systems.
  • Finding and developing talent with critical capabilities—such as forward thinking, transformative vision, and change focus—alongside technical skills.
  • Providing opportunities that require digital skills, to attract and keep critical Talent engaged in the organization.

One of the findings of the 2016 digital business study demonstrate that it’s both the younger as well as middle management people who tend to look elsewhere in case they don’t find opportunities to develop digital skills in their existing organizations.  Such results call for senior management to identify, evaluate, and implement more immediate and appropriate digital technologies methods to attract and retain key talent.  Leading organizations are now incorporating these Talent Transformation efforts into their Digital Transformation programs.

Research on 3700 plus Digital-native respondents further reveals leading organizations to be using a combination of 2 distinct models to manage their Talent:

  1. Talent Markets for Contractors
  2. Digital Tools for Employees

Let’s discuss the first approach to Talent Management in detail, for now.

Talent Markets for Contractors

Acquisition of right talent necessitates fostering linkages with on-demand talent markets for the timely availability of required talent.  Many organizations seek help from on-demand Talent Markets to attract and sustain talent in the digital business environment.  These organizations pursue a flexible recruitment model using digital platforms to attract skilled contractors and consultants.  Digital talent markets can be expanded or contracted depending on the quantity of work and skillsets required.

Digital talent markets can coordinate the work of full-time employees as well as cover live activities of contractors more nimbly and reliably.  Digital platforms offer superior talent markets to assess and manage large talent pool of contractors.  A few organizations are experimenting with developing their own on-demand talent markets while some have cooperated with other organizations to share talent markets.  It’s up to senior management to decide if they want to leverage existing on-demand talent markets or cultivate their own to ensure availability of required skills when needed.  Talent markets can be nurtured using 3 best practices:

  1. Manage on-demand talent markets as a community
  2. Strike a balance between full-time and part-time talent
  3. Create an environment where the best people want to work

Manage on-demand talent markets as a community

To make the availability of required key talent certain:

  • On-demand talent markets should be considered strategic resources and cultivated carefully with future talent requirements in mind.
  • Companies should devote resources and efforts to develop their own talent pool.

Strike a balance between full-time and part-time talent

Talent markets are meant to manage freelancers.  However, a few organizations have also begun collaborating with them and deploying their full-time employees to project work that is critical to build new competences.  A few considerations in this regard include:

  • Companies need to strike an equilibrium between full-time and part-time talent.
  • Some people prefer full-time employment while others fancy flexibility or work from home options.
  • Some workforce providers even offer services of retired people with expert skills, who have proved to be a valuable asset.
  • Firms can choose on-demand workforce providers to have full-time employees to maintain a steady employee base, or pick part-time contractors to handle workload surges.

Create an environment where the best people want to work

Setting up the right environment is central to attracting and retaining the best flexible, on-demand talent.  A majority of companies consider freelancers or independent contractors inferior to their permanent employees.  Organizations that want to attract great talent should think of contractors as valuable resources and treat them as such.  To get top talent, organizations need to:

  • Nurture an Organizational Culture conducive to support on-demand workers.
  • Devise remuneration and reward systems that value contractors and full-time employees equally.
  • Create an atmosphere that offers attractive work experiences for the employees.
  • Deploy people on interesting projects and allow them to experience job rotations to improve their skills sets, problem solving abilities, cross-departmental team collaboration, and improve their engagement levels.

Interested in learning more about the 2 distinct approaches to Talent Management through Digital Transformation? You can download an editable PowerPoint on Digital Transformation: Talent Management here on the Flevy documents marketplace.

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Performance Management Maturity Model: 5 Key Stages Simplified

14 Jun

Performance Evaluation serves as a health check on operations and individuals’ work.  The organizational maturity notion signifies the progress of an organization in terms of developing its people, processes, technology, and capability by implementing quality practices.  Organizations aiming to achieve the highest maturity levels in performance need to take care of the intricacies involved in deploying a Performance Management system and the relationships it has with the other key organizational activities.

Performance Management processes in organizations can be assessed using maturity levels, by measuring the implementation of Performance Management tools, analyzing the availability of internal Performance Management processes in place, assessing the structures, procedures, and interactions utilized to direct Performance Management systems.

An organization’s performance maturity is assessed on 5 levels of progressive growth.  These 5 stages present a valuable dashboard to gauge the implementation of the corresponding levels of the Performance Management Maturity Model.

  1. Initial 
  2. Emergent
  3. Structured
  4. Integrated
  5. Optimized

To achieve maturity in performance management, organizations need to build capabilities in 5 core elements—referred to as “Operational Levers”—Tools, Processes, Governance, Architecture, and Integration.

Initial Stage

The organizations at the first performance maturity level are not acquainted with—or totally unfamiliar of—the tools necessary to implement the Performance Management system.  The Performance Management processes are typically inconsistent.  Organizations at this maturity level do not practice employee empowerment, development, and innovation.  There is a dearth of appropriate KPI calculation approach and the performance architecture is in its budding stage.  Roles and responsibilities, importance of KPIs, and individual/organizational indicators are unclear to employees.

The level is characterized by casual strategic planning practices—dependent on top management experience—with ill-structured communication mechanisms.  The initiatives lack alignment with organizational goals.  Leadership involvement in mentoring and developing employees is at sub-optimal levels.  Staff motivation and increasing their engagement levels is not given due importance.

Emergent Stage

The organizations at the second level of Performance Maturity have a strong desire to improve performance.  At this stage, organizations begin exploring Performance Management tools, but have uncoordinated and un-standardized internal processes and systems.  Initiatives to integrate performance management procedures are planned with clearly defined objectives and expectations.

However, at this level, strategy does not deliver value and is not more than formal documentation.  Managers are assessed based on performance results, but not the lower hierarchical levels.  There is unclear articulation of company goals, misalignment at various organizational hierarchical levels, and incompetent communication.  A few basic performance measurement methods—e.g., KPI selection and documentation are embraced by the organization.  The KPI selection process, however, lacks appropriate yardsticks, tools, standardized forms/templates, and approaches.  Performance evaluation and reporting processes exist but are deficient in clear communication by the leadership.  Leadership possesses a basic understanding of performance measurement processes.  Measuring performance at the individual level is uncommon at this maturity level.  Performance review meetings are short of delivering the insights required to make critical decisions.

Structured Stage

The “Structured” stage of the Performance Management Maturity Model is characterized by well-coordinated and carefully regulated Performance Management processes.  Organizations at this stage have a defined set of Performance Management tools.  There are standardized Performance Management practices with well-defined and improved process flows.  There is typically an inconsistent approach towards adopting an aligned Performance Management architecture though.

Organizations at this level employ strategy monitoring tools—e.g., scorecards and dashboards—but do not cascade these at the lower ranks and files.  KPIs are selected based on a clear-cut criteria, established tools and methods, and agreement across the board.  Standardized forms are used to document and report KPIs.  The KPI targets are established utilizing data, benchmarking, and comparing market figures.  Organization-wide performance evaluation data is gathered and disseminated at all levels.  People, largely, have a fair understanding of their personal and organizational performance goals.  A well-defined Performance Management system is in place with appropriate templates, procedures, and governance structures ready for each Performance Management cycle.  Incentives and training and development opportunities help improve performance.

Interested in learning more about the other stages of the Performance Management Maturity Model?  You can download an editable PowerPoint on the Performance Management Maturity Model here on the Flevy documents marketplace.

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4 Organizational Design (OD) Elements Essential to Inculcate the Desired Behaviors Across the Organization

27 Mar

Inculcating productive workforce behaviors is of utmost significance in Business Transformation, successful Strategy Execution, and Performance Improvement.  However, making people embrace productive behaviors involves a concerted effort across the organization.

The realization of Transformation, Strategy, and Performance improvement goals can become a reality by developing a thorough understanding of the 4 components of Organizational Behavior.  These components act as powerful levers in shaping the desired behaviors in the workforce:

  1. Organizational Structure
  2. Roles and Responsibilities
  3. Individual Talent
  4. Organizational Enablers

These Organizational Design levers work effectively when combined and aligned.  Let’s discuss the first 2 levers in detail now.

Organizational Structure

Organizational Structure represents the management reporting lines that create the organization’s spans of control, layers, and number of resources.  Organizational Structure is a foundational driver to Organizational Design, which also has a strong positive bearing on promoting the behaviors critical to improve the overall performance of the enterprise.  This is owing to the power that a position exerts on the subordinates based on factors that are important for individuals—e.g., work, compensation, and career ladder.

The Organizational Structure indicates an enterprise’s priorities.  An organization is typically structured in accordance with its top most priority.  For instance, functional organizational structure is adopted by enterprises having functional excellence as a priority.  In present-day’s competitive markets, most organizations have to deal with several priorities at a given time, which could be conflicting.  However, this does not mean adding new structures on top of existing ones, thereby increasing unnecessary complexity.  Creating overly complex structures to manage multiple priorities results in red tape and delayed decisions.  All roles are interdependent, necessitating cooperation.  This means taking care of the needs of others—instead of just watching over personal priorities—and encouraging individual behaviors that boost the efficiency of groups to achieve collective objectives.

Roles & Responsibilities

Roles and responsibilities deal with tasks allocated to each position and individual.  Organizational Design depends heavily on redefining clearer and compelling roles and responsibilities—to avoid any duplication of efforts or creating adversaries among team members.  In a collaborative culture where cooperation is the mainstay of an organization, individuals should not only be aware of what is required of them, but also appreciate the responsibilities of their team members, the authorities their roles exercise, the skills required, and the metrics to measure success.

A methodical way to outline roles and responsibilities effectively—while minimizing complexity—that encourages cooperation and empowerment is through the “Role Chartering” technique.  The technique requires distinctly identifying all roles on the basis of 6 key factors:

  • Describing shared and individual accountabilities
  • Outlining indicators to track success
  • Specifying who has the right to decide what
  • Indicating the capabilities critical for roles
  • Assigning the leadership traits valuable for the roles
  • Charting the abilities required for accomplishing personal and team goals.

Interested in learning more about these components to Organizational Behavior?  You can download an editable PowerPoint on Organizational Behaviors here on the Flevy documents marketplace.

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10 Best Practices in Business Dashboard Design

21 Mar

Business dashboards are important tools to measure key performance indicators and data pertaining to an organization or certain procedure.  Just as a vehicle dashboard is powerful performance management tool in summarizing a performance of a multitude of processes, a business dashboard summarizes the performance or impact of a host of functions, teams, and activities; and assists in strategic planning and decision making.

Business dashboards simplify sharing and analysis of large data, and help users visualize complex performance data in simple yet visually aesthetic manner.  Dashboards aid in simplifying complex processes into smaller more manageable information pieces for the organizational leadership to focus on everyday operations.  They keep everyone on the same wavelength and prioritize display of facts based on their importance and potential impact.  The information on a well-designed dashboard is clear, presentable to enhance meaning, readily accessible, and dynamic.  A carefully-planned dashboard allows the leadership to identify and answer business challenges in real-time, develop plan of action based on insights, and inculcate innovation.

Proficient and capable dashboard designers and firms have taken the art of visualization of valuable indicators and insights through dashboards to the next level.  They have devised specific guiding principles, dos and don’ts, and time-tested development routines to accomplish this.  These guiding principles comprise 10 best practices, which can be segregated into 3 major implementation categories:

  1. Planning
  • Analyze your audience
  • Contemplate display options
  • Prompt application loading time
  1. Design
  • Exploit eye-scanning patterns
  • Restrict number of views & colors
  • Let viewers filter data
  • Ensure proper formatting 
  1. Refinement
  • Use Tooltips to reinforce story
  • Eliminate redundancy  
  • Review the dashboard carefully

Let’s discuss the first 5 best practices for now.

Analyze your audience

A careful analysis and understanding of the business dashboard’s intended audience is the first important principle to consider before commencing the development of such a dashboard.  For instance, a busy salesperson in need of quickly going through indicators, whereas senior management needing a deep-down review of quarterly sales results.  This gives the developers a thorough idea of what the audience wants from a dashboard, what data they will visualize utilizing this, and let them know the audience’s technical capabilities in terms of data analysis, theme, issue, and business understanding.

Contemplate display options

The second principle to follow in designing a business dashboard is to research your users’ device and display preferences beforehand.  Building a dashboard with desktop display options in mind when your audience prefers to use phones to view it could be a disaster.  The designers should set the size of the dashboard properly—allowing the users to view it on a range of devices, by building in automatic sizing option for the dashboard to adopt to the dimensions of the browser window.

Prompt application loading time

Your audience and viewers are busy people who hate long waits.  Therefore a stunningly designed dashboard would not get the right traction if it takes too much time to load.  The dashboard author should facilitate prompt dashboard loading by deciding which filters to add in the dashboard and which ones to exclude.  For instance, although filtering is useful in restricting the amount of data analyzed, it effects query performance.  Some filters are quite slower than others as they load all of the data for a dimension instead of just what you want to keep.  Knowing the Order of Operations is also beneficial in reducing the load times.

Exploit eye-scanning patterns

The dashboard authors should have a deep sense of the main purpose of the dashboard in mind when develop such a tool.  They need to be aware of individuals’ eye tracking patterns—typically when most people look at a screen or content, they start scanning the upper left hand corner of the screen first by intuition—and make the best use of the screen space to display the most important content at the right place.

Restrict number of views & colors

The designers often get over enthusiastic during their application designs and try to stuff the dashboard with multiple relevant views.  This is detrimental for the bigger picture.  They must include not more than 2 to 3 views per dashboard and create more dashboards in case the scope creeps beyond the 2-3 views range.  It is also crucial to ensure the content to be clearly visible to the viewer and to use colors correctly to facilitate analysis instead of cramming too many colors in the visuals, which creates a graphical overload for the viewers, slacken analysis (or may even prevent users to analyze data), and even blur the graphics.

Let viewers filter data

Allowing users to filter the data is another best practice to keep in mind while designing business dashboards.  This added interactivity encourages data assessment and permits the users to have their most important view act as a filter for the other views in the dashboard.  This helps in conducting side-by-side analysis, promotes involvement, and retains users’ interest.

Interested in learning more about the other best practices to aid in designing a robust business dashboard and knowing the most common mistakes to avoid in this process?  You can download an editable PowerPoint on Business Dashboard Design here on the Flevy documents marketplace.

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How to Achieve Board Excellence? Have A High Impact, Strategic Board

7 Mar

The pressure on Boards and Directors to raise their game has remained acute. A survey of more than 770 directors from public and private companies across the industries around the world suggested that some are responding more energetically than others.

There is a dramatic difference between how directors allocate their time among boardroom activities and the effectiveness of the Boards. One in four directors assessed their impact as moderate or lower, while others reported as having a high impact across Board functions.

Today, the call to become more forward-looking and achieving Board Excellence is further highlighted. This is further emphasized when the Board and Management are pressured to find the best answers to global business concerns and issues. In Strategy Development, this becomes invaluable. It does not only lead to clearer strategies but also the creation of alignment essential in making bolder moves.

While these are essential, there is a need to raise the quality of engagement on strategy between the Board and Management for each group to achieve smarter options. This is possible only if organizations have high impact, strategic Boards in place.

High impact, strategic Boards have a greater impact as they move beyond the basics and face increasing challenges.

The Challenges that Today’s Board Face

Business is fast-changing and rapidly transforming. The global economy is increasingly pushing businesses, as well as the Board to face a gamut of challenges.

What are the 2 main challenges facing Boards today?

First is Time Commitment. Working at a high level takes discipline – and time. In fact, the greater time commitment is expected on high impact activities. The Board often have 6 to 8 meetings a year. As a result, they are often hard-pressed to get beyond the compliance-related topics to secure the breathing space needed for developing a strategy.

Often, it is the very high impact Directors who invest more time compared to moderate or lower average Directors.

Who are your very high impact Directors? They are those spend a total of 40 days a year working for the Board compared to 19 days of low impact Directors. An extra 8 workdays a year is invested in strategy and an extra 3 workdays a year are spent on Performance Management, M&A, Organizational Health, and Risk Management.

High impact Directors who believe that their activities have greater impact spend significantly more time on these activities compared to low impact Boards.

Second is Strategy Understanding. Why is Strategy Understanding a challenge for the Board? Limited understanding of the organization’s strategy can result in the Board’s limited engagement with the organization. Based on the survey made, only 21% of the Directors have a complete understanding of the current strategy. Often, Board members have a better understanding of the company’s financial position rather than its risks or industry dynamics.

If we look at high impact Directors, they invest more time in dealing with strategic issues. In fact, they invest 8 extra workdays a year on Strategic Planning and discussing strategy compared to low impact Directors. High impact Directors center on Strategy Focus Areas which can, in turn, spur high-quality engagement from the Board on strategy development. The quality of Board engagement on strategy is enhanced, both when the engagement is deep and during the regular course of business.

The Board just needs to focus on 3 areas of discussion for the Board to enhance Strategy Development. One of them is Industry and Competitive Dynamics.

Interested in gaining more understanding of Board Excellence via High Impact, Strategic Boards? You can learn more and download an editable PowerPoint about Board Excellence: High Impact, Strategic Boards here on the Flevy documents marketplace.

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Strategic Key Performance Indicators (KPIs) Primer: Introduction to The KPI Virtuous Cycle

26 Jan

Technological innovation and intensifying competition are forcing leaders to rethink how they use Key Performance Indicators (KPIs) to manage and direct organizations.  Digitization has reinforced the importance of Key Performance Indicators not only in enhancing employee performance but driving the overall organizational productivity.

The role of KPIs is becoming more dynamic.  KPIs are getting demonstrably flexible, smarter, and valuable in achieving strategic advantage.  Leading technology-driven organizations—including Amazon, Airbnb, and Uber—rely on metrics considerably and utilize KPIs to steer their strategy and evaluate success.  They perceive KPIs quite differently than traditional-focused organizations, and employ them as an input for automation, and to guide, regulate, and improve their machine learning tools.

To make the most out of these dynamic and strategic KPIs of this Digital Age, leaders need to be more insightful and knowledgeable.  They should be able to thoroughly determine which KPIs to analyze, how to measure them, and how to effectively improve them.  Understanding the value of selected KPIs and their optimization is key to aligning strategies; making the right decision to invest in data, analytics, and automation capabilities; and create a link between people and machines.

KPI Virtuous Cycle

The relationships and dependencies that clarify, educate, and enhance KPI investment are demonstrated by “KPI Virtuous Cycle.”  By digitally linking KPIs, data, and decision-making into virtuous cycles, companies can align their immediate situational requirements with long-term strategic planning.  The KPI Virtuous Cycle has 3 key components, and it demands active cross-functional collaboration:

  1. Data Governance
  2. KPIs
  3. Decision Rights

The way these 3 components impact—and support each other—keeps changing.  Organizations aspiring to become digital-savvy should embrace, value, and relentlessly invest in the KPI Virtuous Cycle.

Data Governance

The first component of the KPI Virtuous Cycle is about employing authority and control (planning, monitoring, and enforcement) through a set of practices and processes to manage organizational data assets.  Leading digital organizations consider data as a strategic resource, a valuable tool for measurement and accountability, and a mechanism to facilitate meeting strategic KPIs.  Data Governance frameworks are guided by strategic KPIs.  Organizations should know what data sets would be ideal to predict and rank—for instance, customers’ lifetime value and their propensity to leave—to prioritize preemptive and preventive action.  Data and Analytics serve as a component of Data Governance.

Strategic KPIs

Strategic KPIs shape and govern enterprise Data Governance models.  These KPIs include financial, customer, supplier, channel, and partner performance parameters.  For instance, Data Governance initiatives in customer-centric organizations are prioritized to facilitate in realizing customer-focused KPIs—e.g., Net Promoter Score (NPS) and Customer Lifetime Value (CLV).  Enterprise Data Governance frameworks are strongly influenced and informed by strategic KPIs.

Decision Rights

Decision Rights ascertain the decision-making authority required to drive the business and strategic alignment.  Making decisions in such a way that it boosts organizational performance involves identifying the individuals explicitly involved in making decisions, charting an outline on how decisions will be made, reinforcing with appropriate processes and tools, and defining various decision rights scenarios to facilitate in automation.  It is, however, quite tricky to determine and assign decision rights when an enterprise is aspiring to empower its people and making machines function better.

Imperatives for Creating Dynamic and Strategic KPIs

For the KPIs to be strategically defined and become truly dynamic, the leadership needs to provide the required support by getting thorough data sets compiled and meaningful analytics performed.  At the same time, there is a need to:

  • Decide whether the decision rights needs to be assigned to individuals (rather than machines or vice versa.
  • Enhance the capabilities of people and machines.
  • Apply decision rights to generate data to identify and gauge productivity.
  • Identify the delays and bottlenecks between KPIs, data, and decisions.
  • Verify the diligence in the way KPIs, data, and decisions are mapped and monitored.

Interested in learning more about the components of KPI Virtuous Cycle, its applications, and Strategic KPIs?  You can download an editable PowerPoint on Strategic Key Performance Indicators (KPIs) here on the Flevy documents marketplace.

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What Areas to Focus On While Devising Key Performance Indicators (KPIs)?

25 Jan

Creating a culture that measures productivity objectively is a sensitive matter.  Key Performance Indicators (KPIs) are being employed extensively by organizations across the globe to monitor and track performance.  KPIs provide valuable metadata to improve top-down and bottom-up vertical efficiency.

Analytics-driven firms are aware that KPIs are much more than a tool to evaluate performance.  Utilizing KPIs, they gather valuable insights, create enterprise-wide accountability, and develop a goal-oriented culture.

However, most executives typically fall short of utilizing KPIs to their full potential.  They have to realize that the effectiveness of KPIs depends on two distinct yet important elements: KPI transparency for the entire workforce—making the core metrics available across the board at all levels—and alignment of KPIs—determining the KPIs most relevant to the people and organizational purpose, and taking action based on the results of performance monitoring.  Leading organizations share KPIs with all stakeholders and use algorithms to gauge the contribution of KPIs to critical functions, e.g., Marketing and Customer Experience.

To create an objective-driven culture, the senior leadership should work on developing capabilities to outline key performance and putting in place accurate metrics to measure it.  The selection and prioritization of most relevant indicators is something that the leadership needs to carefully think about.

When defining KPIs, there are 5 KPI focus areas.  Each focus area is unique and critical, but collectively they have a profound impact on each other and on the organizations that are aiming to undergo Digital Transformation.  Leading Data and Analytics-driven organizations devise KPIs that cover all 5 of these focus areas:

  1. Enterprise KPIs
  2. Customer KPIs
  3. Workplace Analytics
  4. Partner and Supplier KPIs
  5. Quantified-self KPIs

Let’s discuss the first 3 focus areas in detail, for now.

Enterprise KPIs

The Enterprise KPIs benchmark the effectiveness of core functions of an organization.  These indicators are important to determine the accountability of the leadership and workforce, and are vital for strategic as well as routine decision-making and investment.  Examples of these indicators include Risk-Adjusted Return On Capital (RAROC) and Net Promoter Score (NPS).

Customer KPIs

The Customer KPIs facilitate in measuring the knowledge and impact of all leads, prospects, and customers. These metrics are used to calculate the actual and likely financial contributions of business prospects and clients.  The Customer KPIs assist in analyzing and ranking the relationships that organizations aspire to develop with the customers and better understanding each segment and sales funnel the customers belong.  Customer lifetime value is an example of these indicators.

Workplace Analytics

The Workplace Analytics pertain to quantifying the efficiency and commitment level of organizational people.  These analytics are used to isolate leadership tools and methodologies helpful in enhancing customer focus, and capture and quantify process outcomes and outputs feeding organizational KPIs.  These metrics are valuable in measuring collaboration across the organization, gauging the proficiency of managers in motivating their teams, and highlighting the elements that demoralize people.

Interested in learning more about the 5 KPI areas of focus?  You can download an editable PowerPoint on Key Performance Indicators (KPIs): 5 Areas of Focus here on the Flevy documents marketplace.

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Traditional Value-Based Management vs. Value Creation through Relative Shareholder Return

22 Oct

Value-Based Management (VBM) has been regarded traditionally as a tool to help investors evaluate firms, optimize performance management, and maximize shareholder value.

However, there are mixed opinions on whether to utilize VBM as a mandatory investment or management tool. Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM in confronting the dot-com bubble or other financial downturns. They are even cynical of the efficacy of VBM as a robust management approach for the future or its effectiveness in creating competitive advantage for them.

The following are some shortcomings associated with the traditional VBM approaches that leaders should negotiate:

  • An inadequate link between VBM practices and capital markets realities — absence or lack of analysis of the capital markets to expose gaps between a company’s intrinsic value and actual stock price.
  • Aligning VBM with the organizational systems and its culture for value creation.
  • A broken process for managing the controls that govern value creation — traditional VBM offers rich insights on managing economic principles, but lacks a process on how to further align strategic, cultural, and behavioral levers.

Value Creation Framework

The lack of trust in the effectiveness of VBM necessitates formulating a more thorough, fact-based approach to executing VBM. In developing a value creation agenda, it is quite uncomplicated to conceptually convince managers and employees that it is their main shared focus, but the core challenge is to devise a practical and integrated implementation approach.

The Value Creation Framework depends on 4 value creation levers that senior management can pull in order to effectively achieve their value creation goal. These levers are not autonomous and need to be activated in tandem:

  • Operational Effectiveness
  • Competitive Strategy
  • Portfolio Management
  • Investor Strategy

The framework first stresses the management team to agree on the shared aspirations, prioritized levers, and how the headquarters activities are to be aligned with the business units. This entails revisiting the assumptions, priorities, decisions, tools, and culture at all levels across an organization to harness VBM to achieve improved value creation. The framework warrants the VBM approach to be embraced as a culture to maximize value creation — which is measured in Relative Total Shareholder Return.

Relative Total Shareholder Return (RTSR)

Focusing and aligning the organizations around a shared mission is important for the leadership. Clearly laid out, compelling vision and aspirations — that are reinforced daily — have a profound positive impact on an organization’s value creation potential.

Value creation best practices necessitate establishing a single, long-term goal — the Relative Total Shareholder Return (RTSR) performance. The Relative Total Shareholder Return reflects a firm’s capital gains plus dividend yield relative to a peer group or market index.

The RTSR concept is not new, but practically most companies find it hard to implement RTSR as a goal-setting tool. The RTSR should be clearly quantified and communicated across the board as a long-term goal. The RTSR aspirations motivate and empower line management to work as entrepreneurs to achieve it, set objective targets, and connect business unit management to capital markets discipline. If done right, RTSR is a useful method to specify and communicate a firm’s objectives and the supporting execution plans.

Measuring RTSR Objective

Measuring the RTSR goal achievement at the corporate level can be done by ranking a firm’s TSR against its peers TSR. A RTSR target can be set to analyze the effect of corporate and business unit plans. This can be done by quantifying a subjective goal — e.g., top half or top quartile TSR — into a specific number. The calculations warrant developing a forward-looking RTSR target on the following 3 footings:

  • Anticipated 5-year company cost of equity — to gather an investor’s view of the risk-adjusted average expected return that a firm or market index is priced to deliver.
  • Anticipated spread to achieve relative TSR goal — calculating stretched, above-average TSR goal needs personal discretion. It can be done through superior performance improvements instead of maintaining superior absolute levels of performance.
  • Forward looking 5-year RTSR target — calculation of this goal requires 2 key considerations: RTSR probability of reaching above-median TSR and benchmarks to meet a cumulative top quartile TSR target over different time periods.

Interested in learning more about the Value Creation Framework? You can download an editable PowerPoint on Value Creation: Relative Total Shareholder Return here on the Flevy documents marketplace.

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How to Secure the Promised Revenue Synergies After Signing a Merger Deal?

15 Oct

Stiff market competition, expansion into new territories, product portfolio extension, and gaining new capabilities are the prime reasons why more and more organizations are seriously looking into the prospects of — and carrying out — Mergers and Acquisitions. However, only a few M&As achieve their desired revenue objectives.

Revenue Synergies are a decisive factor in closing such deals. However, identifying precisely where these Revenue Synergies lie and then capturing them isn’t as easy as it sounds.

McKinsey study comprising of 200 M&A executives from 10 different sectors revealed that all the respective organizations of the respondents remained short of achieving their Revenue Synergy targets (~23% short of the target on average). Securing Revenue Synergies is a long-term game. The companies that succeed in securing Revenue Synergies achieve the target in or around 5 years.

Leaders aspiring to achieve Revenue Synergies should first clarify the objectives from and the schedule of the revenue synergies, lay out the organizational priorities and go-to-market strategies, remove obstacles from realizing value, and gain across the board readiness and commitment for the initiative. Organizations that are most successful in securing revenue synergies pay close attention to these 7 guiding principles during the Post-merger Integration process:

  1. Source of Synergies
  2. Leadership Ownership
  3. Customer Insight-driven Opportunities
  4. Salesperson Driven Strategy
  5. Ambitious Targets and Incentives
  6. Sufficient Support
  7. Performance Management

These 7 guiding principles to capturing Revenue Synergies are critical for effective integration of two firms after a merger and unlocking potential benefits from the deal. Let’s discuss the first 3 principles in detail now.

1. Source of Synergies

The inability of the leadership of the acquiring company to spot major sources of revenue that integration brings in results in losing significant pools of opportunity and failure of M&As. Realizing Revenue Synergies demands a thorough methodology to ascertain and qualify revenue prospects along markets and channels, Go-to-Market Strategies, and developing commercial capabilities. This entails:

  • Evaluating customers and markets, selling offerings of the combined firms utilizing existing and additional channels, and adequately training and rewarding the sales teams.
  • Coming up with innovative new products and bundles utilizing combined R&D capabilities.
  • Sharing best practices and commercial capabilities that mergers offer.

2. Leadership Ownership

Organizations that accomplish their Revenue Synergy objectives guarantee that their top management and employees commit themselves fully to the initiative from the onset. They identify potential value pockets from the integration, examine the assumptions about securing value, and get them endorsed by the senior management and front-line staff. The potential Revenue Strategies are regularly evaluated by inter-departmental experts.

3. Customer Insight-driven Opportunities

Accurate estimation of Revenue Synergies demands top-level estimates — assumptions on market share gain, revenue enhancement, or improved penetration — alongside comprehensive bottom-up customer insights, and evaluation of customer relationships. Other important elements to consider include analyzing the offerings being offered to customers, discerning other potential products and services required by the customers, and assessing the ability of the sales team and brands in terms of the potential they offer to the clients.

Interested in learning more about the other guiding principles of securing PMI revenue synergies? You can download an editable PowerPoint on Post-merger Integration (PMI): Securing Revenue Synergies here on the Flevy documents marketplace.

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