If my employees would just do what I tell them ….
CEOs face numerous challenges. Compiled from various sources, here are just a few of the worrisome issues that cause CEOs discomfort:
- Resistance to change
- Lack of commitment
- Inadequate communication
- Limited resources
- Lack of follow-through
- An environment to attract talent
- The right people in the right places
- Talent management
- Operational efficiency & effectiveness
- Anticipate potential disruptions
- Make strategic decisions that drive growth
- Lack of time
- Lack of growth
- Market differentiation
- Globalization
- Regulations & Legislation
One CEO we talked with about his company’s performance stated a core symptom of operating and organizational dysfunction when he said, “If my employees would only do what I tell them to do, we’d show better results!” And this symptom relates to 90% of the issues a company can control.
There are a multitude of reasons employees don’t do what they are told to do, and the reasons vary depending on a company’s situation. To understand some of these reasons, let’s look at the structure of companies that create value.
What drives value creation?
At the core of value creation is an organization whose employees are fully engaged, inspired by executives and managers who possess excellent leadership skills, working in a system designed to drive excellence in operational execution and deliver value to customers.
And when we talk with CEOs, most say that is the way their company operates. CEOs know that employees are the lifeblood, the heartbeat of their company, and most try to treat employees well. After all, the market value of a company is directly proportional to the emotional wellness of its employees. This wellness is directly related to the health of the company’s culture, which will be discussed in some detail later in this blog.
We know that employees join companies eager to apply their skills and experience to do meaningful work and make a difference. Companies hire these employees because they possess the potential to execute the strategy and drive growth. The employees are onboarded and begin to do the work.
Companies operate in this value-creating culture and over time customer orders increase, which requires additional employees and management staff. This growth creates operating complexity that is seen in the areas of leadership, communication, goal setting, and accountability. And in that complexity, if not managed properly, something happens that constrains employees’ ambition, creativity, cooperation, and sense of responsibility, which diminishes performance, cripples execution, and destroys enterprise value.
How does complexity derail the value-creation pattern and what can a company do to overcome the issues of complexity? To understand some of the elements that disrupt the value-creating culture, let’s look at how trouble unfolded in a real-life situation at a company we will call ABC Corp.
The Story of ABC Corp.
Tim is the CEO of this midsize engineering firm known for developing and delivering solutions to customers with greater agility and speed than its larger competitors. This solid reputation enabled the company to grow to $800 million in revenue with 2,300 employees.
But about 3 years ago, market conditions, influenced by COVID among other things, reduced the number of large, more profitable jobs. Therefore, revenue and earnings fell short of the company’s forecast, which prompted management to expand the prospecting plan to target smaller, less complicated jobs.
While this tactic increased revenue and earnings, the company still faced an earnings shortfall. Moreover, during the last eighteen months, ABC Corp. saw an increase in turnover, which along with quality control problems and missed project delivery dates further suppressed earnings.
Tim met with his executive team to discuss the current state of operations. He told them that given the company’s engineering expertise, he wanted to focus on winning $100 million and larger jobs going forward. However, with the turnover, quality, and execution problems they’d suffered, he acknowledged their current culture wouldn’t adequately support these much larger jobs. Further, Tim admitted that he didn’t know what kind of a culture the company needed, let alone how to change the culture.
Direction from that meeting sent the executive team off to solve the most urgent problem first, employee retention and a working group was formed to meet regularly over the next 60 days to determine issues contributing to employee turnover.
The group found several key issues they believe led to the increased turnover, such as:
- Engineers are unhappy that the company was focusing on smaller jobs that required less creativity and problem-solving. The meaning of their job is to develop excellent solutions to solve clients’ difficult problems.
- Staff complained they were in the dark regarding the company’s vision, mission, or strategy.
- Project teams blamed broken and outdated processes and systems for execution delays.
- Functional disputes were disruptive. For example, project teams were upset that Sales promised unreasonable delivery dates, Sales complained that Marketing promoted features that weren’t yet available, and Finance pushed back on Sales for discounted to win bids.
- Project teams also complained that customers with smaller jobs required an inordinate amount of time and support.
In addition to these key disruptive elements, the group found several other issues that also contributed to not only employee turnover but also to the quality decline and execution missteps. The cost of operating complexity, if not managed, can be a significant drain on enterprise value.
To summarize what we know so far, ABC Corp. had a reputation for delivering excellent customer value, which enabled it to grow revenue to $800 million. However, based on the findings of the working group, the strategic shift to bidding on smaller jobs, along with increased operating complexity, created conditions that caused an increase in employee turnover and likely drove enterprise value downward.
And within ABC Corp., employees were doing some of what they were told to do, but they lacked enthusiasm and weren’t doing the work effectively. Also, there was a disconnect between what leadership saw as the company’s vision and mission and how the employees viewed them.
We’ll leave the ABC Corp. story for a moment to discuss what successful companies do to manage complexity and ensure that their employees are doing what they are told to do. In a discussion of operating complexity, it is useful to think about it in terms of disruption and disorder. The constraint of ambition, creativity, cooperation, and responsibility in employees that diminishes performance is certainly disruptive and spreads disorder.
One of the first areas to be affected by growth and the ensuing complexity is leadership. Growth normally requires hiring additional employees and promoting or hiring managers to oversee the work. It can be said that managers were good at the technical work they did as employees, but many lack the skills to lead others, which creates disorder and changes the culture.
The second area hit by complexity is communication. An increase in headcount increases the lines of communication, complicating the communication process, and the message can get distorted as it is passed from the CEO through the management chain down to the frontline employees. If the communication plan is not updated as the company grows, the company’s vision and mission become foggy, and the common knowledge of the operating procedures, processes, and systems that are to accomplish the mission gets lost. If employees don’t understand what is supposed to be done, they formulate their own plan, which results in a lack of unity and focus on corporate goals.
And of course, both poor leadership and the lack of communication disrupt the goal-setting process and accountability, which brings disorder to execution and value creation.
A better understanding of what operating complexity is will help management identify issues affecting performance and develop solutions. However, it is not uncommon for management to focus on an urgent problem and implement a solution, only to find out later that the solution was short-lived and it created several new problems.
Therefore, managing complexity requires an approach that evaluates problems in the context of the whole business system, recognizing which elements impact the problem and which are impacted by the problem.
The most effective methodology to uncover a problem’s root cause and develop a solution is the Value-Creation Operating System™ (VCOS™) approach. The VCOS™ approach starts with an economic value added (EVA) analysis, and then works through three phases that enable a company to overcome operating complexity and generate a significant increase in earnings and value.
EVA Analysis
Many investors use an EBITDA multiple to determine the value of a company, therefore an increase in EBITDA translates to an increase in company value.
Warren Buffett takes a different approach. Mr. Buffett uses EVA as one of the primary tools to value companies; he believes the true value of a company is determined by its ability to earn cash returns in excess of the company’s cost of capital.
We agree with Mr. Buffett; hence the first step to improving operating results is an EVA analysis to gauge the company’s return on invested capital (ROIC) relative to its capital cost. This is a great starting point for management discussions that take place in Phase 1, ensuring that the company is focused on the things that will generate an appropriate ROIC.
Phase 1: Rationalize the operating infrastructure to clarify the “right things to do.”
The phase starts with an executive management discussion regarding the components of the company’s operating infrastructure and how each impacts the ROIC. The initial discussion centers on the company’s intended direction and the foundational elements that support the direction:
- Purpose: Why does the company exist?
- Vision: Where does the company expect to be at some future date?
- Mission: What is the company doing to achieve the vision?
The discussion then turns to evaluating how well the company’s operating activities fit with the stated foundation:
- How do the company’s core competencies line up with market needs?
- Is the company serving the right customers?
- What is the company’s competitive advantage?
- How can the company improve its competitive advantage?
- Do the corporate goals deliver customers’ needs and at the same time generate required earnings?
Clarifying the “right things to do” and establishing the proper corporate goals provides the basis for execution that creates value for customers and the enterprise. Phase 2 sets up the workforce to focus on “doing the right things.”
Phase 2: Reset organizational alignment and accountability to ensure the workforce is “doing the right things”.
At the center of this phase is the question, what are employees doing and are they held accountable for delivering results? Presumably, the corporate goals have been established to produce value for customers and drive value creation for the enterprise.
Phase 2 begins with an analysis of what employees are doing, the impact that “doing” has on creating customer value, and subsequently what employees could do differently to generate more value.
Michael Porter’s book Competitive Advantage – Creating and Sustaining Superior Performance provides a framework for evaluating employee activities. Porter says that to understand the behavior of costs and the existing and potential sources of differentiation, you need to disaggregate a firm into its strategically relevant activities. He introduces the value chain as a systematic way of examining all the firm’s activities and how they interact to evaluate sources of competitive advantage.
Porter explains that a firm’s value chain is a collection of activities consisting of Primary Activities (those functions responsible for sourcing inputs, operations, outbound logistics, sales & marketing, and service), as well as Secondary Activities (those that support the Primary Activities, such as firm infrastructure, HR, IT, and procurement). Each of the activities in the various functions must contribute to creating value for customers, which in turn creates enterprise value.
A review of activities in the functions, departments, and teams gives management the ability to assess how these activities advance the corporate goals and shore up the ROIC gap revealed in the EVA analysis if one exists.
This activity review provides the historical pattern of the workforce effort and provides the background for the executive team to prepare objectives and key results (OKRs) for their business unit, function, or department that will enable the corporation to meet its objectives.
Once the CEO and board have approved the executives’ OKRs, the executives work with their direct reports to agree on their OKRs that will ensure the achievement of the executives’ OKRs. And this continues deep enough in the organization to be sure that the workforce is aligned on doing the right things.
The OKR goal-setting system also establishes accountability. But accountability requires that employees have a good understanding of certain aspects of the company’s operation, such as:
- How the company delivers value to customers, as well as how the company makes and keeps money.
- Why their particular work is critical to the overall mission, and why the mission is meaningful.
- What value they must deliver to their customers, both end-user customers of the company’s products and services, as well as “customers” inside the company that depends on information and material the employees produce.
- What information and material they need from their suppliers, both inside and outside the company, and know that it is their responsibility to ensure their suppliers deliver in a timely manner.
The OKR system can be set up so that every employee from the CEO on down can view the progress of any function, department, team, or employee objectives and results. Periodic communication, feedback, and recognition between the boss and subordinate ensures accountability and allows for course correction when necessary.
The final piece is to be sure the right people are in the right jobs. For example, we recently encountered a situation where Jerry was hired as a financial analyst. He had an aptitude for details and delivered well-thought-out analyses, but he was an extrovert and spent a lot of time socializing with co-workers. Therefore, Jerry never met the performance standards for that job, even after having multiple one-on-ones with his boss.
So the boss had to make a decision on Jerry’s value to the company and he used our assessment methodology to determine that Jerry’s skills and personality would work well in Customer Service. Jerry agreed to a transfer and has exceeded the performance standards over several months in his new position. The methodology used here is a combination of art and science that I will discuss at length in a future blog
Here is a summary of the key elements necessary to ensure proper organizational alignment, accountability, and effective execution:
- A review of employees’ current activities
- Develop and implement an OKR goal-setting system.
- Formulate a communications plan that regularly reinforces and provides updates for the workforce on the company’s operating infrastructure:
- Establish an accountability communications, feedback, and recognition system to monitor performance and goal achievement.
Phase 3: Develop executive and manager leadership skills; the force multiplier that enables “doing the right things extraordinarily well”.
This is the powerhouse phase, the secret sauce! In fact, it’s the force multiplier that reinvigorates a performance-enhancing culture and drives excellence in operational execution.
I know you leaders are on board for improving execution. But why, you say, should I be concerned about culture, especially when there are many important issues to deal with, such as attracting and retaining talent, global operations, growth, competitors, and profitability?
Here is why culture matters.
Culture is the foundation of an organization: A solid foundation supports and drives business success, while an unstable foundation allows enterprise value to slide away. Further, developing the right culture will produce extraordinary results. As evidence, look at a lengthy study done by HBS Professors John Kotter and James Heskett, the results of which are published in their book entitled Corporate Culture and Performance.
The book takes us through their extensive research project in which they looked at 200 companies and studied how each company’s culture affected its long-term economic performance. Their research concluded that companies with cultures emphasizing all the key managerial constituencies (customers, stockholders, and employees) and leadership from managers at all levels – what they call “performance-enhancing cultures” – outperformed firms that did not have those cultural traits by an 8 to 1 margin.
Data from their research reveals that there is enormous value for companies that maintain certain kinds of cultures: Over an eleven-year period, companies with performance-enhancing cultures increased revenue by an average of 682% vs. 166% for companies without, expanded their workforce by 282% vs. 36%, grew their stock prices by 901% vs. 74%, and improved their net incomes by 756% vs. 1%.
The professors said that their studies clearly show two things:
- Certain kinds of cultures help, while others undermine, long-term economic performance.
- That even contextually or strategically appropriate cultures will not promote excellent performance over long periods unless they contain norms and values that can help firms adapt to a changing environment.
The results of this research are compelling; what leader doesn’t want 8x more net income? But how does a company properly emphasize all the key managerial constituencies? And what does the leadership from managers at all levels look like?
Phases 1 and 2 of the VCOS™ approach look at all the key managerial constituencies and leadership from the standpoint of knowing and doing the “right things.” But the next question is, are employees operating in a performance-enhancing culture wherein these “right things” are being done exceptionally well?
Corporate Culture and Performance describes in great detail the benefits of a performance-enhancing culture, but it doesn’t tell us what that culture is or how a company can develop and maintain that kind of culture. Logically, to develop something you need to know what it is you’re developing, so let’s define culture, including what it is not.
Culture is not a set of employee perks and entertainment, such as a game room, outside walking trails, free lunches, holiday decorating, costume parties, and bring your dog to work day. Those features may be nice benefits for employees and can have a temporary positive effect on employee attitudes, but they will not drive employee engagement, excellence in operational execution, or earnings improvement.
Merriam-Webster defines culture as the set of shared attitudes, values, goals, and practices that characterize an institution or organization. A company’s leaders value certain attributes, and they embrace certain attitudes and behaviors to attain those attributes. For example, leadership may value quality so they communicate and model attitudes and behavior that drive quality workmanship and deliverables. Alternatively, they may value winning at all costs, therefore they may manipulate, intimidate, and deceive employees, suppliers, and even customers to get what they want.
Of course, whatever leadership values and models is sure to be picked up and followed by executives, managers, supervisors, and front-line employees. In the examples above, when employees follow the quality scenario the company will likely generate above-average results. Conversely, the attitudes and behaviors in the winning-at-all-cost scenario can create a toxic culture that causes employees to disengage and worse, to spread discontent throughout the company.
We have now defined what culture is not, and what culture is, and we have examples of some of the elements in productive and destructive cultures.
So we have a good idea of what culture is, and that leads us to the next question, how does a company develop the performance-enhancing culture that produced the astonishing results Kotter and Heskett found in their research?
Developing a performance-enhancing culture
A performance-enhancing culture must have all the elements discussed in Phases 1 and 2, but the keys to developing and maintaining such a culture are held by a management team that possesses excellent leadership skills. Those skills include the ability to develop, inspire, guide, and encourage not only direct reports but any employee they interact with within the company, as well as those they interact with outside the organization.
The following quote sets the stage for a discussion of leadership.
“Control is not leadership; management is not leadership; leadership is leadership is leadership. If you seek to lead, invest at least 50% of your time leading yourself – your own purpose, ethics, principles, motivation, and conduct. Invest at least 20% leading those with authority over you and 15% leading your peers. If you don’t understand that you work for your mislabeled ‘subordinates,’ then you know nothing of leadership. You know only tyranny.” Dee Hock, founder and CEO Emeritus Visa International.
To lead people, you must have their trust, their reliance on your integrity. For example, if there is a disconnect between what you say and do, the workforce won’t trust what you say, but they will certainly copy your behavior. In addition to trust, it helps if you have their respect and admiration for your abilities.
Investing to lead yourself, particularly in the areas of ethics, principles, and conduct, is the bridge to winning the trust and respect of others. But what is the investment vehicle to improve leadership capabilities? A good place to start is to study emotional intelligence (EI).
Technical skills account for only about 15% of an employee’s value, particularly for executives, managers, and supervisors. The remaining 85% is determined by the employee’s level of EI, which is comprised of self-awareness, self-control, empathy, motivation, and the ability to form and maintain relationships. And in building solid relationships with co-workers, suppliers, and customers, you are building mutual trust and respect.
Companies often make a mistake when they promote an individual to a position where they are expected to lead people on the basis of their technical abilities. Since most companies do not teach EI, nor is it often taught in school, most employees lack the proper foundation to effectively lead themselves or others.
Phase 3 of the VCOS™ approach offers a segment to build one’s EI, as well as segments that help employees develop other characteristics of self-leadership mentioned in the above quote, such as purpose, ethics, principles, motivation, and conduct.
Learning to properly lead oneself is the foundation of leadership that enables you to lead those who have authority over you. The idea here is summed up by Steve Jobs who said, “It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.” The Board and CEO set corporate goals and the direction they want the company to take, but they expect management and the workforce to execute the strategy and produce results.
The entire VCOS™ approach establishes the structure that ensures management and the workforce are executing all the right things to do with excellence.
Finally, when leaders invest in leading themselves and those who have authority over them, they likely will earn the trust and respect of those over whom they have authority. The above quote says that leaders work for their “subordinates”, and in the VCOS™ approach, there are segments that teach leaders how to develop, inspire, guide, and encourage employees, including clearing roadblocks to employee productivity, ensuring employees have the necessary resources, and one-on-one communication with employees for monitoring, feedback, correction, and recognition.
I mentioned in the introduction to Phase 3 that it is the force multiplier, the secret sauce that inspires excellence in operational execution. And the various aspects of Phase 3 that I’ve touched on build up leaders to be that force multiplier.
Unfortunately, without the appropriate leadership skills, executives, managers and supervisors may lack the understanding to communicate the right things properly, and worse, may lack the leadership skills to inspire great employee performance, instead using manipulation, intimidation, deceit and fear in an effort to drive performance.
Here is a summary of Phase 3 activities that develop leadership skills for executives, managers, and supervisors, eventually flowing down into the ranks.
- Leadership fundamentals – Provide training in the following areas:
- Emotional Intelligence
- Communication
- Understanding people
- Developing people
- Servant leadership
- Leadership fundamentals – How to manage goals, objectives and key results.
- Leadership fundamentals – Provide ongoing coaching in the areas mentioned above for executives and managers.
- Leadership fundamentals – Model leadership behavior, inspiration and encouragement.
Implementing the VCOS™ approach will create the environment Professors John Kotter and James Heskett found in their study of companies that maintained a performance-enhancing culture; a culture that delivered 6x greater market value and an 8x greater increase in earnings than companies that did not have or were not able to maintain this type of culture.
Back to ABC Corp.
Let’s look in on ABC Corp. to see what management has been doing to solve its employee retention problem, as well as whether they are making progress on managing the larger issue of operating complexity and a culture shift.
We worked with management in the company’s Delta Division to educate them on the VCOS™ approach, convincing them that it has the processes and tools that will help ABC Corp. solve the retention problem, as well as boost employee performance, drive effective execution, increase earnings and significantly improve enterprise value.
Following management’s buy-in, we helped them implement Phase 1 of the approach. The management team spent time articulating the “why” for their business and then built a mission statement around the “why”, making sure that it made the appropriate contribution to the company’s vision and mission.
Next, the team assessed Delta’s core competencies and lined those up against the customers they were currently serving, as well as the customers having the large jobs that Tim wanted to pursue.
Finally, they analyzed their competitors and clarified Delta’s competitive advantage, particularly with respect to the customers with the large jobs they wanted to win. From this analysis, the team developed a major strategic action that would significantly strengthen their competitive advantage.
After completing Phase 1 activities, we got the management team started on Phase 2 activities. The Delta management team met with executives at the corporate level to make sure that Delta understood the corporate goals and the contribution their Division was expected to deliver. Based on that understanding, we began working with the team to develop and activate on OKR goal-setting system specifically for their Division.
As described in the Phase 2 details, when fully implemented the OKR system will allow anyone in the company to see the progress individuals, departments, functions, or the entire business unit has made to date toward delivering key results and their objectives.
As this blog is being written, Delta is just beginning to implement the OKR system, hence they have a ways to go before they will see the full benefits of the VCOS™ approach. But Delta’s management has already seen a culture change in terms of employee engagement. A clear understanding of why this Division exists and how their mission drives customer value has energized employees. And this energy sparked the creativity to develop the strategic action that strengthens their competitive advantage. Moreover, corporate management has seen this shift, as well. In fact, while this Division is a test case for the system and it has not yet delivered the 8x increase in earnings that Kotter and Heskett found in companies they studied, corporate management is already talking about implementing the VCOS™ approach for the entire company.
Summary
The VCOS™ approach at ABC Corp. is running smoothly, but building a performance-enhancing culture is not quick or easy. It is no secret that change is difficult for companies, especially culture change, and a good many change initiatives fail to achieve the expected results.
However, decades of experience working with companies to improve operating results has given me the perspective and know-how to implement this whole system approach that creates the environment to attract top talent, and establishes a structure that more effectively deploys assets and people to drive excellence in operational execution!
Even more important, I have studied psychology and emotional intelligence for nearly 20 years, earning a Ph.D. in 2020. And that work enabled me to develop programs and processes that sharpen leadership skills and improve employee performance, all of which are included in Phase 3 of the VCOS™ approach.
What’s Next?
For investors and company leaders who are frustrated with employee performance, the lack of execution, and earnings shortfalls, VCOS™ is a whole business system approach that
- Applies sound judgment, reason and good sense to elements of the operating infrastructure,
- Establishes a communications plan, goal-setting system and accountability tracking that focuses the workforce on achieving the corporate goals, and
- Energizes, inspires and develops people, which establishes a performance-enhancing culture that will significantly increase earnings and enterprise value.
Unlike common practices to improve performance and increase earnings, such as chasing markets for growth, isolated efforts to improve functional performance, across-the-board cost cutting, and reorganizations, the VCOS™ approach measures the performance gap, uncovers and solves root causes for problems that impede performance, rationalizes the operating foundation, realigns the workforce with goals and value-creating activities, and rekindles a performance-enhancing culture.