Article: Decision Rights - Who Gives the Green Light?

Decision Rights: Who Gives the Green Light?

by Peter Jacobs

How a company decides who is authorized to make what types of decisions can have a profound effect on its business, both in terms of everyday effectiveness and the bottom line.

Consider the experience of one global conglomerate that recently shifted to its U.S. headquarters final decision authority for the pricing of bids made by its foreign subsidiaries. The company believed that its U.S.-based executives would be more effective in making pricing decisions because they had a broader purview of the company's needs. But the time needed to transfer the relevant information to headquarters, and for executives there to absorb and react to it, reduced the company's ability to respond to bid requests on a timely basis. Alert to this change, a European rival added a 24-hour limit to its competing bids, forcing quick decisions from clients—and winning new business as a result.

Such a scenario "happens all too often," says Michael Jensen, professor emeritus at Harvard Business School and managing director of Cambridge, Massachusetts-based Monitor Group's organizational strategy practice. "Allocating decision rights in ways that maximize organizational performance is an extraordinarily difficult and controversial management task."

And therein lies a big problem, because how effective an organization is at making high-quality decisions consistent with its mission and objectives, the experts note, is a prime determinant of its ability to compete in the marketplace.

To better understand how the distribution of decision rights drives performance and what companies can do to allocate them more effectively, we spoke with several leading authorities and practitioners. We found that while the barriers to effective decision-rights distribution can be high, several best practices promise to lower them.

Weighing the costs
There are two types of costs that must be considered in allocating decision rights. In their 1990 paper, "Specific and General Knowledge, and Organizational Structure" ( Journal of Applied Corporate Finance, Summer 1995), Jensen and the late William H. Meckling note these issues:

• The cost of delegating decision rights to those who have the relevant information but whose motivations and goals don't align with those of the company.
• The cost of accurately transferring the relevant information from the source to the decision maker.

Placing decision rights where these combined costs are minimal, the authors write, should lead to optimal decision-making efficiency and therefore better performance.

"If I know someone in the organization's lower levels can make a tough call that won't affect other parts of the company, then it's their call," says Nick Pudar, director of planning and strategic initiatives at General Motors.

But finding the organizational spot where decision costs are minimal is only part of the battle. You still must deal with the fact that those imbued with decision authority are invariably motivated by their own sets of personal and professional goals—some of which inevitably are inconsistent with those of the organization.

Overcoming these hurdles begins with the following steps:

1. Routinely review and update how decision authority is distributed
Because organizations, what they do, and the environment in which they operate continually change, decision-rights updates must become routine.

A review should examine carefully where in the organization various types of decisions are being made and whether those particular points are still the most efficient. Keith Leslie, a partner at McKinsey and Company's London office, says his firm recently advised one client to eliminate an entire management layer after such a review.

"Because they lacked sufficient information," he says, "these managers were making highly disruptive decisions about work allocation and subsequently had to spend much of their time quelling the resultant flare-ups. Those they managed were much better positioned to make such decisions themselves."

2. Avoid too much centralization—and too much democracy
Over centralizing decision making is the biggest error companies make, Jensen says. Often as a leader, "you think you can make better calls," but decision rights must be collocated with the relevant information, and raising the level of decision-making authority thus requires transferring information upward as well. And companies often forget to do the latter or simply don't because the cost is too high.

You also need to avoid bringing too many people into the decision process, which can grind things to a halt. But be sure to involve all the key stakeholders.

To address these concerns, GM's Pudar employs an innovative approach to consensus building. Prior to making major decisions about a new initiative, he says, "I meet individually with each group involved and ask three questions: 'What specific results will your organization deliver toward our goals?' 'What actions will you take to make it happen?' And, 'What do you expect other groups will contribute?' I then convene the group leaders and tell them all what they told me. The greatest differences are always their expectations of what other groups will do.

"While there has never been perfect alignment," he says, "this process enables us to rapidly identify and address the inconsistencies."

3. Assign decision rights unequivocally
Ambiguity about who has decision rights is a common problem. Misunderstandings about which individuals or groups have the right to make which decisions frequently carries a high cost for the organization, Jensen notes, whether through duplicated or counterproductive efforts, or through the failure of the parties to act.

Although this often is diagnosed as a communication breakdown, it's really a decision-rights assignment problem, says Jensen. Occasionally, managers forget entirely to inform those to whom they have given decision authority.

4. Don't confuse a particular outcome with the process itself
Good decisions occasionally produce bad outcomes. Kimberly Rucker, of Dallas-based TXU, says management is sometimes too quick to blame the decision makers or the process itself when results are not as expected. If decision rights are well allocated, then reallocating them because of a bad outcome will only make matters worse.

The experts agree that redistributing decision authority in any organization is a difficult task fraught with controversy and organizational politics. Yet, it is also one in which organizations must routinely engage to maintain a competitive edge and maximize shareholder value.

"As a company, we've recognized that good decisions don't just happen," says Rucker. "There is a science to it – a bit of art but a lot of science".

Peter Jacobs is a freelance business writer based in Wellesley, Mass. He can be reached at MUOpinion@hbsp.harvard.edu. (Harvard Management Update, Vol. 10, No.5, May 2005)

Article: What Makes a Great Manager?

What Makes a Great Manager?

Gerard M Blair

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The first steps to becoming a really great manager are simply common sense; but common sense is not very common. This article suggests some common-sense ideas on the subject of great management.

The major problem when you start to manage is that you do not actually think about management issues because you do not recognize them. Put simply, things normally go wrong not because you are stupid but only because you have never thought about it. Management is about pausing to ask yourself the right questions so that your common sense can provide the answers.

When you gain managerial responsibility, your first option is the easy option: do what is expected of you. You are new at the job, so people will understand. You can learn (slowly) by your mistakes and probably you will try to devote as much time as possible to the rest of your work (which is what your were good at anyway). Those extra little "management" problems are just common sense, so try to deal with them when they come up.

Your second option is far more exciting: find an empty telephone box, put on a cape and bright-red underpants, and become a Super Manager.

When you become a manager, you gain control over your own work; not all of it, but some of it. You can change things. You can do things differently. You actually have the authority to make a huge impact upon the way in which your staff works. You can shape your own work environment.

In a large company, your options may be limited by the existing corporate culture - and my advice to you is to act like a crab: face directly into the main thrust of corporate policy, and make changes sideways. You do not want to fight the system, but rather to work better within it. In a small company, your options are possibly much wider (since custom is often less rigid) and the impact that you and your team has upon the company's success is proportionately much greater. Thus once you start working well, this will be quickly recognized and nothing gains faster approval than success. But wherever you work, do not be put off by the surprise colleagues will show when you first get serious about managing well.

Starting a revolution

The idea of starting alone, however, may be daunting to you; you may not see yourself as a David against the Goliath of other peoples' (low) expectations. The bad news is that you will meet resistance to change. Your salvation lies in convincing your team (who are most affected) that what you are doing can only do them good, and in convincing everyone else that it can do them no harm. The good news is that soon others might follow you.

Three faces of a manager

The manger of a small team has three major roles to play:

Planner

A Manager has to take a long-term view; indeed, the higher you rise, the further you will have to look. While a team member will be working towards known and established goals, the manager must look further ahead so that these goals are selected wisely. By thinking about the eventual consequences of different plans, the manager selects the optimal plan for the team and implements it. By taking account of the needs not only of the next project but the project after that, the manager ensures that work is not repeated nor problems tackled too late, and that the necessary resources are allocated and arranged.

Provider

The Manager has access to information and materials which the team needs. Often he/she has the authority or influence to acquire things which no one else in the team could. This role for the manager is important simply because no one else can do the job; there is some authority which the manager holds uniquely within the team, and the manager must exercise this to help the team to work.

Protector

The team needs security from the vagaries of less enlightened managers. In any company, there are short-term excitements which can deflect the workforce from the important issues. The manager should be there to guard against these and to protect the team. If a new project emerges which is to be given to your team, you are responsible for costing it (especially in terms of time) so that your team is not given an impossible deadline. If someone in your team brings forward a good plan, you must ensure that it receives a fair hearing and that your team knows and understands the outcome. If someone in your team has a problem at work, you have to deal with it.

Version Two

That was rather formal. If you like formal, then you are happy. If you do not like formal then here is an alternative answer. A manager should provide:

VISION - VALUES - VERVE

• Vision in that the future must be seen and communicated to the team;
• Values in that the team needs a unifying code of practice which supports and enhances co-operation;
• Verve in that positive enthusiasm is the best way of making the work exciting and fun.

If you do not think your work is exciting, then we have found a problem. A better word than Verve might be Chutzpah (except that it does not begin with a "V") which means "shameless audacity". Is that not refreshing? Inspiring even? A manager should dare to do what he/she has decided to do and to do it with confidence and pride.

Vision

One of the most cited characteristics of successful managers is that of vision. Of all the concepts in modern management, this is the one about which the most has been written. Of course different writers use it in different ways. One usage brings it to mean clairvoyance as in: "she had great vision in foreseeing the demise of that market". This meaning is of no use to you since crystal balls are only validated by hindsight and this article is concerned with your future.

The meaning of vision which concerns you as a manager is: a vivid idea of what the future should be. This has nothing to do with prediction but everything to do with hope. It is a focus for the team's activity, which provides sustained long-term motivation and which unites your team. A vision has to be something sufficiently exciting to bind your team with you in common purpose. This implies two things:

• You need to decide where your team is headed
• You have to communicate that vision to them

Communicating a vision is not simply a case of painting it in large red letters across your office wall (although, as a stunt, this actually might be quite effective), but rather bringing the whole team to perceive your vision and to begin to share it with you. A vision, to be worthy, must become a guiding principle for the decision and actions of your group.

Now, this vision thing, it is still a rather nebulous concept, hard to pin down, hard to define usefully; a vision may even be impractical (like "zero defects"). And so there is an extra stage which assists in its communication: once you have identified your vision, you can illustrate it with a concrete goal, a mission. This leads to the creation of the famous "mission statement". Let us consider first what a mission is, and then return to a vision.

A mission has two important qualities:

• It should be tough, but achievable given sufficient effort
• It must be possible to tell when it has been achieved

To maintain an impetus, it might also have a time limit so that people can pace their activity rather than getting winded in the initial push. The scope of your vision depends upon how high you have risen in the management structure, and so also does the time limit on your mission statement. Heads of multinational corporations must take a longer view of the future than the project leader in divisional recruitment; the former may be looking at a strategy for the next twenty-five years, the latter may be concerned with attracting the current crop of senior school children for employment in two to three years. Thus a new manager will want a mission which can be achieved within one or two years.

"A manager has to take a long-term view; indeed, the higher you rise, the further you will have to look. While a team member will be working towards known and established goals, the manager must look further ahead so that these goals are selected wisely."

If you are stuck for a mission, think about using Quality as a focus since this is something on which you can build. Similarly, any aspects of great management which are not habitual in your team at the moment could be exemplified in a mission statement. For instance, if your team is in product design, your mission might be to fully automate the test procedures by the next product release; or more generally, your team mission might be to reduce the time spent in meetings by half within six months.

Once you have established a few possible mission statements, you can try to communicate (or decide upon) your vision. This articulates your underlying philosophy in wanting the outcomes you desire. Not, please note, the ones you think you should desire but an honest statement of personal motivation; for it is only the latter which you will follow with conviction and so of which you will convince others. In general, your vision should be unfinishable, with no time limit, and inspirational; it is the driving force which continues even when the mission statement has been achieved. Even so, it can be quite simple: Walt Disney's vision was "to make people happy". As a manager, yours might be something a little closer to your own team: mine is "to make working here exciting".

There is no real call to make a public announcement of your vision or to place it on the notice board. Such affairs are quite common now, and normally attract mirth and disdain. If your vision is not communicated to your team by what you say and do, then you are not applying it yourself. It is your driving motivation - once you have identified it, act on it in every decision you make.

Prescience

Prescience is something for which you really have to work at. Prescience is having foreknowledge of the future. Particularly as a Protector, you have to know in advance the external events which impact upon your team. The key is information and there are three types:

• Information you hear (tit-bits about travel, meetings, etc)
• Information you gather (minutes of meetings, financial figure, etc)
• Information you infer (if this happens then my team will need ...)

Information is absolutely vital. Surveys of decision making in companies reveal that the rapid and decisive decisions normally stem not from intuitive and extraordinary leadership but rather from the existence of an established information system covering the relevant data. Managers who know the full information can quickly reach an informed decision.

The influences upon you and your team stem mostly from within the company and this is where you must establish an active interest. Let us put that another way: if you do not keep your eyes open you are failing in your role as Protector to your team. Thus if your manager comes back from an important meeting, sit down with him/her afterwards and have a chat. There is no need to employ subterfuge, merely ask questions. If there are answers, you hear them; if there are none, you know to investigate elsewhere. If you can provide your manager with suggestions/ideas then you will benefit from his/her gratitude and future confidence(s). You should also talk to people in other departments; and never forget the secretaries who are normally the first to know everything.

Now some people love this aspect of the job, it makes them feel like politicians or espionage agents; others hate it, for exactly the same reasons. The point is that it must be done or you will be unprepared; but do not let it become an obsession.

Gathering information is not enough on its own: you have to process it and be aware of implications. The trick is to try to predict the next logical step from any changes you see. This can get very complicated, so try to restrict yourself to guessing one step only. Thus if the sales figures show a tailing off for the current product (and there are mutterings about the competition) then if you are in development, you might expect to be pressured for tighter schedules; if you are in publicity, then there may soon be a request for launch material; if you are in sales, you might be asked to establish potential demand and practical pricing levels. Since you know this, you can have the information ready (or a schedule defence prepared) for when it is first requested, and you and your team will shine.

Another way of generating information is to play "what if" games. There are dreadfully scientific ways of performing this sort of analysis, but reasonably you do not have the time. The sort of work this article is suggesting is that you, with your team or other managers (or both), play "what if" over coffee now and then. All you have to do is to postulate a novel question and see how it runs.

A productive variation on the "what if" game is to ask: "what can go wrong?" By deliberately trying to identify potential problems at the onset, you will prevent many and compensate for many more. Set aside specific time to do this type of thinking. Call it contingency planning and put in in your diary as a regular appointment.

Flexibility

One of the main challenges in management is in avoiding pat answers to everyday questions. There is nothing so dull, for you and your team, as you pulling out the same answer to every situation. It is also wrong. Each situation, and each person, is unique and no text-book answer will be able to embrace that uniqueness - except one: you are the manager, you have to judge each situation with a fresh eye, and you have to create the response. Your common sense and experience is your best guide in analyzing the problem and in evolving your response.

Even if the established response seems suitable, you might still try something different. This is simple Darwinism. By trying variations upon standard models, you evolve new and potentially fitter models. If they do not work, you do not repeat them (although they might be tried in other circumstances); if they work better, then you have adapted and evolved.

This deliberate flexibility is not just an academic exercise to find the best answer. The point is that the situation and the environment are continually changing; and the rate of change is generally increasing with advancing technology. If you do not continually adapt (through experimentation) to accommodate these changes, then the solution which used to work (and which you still habitually apply) will no longer be appropriate. You will become the dodo. A lack of flexibility will cause stagnation and inertia. Not only do you not adapt, but the whole excitement of your work and your team diminishes as fresh ideas are lacking or lost.

Without detracting from the main work, you can stimulate your team with changes of focus. This includes drives for specific quality improvements, mission statements, team building activities, delegated authority, and so on. You have to decide how often to "raise excitement" about new issues. On the one hand, too many focuses may distract or prevent the attainment of any one; on the other hand, changes in focus keep them fresh and maintain the excitement.

By practicing this philosophy yourself, you also stimulate fresh ideas from your team because they see that it is a normal part of the team practice to adopt and experiment with innovation. Thus not only are you relieved of the task of generating the new ideas, but also your team acquires ownership in the whole creative process.

The really good news is that even a lousy choice of focus can have a beneficial effect. The most famous experiments in management studies were conducted between 1927 and 1932 by E Mayo and others at the Hawthorne works of the Western Electric Company in Chicago. The study was originally motivated by a failed experiment to determine the effect of lighting conditions on the production rates of factory workers. This experiment "failed" because when the lighting conditions were changed for the experimental group, production also increased in the control group where no changes had been made. Essentially, Mayo took a small group of workers and varied different conditions (number and duration of breaks, shorter hours, refreshments, etc) to see how these actually affected production. The problem was not that production was unaffected but rather that whatever Mayo did, production increased; even when conditions were returned to the original ones, production increased.

After many one-to-one interviews, Mayo deduced that the principal effect of his investigations had been to establish a team spirit amongst the group of workers. The girls (sic) who had formally worked with large numbers of others were now a small team, they were consulted on the experiments, and the researchers displayed a keen interest in the way the girls were working and feeling about their work. Thus their own involvement and the interest shown in them were the reasons for the girl's increased productivity.

By providing changes of focus you build and motivate your team. For if you show in these changes that you are actively working to help them work, then they will feel that their efforts are recognized. If you also include their ideas in the changes, then they will feel themselves to be a valued part of the team. If you pace these changes correctly, you can stimulate "multiple Hawthorne effects" and continually increase productivity. And notice, this is not slave driving. The increased productivity of a Hawthorne effect comes from the enthusiasm of the workforce; they actually want to work better.

A general approach

In management there is always a distant tune playing in the background. Once you hear this tune, you will start humming it to yourself: in the shower, in the boardroom, on the way to work, when watching the sunrise. It is a simple tune which repeats again and again in every aspect of your managerial life; it goes:

Plan - monitor - review

Before you start any activity you must STOP and THINK about it: what is the objective, how can it be achieved, what are the alternatives, who need to be involved, what will it cost, is it worth doing? When you have a plan you should STOP and THINK about how to ensure that your plan is working. You must find ways of monitoring your progress, even if it is just setting deadlines for intermediate stages, or counting customer replies, or tracking the number of soggy biscuits which have to be thrown away, whatever: choose something which displays progress and establish a procedure to ensure that happens. But before you start, set a date on which you will STOP again and rethink your plan in the light of the evidence gathered from the monitoring.

Whenever you have something to do, consider not only the task but first the method. Thus if there is a meeting to decide the marketing slogan for the new product you should initially ignore anything to do with marketing slogans and decide:

1) How should the meeting be held,

2) Who can usefully contribute,

3) How will ideas be best generated,

4) What criteria are involved in the decision,

5) Is there a better way of achieving the same end, etc.

If you resolve these points first, all will be achieved far more smoothly. Many of these decisions do not have a single "right" answer; the point is that they need to have "an" answer so that the task is accomplished efficiently. It is the posing of the questions in the first place which will mark you out as a really great manager - the solutions are available to you through common sense.

Once the questions are posed, you can be creative. For instance, "is there a better way of producing a new slogan?" could be answered by a quick internal competition within the company (answers on a postcard by tomorrow at noon) asking everybody in the company to contribute an idea first. This takes three minutes and a secretary to organize, it provides a quick buzz of excitement throughout the whole company, it refocuses everyone's mind on the new product and so celebrates its success, all staff feel some ownership of the project, and you start the meeting with several ideas either from which to select a winner or to use as triggers for further brainstorming. Thus with a simple -- pause -- from the helter-skelter of getting the next job done, and a moment's reflection, you can expedite the task and build team spirit throughout the entire company.

It is worth stressing the relative importance of the REVIEW. In an ideal world where managers are wise, information is unambiguous and always available, and the changes in life are never abrupt or large; it would be possible for you to sit down and to plan the strategy for your group. Unfortunately, managers are mortals, information is seldom complete and always inaccurate (or too much to assimilate), and the unexpected always arrives inconveniently. The situation is never seen in black and white but merely in a fog of various shades of grey. Your planning thus represents no more than the best guess you can make in the current situation; the review is when you interpret the results to deduce the emerging, successful strategy (which might not be the one you had expected). The review is not merely to fine-tune your plan; it is to evaluate the experiment and to incorporate the new, practical information which you have gathered into the creation of the next step forward; you should be prepared for radical changes.

Leadership

There is a basic problem with the style of leadership advocated in this article in that nearly every historic "Leader" one can name has had a completely different approach; Machiavelli did not advocate being a caring Protector as a means of becoming a great leader but rather that a Prince ought to be happy with "a reputation for being cruel in order to keep his subjects unified and loyal". Your situation, however, is a little different. You do not have the power to execute, nor even to banish. The workforce is rapidly gaining in sophistication as the world grows more complex. You cannot effectively control through fear, so you must try another route. You could possibly gain compliance and rule your team through edict; but you would lose their input and experience, and gain only the burdens of greater decision making. You do not have the right environment to be a despot; you gain advantage by being a team leader.

A common mistake about the image of a manager is that they must be loud, flamboyant, and a great drinker or golfer or racket player or a great something social to draw people to them. This is wrong. In any company, if you look hard enough, you will find quiet modest people who manage teams with great personal success. If you are quiet and modest, fear not; all you need is to talk clearly to the people who matter (your team) and they will hear you.

The great managers are the ones who challenge the existing complacency and who are prepared to lead their teams forward towards a personal vision. They are the ones who recognize problems, seize opportunities, and create their own future.

Ultimately, they are the ones who stop to think where they want to go and then have the shameless audacity to set out.

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This article originally appeared in Management Development Review, Volume 6 Number 4.

Communication: Getting to the Heart of the Matter

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According to Christopher Connolly, more effective communication is reported as a solution to most life and work problems. But, he asks, what are managers doing about it?

When I walk into almost any organization at the beginning of a consultancy project, I can be sure of one thing: communication will come at or near the top of any list of gripes. It is a "motherhood" issue against which few will argue. Everyone wants better communication within their team, between teams and across their organization. Better communication is seen as a solution to most of life's problems. And indeed better communication can help - but what are managers doing about it?

Many managers respond by pointing to their regular "team briefings" as a sign that they are already doing all they can to ensure effective communication. Having watched many of these briefings, I am sad to report that many such briefings consist of no more than a perfunctory description of issues and decisions dealt with elsewhere in the organization, a few "old chestnuts" that lead to a familiar pattern of frustration and inaction, and a request for questions from the team that signals the end of the meeting. Those who do speak usually respond only to the team leader or speak into thin air, ensuring either a series of dialogues or a jumble of comments rather than a true discussion. So, in many cases the "team briefing" fails to provide a forum for real interaction. It addresses the need for communication in a business team at only a superficial level.

One increasingly prevalent alternative is e-mail, which seems to have largely replaced the written "office circular" pasted on a notice board or sent from desk to desk with a circulation slip stapled to the corner. Indeed I have heard more than one manager respond to criticism of poor communication within his term by saying "what do you mean I never communicate? I send you e-mails every day" - and this to a colleague sitting less than ten meters away! E-mail is undoubtedly a useful tool. It is fast, cheap, provides a more permanent record than a conversation and can be sent to any number of colleagues in the same office or on another continent. With the growth of virtual teams it is indispensable. But does it solve the communication problem? Not always.

Most organizations in fact rely on much less formal forms of communication than e-mail or team briefings. The conversations while waiting for the photocopier, a shared table in the canteen, the chat over a pint on Friday night, all contribute to real-world communication. But these informal networks suffer from limitations too. They rely on personal relationships that are subject to the complexity of cliques, misunderstanding and outdated attitudes. In a team of 16 people there will be 120 relationships. It is unlikely that each one of these relationships will be equally strong, so although they are an important communication channel they will usually be subject to bottle-necks and exclusions. Think about your own experience - do you normally talk to the same person while having a pre-meeting coffee or do you find yourself talking to a different person each time? Chances are there will be a pattern of communication already established, right down to the topics of conversation. There is nothing necessarily wrong with this; it just means that a team's informal communication will be heavily influenced by the nature of its members' relationships.

There are, however, some actions that managers can initiate to help to improve communication in their business teams. None of them require up-grading of your computer system, or longer meetings. Most in fact rely on a simple willingness to pay more attention to each other.

Recognize the difference between task, maintenance and process in meetings

In any meeting there are three distinct elements: task, maintenance and process. Get the balance right and a meeting will be shorter, livelier and more effective too. Get the balance wrong and the meeting will drag on or follow its normal path to a dead end.

Task

This is the business part of the meeting. It is the aspect most team leaders and chair people know most about because it includes defining a purpose for the meeting, setting an agenda, gathering information, analyzing data, making decisions and sharing opinions. In a well run meeting this component should take about 85 per cent of the allocated time.

Maintenance

This element is often forgotten. It includes any aspect of the meeting that involves paying attention to relationships, individual comfort, or how people feel. Ensuring the room is suitable, that everyone can see everyone else, and that there is adequate fresh air and lighting are examples. So is taking time out from a meeting to deal with one another on a personal, rather than business level. While some people prefer to keep a very clear boundary between work and private life, there is much to be gained by recognizing that each of us is more than our job. Often, taking time to acknowledge this fact pays dividends.

For example, at a recent meeting I observed one team member seemed to be more agitated than normal and was not contributing his normal flow of task-related comments and suggestions. After a little while, someone asked him "What's the matter?" "Nothing" was the reply, "just that my daughter had a baby yesterday and I'm over the moon." Laughter and congratulations erupted and after a few minutes the whole team continued its meeting with renewed focus.

Whether it is easy for us to acknowledge our feelings or not, how we feel influences how we perform.

Be prepared to allocate about 10 per cent of a meeting to maintenance. Most of this will take place at the beginning and end of the meeting, but it may be necessary to take a break during a meeting to allow team members to look after their own needs.

Process

This is the act of stepping back from the detail of the meeting to comment on how the meeting is unfolding. This requires facilitation skills and the use of feedback that describes rather than judges what is happening. Usually the people most involved in a discussion are the least aware of what is happening around them. A simple comment like "Jim, that's the third time you've interrupted Linda as she tried to speak" will draw Jim's attention to an aspect of his own behavior of which he was probably unaware.

"Everyone wants better communication within their team, between teams and across their organization. Better communication is seen as a solution to most of life's problems. And indeed better communication can help - but what are managers doing about it?"

Increased awareness leads to greater choice, and the team develops its ability to self-regulate its behavior. Naturally, using descriptive feedback requires practice and an understanding of its intent among the team. When this has been established, as little as 5 per cent of the total meeting time needs to be allocated to process. The benefits are greater participation, shorter meetings and an evolving team.

Keep a balance between electronic and human communication

Any team that uses e-mail to maintain communication runs the risk of letting its ratio of electronic to human contact drop too low. My guess is that in a true virtual team, where team members are located in different offices or countries, at least 20 per cent of the communication needs to be personal, either face to face or at least by telephone. This basic level of live human contact can then sustain the bulk of electronic communication.

Additionally, remember the elements of task, maintenance and process just described. Make sure there is an element of maintenance in electronic communication - a little banter goes a long way to providing the type of communication that builds a stronger team. Likewise, occasionally consider how you are using e-mail. Have you inadvertently developed habits that get in the way of clear communication?

In teams where e-mail is used within the same office, back up important messages with face-to-face discussion. You may send the facts electronically but you will have no idea of the human impact of your message unless you speak with, and listen to, your colleagues. I recently heard of a manager sending a redundancy advice via e-mail, initially without any face to face follow up. The person on the receiving end was, naturally, upset, but what made matters worse was the impression that her supervisor did not care or was unwilling to meet her. A short meeting between the two did not change the facts of the redundancy, but did ease the impact on team morale and enable the individual an easier transition from the team.

Meet in pairs and sub-groups to network and build relationships

Most of us recognize the need to "network" with colleagues in other departments and companies in order to help us stay in touch with developments. How often though do we remember that networking, like charity, begins at home? By creating formal and informal opportunities within a team for people to meet and learn more about each other, a manager is encouraging a greater willingness to share ideas and resources, based on stronger relationships within the team.

Vary the format of team meetings to include occasions where sub-groups, rather than the whole team, meet to share ideas on a specific topic. Do not restrict this to people who normally work together, experiment with cross-fertilization meetings that bring together people from diverse functions to brainstorm, exchange ideas, address joint problems or brief one another on current events. Make sure there is a clear agenda, keep to the time limit and nominate someone to facilitate. Ideally the facilitator will not be too involved in the task detail so they can pay attention to maintenance and process issues.

The same principle applies to the smallest of all teams, a pair. Encourage short, sharp ten minute meetings between colleagues where they address one specific issue that involves them both. Make sure they have protection from distractions such as unannounced visitors or phone calls and remember that the short time-limit is designed to aid their focus.

Develop team members' communication skills

The need for effective communication does not exist in isolation from day-to-day work demands; neither should the development of communication skills be isolated from the development of technical skill. More companies are now recognizing the advantages of integrating these "people skills" with technical training to maximize their return on training investment. For example, we have worked with training departments in the automotive industry to combine quality methodologies such as statistical process control (SPC) with communication skills that supported innovation through negotiation and building relationships.

Managers or those responsible for leading meetings need specific skills in facilitation and meeting conduct. All team members need a range of well-developed communication skills that enable them to interact effectively.

Typically, the following are core inter-personal skills:

• Listening effectively to build a supportive and creative environment;
• Questioning for both meaning and content;
• Speaking to frame information and highlight key facts;
• Giving feedback on other's behavior and one's own response;
• Developing agreements where both parties feel ownership.

A final consideration is that these skills will contribute to greater teamwork, and at the same time they require a certain degree of teamwork to be applied in the first place. One solution is to embed them not only in technical training, but also to include them in team development programmes where team members have the opportunity to meet off-site in order to improve their relationships and consider the issues faced by their team.

Conclusion

Communication in business teams continues to be essential for effective teamwork, technical excellence and customer responsiveness. Technology has increased the speed and ease of much communication, and the reliable stand-by of the team briefing remains a core component. Yet perhaps the most effective ways of improving communication are also the simplest - taking the time to really notice your colleagues, listening to how they speak as well as what they say, and remembering that what happens inside of us, in particular how we feel, will have a profound influence on what we do.

Managers and teams who truly apply these principles know they have got to the heart of communication.

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This article was originally published in Management Development Review Volume 9 Number 7.

Human Capital in the New Economy: Devil's Bargain?

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Human capital embraces both the broader human resource considerations of the business workforce, traditionally known as the labor market, and the more specific requirements of individual competence in the form of knowledge, skills and attributes of managers and the people they manage.

Dynamic global change has impacted swiftly on the way talent is managed in businesses. At the end of the 1980s Charles Handy used the shamrock metaphor to describe the organization of the future with three shamrock semi-circles describing the division of the workforce. These divisions were the core staff of loyal employees, those who were contracted and paid for services rather than by tenure, and the flexible rump of temporary workers.

While Handy's analysis was a useful structural insight, even futurists have not predicted the pace of change in the labor market.

Globalization, various government policies, cycles of labor market de-regulation, technological innovation, the breathless nature of competition and new patterns of working have assailed the notion of a psychological contract between employers and employees. These new patterns of working include different organizational imperatives and changing worker aspirations and expectations.

The notion of the employment relationship is changing not only in relation to temporary or contract workers. Distinctions between employees and the self-employed have blurred and old conceptions of single employer-individual employee relationships, for so long the norm, have been challenged by the emergence of multi-employer-worker relationships.

What workers need for the new economy

If the modern day labor market is developing such a different complexion, what competencies do workers require? Work competence is made up of the requisite knowledge, skills and personal attributes needed to do the job.

If the attachment factors of human capital in the new economy emphasize short term involvement as temps, self-employed or shareholders, workers will first of all need to possess knowledge that is specialized, differentiated and relevant to industry. No knowledge worker can afford the trap of technological obsolescence. It is imperative to sustain technological literacy.

Workers need some knowledge of operations and processes and they will need at least generalized knowledge of the changed business environment and the potential of e-business. They will need transferable skills that are up to date, technologically relevant and portable and these include the ability to work in a team.

Workers need to be capable of building relationships and the ability to work on multiple projects at one time. They need client-focused skills and a general marketing consciousness about products and processes in an e-business environment.

The personal attributes required involve self-confidence, resilience and the ability to be flexible and adaptable. Most importantly they must be able to handle ambiguity. If job security is no longer tenure-based, new economy workers will need to be psychologically able as well as technologically proficient to scan the environment and recognize opportunities.

The more volatile reward structures in the new economy mean that professionals, in particular, with knowledge of their own market value and the negotiation skills to extract it will prosper. Underpinning the development of human capital is the requirement for fast learning and the need to acknowledge that learning cannot stop. The culture of the modern workplace is less about organizational loyalty than it is about teamwork, collaboration, relationship building and what could be called aggregated individualism based around project work.

"The competencies needed by workers have moved from dependability factors, such as loyalty, company, tenure and job security, to adaptability factors, like individualism, flexibility, resilience and change-orientation."

There can be a danger to business in attenuated relationships between people and organizations because of the risk of forgetting that developing talent is business's most important task. However, if it is assumed that people development can occur only in the way we have conventionally undertaken it, largely through organizational structures and processes, then it may be a false assumption. If it is instead accepted that there exists a transitional model of human capital and that significantly different individual competencies are needed by workers, then this does not spell death to people development, it simply makes the job different. It is different because the competencies needed by workers have moved from dependability factors, such as loyalty, company, tenure and job security, to adaptability factors, like individualism, flexibility, resilience and change-orientation. This shift alters traditional methods of people development as the control of work relationships subtly changes, both structurally and culturally.

If people relations are the "glue" of human capital development in the new economy, and conventional organizational structures are increasingly redundant, the spotlight is thrown onto managerial competencies and an individual's self-directed learning for work. A fundamental realignment of the managerial function in the new economy has occurred as increased self-management accompanies greater worker autonomy in business. This means that modern managerial competencies are more likely to be enabling and interacting rather than controlling and commanding, which does not necessarily reduce the difficulties inherent in managing the employment relationship. It may, however, shift the balance towards a combination of robust contractual arrangements and higher trust relationships.

There are a number of managerial competencies that are generally recognized as appropriate for the new economy. These are profitability, marketing competence and the three recurring themes of change management, risk management and knowledge management.

However, an additional and complementary taxonomy is required specifically to address the knowledge, skills and attributes managers need to develop talent in the new economy. Such a complementary taxonomy will require new thinking from management educators. For example, current human resource curricula spend considerable time on organizational behavior that may need to give way to a greater emphasis on human behavior and basic individual psychology.

Similarly, formalized "soft skill" development in interpersonal communication may pay as much dividend as the concentration on the harder wiring of ICT literacy in management education.

So how will managers develop these competencies? Government and economic development policy agencies emphasize the lack of management and leadership in innovation within the new economy. Suggested remedies include improvement in educational levels in order to move from prescriptive job titles to a focus on the desired end result. Research has been less specific about the nature and form of such competency enhancement. It is clear while on-the-job training remains important to specific industry sectors, such as the software industry; there is a shift from training towards self-directed education by ambitious, mobile professional workers who anticipate their own management potential.

Managerial competencies are not necessarily generic, nor will they all be located in one "super-being". They are contingent, too, on such things as the industry sector, the size of the organization and the degree of competition in the market.

What are the implications for executives if people development is required to be different rather than off-loaded and ignored by organizations? First, executives will need to recognize and acknowledge the fundamental differences in employment relations, including worker aspirations, which underpin the modern, knowledge economy labor market. Familiar thinking about HRM may be out of date and will not necessarily lift human capital to the levels required. For example, staff development is often enclosed in budgetary data under the label training and is often primarily spent on instrumental, in house skill development. But to attract and retain quality people, executives will have to understand that workers want self-development opportunities that combine self-actualization with company enhancement.

The new economy

The changed nature of human capital in the new economy requires workers, their managers and executives to possess different and sometimes unconventional characteristics to survive. Ironically the breathless nature of business, which is perhaps the only constant in the new economy, is generally blamed for the one time-deficit that can make a difference – time for people.

However, understanding what it is that drives the knowledge economy and how best people are attracted and attached to employment, what motivates them, and the nature of the employment relationship, requires a challenge to traditional conceptualizations of human resources.

The human capital demands of the new economy; deciding what it is that workers need to have, how managers can make them productive and the implications for executives, require considerably more attention from educators, policy agencies and governments. Business and other organizations can then test and evaluate new thinking about using talent in the knowledge economy. Only then will the devil's bargain – not developing talent as a consequence of changed employment relationships – be resistible.

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This is a shortened version of the article which appeared in the Journal of Intellectual Capital, Volume 5 Number 1, 2004.

A Guide to Hiring an HR Professional that Adds Real Value

Great Expectations/A Guide to Hiring an HR Professional that Adds Real Value

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I have dealt with management at all levels of the organization for 20 years on a host of different people, productivity and organizational issues.

From this collective experience, I have arrived at an interesting conclusion; that almost all members of the executive team require solid advice and direction on human capital issues for many different reasons. However, the executives that get the most value from their HR professional are the ones that hired the right HR person to handle that function in the first place. Somehow, they have managed to hire an individual that understands the business end of business and as a result, are partners in the truest sense of the word. As an example, they do not spend time in meetings engaged in only HR-speak, nor do they spend their time administrating to endless bureaucratic requirements and their eyes do not glaze over whenever the conversation turns to driving revenue and making numbers. However as HR professionals, they do understand the need to balance these business imperatives with strong employee commitment and dedication and understand that this task is a delicate, constantly changing and well planned balancing act. This juggling of these organizational requirements emanates from the need to drive business objectives at one end of the spectrum and balancing employee commitment and dedication to the organization at the other.

Understanding this concept is not easy. Go too far in one direction and you achieve great numbers at the expense of burned out employees, increased turnover and eventually, a loss of productivity. As a result, the numbers you worked to attain erode. Furthermore if employees are unhappy, they are easy pickings for the competition and usually it is the top performers who are recruited away first. Go too far in the other direction and you have the most dedicated and committed employees on the face of the earth. They love coming to work, have great benefits, all of the tools they could ever want and excellent compensation. The only problem with this scenario is that the organization pays dearly for this situation because the numbers that the organization utilizes to benchmark and measure success erode to dangerous lows. As a result it becomes obvious that running a successful business requires balancing everyone's needs in an intelligent and well thought out way.

Dealing with the balance that exists between the prudent judgment required for the leadership of human capital issues versus the need to achieve levels of profitability, ROI and shareholder value is exactly where the business oriented HR professional comes into the picture. This enlightened individual is a rare bird, and if you have one on staff with the talents and judgment required, I strongly suggest you make them a member of the executive team and give them the opportunity to support the development of long term organizational strategy. According to Bob Griffin, CEO of Knowledge Computing Corporation "When I look for an HR executive I search for someone that understands the needs of the Clients, Shareholders and employees with an ability to manage conflict across all three. Once I have added that individual as a member of the executive team, as with any other executive team member, I let them do what they do best and build an organization to achieve success." Just as you depend upon your CFO to map out your organization's future from a standpoint of financial capital, you should depend upon this individual to map out your needs to identify, attract and retain the human capital required to get you from here and now to your planned destination. The inability to understand this requirement can have grave consequences. Without having the right people at the right price doing the right things you can wind up with a workforce that can't support organizational objectives and fall short of your overall goals.

"Almost all members of the executive team require solid advice and direction on human capital issues for many different reasons."

Following this logic, the question becomes a simple one; what attributes does a CEO need to look for in an HR professional that will support the organization's objectives using sound business judgment while successfully balancing the human capital end of the organizational picture? The answer has three parts:

1. It is necessary to hire an HR professional that understands the business end of the business in which you are involved and knows what making a good business decision is all about. Not only does HR have to walk the line between sharing your values and supporting your organizational objectives, but it must also be able to communicate the requirements to the employee population so that those objectives become a reality.
2. You must look for an HR professional who speaks the language of business. Do they know what role a balance sheet plays in making decisions? What about an income or cash flow statement? Please do not misunderstand my message. They do not require the same ability to understand or be able to manipulate numbers and projections with the same fluid grace as your CFO. However, if they sit at the executive team meeting devoid of even the most rudimentary understanding of numbers they will seldom contribute anything of value to strategic organizational decisions. Numbers are often the very language of business and if they do not understand the financial underpinnings that drive those decisions, they cannot offer the value required at the executive team level.
3. The HR person must be able to go off with a good understanding of the mission and come back with well thought out plans relating to development of the human capital end of the plan that will support your strategic organizational objectives. Let's look at a real-world example. If for example, dramatic growth over a five-year period is an organizational objective, you are not looking for an HR person to ask how you want to accomplish that. You are looking for a leader, a thinker, and a doer. You need a person who will not ask questions but explore options and provide solutions. Does growing organically make the most sense? Is growth by acquisition a better plan? What about joint ventures and/or outsourcing or other options? What are the costs associated with each of these options? Furthermore, can they provide a complete risk analysis for each concept with associated pros and cons along with examples of what other organizations have done that have had success or failure in similar endeavors? Most importantly, can they make a recommendation that can be backed up with a solid business case?

Now let's look at some examples of HR professionals that would not make the best addition to your executive team based upon their approach and philosophy as it relates to the way in which they perceive their role:

1. Those who have made a career of striving to become a better HR/recruiting professional. Although admirable in purpose and intent, becoming better at what most HR is today simply produces less ROI over time. Although it may provide that individual with incremental added value as it relates to organizational partnerships, it does not measure up to what your real needs are since that person does not possess the core competencies for the task at hand.
2. Those endlessly embracing more sophisticated levels of technology for greater administrative purposes. A strong HR executive will understand the need to balance the technical requirements of the organization to ensure compliance with the appropriate costs and returns, but also understand that technology moving beyond this requirement is superfluous. Those individuals who believe that more technology is always the answer very often miss the meaning of the overall objective in the first place.
3. Those looking to obtain memberships, endless certifications, and advanced degrees. I have seen HR professionals with more degrees and certifications, than can fit on a business card. That being said, staying current in your field is important; i.e. understanding new guidelines and laws will ensure that the organization is in compliance. Once again, it is all about balance and intelligent utilization of resources
4. Those who demand a seat at the table. It has been said that power is never given; it can only be taken. This is a good philosophy in war, but it will not be effective in the workplace. However, the right HR Executive will understand their value and as a result, expect a seat at the table. You, as the enlightened leader, should do no less than provide one.

With this logic solidly in place, it is important to remember that the HR professional you bring to the table must provide the substance and expertise required to be identified as a resource that is a vital part of supporting the organization's business objectives. That person must also demonstrate the soft but very real skill of actually using their business head combined with their background to chart a course and implement the plans that the team agrees upon. Lastly, they must demonstrate, at the most fundamental of levels a clear understanding of where the team wishes to go and work to make that course of action a reality. Hire the right person and your great expectations will be a great reality.

About the author:

Howard Adamsky is the founder and president of HR Innovators, Inc. He is also an author, consultant and public speaker. Mr Adamsky specializes in organizational behavior, which provides effective solutions for organizations struggling with issues relating to recruiting, executive and management coaching, organizational effectiveness, and employee productivity.

Reach for the Goals

The Star Online > Lifefocus

Friday August 19, 2005



Reach for the goals

By DATIN T.D. AMPIKAIPAKAN

A concerned leader of a team was getting very frustrated trying to get his team members to understand the goals, mission and vision of the organisation.

It is the same story everywhere. We start a business. We have a clear idea of what we want to do and how to manage it. Then we begin to hire people and, somewhere along the line, they lose sight of the vision and mission of the company. And all too quickly, they develop bad habits and attitudes; they become complacent and lazy. They get stuck in a routine, their energy levels dip and they fail to perform.

There is always a reason for doing business in the first place. Ask anyone, from a CEO of a multinational to a hawker selling chee cheong fun (my favourite breakfast snack), and both will tell you the following:

The hawker: "I must choose the right place to sell the chee cheong fun! The food must be good and tasty. Then customers will come. Every day, I must sell all. My chee cheong fun is homemade and the quality is very good." (Simple philosophy and good goals set for business at hand.)

The CEO: "Quality product and service are the keys to success. People want value for money and service satisfaction. We must deliver what we promise and promise only what we can deliver." (Specific goals set for the business.)

The hawker is often very successful because he has family support that provides a personal touch to his business. He is constantly watching out for his regular customers, treating them with extra care and giving them what they want. This is the advantage the hawker has.

In a big organisation, however, once you start a company, you have to depend on other people - your employees - to deliver what the company has promised. Therein lies the root of the problem. How does a boss convince his employees that the goals set by him are non-negotiable? How does the employer get the employees to flow in the same direction?

Putting things into perspective is the key. People who have no goals lack clear direction (except to learn crisis management). The leader of the organisation should do the following:


a.. Hire the right people for the job. We are sometimes too caring when we hire friends of friends and people who are recommended by others. Hence we sometimes land up with people who have no attitude or aptitude to learn and understand the corporate goals that need to be practised.

a.. Teach skills, both technical and soft. This is necessary to ensure that there is complete understanding of the goals set by the leader. But this is often the last thing that companies do; training is often considered optional. Bosses do not realise that the people they hire need to understand what is important to the company and what needs to be learnt. Bosses often forget that their employees come from different companies, bringing various corporate cultural baggage. Gelling with other employees can be difficult and tiresome - all the more reason why orientation to the new corporate goals is vital. Every new employee has to be initiated.

a.. Put the value system in place so that employees know what ethical values are to be practised, what rules cannot be broken and what rules can be bent without harming anyone.

a.. Create an atmosphere that would encourage and motivate the employees to excel and practise the goals that have been determined by team leaders.

a.. Create a sense of professionalism. If people have personal issues in dealing with one another, they cannot let them get in the way of doing their work well.

a.. Constantly remind employees that goals have to be met and standards maintained so that targets are achieved. This strategy often motivates people and challenges them to achieve results as well as teaches them to set personal goals.

a.. Allow employees to create a balance between work and home. This will prevent burnout and encourage people to enjoy coming to work even if it is a routine job.
There is always a bigger picture in everything we do. We set goals because they empower us to achieve our dreams, big or small. The greatest tragedy is not in not fulfilling one's goals but in not having any goals at all to reach. When companies do not plan for the future, when they do not have clear objectives and when they do not encourage their employees to make goals, they are headed for stagnation.

If team leaders do not set goals that motivate their members, they will not earn the respect they deserve. Employees must understand what is expected of them. Employers must be able to coach them adequately. Goals set have to be achievable and everyone must be given the opportunity to acquire the necessary skills to obtain the desired results.

Ponder on these questions:

1. What is the purpose of your work with the company you have joined?

2. What do you want to achieve in your work?

3. What would you like your professional life to be like, five years down the road?

4. What is the direction of your personal life?

5. What role model do you want to be for your family?

Non-Financial Performance Measures: What Works and What Doesn't

Non-Financial Performance Measures: What Works and What Doesn't
By Christopher Ittner and David Larcker
Knowledge@Wharton

Choosing performance measures is a challenge. Performance measurement systems play a key role in developing strategy, evaluating the achievement of organizational objectives and compensating managers. Yet many managers feel traditional financially oriented systems no longer work adequately. A recent survey of

U.S. financial services companies found most were not satisfied with their measurement systems. They believed there was too much emphasis on financial measures such as earnings and accounting returns and little emphasis on drivers of value such as customer and employee satisfaction, innovation and quality.

In response, companies are implementing new performance measurement systems. A third of financial services companies, for example, made a major change in their performance measurement system during the past two years and 39% plan a major change within two years.

Inadequacies in financial performance measures have led to innovations ranging from non-financial indicators of "intangible assets" and "intellectual capital" to "balanced scorecards" of integrated financial and non-financial measures. This article discusses the advantages and disadvantages of non-financial performance measures and offers suggestions for implementation.

Advantages
Non-financial measures offer four clear advantages over measurement systems based on financial data. First of these is a closer link to long-term organizational strategies. Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do not deal with progress relative to customer requirements or competitors, or other non-financial objectives that may be important in achieving profitability, competitive strength and longer-term strategic goals. For example, new product development or expanding organizational capabilities may be important strategic goals, but may hinder short-term accounting performance.

By supplementing accounting measures with non-financial data about strategic performance and implementation of strategic plans, companies can communicate objectives and provide incentives for managers to address long-term strategy.

Second, critics of traditional measures argue that drivers of success in many industries are "intangible assets" such as intellectual capital and customer loyalty, rather than the "hard assets" allowed on to balance sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data can provide indirect, quantitative indicators of a firm's intangible assets.

One study examined the ability of non-financial indicators of "intangible assets" to explain differences in US companies' stock market values. It found that measures related to innovation, management capability, employee relations, quality and brand value explained a significant proportion of a company's value, even allowing for accounting assets and liabilities. By excluding these intangible assets, financially oriented measurement can encourage managers to make poor, even harmful, decisions.

Third, non-financial measures can be better indicators of future financial performance. Even when the ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now. Consider, for example, investments in research and development or customer satisfaction programs. Under U.S. accounting rules, research and development expenditures and marketing costs must be charged for in the period they are incurred, so reducing profits. But successful research improves future profits if it can be brought to market.

Similarly, investments in customer satisfaction can improve subsequent economic performance by increasing revenues and loyalty of existing customers, attracting new customers and reducing transaction costs. Non-financial data can provide the missing link between these beneficial activities and financial results by providing forward-looking information on accounting or stock performance. For example, interim research results or customer indices may offer an indication of future cash flows that would not be captured otherwise.

Finally, the choice of measures should be based on providing information about managerial actions and the level of "noise" in the measures. Noise refers to changes in the performance measure that are beyond the control of the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware of how much success is due to their actions or they will not have the signals they need to maximize their effect on performance. Because many non-financial measures are less susceptible to external noise than accounting measures, their use may improve managers' performance by providing more precise evaluation of their actions. This also lowers the risk imposed on managers when determining pay.

Disadvantages
Although there are many advantages to non-financial performance measures, they are not without drawbacks. Research has identified five primary limitations. Time and cost has been a problem for some companies. They have found the costs of a system that tracks a large number of financial and non-financial measures can be greater than its benefits. Development can consume considerable time and expense, not least of which is selling the system to skeptical employees who have learned to operate under existing rules. A greater number of diverse performance measures frequently requires significant investment in information systems to draw information from multiple (and often incompatible) databases.

Evaluating performance using multiple measures that can conflict in the short term can also be time-consuming. One bank that adopted a performance evaluation system using multiple accounting and non-financial measures saw the time required for area directors to evaluate branch managers increase from less than one day per quarter to six days.

Bureaucracies can cause the measurement process to degenerate into mechanistic exercises that add little to reaching strategic goals. For example, shortly after becoming the first US company to win Japan's prestigious Deming Prize for quality improvement, Florida Power and Light found that employees believed the company's quality improvement process placed too much emphasis on reporting, presenting and discussing a myriad of quality indicators. They felt this deprived them of time that could be better spent serving customers. The company responded by eliminating most quality reviews, reducing the number of indicators tracked and minimizing reports and meetings.

The second drawback is that, unlike accounting measures, non-financial data are measured in many ways, there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways.

Many companies attempt to overcome this by rating each performance measure in terms of its strategic importance (from, say, not important to extremely important) and then evaluating overall performance based on a weighted average of the measures. Others assign arbitrary weightings to the various goals. One major car manufacturer, for example, structures executive bonuses so: 40% based on warranty repairs per 100 vehicles sold; 20% on customer satisfaction surveys; 20% on market share; and 20% on accounting performance (pre-tax earnings). However, like all subjective assessments, these methods can lead to considerable error.

Lack of causal links is a third issue. Many companies adopt non-financial measures without articulating the relations between the measures or verifying that they have a bearing on accounting and stock price performance. Unknown or unverified causal links create two problems when evaluating performance: incorrect measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes. Xerox, for example, spent millions of dollars on customer surveys, under the assumption that improvements in satisfaction translated into better financial performance. Later analysis found no such association. As a result, Xerox shifted to a customer loyalty measure that was found to be a leading indicator of financial performance.

The lack of an explicit casual model of the relations between measures also contributes to difficulties in evaluating their relative importance. Without knowing the size and timing of associations among measures, companies find it difficult to make decisions or measure success based on them.

Fourth on the list of problems with non-financial measures is lack of statistical reliability - whether a measure actually represents what it purports to represent, rather than random "measurement error". Many non-financial data such as satisfaction measures are based on surveys with few respondents and few questions. These measures generally exhibit poor statistical reliability, reducing their ability to discriminate superior performance or predict future financial results.

Finally, although financial measures are unlikely to capture fully the many dimensions of organizational performance, implementing an evaluation system with too many measures can lead to "measurement disintegration". This occurs when an overabundance of measures dilutes the effect of the measurement process. Managers chase a variety of measures simultaneously, while achieving little gain in the main drivers of success.

Once managers have determined that the expected benefits from non-financial data outweigh the costs, three steps can be used to select and implement appropriate measures.

Understand Value Drivers
The starting point is understanding a company's value drivers, the factors that create stakeholder value. Once known, these factors determine which measures contribute to long-term success and so how to translate corporate objectives into measures that guide managers' actions.

While this seems intuitive, experience indicates that companies do a poor job determining and articulating these drivers. Managers tend to use one of three methods to identify value drivers, the most common being intuition. However, executives' rankings of value drivers may not reflect their true importance. For example, many executives rate environmental performance and quality as relatively unimportant drivers of long-term financial performance. In contrast, statistical analyses indicate these dimensions are strongly associated with a company's market value.

A second method is to use standard classifications such as financial, internal business process, customer, learning and growth categories. While these may be appropriate, other non-financial dimensions may be more important, depending on the organization's strategy, competitive environment and objectives. Moreover, these categories do little to help determine weightings for each dimension.

Perhaps the most sophisticated method of determining value drivers is statistical analysis of the leading and lagging indicators of financial performance. The resulting "causal business model" can help determine which measures predict future financial performance and can assist in assigning weightings to measures based on the strength of the statistical relation. Unfortunately, relatively few companies develop such causal business models when selecting their performance measures.

Review Consistencies
Most companies track hundreds, if not thousands, of non-financial measures in their day-to-day operations. To avoid "reinventing the wheel", an inventory of current measures should be made. Once measures have been documented, their value for performance measurement can be assessed. The issue at this stage is the extent to which current measures are aligned with the company's strategies and value drivers. One method for assessing this alignment is "gap analysis". Gap analysis requires managers to rank performance measures on at least two dimensions: their importance to strategic objectives and the importance currently placed on them.

Our survey of 148 US financial services companies — a joint research project sponsored by the Cap Gemini Ernst & Young Center for Business Innovation and the Wharton Research Program on Value Creation in Organizations – found significant "measurement gaps" for many non-financial measures. For example, 72% of companies said customer-related performance was an extremely important driver of long-term success, against 31% who chose short-term financial performance. However, the quality of short-term financial measurement is considerably better than measurement of customer satisfaction. Similar disparities exist for non-financial measures related to employee performance, operational results, quality, alliances, supplier relations, innovation, community and the environment. More important, stock market and long-term accounting performance are both higher when these measurement gaps are smaller.

Integrate Measures
Finally, after measures are chosen, they must become an integral part of reporting and performance evaluation if they are to affect employee behavior and organizational performance. This is not easy. Since the choice of performance measures has a substantial impact on employees' careers and pay, controversy is bound to emerge no matter how appropriate the measures. Many companies have failed to benefit from non-financial performance measures through being reluctant to take this step.

Conclusion
Although non-financial measures are increasingly important in decision-making and performance evaluation, companies should not simply copy measures used by others. The choice of measures must be linked to factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. In addition, companies should remember that performance measurement choice is a dynamic process - measures may be appropriate today, but the system needs to be continually reassessed as strategies and competitive environments evolve.