Vital Signs Framework for Performance Management (Part1) #vitalsigns #innovation

What are your organization's vital signs? Are they clearly aligned to your strategy? Are they fully integrated?

I get asked by corporate clients to help align strategic objectives to performance measures in the context of a planning, budgeting, forecasting project. Over the past couple of years, I've been developing a concept of corporate "vital signs".

Depending on the scope of the engagement, I begin an assessment with one key question: "how healthy (along a variety of dimensions) is the organization/business unit/functional group?" The analogy comes from the human body metaphor for gauging the health of a person but I've taken some liberty to expand it to include not only health but competitiveness, process performance, the culture of the organization, effectiveness of the leadership team, and the skill sets of the people.

The concept of vital signs is even more important in today's turbulent times. Take for example the measuring of business health (think about the bank stress tests: "Banks Needs at Least $65B in Capital") to assess the state of the economic recovery.

Play this quick mind game: If I asked your key stakeholders to list your company's vital signs in relative importance, what would they say?

Use this definition: Vital signs are a limited set of internal and external performance and risk indicators that satisfy your stakeholder needs. Vital signs can be planned, forecasted, measured, and analyzed against your strategic objectives. Note this definition is more than standard scorecarding because it looks externally as well as looking at the risks.

In the true spirit of growing economic value, would your Board, as a proxy for shareholders and stakeholders say "revenue growth" is a vital sign to indicate that your business model is competitive and that you are serving more customers? Or would it say that "operating margin" is a vital sign to indicate that you are running a lean operation? They are very likely to point to strategic risk but would they know how to measure it?

Would the management team look at "% revenues from products/services introduced in the past 2 years" as an indicator of innovativeness?

Would your employees say that "% customers highly satisfied" is a vital sign for how well you serve your customers?

What about your customers? Maybe they'd say that your company's vital signs should be your ability to solve customer problems or "% of customer problems resolved on the first call".

Would the public, as your ultimate stakeholder, insist it is your "carbon footprint"?

The fact is you may be saying "yes!" to all of these questions and you would be right. Depending on your stakeholder's perspective, there's a vital sign that's more important to them because it drives their decisions as they interact with or do work for your organization.

Clearly a hospital's vital signs are different from a car manufacturer's vital signs which are different from a professional services firm's vital signs.

How are these vital signs best identified? How do you know you've got the right ones? In future posts, I'll describe what I call the "Vital Signs Framework" for identifying and integrating your vital signs into the strategic and operational management process.

Vital Signs: HP's environmental goals

On the topic of vital signs relating to corporate sustainability initiatives, HP is setting a strong example of how global organizations can contribute to the reduction of their carbon footprint:

Picking up on the Davos call for investments needed to develop a clean energy infrastructure and move to towards a low-carbon economy, the following recent post was higlighted by the "Green SOCH @ ISBR" blog:

"Sustainable computing - As part of this program, they are upgrading the core sites in a phased approach, with new technology and more efficient use of space. Through this and other energy efficiency initiatives, they reduced absolute energy use from operations by 1% in 2006. That equals savings of approximately 35 million kWh and reduction of the carbon footprint by 18,000 tons of greenhouse gases. HP has set a goal to reduce the combined energy consumption of HP operations and products 20% below 2005 levels by 2010."

More specifically from HP's 2008 Global Citizenship Report, HP has set the following target metrics:

2010

HP will reduce the combined energy consumption and associated GHG emissions of HP operations and products by 25 percent below 2005 levels¹ by achieving the following:

• Operations: HP will reduce energy consumption and the resulting GHG emissions from HP-owned and HP-leased facilities worldwide to 16 percent below 2005 levels.²


• Products: HP will reduce the energy consumption of HP products³ and associated GHG emissions through specific goals for representative product categories, including the following goals for some of HP’s highest-volume PCs, printers and servers families:
• Improve energy efficiency for high-volume server families by 50 percent, relative to 2005⁴
• Reduce the energy consumption of volume desktop and notebook PC families by 25 percent, relative to 2005⁵

2011

• Products: Improve energy efficiency for high-volume printer families by 40 percent, relative to 2005⁶

Progress: We reached 19.2 percent reduction in our combined operations and products energy use at the end of October 2007, the end of HP’s reporting year. We are confident that we surpassed the 20 percent mark by February 2008, more than two and a half years early.

Reference:
Green Soch @ ISBR

Vital Signs: Google's others numbers!

In "Google: A Druckerian Ideal?", Rick Waltzman of the Drucker Institute unveils an interesting set of measures that help to tell the story behind the financials:

Google (GOOG) turned out quite a dazzling display of data recently when it released its third-quarter results: Profit jumped 46%. Revenue soared 57%. The company's shares shot up $6.14, to more than $639 each, on the news. But it's another set of figures that most impresses me: 17, $0, and 20%.

These refer, respectively, to the number of cafés at Google's Mountain View (Calif.) campus; what it charges employees for all the meals and snacks eaten there; and the amount of time it encourages its engineers to carve out each week to tackle company-related projects that interest them personally but aren't part of their core assignments.

The 20% Google allows engineers to follow their passions and this has resulted in innovative products such as Gmail, Google News, and the Sky feature on Google Earth. They've certainly taken a page from 3M's innovation playbook described in a recent article At 3M, A Struggle Between Efficiency And Creativity":

Official company policy allowed employees to use 15% of their time to pursue independent projects. The company explicitly encouraged risk and tolerated failure. 3M's creative culture foreshadowed the one that is currently celebrated unanimously at Google (GOOG ).

Thanks Rick for highlighting other vital signs that help us understand more of the story that underlies Google's financials!

Vital Sign: Workforce Engagement. 38% of Worksforce are partly to fully disengaged!

In his recent book about management innovation, the Future of Management (p.57), Gary Hamel identified a 2005 Towers Perrin report with a particular performance measure about employee engagement and concluded that the challenge is to reinvent our management systems so they inspire human beings to bring all of their capabilities to work every day.

In the 2007 version of the Towers Perrin Global Workforce Study, this report identified a significant 'Engagement Gap' among the Global Workforce. According to the October 2007 Towers Perrin news release:

Just 21% of the employees surveyed around the world are engaged in their work, meaning they're willing to go the extra mile to help their companies succeed. Fully 38% are partly to fully disengaged. The result is a gap - which Towers Perrin has dubbed the "engagement gap" - between the discretionary effort companies need and people actually want to invest and companies' effectiveness in channeling this effort to enhance performance.

The study found that companies with the highest levels of employee engagement achieve better financial results and are more successful in retaining their most valued employees than companies with lower levels of engagement.

"It's impossible to overstate the importance of an engaged workforce on a company's bottom line," said Julie Gebauer, managing director and leader of Towers Perrin's Workforce Effectiveness consulting practice. "The Global Workforce Study establishes a definitive link between levels of engagement and financial performance and, for the first time, begins to quantify that link. It demonstrates that, at a time when companies are looking for every source of competitive advantage, the workforce itself represents the largest reservoir of untapped potential."

The most striking data about the linkage between employee engagement and financial performance come from a study of 40 global companies which involved a regression analysis of company financial results against engagement data. It found that firms with the highest percentage of engaged employees collectively increased operating income 19% and earnings per share 28% year to year. Those companies with the lowest percentage of engaged employees showed year-to-year declines of 33% in operating income and 11% in earnings per share.

The last line above is particularily interesting and helps make the link between the Finance and HR functions of today's leading organizations. Assuming that this is a non-financial vital sign, Finance should ensure that Workforce engagement is included in the exceutive team's business performance management scorecards.

Download the summary here.

Vital Sign: Competitiveness Rating. Top 40 Most Competitive Companies in 2007

According to "Most Competitive Companies 2007", a report on competitiveness of consumer oriented companies, a Competitive Rating (CR) represents a company’s ability to earn a consistent profit above their cost of capital, and their ability to protect that profit through multiple sources of ompetitive advantage with consumers.

The Top 5 Competitive Companies:
1. Google Search
2. Bud / Bud Light
3. Coca-Cola
4. Food Network Channel
5. Under Armour

The last two were a surprise, given that recent revenues for FNC and UA were less than 10% of the top 3 in the list.

According to W Ratings, the author of the report:

The competitiveness score is calculated by percentile, ranking companies by their average economic profit over the past five years and by their total moat score, and weighting those rankings equally into one score.

"Economic profit" is defined as a company's return on invested capital in excess of the company's weighted average cost of capital. Additionally, W Ratings measures a company's ability to achieve a higher economic profit than its rivals and sustain that competitive advantage through "moats," a term popularized by investment guru Warren Buffet when describing the qualitative measurement of a company's ability to keep competitors from penetrating their market for an extended period of time. Total moat score is derived from a consumer survey database and is defined as the sum of nine areas of competitive advantage with each area, or moat, measuring between negative one and five. The more moats and higher total moat score indicate a higher likelihood of sustaining a competitive advantage with consumers. To be considered, companies must have either a dominant market share or wide recognition among the general U.S. population and have publicly available financial data. Sectors surveyed comprise retail and consumer goods, media and communications, financial services, travel and leisure, and restaurant and beverage.

Report available as a download here: http://www.wratings.com/freereport.pdf

Vital Sign: 4,500 Scientists in GE’s Bangalore John F Welch Technology Centre

The first post tagged as 'Vital Signs'. 'Vital Signs' posts will be posts which feature a Key Performance Indicator of the innovation economy.

As reported in the article "GE puts India on Centre Stage" (Business Standard), GE has drawn up plans to make India a global sourcing hub for all its core businesses. The story illustrates GE's strategy for sourcing innovative products from India:

Giving an example of products developed in India, which can be taken to mature markets, Chopra said that GE’s John F Welch Technology Centre in Bangalore had developed a mobile electro-cardiogram, which costs a fraction of what existing machines cost.

“We can even sell it for use at home in the US,” said Chopra, adding, “We solve unique problems here as over 300 million people live at less than $1 a day. The innovation coming out of this country in terms of technology as well as business models can help us in whatever we do.”

Vital Signs - A new focus for the blog

Introduction to the new Vital Signs Blog

For those of us who seek metaphors for what we see in the business world, the Wikipedia definition for Vital Signs helps us with a medical health metaphor: vital signs in medicine are those measures taken by health professionals in order to assess the most basic body functions. They are: body temperature, pulse/heart rate, blood pressure and respiratory rate.

In the business setting, CFO's are called upon to measure, report and assess the health of the business and its ability to be competitive. CFO's are expected to have the pulse of the business and to know its financial and non-financial vital signs. HR leaders are expected to increase the talent base of the organization, arguably noting that ability to attract and retain talent is a vital sign that should be measured. This business-oriented blog therefore focuses on business vital signs but extends the metaphor beyond basic health to vital signs of competitiveness and innovation. And these are most often leading indicators.

As a management consultant focused on helping organizations transform their performance management processes (see my recent article, 'CFO as Strategist and Catalyst in Building a High-Performance Culture), I have come to the realization that many employees are not aware of the organization's vital signs, let alone the vital signs of their industry, and of the global economy in which their organization operates. In future posts of this Vital Signs blog, I will explore key internal performance measures as well as industry, and broader economic Vital Signs that could be part of your organization's scorecard. Both financial and non-financial vital signs will be highlighted.