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

Accountable or Responsible

-- The telecom company had to come back twice to fix your triple play installation (telephony, internet, cable television), yet the telecom company proudly publishes very high service levels and customer satisfaction.

-- You complain about the service or the cleanliness in a public facility and they point you to a sticker providing you with a 1-900 number for "suggestions and ideas," $0.49 per minute.

-- The agent in the centralized call center of the police doesn't recognize the name of the street where you report an accident in, and also doesn't know about the roadworks that make it hard to reach the place.

-- The helpdesk reports high effectiveness rates, 80%+ of all inquiries are solved immediately, and tickets can be closed again. At the same time, the employee satisfaction survey show a high dissatisfaction with IT.

-- The hospital informs you that you are on the waiting list for the waiting list?!?

-- . . . and you recently received an email survey asking you how satisfied you were with the previous satisfaction survey.

These are all actual examples of what happens if you drive too much efficiency.

In the last twenty years, most public and private organizations have gone through multiple rounds of reorganization, squeezing cost out while aiming for operational excellence. Governments have privatized healthcare and social services, to be more run as a business, and have introduced competition. Companies have outsourced business processes to shared service centers that offer economies of scale and strict division of labour. Although the cost structure has improved significantly, there are adverse effects.

Now, on top of the requirements for even more increased efficiency and operational excellence, organizations are faced with the need for being accountable as well. If not addressed well, it can lead to dysfunctional behaviors, running the numbers instead of running the business. This effect is documented very well. The police station doesn't want to get called directly anymore, because then calls are not registered in the central system, that is needed for reporting. Hospitals create an unoffical waiting list before you get on the actual waiting list, because the official waiting list counts for the statistics. Every department of the telecom operator claims to have 95% success rate, but as a value chain it scores 0.95 x 0.95 x 0.95 x 0.95 x 0.95 = 77% success.

At the same time, optimizations led to a high level of specialization. Management guru Mintzberg explains how modern enterprise often traded in "mission goals" (what do we like to achieve) to "system goals" (how can we manage our process). Another way of saying this is that organizations focus on accountability, instead of responsibility. Accountability focuses on displaying what you do. Responsibility on what you achieve for your stakeholders, such as your customers, your partners, your investors and society at large. In organizations that are highly optimized towards specific activities, instead of in charge of a complete process, it is even very hard to take responsibility, every department is simply a small link in the overall chain. Then accountability is all what is left.

If you are not in touch anymore with the end result for consumers or citizens, all you can do is set goals for your own part in the process. All you can do is measure your input and your output, but not your effect. All you can do is create controls to optimize your performance and minimize your cost. And no one is responsible anymore for the overall result.

Don't get me wrong, I am not opposing accountability. However, I am against playing games with performance indicators. We should organize ourselves so that we can take responsibility for what we achieve. And that is not that hard to do, if we let go all kinds of organizational "best practices" and start thinking for ourselves. So not only measuring our own stuff, but also what we achieve for other. And most of all, let's not talk about "internal customers" anymore, but call them what they are: colleagues, with the same objectives and the same customers. And one last piece of advice: if you notice that performance indicators stand in the way of doing the right thing,  it would be great to take responsibility and do the right thing, never mind the performance indicators.

--frank

The myth of the one version of the truth

Since the dawn of MIS (Management Information Systems), the most important objective has been to create a single version of the truth. That is, a single set of reports and definitions for all business terms, to make sure every manager has the same understanding. Most organizations have many different definitions of the business terminology they work with on a daily basis. This is often visible with common business words such as "revenue," "number of employees", and "number of customers." For any given market, there are specific terms that have different meanings within the industry and to the outside world, such as the word "flight" for an airline, "account" for a bank, and "student" for a university. There is actually a rule for this:

The more connected a term is to the core of a business, the more definitions of it exist.

In the last 20 to 30 years, countless efforts have been made to identify different versions of the truth and collapse them into a single definition so that all business departments can align along the same meaning of business-critical terminology. Rarely have these exercises been successful. In fact, I would call most of them misguided. There is a reason for so many definitions. If a term is closely connected to the core of the enterprise, many business functions will add their unique interpretation of that word. You might wonder what value a business department brings to the organization if it does not have its own unique view. This doesn't mean every single definition for a term is valid and useful. On the contrary, many may be redundant. The challenge, of course, is how to decide which definitions are valid and which ones are not.

A good example can be found in the software industry. If we look at the term "revenue," many versions of the truth emerge during and after the sales process. Here are just a few variations:

• Gross revenue: Total sales before software discounts, customer bonuses, and lead incentives for partners. Customer bonuses may comprise discounts on or free consultancy, training or other services.
• Net revenue: Total sales after software discounts, customer bonuses, and lead incentives for partners.
• Net own revenue: Net revenue minus royalties. Royalties are fees that need to be paid to third parties whose software the company resells as part of its own portfolio.
• Recognized revenue: Due to compliance regulations, not all revenue on the contract may be recognized in the period the contract is signed.
• Revenue U.S. GAAP: Revenue, including corrections based on U.S. reporting regulations.
• Revenue Local GAAP: Revenue, including corrections based on reporting regulations specific to the country where revenue is recognized.
• Management revenue: Total revenue as the base for internal reporting, using net revenue as the starting point. Revenue recognized in other countries but belonging to the account management structure in the manager's country must be added. Revenue recognized in this country but realized for an account manager in another country needs to be subtracted.
• Commission revenue: Revenue specific to a sales person, upon which his or her variable income, bonuses, and other incentives is based. Corrections may appear for recognized revenue for and from other account managers.
• Invoiced amount: The amount that is invoiced and received in the current or next period. This amount may not all be revenue for the current quarter. For instance, multiple years of maintenance revenue is invoiced upfront.
• Statutory revenue: Recognized revenue aggregated to the legal entity level. A sales office in a specific European country, for example.
• Fiscal revenue: Revenue for a fiscal entity for which corporate income tax (CIT) needs to be paid. Legal entities and fiscal entities are not necessarily the same.
• Revenue for value-added tax: The total of invoiced revenue broken down into the various categories of VAT.
• Cash inflow: Invoices paid by customers in a certain period, including other sources of income such as interest. 

In this somewhat simplified list, there are thirteen variants of revenue. In many cases, management reports will refer to the generic term "revenue" for many of them. Which definition of revenue is actually meant is often determined by the manager or business domain for which the report is created.

How Different Versions of the Truth Provide Insight

With the idea of a value chain in mind, having different versions of the truth provides additional insight. However, this insight only occurs if these different versions of the truth are placed into context. One way of doing so is to create a revenue report that cuts across the various definitions of revenue, such as:

gross revenue  >   net revenue  >  net own revenue   >  recognized revenue  >

management revenue  >  commission revenue  >  invoiced amount  >

statutory revenue  >  cash inflow

By organizing the different definitions of revenue in a flow, we can see which existing definitions make sense and lead to alignment, and those that add to confusion. The former definitions should be kept, the latter eliminated. In a sense, the revenue report-with the various definitions of revenue that it includes-has created the long-wanted single version of the truth, almost intuitively. There are no synonyms possible anymore, as all terms appear in the same report and the combination of them represents a single flow of revenue. We have essentially created one context of the truth.

This one context of the truth brings not only more alignment, but also a deeper understanding of the business. For instance, an account manager may already know the difference between gross and net revenue-but through net own revenue, sees that his or her contribution is really low because of all the royalties that have to be paid to third parties. Or the account manager may notice that his or her clients take a very long time to pay their invoices, negatively impacting cash inflow. Through management revenue figures, a sales manager may see how much of the revenue is not realized for his or her geographic region, possibly leading to a reassignment of customer accounts. Lastly, looking at statutory revenue, all managers see how their operational decisions affect external reporting and compliance.

Want to know more? Send me an email, and I happy to share the examples I have collected working with many customers on the subject.

--frank

Corporate Transparency Is a Great Thing. . . Or Is It?

Transparency will give you deeper insight in your own organization, which will lead to better decisions. Transparency is a competitive weapon to differentiate from the competition in attracting capital, informing customers about the value proposition (not only price) and in cost efficiencies by driving down the transaction costs in the value chain. Empowering the knowledge workers leads to more organizational collaboration, everyone being on the same page (focus and alignment) and as a result more ambitious targets.

Doesn't this all sound great and wouldn't you want this all to happen in your organization too? Yes... and no. Transparency simply is a great idea and every person in the organization will understand the power of it.

But there's a flip side, let's think this through for a second... (sorry for the long post, but such an important topic really requires some thought).

Perfect transparency

What would perfect transparency look like? Let's sketch a hypothetical situation, in which everyone within your company has access to all relevant information. The management information provides a perfect representation of the value drivers of the business. Annual financial budgeting doesn't exist anymore; instead, your company follows a system of continuous planning through a collaborative process. Every manager knows exactly how his or her decisions affect other parts of the company. There is a good overview of how external changes have an impact on internal matters. And your organization is able to predict precisely how the market will respond to your activities. The systems you have implemented offer all this information at exactly the moment it is needed, "right-time." And let's make our hypothetical example even more perfect, by assuming the total cost of ownership of this all consists of just some minimal work to set it up and maintain it, a fraction of the cost of current information systems, processes and people. Perfect.

Or is it perfect? If your company would have the capability to create this perfect transparency, then it would be reasonable to assume that other companies could create the same system too. And if other companies can do so, it's logical to believe that ultimately everyone can. Money is not an issue and best practices become readily available, because it is perfect. This means the overall market for everything (ranging from banking to legal services to mobile telecoms to energy to bicycles) would be completely transparent, with complete insight into profitability of every player. And if all companies have that insight, again it is logical to assume consumers will have the same level of insight. In essence, that is a good thing, because it ensures that every transaction will have a fair and reasonable profitability. In microeconomic theory, this is called "perfect competition." But not all current profits are fair and reasonable. Some profitability is based on a market's intransparency: customers are unaware of better or cheaper alternatives, or are unaware of the abnormal profit taken on a product or service. Under conditions of perfect transparency, these margins will disappear, leading to margin erosion for large and established firms. Many small firms, doing business in a certain region or in a certain niche, even exist by the grace of intransparency and as a result will be wiped out completely.

The conclusion is simple. Part of your profitability exist because of intransparency. Transparency can lead to margin erosion. Is that what you are looking for?

Customer behavior

But let's assume, realistically, that an entire market can't attain perfect transparency, and that only individual corporations can provide some transparency to their customers. You can reason that that provides competitive advantage, because transparency can increase customer loyalty as customer come to trust and prefer a particular brand. Unfortunately, it is equally easy to reason the opposite point of view. A recent Harvard Business Review article pointed out that this form of customer loyalty can actually lead to lower profitability, because loyal customers who have a long history with a company expect the best deals and know how to get them.

Organizations have responded by seeking ways to counter these expectations. One hotel chain had a loyalty program for highly profitable customers that included an occasional upgrade to a suite.  These savvy customers came to expect upgrades and were even disappointed if they didn't receive an upgrade within the expected timeframe. The program started to have a negative impact on customer satisfaction. The solution to this problem involved creating a number of scripts. In one example, the loyal customer would occasionally be told on check-in that the hotel was overbooked, but that he or she would be upgraded to a suite as part of the loyalty program. Research shows that if there is a problem with customer service and it is quickly resolved, customer satisfaction will be higher than it was before the incident. In fact, the solution of using scripts has actually added intransparency to the process.

The conclusion again is straightforward. Customer loyalty partly exists due to intransparency in the relationship.

Public relations

Corporate transparency is touted as being good for a corporation's image, and is a key ingredient in compliance and governance. Transparent companies inspire more trust and will be less inclined to create and allow irregularities, which are likely to be scrutinized closely in the environment they have created. But is such corporate transparency really such a good thing? Consider the example of one large multinational firm which is actively positioning itself as a transparent company. Its annual reports win prizes and the company is highly involved in corporate social responsibility activities. However, the tax office in one of the countries where the company is active found some irregularities in the firm's tax planning department. Newspapers linked "good image" to this tax issue shareholder value vaporized. Because the company had  publicly prided itself in its transparency, it fell even harder.

Still, opacity (or intransparency) is an even bigger risk. Not showing what you're doing is simply not accepted anymore. Customers want to know type of business they are dealing with. If you don't integrate in your value chain, at one moment you'll be shut out. Regulators simply demand the information they require. And competitors who did get transparency right will overtake you left and right.

It's simple, we live in a transparent world. Period. How to balance the pros and cons? That's an interesting journey for all of us...

--frank

The Future of IT: A Scenario Analysis

Not even the best performance management initiative can predict the future. However, it can help you getting ready for it. One of the techniques that help becoming future-oriented is scenario analysis. According to wikipedia, scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes, called scenarios.

Scenario analysis is becoming more important as part of performance management. Organizations do not operate stand-alone; many decisions made elsewhere in the value chain or in the market impact our performance. Today, in most organizations we cannot budget and plan based on just our resources. Our external stakeholders ask not for our budget, but for our projections, our forecasts, and our guidance to the market. If you miss external trends that impact your business, and you do not make your guidance, this has serious repercussions. Your stakeholders lose confidence in the capabilities of the management, the share price may be affected, and ultimately the agencies lower your ratings, leading to an increase of the cost of capital. How's that for a business case for enterprise performance management and scenario analysis?

There are many techniques for scenario analysis. Some use narratives, stories that describe "the day in the life of manager John" in 2009, going through different experiences based on what he decided in 2007. Narratives can also be a bit bigger, such as the future of the telco industry 2020, when (if?) literally every device is connected, or the world at large in 2100 if we don't address global warming. Other techniques use complex quantitative techniques, based on stochastic or Bayesian modeling, assigning probabilities on certain outcomes and outcomes of outcomes.

Whatever "school of thought" you belong to, scenario analysis is about thinking the unthinkable, questioning the most foundational beliefs in your business, and see what happens. It is not even important if one of those scenarios becomes reality. The real benefit of scenario analysis is flexing the mind and being ready for any change, understanding that the future begins now and we should come into action, or seeing today's word simply in a broader scope. Predicting the future can be done best by shaping it yourself!

In this blog I will describe three ways of "predicting the future":

• Trend - Counter trend. Every action leads to a reaction. Every thesis leads to an antithesis. There is never simply a single trend that extrapolates endlessly. There is always a complexity of trends in different, sometimes opposite directions, that lead to a balance, an equilibrium. Every time the balance is disturbed, different trends compete for a different balance and the equilibrium is restored. What happens is we look at today and describe the opposite situation? I will post on how a counter-reaction to user-friendly software could lead to "power to the nerds."
• Extrapolation. Although there is never a single trend extrapolating eternally, trends do sometimes extrapolate for a while. What happens if we take today's situation, understand how we got there, and logically think through the next steps? I will reason how Service Oriented Architectures could make business consultants out of IT vendors and business integrators out of system integrators.
• Comparison. Global trends are not restricted to a single industry. Privatization in the energy-business will most likely lead to the same effects as it has in privatizing the post office, or the railways. Or privatizing the police or the army, or the treasury department, all would be unthinkable today. What happens if we apply the dynamics of another industry on our own? How can Search benefit from understanding a human shopping experience?

See if you agree, disagree, if it makes you smile of even upsets you. If so, scenario analysis has worked.

The Future of IT: Power to the Nerds

IT used to be the arena of experts. With a double PhD, wearing lab coats. They would talk in a language no one understood (although it vaguely resembled English), and computers were off-limits for most people. Today's different. Most people I know have more bandwidth at home than in the office. We all use computers. We're all online. But we don't program a lot ourselves. We just use 'em. In fact, we expect them to work as our iPod: out-of-the-box, perfectly and without reading the manual. Software is being promoted as easy to install and to use.

 Well, the future of IT could be different. As a reaction, the trend could reverse. Power back to the Nerds. With all software being easy to use, a low cost of ownership, everyone being able to reap the benefits, where's the exclusivity? Where is the competitive advantage? If we continue like this, Nicholas Carr's words on "IT doesn't matter" become a reality.

 In the future, software should become harder to use, require more programming, some software will become much more expensive, as companies require some exclusivity. Bespoke systems will make the difference, which is the ultimate price of software, being built for a single user or company only.

 In this future, Open Source can go both ways. Either open source becomes a commodity and people use it just for non-competitive stuff such as printer servers. Or it is just a basis, and open source developers adapt it to bespoke software with unique and exclusive features and functionality, not used by anyone else.

 The advantages of such a model are evident. Whoever has the information has the power. In an information democracy, the people have the power. In an information monarchy, the rulers have the power. And in an information-centric business, this is true competitive advantage. If transparency is forced by legislation and regulation, the need to exclusive systems is even bigger. If everyone has the same information, only the ones who have superior insight benefit.

 It's the nerds who hold the power in this future. They are the ones making more money than the CEO. They are the only ones who can build and control these complex systems. The lab coats are back, this time just with some pizza stains added. It's not money or muscles that count, it's brains. The most popular guys in school, admired by all cheerleaders? You got it, the nerd! The guy or girl who can get you the concert tickets you want, who can help you with your homework, who can get you connected with everyone and everything, and who will make a ton of money.

The Future of IT: Software Vendors as Business Consultants

IT is changing. Service-oriented architectures break up application silos into many reusable software components. Within a certain framework, these components can be used to put together new systems, and making changes is done by simply reassembling these components in a different way. This is a partial reality today, but it is not hard to imagine this happening across a complete domain of business applications. Let's extrapolate this trend and see where it could further lead.

 First of all, in this future this will create a different class of workers. Not IT people, as they are business experts in their industry, and not business people, as their task is to build and maintain systems. Where's the difference between building and maintaining systems? It's not really there. Lines between these two IT disciplines will blur. Prince2 as a development methodology and ITIL as a maintenance methodology will need serious updating as application development and management change dramatically.

At the same, time, business models and business innovation is becoming more information- and IT-centric. Mass customization principles (mass production, in which every item may have different specifications) today already make that consumers can configure their own car, or their own sneakers, or their own health insurance. And why stick to combinations of one producer or supplier? It is easy to imagine that customers (first business-to-business, then business-to-consumer) would want to assemble their own systems as well, for instance for integrated travel planning (air, hotel, car), multimedia experiences from various sources, games spanning multiple "worlds," or personal administration. All through standard services. You could say that IT has become the business itself.

 In this world, the role of software vendors will be changing. First of all, they don't sell applications anymore; they sell a platform on how to compose, decompose and recompose services. Their brand is not about the company anymore, but represents the overall community of small vendors adding components (why would they come from one vendor) and best practices from consumers on how services are being used. In creating and running these communities, the role of the software vendor most likely even turns into that of a business consultant, with an intimate understanding of industry-specific processes. Even more, the software vendor monitors these processes running at customers and provides advice on how to optimize them, helped by benchmarking based on comparable processes. This exists today already on how well systems are running, but this would evolve into process monitoring.

The role of systems integrators changes too in this scenario, they could become business integrators. Often system integrators have a vertical focus already, they are organized in industry units. They often have large outsourcing practices, in which they run their customers' systems. They often serve multiple customers in an industry, and in case on value chain integration, act as an project integrator between all parties. From system to project to business integrator is just a small next step. Business integrators have a central spot in a certain industry or value chain, and make sure the partners connect, to run a seamless process. They are not an IT service provider, they are deeply embedded in the vertical itself. Think for instance of an IT company to which a banking system is outsourced too. The only thing missing being a bank itself is perhaps the banking license, something that could be fixed by a cooperation with a bank or with multiple banks. This may very likely happen today already, although I am not aware of any specific examples and what legal possibilities or boundaries there are. A system integrator working in the telco industry could come up with services to connect networks better, and could start sell these services to consumers directly. How many internet providers have gone into "content" already?

Stock investors always warn that results of the past are no guarantee for future results, but for extrapolation the opposite counts. The signs can usually be spotted throughout the complete trend. First attempts may not always be successful, it usually takes a few rounds to get the next step in business right. Not every internet provider that went into content was successful. But success is the summary of all failure. Extrapolation of trends helps you keep that faith.

The Future of IT: Search

Everything has to be search-driven when working with computers. The effect of search engines on IT, and specifically user interfaces, has been enormous. It has even led to enriching the language, as we "google stuff." I wonder how long it takes until the verb "googling" is used even for physical searches. "Honey, the cat walked away, I'll be googling the neighbourhood now."  Too bad the airlines can't google my luggage yet.

Is keyword search the ultimate way of finding information we need? Comparing search with a human shopping experience says it's not. The future of search could benefit from lessons from today.

Let's first look at how a human shopping experience would be like if it worked like keyword search. Imagine you are going shoe shopping. You go into a shop and show the salesman your shoes, and you tell them you want the same shoes in black. If it were search the salesman would either immediately say "no" (without even saying sorry, or that he could order them), or would come back with those black shoes in every size between 6 and 12, because you forgot to specify your size (how dumb was that?). In both cases the result is the same, you leave the shop. You no new shoes. The salesman no revenue. Loss-loss situation.

How does it really go? If the salesman has the shoes, he will ask for your size, or will measure it, and then will go. He'll also try and sell you shoe polish, a set of shoe spanners, and matching socks, although you didn't  ask for it, but wanted it anyway. If he doesn't have those shoes, he'll tell you he'll check for a minute, and come back with something like it. In the meantime, you were walking around the shop and found another pair of really cool brown shoes too. The salesman will point out that the shoes you asked for were last season's anyway and that he has brought the latest model, something that fits much nicer with the fashionable clother you are wearing (hmm, what a nice person, you can't help thinking). You leave the shop with two pair of shoes, both better than the ones  you thought you wanted, shoe spanners, socks and shoe polish. Win-win situation.

Search today is unidirectional. The supplier of information is the slave, the customer decides everything, is master. This is not in the best interest of both. Information demand and supply won't meet in an optimal way. The future of search is like in human interaction, bidirectional. This means that search engines need to become aware of what search process they serve, and ask the right questions back. It means that the search engine needs rules on how to interpret the answer, as much as how to interpret the question. Searching for an LCD TV with certain specifications, could lead to the search engine producing the result of a Plasma TV, because for the same price and specifications, the margin is higher (in the best interest of the supplier of the information). If the desired vacation in Greece is not available, perhaps a similar location in Turkey is a good option. If you search for a second-hand Jaguar in black, with not more than 100,000 kilometers, perhaps the dark blue one with 101.000km is fine too.

Innovation, to shape the future, often comes from comparison with other industries or similar processes. The future of Search is no exception.

frank

Profit and Profit statement

I've been writing about this before. No organization stands on its own. In fact, an organization as such can be defined as a unique collaboration between stakeholders to achieve goals, that none of them could achieve by themselves. Yet most performance management initiatives focus only on "how do I optimize my performance?" instead of also recognizing stakeholder contributions: "how do my stakeholders contribute to my performance, as well?" This question can only be asked, I always add, if you are also prepared to ask the opposite question: "And how do I contribute to my stakeholders' performance?" Stakeholders include shareholders, customers, employees, regulators, business partners, suppliers and society at large.
 
Recently I spoke with a large global industrial manufacturing company, who wanted to reflect this reality, even in their financial reporting. Their financial consolidation system produced, next to all traditional reports, also the following report: 

Generation of value added

• Customers: Net Sales
• Suppliers: Procurements
• Produced Added Value: Net Sales - Procurements

Distribution of value added

• Employees: Salaries
• Public Sector: Taxes and indirect employee costs
• Creditors: Financing expenses
• Shareholders: Dividends
• Distributed to Stakeholders: Total of above items

Retained in business

• Produced Added Value - Distributed Added Value

 

It looks like an ordinary P&L statements, but it has an interesting twist. It is a Stakeholder Profit and Loss statement. It first of all calculates, in a classic way, the added value of the company. This is defined as the net sales minus the procurements. Then it shows how the added value is distributed over the various stakeholders, being the employees, public sector, creditors and shareholders. This is their slice of the pie. Lastly, the traditional result is profitability, how much of the added value is retained in the business, to create sustainable growth. This is a great example of taking a more stakeholder oriented approach, creating a win-win mindset. It shows profitability cannot exist without the contributions of employees, society, shareholders and other stakeholders.
 
The next step would be to compare the distribution of value added with the collection of value added, what did the stakeholders contribute to the company. Together this would create a new performance indicator: Return on Stakeholder.
 
Interesting Profit and Loss statement, or should it be called Profit and Profit statement?

Intercultural management

Measurement drives behavior. That is one of the most fundamental rules of performance management. Another way of saying this is "what gets measured, gets done." Setting goals and targets, and linking performance indicators to incentives is meant to motivate people. However, people's behaviors are culturally dependent. Looking someone in the eye is polite in my country (The Netherlands), yet very impolite in others. The Dutch are known for being very direct (others would call it blunt), which doesn't always work in the UK or USA. My wife Alexandra is German, and she needed to learn to explain "why" if she wants something done (or not done) in The Netherlands, where in Germany authority counts more. 

Yet, management culture seems to equate to USA culture in many cases. Methodologies such as balanced scorecard, and best practices for implementing them, may usually work in the USA, but may completely fail somewhere else. Global companies have cultures too, but national cultures seem to be stronger than company cultures.

We have to make performance management culturally dependent in order to drive the right behaviors of people. Fortunately, in the field of intercultural management there is a lot of research on this topic; for instance, by Trompenaars and Hofstede. These scholars, and others, have defined many dimensions on how to describe cultures. Here is one example of how to apply performance management in different cultures, making use of one interesting cultural dimension, called Rules Orientation. The spectrum has two extremes: universalism and particularism.

Universalist cultures play it by the book. There are clear rules to make sure there are no exceptions and everyone is treated the same. This counts for citizens, customers, but also employees. Contracts need to be kept, regardless of the circumstances. Particularist environments contrarily focus on specific situations at hand. They speak of people in terms of relationships, such as "friend," "special customer," and "loyal employee."  Rules or not, the relationship needs to be protected. Contracts can easily be changed if circumstances change. If we apply this to performance management, it creates two entirely different sets of best practices. In universalist environments everyone is measured te same way. Metrics are clearly defined, consistent and comparable. Feedback is very open, rankings are public information within the company. The number speak for themselves. There is a clear bonus schema based on under- or over-performance.

However, in particularist environments, this would lead to dysfunctional behaviors. People will find ways to discredit the system, they will find alternative versions of the truth. Metrics in particularist environments are personal, they describe a person's unique position in the company. Feedback is not public at all, it is personal too, and the metrics are used to trigger a qualitative discussion. Incentives are at the discretion of the managers. However, in a universalist culture, this way of working would be totally rejected. It would lead to cynicism, and accusations of favoritism and even nepotism. Surely no collaboration can be expected in such a situation.

Behaviors of people, when confronted with performance management, can be predicted. And positive behaviors can be triggered. All it needs is a little cultural sensitivity.

frank