As with all of the business models I have written about, organisational governance has been well documented by other authors. And for every author there is a definition.

I define governance as the proactive management of variance, applied equally to compliance and performance. The two halves of governance are equally important yet it seems that whenever I read articles or hear conversations on the subject, they are always to referring to compliance.

Compliance is the activity where the company ensures adherence to its own internal policies and standards; and to the policies, standards, regulation and legislation imposed on it by external industry bodies, local, national and international law.

Performance refers to ensuring operational processes adhere to the internal standards for revenue, cost, quality and service; or put more simply, ensuring that operations are working to budget.

There are two important truths, here:

1. You can have process without compliance, but you cannot have compliance without process, and
2. You can have process without management, but you cannot have management without process.

It is therefore the business process that binds compliance and performance together.

The role of management is to ensure business processes adhere to budget and to address variances as they arise. This is true for all managers irrespective of their position or role in the organisation. It therefore embraces all functions including the functions.

The reverse is equally true; as compliance functions are expected to manage to budget (ie performance), operations functions can be expected to manage to the restrictions imposed by compliance frameworks.

This therefore raises the question: why does the term Governance get used so widely and have so much importance placed on it? If managers accept that their role embraces both performance and compliance, then Governance and Management become one and the same thing, and the apparent separation disappears.

Many of my clients have employed managers for compliance specific roles – such as an OH&S manager or a Sustainability manager. There is nothing wrong with these appointments, indeed they are most necessary. These managers are employed as subject matter experts to own a portfolio (such as OH&S) and to be responsible for how that portfolio manifests itself in the business. This includes being responsible for knowledge transfer, awareness, training, etc – and all the other dimensions that a subject matter expert can bring to the business.

They are also accountable for the appropriateness of the framework they use and for managing how well the business adheres to the compliance processes associated with their portfolio. In essence, they are responsible for managing how well the business complies with its own compliance regime.

What they are not responsible for is the active management of compliance in the business. Here the operational process managers are responsible. The operational manager is responsible for not only what gets produced by the process, but also how the output is produced. In this case, the ‘how’ is defined by the restrictions imposed on the production process by any and all of the applicable compliance frameworks. Process managers don’t get to choose which framework they will and won’t adhere to.

The compliance framework

To further explore the idea of compliance frameworks.

A framework is a model and a filter and importantly a model is only an abstract; an alternative way so see the business. It is not the business itself. Every framework is different and each allows a manager to view specific aspects of the business and to filter out all those aspects of the business that they are not interested in.

Every compliance manager has their preferred framework. Popular frameworks include the eTom for Telecommunications, ITIL for IT, APQC for business analysts and Sarbanes Oxley for Finance. These frameworks all manage risk in some way. Then there are the risk frameworks themselves which get treated as something different again.

While each framework is different, the business is consistent. It doesn’t change no matter which framework you use. Consider the following illustration of a generic enterprise.

In this ‘naked’ view, it does not matter who is looking at the business. Everybody sees the same thing.

If you apply views/filters you get the following. The filters are example only.

It is the same business, but now seen through the selected view of the managers choice. These views do not corrupt the message. Rather they focus it to remove ‘noise’ and other irrelevant data. But it is clear is that if a manager is looking at the business through an HR view, then they are not looking at it through an IT view. This tends to create silos, in that managers start to only see the business through one view and forget that it is only a view and not the business. Working in teams helps mitigate this issue.

Frameworks guide the manager as to what should be considered when transacting the business process and which parts of the processes need to be controlled to ensure that the business is adhering to its internal policies and applicable external regulations, legislations etc.

For example; the COSO framework requires a business define itself in four categories; Finance, Sales and Operations, Corporate and Legal affairs, and HR.

For each of these categories there are sub categories and so on and so forth. The drill down process stops when it gets to the business process. At this point, specific process steps in the transactional process are identified as control points to ensure that the process will deliver an outcome consistent with the requirements of the framework.

The compliance manager owns the framework, but the business process manager is accountable for ensuring adherence to the control points. Their daily/weekly/monthly process KPIs should include validation that the control points are being managed correctly.

This is fairly straight forward when a manager is dealing with one compliance framework. It gets more complicated when the same process step is the control point for multiple frameworks.

To manage this complexity the risk manager should own and manage a repository of control points. The repository will detail the many to many relationships between Risk, Framework, Process, Process Control Points, Process Managers and Process Owners.

This spectrum tells the process owner what control points they should be managing in each of the processes in their portfolio; and it tells the risk manager who they should be working through to mitigate each of the risks. It highlights which process steps are key control points in that they are governed by more than one compliance framework. The relevant compliance manger ensures that the responsible managers have the skills and tools to manage the control points.

The organisation model could look like this:

Once the repository model is established and the relationships known, then the process manager should use a scorecard to manage the control points in exactly the same manner as they manage process performance using KPIs, short interval control and analysis of variance.

A simple example scorecard is shown below. The compliance SME will work with the process manager to agree the appropriate frequency of review, the units of measure (UOM) and the target score (budget) for each compliance metric.

For mine it is not an overly long bow to treat a scorecard as just another framework.

There are many opinions on what’s an appropriate organisation structure to manage the marriage between performance and compliance. Operational performance generally reports through to the COO. Compliance is all about risk and the risk manager should be accountable for the means by which risk is understood by the business. This includes ensuring the use of appropriate frameworks. By extension compliance managers should report to the risk manager and the risk manager should apply a very broad definition to the word ‘risk’.

This raises the question – who should the risk manager report to. The answer is largely determined by the nature and culture of the business and the strength of the need to separate operations from risk. In certain circumstances it will be acceptable for the risk manager to report to the COO, in other cases this would be akin to asking the fox to install the chicken wire. Other reporting lines can be through the CFO or directly to the CEO.

For such a structure to work requires effective matrix management. It also requires operational managers to take the time to fully understand the processes they are responsible for and to embrace their wider responsibility in terms of risk and compliance management.

In closing it is worth reinforcing the point that effective governance/management requires the adherence to multiple frameworks. One framework cannot do it all. Equally to allow, or cause, a manager to focus predominately or solely on performance is to undermine the wider role of management in the business.

I welcome your comments on the above. If you disagree with me let’s have the debate as it drives the learning process for both of us.

Introduction

One of the best books I have read on the topic of culture is the classic by Bolman and Deal – Reframing the Organisation. In this book they discuss that culture is a product of the myths, rituals and ceremonies within the organisation.

Myths include stories of past exploits.

Rituals are the ‘things’ done on a daily or weekly basis that are unique to that organisation or department.

Ceremonies are the bigger activities, performed on a less frequent basis. A bit like making your partner tea in the morning (a ritual) and going out for a celebration on your wedding anniversary (a ceremony). Rituals and ceremonies help define your marriage.

Then there are additional contributing factors such as theatre: this is the physical stage-setting in which business is carried out. The impression you get when you walk into a business reception, and further into the working environment is always a good indicator of the culture of the business. Staff also pick up on these non verbal cues and begin to behave accordingly.

A more traditional definition of culture is: ‘the way we do things around here’. This is a valid definition, but too simplistic. My preference is to see this simplistic definition – the way we do things around here – as the product of the myths, ceremonies, rituals, etc of the company.

Recognising the contributing factors for what they are provides you with the levers you need to influence or change the culture.

From ‘As is’ to ‘To Be’

Over the last 20 years or so, my consulting has broadly focused on performance improvement and business transformation. Having said that, it is also worth noting that for nearly all the clients I have worked with and for all the projects I have completed, the vast majority have benefited from an improvement in performance but very few clients have truly transformed themselves.

In my experience, business transformation cannot be achieved without a substantial challenge to the prevailing culture. But as with all improvement projects, to change the status quo requires that you understand what the status quo is. Or, in consulting speak, understand the ‘As Is’ and then define and move to the ‘To Be’.

Understanding the current culture in an organisation is readily achieved through the administration of a survey or organisational diagnostic tool. I have used a few and found that most of them use a foundation model against which the survey results are modelled.

For example, the Roger Harrison diagnostic identifies four organisation types; Power, Role, Achievement and Support. The diagnostic then indicates which type the organisation is more closely matched to.

There is nothing wrong with this approach. Having a foundation model is good place to start, but it is important to validate that conceptually the model represents your organisation. If you disagree with the idea of restricting your organisation to Harrison’s four types, then his diagnostic is not suitable for your company.

Executives know that the culture is in some way a reflection of them, and it is possible that they could reject any foundation model that doesn’t broadly align to their view of the organisational culture, or what the culture should be. Using the Harrison example, a CEO may privately support a Power culture, but publically espouse a Support culture and therefore will not use the Harrison diagnostic as it may expose his private views.

There is no easy way to mitigate this besides working with executives to help them accept that when it comes to the ‘As Is’ there is no right or wrong answer. All modern diagnostics should broadly give you the same answer, and recognition and understanding is substantially more important than how the result is labelled.

Equally important is the level of detail provided. What you don’t want is really fine detail as each person in the organisation will have their own interpretation of what the culture is and what it means to them. And an individual’s interpretation of the culture is heavily influenced by their own personal circumstances and views on life. It is easy for a person to pick out the few aspects of the culture that supports their behaviour and ignore the multitude of other cues that challenge it.

Given this, changing the culture at the individual level is a very long game and likely to yield a very poor result.

What is important is to fully understand how the perceived current culture is influencing the behaviour of groups of people, since different groups may have different interpretations of the organisational culture.

Everyone considers themselves part of the business, but acts in accordance with their ‘local’ culture. It is similar to there being different dialects of English between towns and villages. They all identify themselves as English, but at the detail level, they acknowledge and celebrate the differences.

The Internal and External Environments

For me, the two drivers of culture are the:

1. Internal environment, and
2. External environment

While this may seem simplistic, it does get more complex as you examine the two environments.

The internal environment is the product of:

1. Leadership
2. Management style
3. Rewards

The prevailing organisational culture is the intersection of the four drivers:

The primary region of interest represents the point at which the politics of the four drivers are most in harmony and this becomes the prevailing culture of the company.

Leadership and Management style is often the same thing at the CEO level. As soon as you move down the hierarchy they separate and leadership may become less of a factor, and management style can start to dominate.

The more senior the role, the greater the influence an individual’s management style has on the culture of the company. It is not hard to accept that a supervisor may create a micro culture within their area of control and that this would not have significant influence on the culture of the organisation.

On the other end of the spectrum, the management style of the senior executive of the company will have significant influence on the company culture. If their style is to be cautious and to enforce detailed analysis into the decision making process, then this will create a very different culture to the company where the senior executive actively empowers and enables his managers and is willing to make decisions on 60% of the facts.

The influence of Leadership on the organisational culture is enormous. My view is that just because a company has a ‘leader’ (Managing Director, CEO, Owner etc), does not mean they have leadership. For me, leadership is the capability to engage the hearts and minds of people and cause them to emotionally invest and believe in a vision for the future.

Leadership can therefore manifest itself at any level in the organisation. The higher up the organisation, the more it will influence the culture.

It is therefore true you can have great managers who are poor leaders and vice versa. Depending on whether the CEO’s strength is in leadership or management will significantly influence the culture of the organisation.

Rewards

Rewards are the third arm of the internal environment and I consider them to be as equally important as the management and leadership arms.

The salient point is that rewards refer to the receipt of the reward, not the giving. This means that for any given individual, rewards can be intrinsic and extrinsic.

Intrinsic reward is the reward that a person bestows on themselves for the job they are doing.

Using stereotypes as an example, a charity worker is more likely to frame the work they do in a way that allows them to see themselves as giving back to society. If they were in it for the money then it is unlikely that they would last, as charities never have enough money and the motivation is wrong.  Rather they need their internal reward system to provide the self value needed to continue.

By comparison, a hardnosed businessperson is less likely to rely on their internal reward system for recognition, choosing rather to measure themselves by the external rewards they receive for the work they do. In this case, reward = recognition and the most obvious examples are salary, car, office and title.

There is a maxim that says “Tell me how you are measured and I will show you how you behave”. For the purposes of this paper I will take poetic licence and equate measure with reward; “Tell me how you are rewarded and I will show you how you behave”.  Behaviour and culture are inextricably linked.

The simple, earlier definition company culture – the way we do things around here – can also be defined as ‘the way we behave as a company’. If the reward is money and materialistic gain, then the culture will have an orientation of achievement and power. If the reward is self fulfilment and non materialistic gain, then the culture will orientate towards humanistic and self sacrifice.

The external environment

The external environment is normally beyond the control of the company and its staff. There are a few cases such as Jack Welsh, Bill Gates, Steve Jobs etc, where the person has influenced the external environment.

The influence of the external environment is a product of the mix of global and local legislation, speed of transactions, size of transactions, average age of decision makers, national identity and the social impact of getting it wrong.

To explain speed and size of transactions, consider a currency trader. They can place trades in billions of dollars and are ‘in and out’ of the market in 20 minutes. Dealing with those sorts of sums has to distort the way the trader sees the world. A loss of $10million is quickly shrugged off – it was only $10million after all. To survive and flourish in this environment requires a very specific type of personality. My experience is that they work in a culture that encourages staff to play and work hard. Long hours in the pub are not unusual, and to fit into the team a person would need to embrace this aspect of the corporate culture.

The national culture will have a strong effect on the organisational culture. To use a few stereotypes; Western culture is founded on freedoms, equality and rights particularly at the individual level. The national culture is generally one of success, and businesses are built in the same mould. The outlook tends to be financially driven and the short to medium term is emphasised.

Eastern culture appears very different to me. There is an equal determination to be successful, but with a much stronger focus on the community and with deep respect for history. Profit is important but over the medium to long term. The expectations of society of its citizens will have a substantial influence on how people think and behave at work and, by extension, a strong influence on the organisational culture of the businesses within that society.

The question now arises – how do you set or change the culture.

How to set or change culture

Changing the organisational culture is exceptionally difficult as it requires changing behaviour.

Let’s say the ‘As Is’ survey has defined the current culture. The next step is to define the desired culture. How does the leader wish the company to behave? Closing the gap becomes the challenge.

Using the simple definition of culture – the way we do things around here – defining the desired culture obviously becomes – the waywe want to do things around here.  This can have many elements:

• Time – point of focus: past or present, short or midterm
• Communication – Formal or informal, High or Low context
• Space – Private or shared
• Individualism – Recognition of individuals or teams
• Competitiveness – High or low
• Structure – Flexible or ordered
• Environment – High or low control
• Power – equality or hierarchy orientated

This list is for example only. Each company should come up with their own list of drivers for their desired culture. A good place to start is the result of how they measure the current culture. Determine what aspects of the existing organisational theatre, rituals and ceremonies are reinforcing the current culture and then consider how they could be challenged and reinterpreted.

It is however relevant to ask: should the company change the culture?

In certain organisations the culture is widely known and accepted – for example in the military, and the mines.

Both these working environments have a very strict culture of ‘do what you are told’, as this culture is vital to the safety of the ‘employee’. For example I once witnessed a small underground rock fall. The rocks landed on a miner’s ankles breaking the bones. The poor man was in a lot of pain and was taken away for medical assistance. Concurrently a charge sheet was written up against him as he should have made the working environment safe before entering. This work practice was not negotiable and his tardiness in this matter resulted in him having broken bones and a date with the in-house judiciary once he was out of hospital. I asked if the broken bones were enough punishment and was told – absolutely not. There is no room to question instructions given underground.

Google and Facebook are companies that appear to be on the other end of the spectrum. In each, the rules of the traditional working culture have been significantly challenged. From a theatre point of view, staff can dress largely as they please, work stations/work areas are less proletariat in their nature and layout. Creativity is strongly encouraged. As companies whose success relies on leading the market, they cannot afford to have a culture that inhibits creativity.

What next?

Once the new culture is defined; all that you really have is a document describing an organisation that is similar but different to your current one. To implement this new culture and take it to a point where the employees use it to drive their behaviour takes substantial effort and frequently some very physical changes.

The easiest thing to physically change is the organisation chart. This may be as simple as title changes or a dramatic as changes to reporting lines. Each change sends a different message to the staff.

Another changes that are equally dramatic – but slightly more effort – is changing the physical working environment.

One of my clients recently changed from a traditional workstation environment to an activity-based working environment where no one has a set desk, or telephone. There are no desktop computers and desks are tidied every night. Each person has a locker for their papers. The move was expensive but the message was blunt. We are going to do things differently from now on.

The initial change here was a dramatic change to the theatre. As a result, staff were forced to change their behaviours, and new ceremonies and rituals were introduced. Legacy behaviour from the previous work environment was seen to be obstructive. While my client did not necessarily set out to change the culture, they did achieve a positive change through a dramatic change to their theatre.

Change the people

The problem is that no matter how much you change the theatre in which the play is delivered, if you keep using the same actors, you may soon be getting the same performance quality as before.

A complex change is changing the actual staff members. I subscribe to the maxim that says – “if you can’t change the people; change the people”.  Moving a key person sideways or out of the organisation is a clear message of the intent to establish a new way of doing things. It also ensures that the company does not slide back to the old way of doing things.

While I agree that the company will always have an overarching culture, it is also expected that once the company has migrated to the new culture, each department will have its own interpretation of the new culture, based on the function of the department and the personality of the departmental manager.

Consider: the new company culture is to delight the customer and senior managers now dress in corporate casual and have increased expense accounts for customer lunches; this does not mean that that the credit office should be any less aggressive in identifying potential bad debts.

Customer delight can never be their culture or mantra.

The same applies to an in-house quality assurance laboratory. For them it really doesn’t matter what the culture is. They must test to specification and fail products that do not meet it. It can be argued that this is ensuring customer delight, even if it means upsetting the customer.

Company language

One of the most difficult aspects of changing the organisational culture is changing the lexicon of the company.

Over time, the company builds up an internal vocabulary. The words people use provide direct insight into how they think. It is very difficult to convince anyone that the words you use do not reflect the way you think. Once can be a joke. Repeated use of words just becomes the way you think. Racial statements are an easy example. Said once, it can be a poor taste joke. Multiple times and you are a racist, even if you don’t admit it to yourself.

Less easy examples are the use of words such as ‘Customer’ versus ‘Client’, ‘Locked in’ contracts versus ‘Termed’ agreements. These words can mean the same thing but using the right words and, importantly, no longer accepting words that do not reflect the new culture, is a significant step forward to embedding the new culture.

Companies should want to sign their customers up to a term contract – this provides certainty of cash flow. They shouldn’t want tolock their clients in. It implies malice of forethought and behaviour. They don’t want staff thinking of ways to lock clients in; they want staff thinking of products that can be sold on term agreements. The principles are the same, but the mental framework is different. Often the public face of the company will use language such term contracts but privately they may discuss how they can launch products that will lock their customers in. To change the culture this private vocabulary must be stamped out.

To summarise: to change the way people think, get them to change the way they speak. Once they think differently, then they will behave differently and the new culture will embed itself.

It is quite likely that the staff will need some assurances that the new behaviour is acceptable. On this matter there is no better substitute for embedding the new culture than for the staff to see the senior executives walking the floors in a manner that exemplifies the new culture. Staff will see it’s acceptable and the new culture will start to take hold.

I will close with the note that cultural change is not for the faint hearted. It can take years to complete and if a company does not have the stomach for driving change over a long period, then it is probably better not to start. Giving up halfway means you will have a new culture, but you won’t know what it is.

I welcome your comments on the above. If you disagree with me let’s have the debate as it drives the learning process for both of us.

At each session the Managing Director would make a presentation acknowledging issues and/or describing the future. The trade unions were invited to these sessions and were privy to all the presentations

The intent of the communications package was to ensure that everyone in the organisation was aware of the need for change, what could be expected from the project and how they could communicate their concerns back to management.

For mine the crowning moment of the change management program was when the trade union members stood up, unannounced at a town hall meeting and started singing songs of support for the program. What was once an adversarial relationship was quickly becoming a relationship based on respect and a common desire to address the issues in the company. It was a highly emotional moment and instantly became my benchmark for what a well orchestrated change management program could achieve.

In summary the characteristics of the MBSA change management program were:

1. A well funded, well staffed, cohesive project team.
2. A well funded dedicated change program
3. A broad selection of communication mediums catering for all levels of literacy and learning preferences
4. A substantial allocation of time to the change program
5. Strong participation and leadership from the Managing Director
6. Management went to the people. (Staff were not called to a head office presentation).
7. Honesty
8. Willingness to actively listen and respond to feedback.

In the time since that project, I have not seen another like it. The major difference between MBSA and subsequent projects I have witnessed is the restriction on time and money. Project leaders almost always acknowledge the need for a dedicated change management program but frequently this desire does not translate into sufficient funds, time or active engagement from the leadership.

There are two dimensions to change management.

The first is to engage the hearts and minds of all stakeholders. The focus is on establishing a common and pervasive understanding of the need for change and ensuring that each person is aware of their responsibility in assisting change to happen.

The second is actually changing the behaviour of the individual. Even with a comprehensive change management program, it does not mean that individual will actually decide to modify their behaviour.

The first dimension is the organisational level view; the second is recognition of each individual in the business.

Effective change management at the organisational level requires that the business give it a formal mandate. This means that its importance is recognised and that it has a formal structure.

An effective change management structure typically has four levels.

1. The steering committee
2. The working committee
3. The project teams
4. The program office

The steering committee sets the project strategy and ensures the projects are delivering change in line with the strategic intent of the company.

The working committee is the primary engine for driving change in the business. Its purpose is to establish and manage the project teams that will gather and synthesis data and then to discuss this data and make recommendations to the steering committee.

The project teams are task focused groups, typically made up of staff who have been seconded full time to the project, part time subject matter experts and business consultants who may provide methodology and other specialist skills.

The program office ensures this change hierarchy is managed for success. It provides the tools and resources and allocates the budget to ensure the desired outcomes can be achieved. It should restrict its role to librarian and score keeper. It is not on the field of play, but watching the play. This ensures that it does not inadvertently impede the business from taking ownership of change. It is important to note that the business provides the budget. The program office allocates the budget.

Putting it all together you get

The project teams can either be orientated by function or service line. Eg, a finance team that examines everything in finance, or a process team that examines all processes in the business. In the former, the subject matter expert is the process person and in the latter the subject matter expert is the finance representative.

I consider it essential that one of the project teams is a communications team with the sole focus of communicating the ‘project’ to the business and ensuring that the business can communicate with the project.

Bringing ‘business as usual’ into the picture:

Business as usual gets on with running the business and the project teams engage with the business to better understand the issues and discuss improvements.

If the business is willing to fully formalise this approach then the above structure will include a corrective action team (CAT) as a second essential project team. The various project teams can come and go as required, but the CAT and the communications team become permanent fixtures.

To provide some detail behind the communications and corrective action team.

Many project leaders I speak to consider their projects to be too small for such a formal communications management role. To mitigate this constraint, the communications process should still be formalised but the staffing becomes part time.

I learnt a long time ago that the formula for rumour is – ambiguity x interest.

With a project there is always interest. Good communications will dilute the ambiguity.

There are two aspects to preparing a structured communications package. These are; the message itself and the management of the message. Each has sub attributes.

For the message consider: Who is going to read the content and why is it relevant to them. What is the level of accuracy required? Will broad brush statements suffice or is it important to include numbers to the second decimal point. When is the information needed and how will it be accessed. If there are questions who do they turn to for support?

The answers to the above questions will determine the physical attributes of the message. A senior executive is accustomed to working with electronic messages anywhere in the world. A factory worker may want to be addressed personally in a town hall meeting where they can evaluate first hand, the ‘trustworthiness’ of the messenger. Management of the message includes answering the questions; Where does the raw data come from? How do I reply to it? Where can I access it at a later stage?

To briefly summarise the concept behind the corrective action team. The business gets on with day to day operations. When a non conformance (non conformance to requirements) is identified through normal business activity, then it is up to the management structure to address the issue. In the event that they are not able to permanently resolve the underlying issue that caused the non conformance, then they will raise a CAR (corrective action request) and lodge it with the CAT. The CAT will work with the other project teams to fully diagnose the underlying issue and will recommend actions up to the working committee to permanently resolve the problem. The working committee reviews and endorses the recommendations and the business is asked to implement the change and to monitor its effectiveness. The project teams should assist with implementation.

As this corrective action process gets better and stronger a culture of continuous improvement emerges and the change management structure evolves and transforms from being a vehicle set up to deliver a project to become a vehicle that delivers excellence in the business.

This brings us to the second dimension of change management – changing the individual.

When a person is asked to change their routine and habits they generally go through three stages of change. Suitable terms for these stages are:

1. Mechanistic
2. Conceptual
3. Adoption

The mechanistic stage is the toughest. This is when an individual is most resistant to change. They are questioning the relevance of the change and often say that while they fully support the change, it does not apply to their role. Often staff will attend meetings or training on the new approach and be positive in the session. Afterwards they return to their work area and will tell their staff – “that’s all rubbish, those folk in their fancy suits don’t know talking about and it will never work here. We will continue doing what we have always done”.

To resolve this mindset the change manager needs to work with the individual staff members and often the best approach is JFDI – ‘Just do it’. The individual is forced to comply. S/he does not have to fully understand why the change is important, they only have to adopt the new way of doing things.

Over a period of time, could be hours, days or weeks, the penny will drop and the staff member will start to see the benefits of doing it the new way. This is stage 2 – conceptual understanding. At this point they will start to introduce positive improvements and customisations to make the changes more relevant and appropriate to their area. As this happens they move to stage 3 – Adoption. They now have full ownership of the changes and consider them their own. Asking them to make further changes at this time becomes difficult as they will be back to stage 1.

To move a person through these three stages requires extensive ‘on-the-floor’ support. The change agent needs to working with the business on a daily basis to help implement the changes.

The expected level of resistance can be plotted in the following matrix:

Identify those staff that can work in the new way of doing things and will who work with you and use them as change leaders/role models. These staff require the least amount of effort.

Staff that Will work with you but lack the skills to do so (Can’t) are the next easiest group. Their mind is open and they are willing to learn. Give them training and mentoring to embed the new routines. It is important not to under estimate the amount of time these staff need to embed the change. Without ongoing mentoring, the changes may become too difficult and the person may slip into the Won’t/Can’t category.

The third category is Can/Won’t. This person has the skills to work in the new way but is resistant to doing so. They are firmly entrenched in stage 1. This person is most dangerous to the change program. Other staff will watch how this person is dealt with and may take their lead from him/her. This person requires extensive on the floor support and the JFDI approach should be strictly enforced. If you can switch this person from a Can/Won’t to a Can/Will, then you may have the best change champion you could ask for.

The last category is Can’t/Won’t. This person needs counselling to help them understand their position and extensive on the floor support. If they do not show signs of moving to Can/Won’t or Will/Can’t then they are probably not suited to that role. The platitude is – “if you can’t change the people, change the people’. Unfortunately this is sometimes required.

The typical progression between categories is shown.

It can be said that the only time change is real is when it is at the level of the individual. Concepts such as ‘organisational change’ or ‘business transformation’ are valid phrases and have specific meaning. But they can also be misleading. Businesses don’t actually exist. They are legal constructs. What exists are the elements of the business – people/plant/machinery/money etc. To change a business means that you need to change the relationships between the elements and ‘People’ refers to the staff members and this means actual change takes place at the individual level.

Coming back to the two dimensions of a change program:

1. Engage the hearts and minds of all stakeholders. Use this dimension to address the Will/Won’t aspect. Get the staff to a mindset of Will.
2. Change the behaviour of the individual. Use this dimension to address the Can/Can’t aspect.

By way of acknowledgement, the model I use for this paper was given to me by my MBA lecturer – the late Michael Halliday. I found it at the back of a reading he asked us to look at.

The reading went on to say “Shareholder value creation can be defined as the process of building lasting economic value for a corporation’s shareholders and key stakeholders such as the employees, customers, suppliers, financiers and society.

The problem is that the objectives of the shareholders and stakeholders are often different and most likely in conflict with each other. These differences stem from the fact that while managers face the daily challenge of maximising sales, profit and market share, third party institutions generally own the majority of shares.

This creates a separation of ownership and control. Theory has it that managers are the agents of the owners and in a perfect world the share price would reflect the present value of all future activities the company and good management practice would drive up the share price.

In reality, institutions are judged on the short term performance of their portfolios and they therefore pressure management to deliver high increases in the short term.

This in turn causes business managers to adopt inappropriate management practices at the expense of the mid to long term”. Michael Halliday.

The above quote refers to public companies. I believe it is equally true for private companies. The difference is that in private companies the owner is the manager and as such time pressures (quarterly reporting) are reduced and there is less scrutiny on his / her behaviour and decision making. But in practice, the end game for both types of company is the same – namely value creation.

There are four primary drivers of organisational value: Profitability, Productivity, Cash flow and Strategic Growth.

These four drivers are of equal importance and it is difficult to pick a start point. You need cash, otherwise you can’t start, but you also need a market and a business otherwise you can’t apply your cash. You may have identified your market, but if you don’t have a sales proposition, then you won’t sell and you won’t place demand on your assets (productivity).

I will start with Growth. Growth represents the markets that you trade in or plan to enter. Ansoff articulated it well with his grid.

This paper is going to focus on differentiation only. This is improving returns from an existing market.

Differentiation is easier of the two strategies as the market knows who you are and is preconditioned to trust your products.

With differentiation the manager has two choices at their disposal.

• Compete through better product positioning. Degree of differentiation.
• Compete through cost leadership.

Consider the following graph.

On the Y axis is the degree of differentiation. How are the products or services positioned and perceived in the market. Is it positioned as ‘tailor made’ or is it seen as a ‘commodity’ or somewhere in between. The scale[1] is as follows

• Commodity
• Quality
• Exclusive
• Tailor made

The more a product is positioned and perceived as exclusive or tailor made, the more the market will pay for it.

A product positioned as Tailor Made is developed for a specific individual according to their specific needs. This by its nature is highly differentiated and very expensive.

On the X axis is cost leadership. How cheaply can you sell your product or service. This automatically positions the product as a commodity. The strategy is high sales volume

Traditionally you can’t have both and these two axes work inversely to each other. The more you differentiate, the more it costs.

To differentiate your product in an existing market requires that you know how it is positioned relative to the rest of the market. Consider the following example market plot.

The X axis is Functionality and the Y axis is Price. Both axes are rated high/low. The plots represent the product positioning in the market.  There are some great toolsets in the market to assist with this type of analysis.

The plot identifies open areas, where there are few or no products. These areas represent the opportunity to either reposition your existing product or launch a new product to fill the void.

The risk is that existing products (including your own) have an existing position in the market and customers understand this. If the distance from the current position to the new position is too great, the customer will become confused and it is likely you will lose sales. For ‘bigger distances’ it is better to launch a new product that is clearly different from the existing products.

This type of repositioning happens in the ‘profitability’ leg. The growth leg determined which markets you will sell in; the profitability leg determines how you will sell to that market. The primary levers for product re/positioning are:

• Pricing
• Sales approach
• Sales support

The need for, and nature of, the sales support makes a huge difference to profitability. A product that requires face to face sales support requires a higher margin. When introducing a new product, this type of support should be considered. If the new product is a premium product, then the cost of hiring and training specialist sales staff should be considered. Or, if the strategy is to reposition an existing product as more exclusive, then the existing sales staff may not be of the right profile to sell/represent the new position.

The strategy of the ‘profitability leg’ is to create a balance between margin and volume. Volume equals demand for the product. In many respects, volume is the most important variable in the business. You can have great people, outstanding marketing, top products, but if you don’t sell anything you don’t have a business. You also need an appropriate return for the product or service. If the margin is high, then the volume can be low. This is perfectly acceptable in a business designed for low volumes. But in many cases a high margin is not enough. Volume must be high as well. Consider a $1 product that produces an 80% margin. Good margin, but no money.

Volume is the primary driver for the ‘productivity leg’.

To compete on cost requires a focus Asset Productivity. A key measure is Return on Capital Employed.

Consider the following four assets:

• Human Resources
• Machinery/Plant/Facilities
• Money/Finance/Treasury
• Inventory.

These four assets are the tangible side of the business. Improving the yield (productivity) from these assets will grow the value of the business.

Productivity is measured as an input : output ratio. Therefore to improve productivity the options are:

• Same input: improved output
• Increase input: more than increase output
• Decrease input: maintain output (or small decrease in output)

The inputs are the assets. The output is the product or service that the customer buys.

Earlier in the article I noted the need to create demand for the business and that the ‘legs’ of growth and profitability create demand. In this case, demand means – demand for the output of the business. The managers job is to maintain and grow this demand and to work the assets to maintain a target productivity ratio.

Unfortunately most managers only have control over the assets and not the market place. By market place I mean the sales and marketing initiatives of the company. This means that most managers have little control over the creation of demand for the assets in their managerial portfolio and the only lever they can pull (especially when times are tough) is option 3 – the cost reduction lever – decreased asset input. This is often results in layoffs as the human asset is the easiest one to move and is the asset that delivers immediate cost reductions.

But if the business wants to lower the cost of production whilst maintaining is point of differentiation then I recommend a model I picked up from IBM called the dynamic stability model.

The way it works is to separate marketing from production.

As discussed previously strategic product marketing is broken down into 4 segments:

• Commodity
• Quality
• Exclusive
• Tailor made

From a production point of view there is:

• Mass production
• Continuous improvement
• Invention
• Mass customisation

Prevailing wisdom says that these concepts are closely aligned. ‘Tailor Made’ requires ‘Invention’ and ‘Commodity’ requires ‘Mass production’.

The strategy is to break the connection between the two concepts. In the extreme this means that you setup a mass production environment for a Tailor Made product.

Mass production reduces the cost of the producing the product. Tailor Made maximises the value of the item. The difference is a maximisation of the gross margin of the product. If you can keep a mass production environment working the assets have little to no downtime and productivity ratio will be high.

Stakeholder value is created when a business is able to lower the cost of production without compromising the point of differentiation. This is the ideal position and it represents the point at which the company can charge a premium price and take an inflated gross margin.

It is one thing to know what to do. It is another thing to pay for it. This introduces the last leg of the model – finances. Finance is relatively straight forward. You have two options:

• Debt
• Equity.

It is vital to understand the assumptions behind the venture before making the financing decision. It is common for entrepreneurs, managers and business analysts to build an investment spreadsheet and consider to that it reflects what will happen in real life.

On paper it all seems reasonable, but will it happen in practise. The devil is in the detail. To validate the model I suggest the following sequence:

• Write down the assumptions you have made about the business
• Build a model based on these assumptions
• Hold an open workshop with trusted advisers to rigorously challenge the assumptions
• Refine the model and prepare a sensitivity analysis on the key variables
• Produce a final answer.

It is important to not only validate the written assumptions, but equally or more important, to validate assumptions that are not there. What has the author missed? What’s not written down?

If you have an existing business then the model should focus on the planned extension to the business. In other words could the extension stand on its own merits? If it cannot, you could be growing revenue but diluting gross margin. If it can, what synergies will you pick up by merging the new with the existing business?

The answer is really the least of your worries. Do not anticipate it, do not rush it. A rushed model will provide the answers you want rather than the answer you need.

Once you have the answer you are now in a position to determine your source of funds. I acknowledge the model will need to include funding options in order to take into account interest expense. But you should model with a ‘switch’ to turn this option on or off.

If the model indicates stable growth and there is confidence in the assumptions, then debt is probably the way to go. If it appears that the venture will require a ‘long runway’ to get off the ground then equity may make more sense, depending whether or not you can fund the interest payments on debt. My experience is that things always take longer to materialise than expected and if you go the debt option, allow yourself a good cushion of time.

It must be said that equity is the most expensive form of money. Not in terms of dividends etc, but when it comes to selling the asset. What at that time, what seems like a reasonable equity percentage at the start could become a very big payout number at the end. A good equity partner should assist the business and help it grow. Often investors have great management skills and can bring a lot to the business.

In closing; To grow shareholder value:

• Understand your markets
• Understand how you will create demand from those markets
• Understand how this demand will improve the Return on Capital Employed
• Choose a financing methodology that will support your business through the difficult first years but will not be too expensive when it comes time to exit.

I welcome your comments on the above. If you disagree with me let’s have the debate as it drives the learning process for both of us.