Are you profitable? I'm sorry, that is just not enough!

The newspapers report on it almost daily. Activist shareholders such as hedge funds build up a small percentage of shares and sends the board a letter, sharing their ideas of a new strategy. Splitting up the company as the divisions independently are worth more than the total company.

No wonder, the way how we typically organize ourselves as a multidivisional company may easily lead to that situation. Divisions or business units are seen as a portfolio. Each of them need to be profitable independently (in Dutch we call this "need to be able to hold up their own trousers"), and usually they are managed from a certain distance, based on financial results. Most performance indicators measure the business unit's contribution to the group.

Although we can't justify the existence of business units that totally depend on others (they would be service units then), I think managing based on contribution, the portfolio approach, has gone too far. What's the value of being part of a multidivisional company as a totally independent business, just contributing profit? I would say the value is negative, it doesn't justify the cost of the holding. There should be synergies, or leverage. Of course this starts with some economies of scale of shared IT, shared finance and HR, but ultimately synergy is not about costs, but about opportunities.

 I think we need a new control model, not based on measuring contibution, but measuring leverage. What cross-sell opportunities did it create? What innovative techniques did it share? What markets did it open for others to leverage? How did it optimize its planning not for its own sake, but for the benefit of the group (think about this one really hard)? This all justifies being part of the group. And this is what a balanced scorecard really should be about.

In a world of hypercompetition, we need all the collaboration we can get. If we don't cross-sell, we leave money on the table. Local optimizations have a overall negative impact on the companies margins. If we don't innovative across the board, someone else overtake us. Pretty tangible business cases. But perhaps the most important business case is somewhat intangible of nature. In a global economy, organizations need to be authentic, need to stand for something in order to be recognized, need to speak with one mouth. A "bunch" of business units, each contributing to maximize profit, are an unlikely structure to do so.

--frank