Transforming Your Performance Management System into a Strategy Execution System

Transforming Your Performance Management System into a Strategy Execution System Speaker: Okay. Good afternoon everybody. My name s Paul Docherty. I m the founder and executive director of a leading software company in the area of strategy execution. But I m not here to talk to you about that today. I m here to share something I m extremely passionate about which is the concept of strategy execution. I guess the first thing to say is I m not a HR guy. I ve worked a lot with HR in the past and I guess for the last 20 years, I ve been involved in building and running businesses both in a corporate role and also for large enterprises as well as start-ups. And I ve come to believe one thing which is that and the reason I m here in fact is that HR have an extremely important role to play in the execution of strategy. And I believe they deserve a seat at the table with the rest of the executives in terms of taking that role and helping companies execute their strategy. Over the next 40 minutes or so, I m going to share with you the lessons I ve learned working with over a hundred different organizations with the executive teams of those organizations, with smart and very passionate people who ve really developed some very effective strategies for delivering the results for their company. Before I start, I would say that whilst I believe HR have a significant role to play, the evidence suggest that there s not yet the maturity that HR is still focused largely on a transactional orientation rather than strategic orientation. I think some recent DDI research suggest that about 12% of organizations believe that their HR strategy is fully aligned with their business strategy. And what I d like to do is take that a step further and explain today how you can, as part of the organization, as the HR organization how you can help your organization execute more effectively on its strategy. How you can transform your existing performance management system into a strategy execution system. So let s start with a little bit of data. I think most people in the room will be aware that many companies are not so successful with execution. In fact, there was a survey undertaken by Cathleen Norton with the Harvard Business Review and they refer to some Deloitte research in which they d surveyed over a thousand companies in a five-year period. And they determined what percentage of those companies actually delivered on a substantive part of the promises they d made to their shareholders. And the answer was less than 10%. This is of the global 5,000 companies, a thousand of those companies as a survey. So that gives you some idea of the struggle that organizations have today with execution. So let s think about it a little bit for now from the executive perspective. What do you think it is that CEOs most passionately care about? Is it the things you would expect? Is it revenue, profit growth, customer satisfaction, quality? These are the sort of things that you would expect them to care about. 1

But in reality, what they care about as evidenced by this survey, this is a survey done by the conference board. It s a Canadian survey company that surveys 500 of the global 5,000 CEOs every year to identify their top 10 priorities. Their number one and number two priority for the last decade year in, year out has been the ability to execute. Now you d think that if this problem was the same problem year in, year out why does this problem still exist? And I think it s because that the problem is multi-faceted? It takes a lot of time and a lot of energy to understand what s going on and I ve been spending the last 20 years trying to figure out what is it that we have to do to be able to execute more successfully. So if you look at the reality, the reality is not only is execution the number one CEO priority, but from their perspective, the kind of challenges you have are the kind of challenges that HR can help with. Poorly communicated strategy, unclear accountabilities, poorly-defined roles, responsibilities and inadequate sort of monitoring and following up of performance. So I believe there s a key here to explore. But before we get into the detail, I want to unpack this problem a little more. I want to break down for you what the real challenges are in execution. So first thing, maybe a little bit interesting to relate a story here. Before I started i-nexus in the 90s I was responsible for a major operational excellence program in a large telecom supplier. And this is a UK-based company but it s a global organization about eight to nine billion in revenue dollars. The question that I was interested in in preparation for a management conference, I asked my boss who was the CEO of the business, I said, Mike, you launched your strategy at the beginning of the year. Mike had 10 objectives, you can imagine the PowerPoint that the CEO has his 10 objectives and he tells everybody this is what we re going to achieve for the year. And we took those 10 objectives and that was in January. It s now the end of March and every leader in the organization has gone through a performance appraisal process, goal-setting and they ve cascaded through the organization these objectives. I bet you everybody in the room is involved in a process like this or helps facilitate a process like this. But we have a management conference of the top 200 managers of the business in April. And in preparation for that conference, I suggested to Mike it might be interested to understand how wellaligned the team were behind his objectives. And we took the personal appraisals of all of the top 200 managers. I wasn t very popular asking for this. And we took it all and we put it up on the wall of the hotel like a conference room wall like the one we re in now. Mike s at the top, next level management, next level management. And then I tried to draw the lines between the goals to try to make sense. I mean I ll let you think a little. How many people in the room imagine it was all good, that everything was aligned? I suspect not many. In fact the reality was they were directly contradictory objectives. People had objectives that were nothing to do with Mike s priorities. This is not a surprise. This is reality. And in fact, in most organizations, the goal cascade process is the first real challenge we have. And we call it the 10% problem. When we mean the 10% problem? We mean that less than 10% of the people in the 2

organization can articulate how their goals relate to the organization s objectives. And what does this mean? This means that 90% of the energy of the organization is not focused in the right direction. Seriously challenging for me. I think this is the first challenge. So how do we deal with this problem? That s one thing. The second thing is the execution itself. So what happens? We break a lot of goals down. We d end up with a set of initiatives and actions that we need to take. But we all live in the real world and the real world is very busy. We call it the whirlwind, the day-to-day, the day job. Can you do a quick hands-up? Anybody in this room who s not busy at work? In fact, I never met somebody who s not busy. In fact, if we double the time we all had, I bet you we would still be busy. So the reality is the time we have to actually execute the strategic actions is never what we want it to be. This living in the real world means that the second problem is what we call the urgent not important problem. Urgent work will always win. The day job always wins and there s a little bit of a truth in this. Why does that happen? That happens because what we get rewarded for is getting stuff out the door. It s rarely that we ve made that linkage directly to compensate us for the outcomes that are strategic. And in fact, if you think about it, again, HR has a big part to play in making sure that people are rewarded and recognized for the strategic outcomes not just for the business as usual. And finally, the other major process that every business has is the ability to find out where you are. Now another little exercise I remember from my Marconi days was taking all of the indicators used by the business, all the KPIs used by the business and organizing them into the traditional balanced scorecard levels. So finance, customer, learning and growth, people. And then where do you think the majority of the indicators were? In the leading people and process or in the finance and customer? More in the finance. In fact, 75% of the indicators of a global footsy 100 company, we re in the area of finance and historical reporting. This is interesting because what it says to us is the majority of information we have is telling us about what s already happened. We call it the rearview mirror problem. When we re looking, we can t see forward, we can only see backwards. We can only even look and slice and dice what s happened in the past. That gives us some clues but it doesn t tell us if our strategy s executing. In fact, I would be a little bit more bold. I would say that what we define a strategy is not what we write down on paper. It s what we spend our money on. It s what we invest, which projects we start, which initiatives we re running. And if those initiatives are not on track or moving us towards our goals, I guarantee to you the result you get will not be different from the year before. So this kind of summarizes for us the underlying challenge. Ensuring alignment and accountability, maintaining a laser focus in the whirlwind, this constant churn that you find of being busy and being able to look forward not just backward. So I believe that HR has got a big part to play in this but I think there are some tools that are emerging to change the world to help apply this concept and make it reality. But before I do that, I want to introduce you to the least well-known 18 billion dollar 3

company in the world. And before I even do that, I d like to spend a second about a second problem. The second problem I d like to describe I mean everybody we just discussed this off-site strategy day, building our goals, cascading them. There s a second problem that every company faces when it s executing strategy. And that s the fact that the budget, which is how we divide and economically align the resources of the organization, rarely lines up with the goals of the organization. And the reason for this, who s been involved as a HR organization even in what we call the budget dance on a yearly basis? What I mean by the budget dance is this process by which everybody tries to gain the system. And what they do is at the beginning of the year, the budget they say, Please give me your budgetary numbers, how many people, what resources do you need for next year? And then everybody rolls up the budget numbers, the cost and the projections. And the top management go, Wow too much, too much cost not enough growth. And then we say, No, cut that. And then you really think about what you want to keep. And that then rolls back up. And what happens ultimately is the cascade we have of resources and the desire for projects and actions does not line up with the allocation of money and resources in the organization which makes the problem of execution even harder. So these two things combine to make execution difficult. Now again I want to go back to that point I made about the least well-known business, 18 dollar business. Has anybody in the room heard of a company called Danaher? Danaher Corporation? They re an American organization. Started in 1969, They re listed on the S&P in the US and I would say apart from being the most profitable company in the world, they re also one of the most interesting companies in the world. They re an industrial conglomerate. They make the kind of products that businesses need but are very boring. I mean I apologize to Danaher but they re not the sort of sexy kind of products that kind of consumer things that people might know about. They re the kind of industrial products that people make and they make a lot of different types of products. But they are the single most successful company in the world in my view. This is a chart that shows what the effect would have been if you d invested on a hundred dollars of Danaher stock in 1990. And last year they outperformed the index yet again. And the question is why are they so successful as a company? This is obviously a rhetorical question because I m going to try to give you the answer. The reason they re so successful as defined by Lawrence Culp, who s the CEO of the Danaher business is because they have what they call the Danaher Business System. And behind the Danaher Business System is the combination of a fanatical focus on LEAN, which is the waste reduction and a process, combined with a concept known as Hoshin planning. Can I ask anybody in the room who s heard of Hoshin planning to put your hands up? Okay, that s about what I expect but to be honest, that s the good news. I m bringing to you an idea I hope which you will find very useful. What Hoshin planning is a systematic way of effectively staying focused when you re in the whirlwind. And what it s all about as a concept is effectively understanding what your goals are and being able to systematically break them down. And then ensure that the plan is realistic. 4

But before I go there, I want to talk about effectively the three key lessons we ve learned. And the first of those lessons is that you need to stay focused. And what I mean by staying focused is choosing the right number of goals. I d spoke about Mike, CEO of Marconi. One of the things that he made a mistake almost at the beginning of the process, he d set too many goals. And one of the things I observe about businesses is that they try to do too much. When the challenge is if you ve got a lot of stuff going on, it s actually more successful if you do less. Let me illustrate. If you think about the conflicting forces of the whirlwind and the day-to-day goals and you think about this challenge between important and urgent, how many goals do you think should a CEO or top management team set in terms of major breakthroughs that an organization needs to achieve? How many? Two or three. I m exactly with you. And this is as I mentioned here let me skip to this. I m going to go to this slide here. The consequences of not staying focused are significant. If we ll think about two to three goals, the difference between what happens when you create two to three goals and what happens through the organization when you break those down is tremendous. What that will result in at the sort of significant senior management level potentially is 30 to 40 to 50 actionable strategies, things we have to do. Which at the ground level would effectively generate many hundreds if not thousands of actions. Whereas if you are trying to do 10 to 20, which is where Mike was starting, you might end up with hundreds of top level objectives. Never mind the number of initiatives that drive out from that. And what do you think happens when you multiply up the number of things people do? Do you think you do less successfully or more? In fact the less you do, the more you complete and that s an absolutely critical point. So this is I think one of the key lessons, and the question is how do you ensure that you remain focused? Well there are a number of emerging strategies, ways in which methodologies that you as a HR organization can bring to the organization to help them understand how to stay focused. Whether you use, for example, Franklin Covey s Four Degrees of Execution or whether you use the concept of strategy mapping and balanced scorecards or whether you use a concept called Hoshin planning which I introduced with Danaher, you need a way of getting to key focus. And I m going to talk more about the Hoshin model because I believe that s the one which offers the most promise to organizations because it s a way really of forcing a dialogue in the organization and making that process of cascading objects not just generate 10% of people who aligned and brought in and aligned but 90% of people are on that way. So let s introduce this concept. Hoshin Kanri is an idea that actually originated in 1960 in Japan so it s been around for a while. In fact, it was first identified by Bridgestone tires who are looking at the long range planning processes of Japanese companies for a damming report that they were putting together for a quality award. And it remained to be adopted largely by Japanese companies for 20 or so years. In fact, Toyota were one of the companies that really made it successful. And it came to the US in 1987 or something like this through a subsidiary of HP. And for a number of years, the main companies implementing you could write on one hand or maybe two. And those companies were 5

amazingly successful as a result of using this approach. But people didn t really know it existed. In the last 24 months, in the US and Europe alone, there has been a massive increase in the use of Hoshin planning. To give you some idea, this is just some of the companies we ve been talking to about the process. We believe now that from less than 1% it s about 10% of the global 100 and maybe 20% of the Fortune 500, companies that are applying this approach. So what is it and how does it work? It s really an obvious process. It s no different. The formulation of strategy is exactly the same which kind of business you re in. You have lots of different approaches to this, you look outside, you look inside. You develop a plan and you say, This is what we want to do. Where Hoshin differs is it says we need to be clear, very clear what our breakthrough objectives are in the next three to five years, the two or three things to your point that we need to achieve as an organization. And then from that we develop very clear annual goals and then we cascade. So at the surface it looks just like the kind of process that you do anyway in every business except in the Hoshin world the development of the goals is a collaborative exercise. It s done in a way with a process called Catchball planning. Catchball planning is one of the ways to avoid what happens is most organizations which is I give somebody a goal. I m the CEO, I give you a goal, the VP sales, a goal of growing sales by 30%. VP Sales says, Hang on, I need to put in my goal at 40% and then he gives it to sales directors and they make it 50% and suddenly it becomes totally and utterly unrealistic as a plan. What Catchball says is I give you a plan. I don t get a response from that until you ve worked out with the team what s possible and then we agree and target that. So target-setting is a collaborative team-based process. Secondly it introduces a number of formats for developing a plan that put the whole plan on one page. What s called in the Hoshin world an A3 for the size of the paper that you use to do it or the conceptual paper you use to do it. And then finally what Hoshin brings which is extremely important and one of the key things that we ve learned as well is essentially being able to focus and is closing the loop. What it does is it ensures month by month that we track progress towards the strategy. This is for me the most important difference. I suggest that most organizations define their goals at the beginning of the year. They might look at them in the middle of the year but typically, they reward and recognize and align at the end of the year. I think this is very dangerous because if you only look where you are at the end of the year or very superficially during the year, what action can you take? Businesses are like super tankers. If you want to turn the wheel, if you re heading to the rocks, don t wait until you re close to the rocks. Because turning the wheel will only end up hitting the rocks. Whereas if you can see early that you re on track or off track and take appropriate action to bring yourself back on track, you have a much better chance of being able to execute. So being able to look forward, to close the loop and that s a big part of the monthly process of Hoshin. So Hoshin works firstly by using a concept called the X-Matrix. Anybody seen this before, this concept? 6

It s a really neat idea. What it is is a single page, if you like, that links what you re trying to achieve to how far you need to get in this year to how you re going to do it, what are the key improvement priorities and then how are you going to measure it, what KPIs are you going to use and finally, who s responsible? And what happens is a management team build this picture together. And they develop a picture. They put dots in the matrix where there is a linkage. And what it does is it gives you a way of quickly testing to see if there s a relationship. Now when I first saw this form I thought, wow that s complicated. But then I started to think about it. What actually needs to be known to execute strategy? We need to know what we re trying to achieve, who s going to do it and how we will know when we get there. And to be honest about goals, I think it s really important to recognize that part of Hoshin is a goal is only defined by saying I want to go from x to y by when. One of the problems of management teams is we re not specific enough in goals. Does anybody know what the mission of NASA was in the 60 s? Any ideas? Audience: Landing on the moon? Speaker: Well before that. The mission before that was to be the best space research agency in the world. Exciting? It doesn t really get me out of bed in the morning. How about what Kennedy said? We re going to put a man on the moon and bring him back alive by the end of the decade. That s a goal. That s something I can put my hands on and make sure that I understand. That s a breakthrough. So I take that breakthrough and say, How do I get from there to the end of the day to what I have to do. This is what the power of the Hoshin tool is. It gives a story that you can take to the organization and explain how the organization is going to achieve the goal. Plus I understand where my responsibility fits into achieving it. So what appears complex, I assure you when you use it becomes a powerful way of communicating as a common language through the organization. Second thing is that you can take the concept of a strategy map and you can use a strategy map to link your goals. I m not going to spend too much on this but I do believe, how many people in the room are using the balanced scorecard? I would say a better penetration of this concept. The balanced scorecard is a useful starting point because behind the balanced scorecard are some assumptions about the goals and the key performance indicators of the organization. We ve seen and helped a number of organizations link their balanced scorecard as the starting point to break down using the Hoshin process. They are not competitive. They re complementary concepts. So how does the cascade occur? Well you can only see this kind of in pictorial representation. But fundamentally, I ve got a set of breakthrough objectives here. I ve got some annual objectives here and I ve got some breakdown there. What happens is that we break down and we rotate the matrix. So if you are the CEO level, you see it at the top, the first level, your exec team. If you are the business unit or functional level and you break down, you just rotate the matrix and what are the next level annual goals go to the bottom and I put my new goals at the top. And this is how you d link the goals through the organization. No more appraisal forms. No more basically simple cascading process. No 7

more trouble to work out how does my goal fit to the senior leadership goal. But critically what happens in the process is when we come up with the next level matrix, it s not an isolated event. We don t do it behind closed doors. We put this on the wall and before we put that on the wall, the team that produces the second level matrix comes back to the senior leadership team and presents the matrix to them and said, This is what we think we can achieve. And there is a dialogue to align and validate the goals and targets. It s a very valuable process because what happens is if you play this out several levels of the organization, you ve got a total alignment in your organization. And the thing that you re vulnerable then to is the quality of the assumptions. So Hoshin goes a step further. It says okay, behind my plan for everything at the bottom level, I don t just need to have an appraisal in some and I hope somebody s going to come up with a plan. The discipline is for every strategic objective we cascade at the ground level, we need an action plan, an action plan that we can follow up on like any other plan. Now this kind of discipline, I mean you re beginning to see that this kind of discipline is quite hard work. And I m not in any way saying it isn t. But if you want Danaher-style results, you need to put in Danaher-style effort. And guess what? The people who can facilitate this process are sitting in this room. The people who can bring this idea and help the organization implement it in partnership with the business are sitting in this room. So you take your actions. At the next level you build your action plans. And finally, this is the critical concept, Hoshin does not stop with just breaking it down and creating action plans. It then puts in place a regular monthly review process. Month on month we look at our goals and our underlying actions and metrics and we track month on month, It s called a Bowling Chart because of the kind of thing you use when you do bowling, if you know the bowling sport in America. It s a concept of measuring month on month. But as a management team, we only care about the reds on the chart. If we re all green, that s great carry on executing. But if we see reds, in my experience, management see reds as a problem. This is a cultural challenge. For Hoshin to work, red is actually a signal of a chance to do something. Red is not beat the person up who s just delivered me that message. And in this business concept, the idea of red is it s an opportunity for the executive team or the owner to put a plan in place to bring himself back on track. And I have sat in a Danaher monthly business review. It s a totally different concept. They look at their Bowling Chart for about three minutes, three minutes. They have an hour meeting. The rest of the time, they re worried about what their action is to get the reds to green. And that is exclusively the focus of the conversation. There is no blame. There is no Why has this happened? other than what can we do, what s the root cause and what can we do about it? I don t know if you mentally contrast this with your own management review meetings and what happens in those review meetings. It s all about shifting from a historical focus to a future focus. What can we do about it? As leaders, what can we do about that on a monthly basis? This culture executed well will, I guarantee to you, transform your business results. But it means you need to extend your 8

current performance system. Because that system basically does some cascade. It s like where I was in Marconi. I do some cascade. There s some problems with alignment. I don t really know what s going on and then I find out at the end of the year whether I did or didn t do what I said I was going to do. This is not execution. Execution is bringing that discipline to break it down, plan the actions and follow up regularly as you go forward through the year to see if the targets are hit. The problem, if you like, is that the heart of the challenge is instigating a heartbeat in your organization. What do we mean by a heartbeat? I mean a constant regular refreshed that says as a management team, as an organization, are we laser focused on execution? And in our experience, the best companies in the world are the ones that have a process in place to review and follow up on their strategy. As I said too before, is it good to write it down or is it good to make it happen? What s good to make it happen is we have to know if we re going in the right direction. And to do that, we find that there needs to be in every organization a hierarchy of review meetings. So at the beginning, we check on our actions. Are our actions on track? And then we say, Have they moved the dials? And then finally we say, Are they delivering the outcomes that we re expecting? Are assumptions playing out? And that corresponds to the, if you like, the practitioner or project or business level measurement, rolling up to the sort of divisional or corporate and then finally up to the CEO kind of level to say are we going in the right direction. And what we need to put in place is a sort of monthly execution heartbeat. And our experience is the reason organizations don t do this, that they struggle with this is that it s extremely difficult to do this effectively without some kind of technology support. Think about it. In i-nexus we work with some of the largest companies in the world. One of our customers, for example, is Nestle. They have 400-something thousand employees, 400 facilities. Could you imagine how many things are going on on a day-to-day basis across that organization? As a CEO of Nestle, to get a picture of the progress against your strategy is almost impossible without some kind of mechanism to support it. And the good news is that the process which we execute today and the tools which we use to support it, the sort of the various office applications, including the talent management system, the various project execution tools that we have, the ERP system and the BI tools. Today, this fragmented set of tools which make this process almost impossible to execute, those are being replaced or emerging is a new type of software, a new software, a cloud-based software that s able to bring together the talent management and people management perspective, the goal-setting with the project level and with the KPIs and put it together into one integrated solution. And I think the critical thing is if you want to be one of these best companies in the world and we re seeing this happening more and more, what you need to be able to do is translate your goals, link them to the actions, understand the impact and very much get on behind and understand if they re actually moving the dials. And to do that, to make this process happen, you need three things: You need the kind of process I ve described, the Hoshin concept. You need a culture that supports it where the organization is building the capabilities to support it and has the right mental model and guess 9

who has a big part to play in that. And then you need the technology to make it possible, to make that relentless follow-up possible. And I make the observation, if you can get to the point where the goals of the organization are aligned and HR has facilitated that, then it becomes possible to start ensuring that the capabilities of the organization are aligned. How many times do we develop capability models as HR organizations and the goals of the organization change and the capabilities are no longer the right ones to get us where we want to. Without this kind of framework, it s very difficult for HR to deliver the value that you really can deliver to the organization. What s good about this is that this kind of structure, it s now available and i-nexus is not the only kind of organization that can see this opportunity but we are a leader in this area. It s now possible in one tool to bring all of these pieces together. The tool that can actually support your performance management system becoming a strategy execution system. A tool that can integrate with your existing talent management tools and your existing ERP systems. And my key message and I don t want to spend too long on this question my key message is this. At the end of the day, strategy execution is the number one CEO priority. As HR, you have a massive role to lay in ensuring that the organization is aligned with the strategy. We talk about HR becoming strategic. We talk about the concept of making sure that the goals are aligned, the capabilities are aligned. But what we need is an approach that s going to help us do that. Hoshin is the de facto emerging approach that if you want to bring the latest concept to your company is proven in some of the most profitable companies in the world, the ones that generate the best results. But it requires a cultural backdrop. It requires the right behaviours as well as the right process and the right tool and to make tough choices at an executive level about goals. And that requires facilitation. It requires the HR organization to become the business partner to help that process in choosing the right goals. And it ultimately means that if you can stay focus and look forward and follow-up relentlessly I believe that the organization will achieve far more of its outcomes and more importantly deliver the benefits and value that the shareholders or the stakeholders are looking for. And as a side-effect, I think you ll be very pleased to know the HR organization will become increasingly valuable and relevant and important to the organization because you become the way that that happens. And that s basically the summary of what I wanted to cover today. If you want to learn more about this concept, then I would be very pleased if you could visit with [00:39:52 inaudible] and the Taurus team in their stand. They have a lot more information to share. You can also get a podcast version of this presentation to share with your colleagues. And I think a lot of organizations if you want to learn more we d be very happy to help you with this. I feel privileged to be the first person to tell such a good audience of people about this idea. And I hope that I come back in a few years time and then when I ask how many people have heard of Hoshin planning, not two hands but 80 hands or maybe the whole room. That s my hope and I hope to see great results as well from your business. Okay and I thank you for your time. 10