© 2006, 2007
Translating Good Governance into Operational Excellence: Does your Organization have the Capability to
Execute its Strategy?
Translating Good Governance into Operational Excellence: Does your Organization have the Capability to
Execute its Strategy?
Dr. John W. Alden
10-09-2007
Dr. John W. Alden
10-09-2007
Do Directors have visibility to operational weaknesses that elevate risk, sometimes to disastrous levels?
Do Directors have visibility to operational weaknesses that elevate risk, sometimes to disastrous levels?
2© Capability Measurement, 10-2006, 2007
Recent HeadlinesRecent Headlines
•Washington Post: “The Saga of a Bent Spear” “On Hill, Toy Firm Officials Apologize and Promise Changes” “Fixing the Smithsonian”
•USA Today: “Lead in Mattel toys was 180 times the limit”
•Business Week: “Not So Smart”
•Wall Street Journal: “ Most Science Studies Appear to be Tainted by Sloppy
Analysis” At Ford, CEO “Mulally is Optimistic”
3© Capability Measurement, 10-2006, 2007
Top management may not know Top management may not know
WSJ: So your strategy is allowing people to tell you bad news without coming down to hard on them?
Mr. Mulally: Absolutely. One of the first meetings we had, I asked how it’s going and most of it was all green and a little yellow. I said, “Hey, we lost like $12 billion, it can’t be all green.”
4© Capability Measurement, 10-2006, 2007
Open Standards Frameworks Focus
Does your Organization have the Capability to Execute its Strategy?
5© Capability Measurement, 10-2006, 2007
Improving process capability benefitsImproving process capability benefits
High High MaturityMaturity
CapabilityCapabilityOrganization-wide Organization-wide
OutcomesOutcomes
TechnologyTechnology
DeploymentDeployment
ImprovedImproved
EnterpriseEnterprise
Risk Risk
ManagementManagement
Leaner OpsLeaner Ops
Culture based Culture based on trust and on trust and
factsfacts
SpeedSpeed
ImprovedImprovedComplianceCompliance
AgilityAgility
ImprovedImprovedmarginmargin
This set of complex interactions is measurable!This set of complex interactions is measurable!
6© Capability Measurement, 10-2006, 2007
Operational challengesOperational challenges
Enterprise strategy risks*•External
Customers don’t like the offering Competitor actions Game changing technology
• Internal to the organization People:
•Knowledge and skills•HC process management
Technology integration Business Process:
•Variation in work group activities•Cascading rework
*Source: The Halo Effect
C-suite
C-suite
Measurement
Measurement
7© Capability Measurement, 10-2006, 2007
Risk & Capability: a core relationshipRisk & Capability: a core relationship
Operational Operational RiskRisk
Operational Operational CapabilityCapability
HighHigh
HighHighLowLow
LowLow
WorstWorst
BestBest
These relationships are not new!These relationships are not new!
11 % C
omplete
d ERM
11 % C
omplete
d ERM
8© Capability Measurement, 10-2006, 2007
The Five Capability LevelsThe Five Capability Levels
Level 1Initial
InconsistentInconsistentmanagementmanagement
Repeatablepractices
Level 2Managed
Work unitWork unitmanagementmanagement
Standardized
best practices
Level 3Standardized
Business lineBusiness linemanagementmanagement
Quantitativelymanaged
practices
Level 4Predictable
CapabilityCapabilitymanagementmanagement
Level 5Innovating
ChangeChangemanagementmanagement
Continuously
improvingpractices
Capability Capability Maturity Model:Maturity Model:
A Framework for A Framework for Measuring Measuring Organizational Organizational CapabilityCapability
9© Capability Measurement, 10-2006, 2007
Low Maturity OrganizationsLow Maturity Organizations
People capability variationPeople capability variation
Transaction workers: +/- 100%Transaction workers: +/- 100%
Knowledge workers: +/- 1000%Knowledge workers: +/- 1000%
10© Capability Measurement, 10-2006, 2007
Management Visibility
In OutLevel 1
In OutLevel 2
In OutLevel 3
In OutLevel 4
In OutLevel 5
Exception(s)Exception(s)
11© Capability Measurement, 10-2006, 2007
How the MM’s Works-GeneralHow the MM’s Works-General
Level 5Innovating
Implement continual proactive improvements to achieve business targets
Capable processesPerpetual innovationChange management
Level 4Predictable
Manage process and results quantitatively and exploit benefits of standardization
Predictable resultsReuse/knowledge mgt.Reduced variation
Level 3Standardized
Develop standard processes, measures, and training for product & service offerings
Productivity growthEffective automationEconomies of scale
Level 2Managed
Build disciplined work unit management to stabilize work and control commitments
Reduced rework Repeatable practicesSatisfied schedules
Level 1Initial
Motivate people to overcome problems and just “get the job done”
Mistakes, bottlenecksAd hoc methodsHero worship
12© Capability Measurement, 10-2006, 2007
How the MM’s Work-MeasurementHow the MM’s Work-Measurement
Level 5Innovating
Implement continual proactive improvements to achieve business targets
Deep/unique process insight supported by numbers/analytics
Level 4Predictable
Manage process and results quantitatively and exploit benefits of standardization
Manage by the numbers/analytics
Level 3Standardized
Develop standard processes, measures, and training for product & service offerings
Process and data standardsAggregation possible
Level 2Managed
Build disciplined work unit management to stabilize work and control commitments
Work group/project qualityAggregation difficult/costly
Level 1Initial
Motivate people to overcome problems and just “get the job done”
Ad hoc methodsNo data standardsNo aggregation
13© Capability Measurement, 10-2006, 2007
Case Study: $2B Software/FS Services
In Out
TechnologySolutions
Sales
IT
ClientServices
TechnologyServices
Immature Products
Fixed Date, Budget
Vague Requirements
Defects
Deferred Items
Ineffective Execution of Product Strategy
Customer Dissatisfaction
Liquidated Damages
Increased Service Calls
Increased Rework
Without end to end process visibility, the hidden costs grow down stream
14© Capability Measurement, 10-2006, 2007
Summary:Capability Building Yield Dramatic BenefitsSummary:Capability Building Yield Dramatic Benefits
BenefitLevel 1Baseline
Level 2 Level 3 Level 4 Level 5
Rework 40% 20% 10% 6% 3%
Estimating accuracy
+30% to >100%
+10% to +20%
+5% +3% +1%
Delivered defects
X ½ X 1/4 X 1/10 X 1/100 X
Pretest defect detection
<30% 60% 80% 90+% 99%
Productivity X 1.5X 2X 3-4X >4X
Component reuse
negligible negligible occasional >30% >50%
*Based on Bill Curtis extrapolations published research
15© Capability Measurement, 10-2006, 2007
Measurement Measurement
ItemMean1&2
34&5
To what extent is operational information available to directors? 3.5 6 17 25
To what extent is operational information linked to the financial performance of the organization? 3.5 8 10 28
To what extent does your organization participate in external benchmarking? 2.8 14 20 9
To what extent are you presented with non-financial measures of business performance (e.g. customers, competition, people, technology)? 3.3 10 16 22
++
--
++
++
16© Capability Measurement, 10-2006, 2007
Operational RiskOperational Risk
ItemMean1&2
34&5
To what extent is operational information available to directors? 3.5 6 17 13
++
17© Capability Measurement, 10-2006, 2007
Organizational CapabilityOrganizational Capability
ItemMean1&2
34&5
To what extent is operational information available to directors? 3.5 6 17 16
To what extent do you have knowledge or insights about the capability level of your information technology organization? 3.2 9 24 15
To what extent are you involved in efforts to understand how well aligned the organization is to the strategy as enunciated by the board and executives? 3.7 2 18 28
++
++
++
18© Capability Measurement, 10-2006, 2007
People ProcessesPeople Processes
ItemMean1&2
34&5
To what extent is operational information available to directors? 3.5 6 17 26
To what extent do directors have visibility into the performance of the workforce against objective external standards? 3 13 20 14
To what extent do you have knowledge of the recruiting, development and retention processes for talent management? 3.2 10 20 18
++
++
++
© 2006, 2007
Panel & DiscussionPanel &
Discussion
20© Capability Measurement, 10-2006, 2007
Summary Questions: Process OperationsSummary Questions: Process Operations
•What level of visibility do you have to operations? What’s the correct level?
•How do you gain an understanding of operations?
•How robust are your processes for managing/tracking operational risk?
•What is your role in surfacing issues where you lack detailed understanding of operations?
•What level of “evidence based management” is practiced in your organization?
21© Capability Measurement, 10-2006, 2007
Discussion Questions-McKinseyDiscussion Questions-McKinsey
1. Are major trends and changes in your business unit’s environment affecting your strategic plan? Specifically, what potential developments in customer demand, technology, or the regulatory environment could have enough impact on the industry to change the entire plan?
2. How and why is this plan different from last year’s? 3. What were your forecasts for market growth, sales, and profitability last year,
two years ago, and three years ago? How right or wrong were they? What did the business unit learn from those experiences?
4. What would it take to double your business unit’s growth rate and profits? Where will growth come from: expansion or gains in market share?
5. If your business unit plans to take market share from competitors, how will it do so, and how will they respond? Are you counting on a strategic advantage or superior execution?
6. What are your business unit’s distinctive competitive strengths, and how does the plan build on them?
7. How different is the strategy from those of competitors, and why? Is that a good or a bad thing?
8. Beyond the immediate planning cycle, what are the key issues, risks, and opportunities that we should discuss today?
9. What would a private-equity owner do with this business? 10.How will the business unit monitor the execution of this strategy?
22© Capability Measurement, 10-2006, 2007
Discussion Questions-DeloitteDiscussion Questions-Deloitte
1. Do we know the overall risk profile of the company’s assets—i.e. people, products, processes, and facilities—as well as the interrelationships among these risk?
2. Have we integrated risk management processes throughout the enterprise?
3. Are we constantly reviewing and tweaking our business continuity plans?
4. Can security processes be improved so the company enjoys fallout benefits—like increased efficiency and improvement customer services?
5. What technologies and metrics are available to evaluate and improve risk management processes?
6. Is adequate security training in place?
7. Do we have an environment where employees feel free to speak out about potential problems to upper- level managers.
23© Capability Measurement, 10-2006, 2007
Dealing with operational complexity links to profitDealing with operational complexity links to profit
4% of global CEO says they are very good at measuring complexity. And only 5% say they have a corporate-wide framework for managing complexity. (PWC Global Report on Complexity)
7 of 10 directors are satisfied with their access to financial information but “their satisfaction tails off noticeably when the subject turns to strategic and operational information.” Not surprisingly, internal board members are more satisfied than external directors. (McKinsey Quarterly, 07)
Management focused improvement initiatives appear “soft” to some executives and board members. However, McKinsey and Accenture research links profit and operational performance. (McKinsey Quarterly, 07 and Accenture Outlook, 07)
24© Capability Measurement, 10-2006, 2007
IT Risk is not well understood IT Risk is not well understood
IEEE Spectrum-Compilation by Robert Charette
25© Capability Measurement, 10-2006, 2007
Boards, in particular, non-executive directors, simply Boards, in particular, non-executive directors, simply don’t have the inherent practical experience of IT don’t have the inherent practical experience of IT risk, as one of our internal audit heads reminds us risk, as one of our internal audit heads reminds us and this means that they are unlikely to understand and this means that they are unlikely to understand the full extent of the risks and opportunities that the full extent of the risks and opportunities that technology presents to their companies”. technology presents to their companies”.
““Over a third of senior management respondents and Over a third of senior management respondents and almost half of the internal audit heads feel that IT almost half of the internal audit heads feel that IT professionals lack the ability to communicate IT risk professionals lack the ability to communicate IT risk and its potential business impact in a way that the and its potential business impact in a way that the board understands.”board understands.”
Source: UK PWC, LLP and Institute of Internal AuditorsSource: UK PWC, LLP and Institute of Internal Auditors
Institute of Internal AuditorsInstitute of Internal Auditors
26© Capability Measurement, 10-2006, 2007
Mercedes: near the bottom of the JD Power reliability surveyMercedes: near the bottom of the JD Power reliability survey
Mercedes is still reeling from a series of embarrassing recalls of its prestige sedan, the E-Class, which starts at $50,000. In May, 2004, the company suffered a spate of problems with its electronic brake control system, and it recalled 680,000 cars for inspections. This year, in late March, Mercedes announced the biggest recall in its history -- 1.3 million cars with faulty fuel pumps made by supplier Robert Bosch. Software bugs and the complex interfaces that allow the myriad electronics systems to talk to each other are to blame for many Mercedes defects. Getting such bugs out is a fiendishly hard job and can often take years. The problems have also pushed up costs and hurt profits. Last year Mercedes spent some $600 million to cover warranty costs, analysts say.
Worse, the quality fiasco has taken a heavy toll both in Europe, which accounts for 76% of sales, and in the U.S., where the auto maker sells 21% of its vehicles. Mercedes' European market share slipped to 4.2% in the first half of 2005, down from 4.5% for the same period in 2004. And last year, BMW (BMW ) overtook Mercedes as the world's No. 1 luxury carmaker.
Source: Business Week 8-15, Cover Story, Dark Days At Daimler, p. 31-38
27© Capability Measurement, 10-2006, 2007
Business performance expectations Business performance expectations
Even good managers can be notoriously bad when it comes to projecting the future performance of their companies. Many outstanding executives at large companies routinely promise to double their share prices in, say, five years or to beat market returns by margins that even upstart competitors would envy. Others focus on sustaining top- or bottom-line growth and profitability over long periods of time, seemingly heedless of the cyclical ups and downs in their industries.
The intentions of these executives—to set high aspirations that encourage growth, innovation, and efficiency—are good. Lofty goals, however, pose special challenges, even for companies that already have strong market positions. Furthermore, they can tempt executives to make risky bets and demoralize employees charged with hitting unrealistic targets.
Yet many senior executives, try as they might, still find it hard to shift their attention away from today’s stock price and the next set of interim results. The forbidding presence of hedge fund and private-equity investors on corporate share registers and the increasingly short tenure of CEOs have only intensified the obsession with short-term performance.
Source: The Halo Effect
28© Capability Measurement, 10-2006, 2007
Estimation accuracy lackingEstimation accuracy lacking
Only 9 of 1,077 large global companies outperformed their competitors on both revenue growth and profitability over a decade, a study finds—confirming that such strong performance is rare and that many executives impose unrealistic expectations on their organizations.
If past is prologue, managers and boards won’t forecast with any precision the timing of the next recession. But they should be asking themselves today whether they are building the financial, operating, and product flexibility to make the most of the next downturn.
Source: The Halo Effect
29© Capability Measurement, 10-2006, 2007
Dangerous Organizational Changes: Look Before Your Leap*Dangerous Organizational Changes: Look Before Your Leap*Type:
1. Mergers and acquisitions
2. Implementing new enterprise software
3. Switching to better HR practices
4. Quality Improvement efforts
5. Business process reengineering (BPR)
6. Layoffs
7. Launching a new product
8. Starting a new organization
Evidence of Success/Failure:
1. Mostly negative results, sell quickly
2. > 50% fail
3. Startups fail more often
4. Talk but not much walk
5. ~30% achieve stated goals
6. Create lasting problems
7. Extremely high failure rates
8. Death rates for new ventures is high
*Source: Hard Facts, Dangerous Half-Truths & Total Nonsense: Profiting Form Evidence-Based Management, Table 7-1
30© Capability Measurement, 10-2006, 2007
Evolving capability and maturity frameworksEvolving capability and maturity frameworks
Brief history:
•50’s, 60’s Crosby--manufacturing process waste Deming—statistical process control
•Mid 80’s to mid 90’s DOD recognition of software development crisis SEI publishes the Capability Maturity Model for software
(CMM)
•Late 90’s to early 2000’s PCMM V1, V2 CMMI V1
•October 2007: Business Process Maturity Model
31© Capability Measurement, 10-2006, 2007
References & SourcesReferences & Sources
Books: Competing on Analytics-HBS Press The Halo Effect-Free Press Hard Facts, Dangerous Half-Truths and Total Nonsense-HBS Press Your Gut is Still Not Smarter Than Your Head-Wiley CFO Insights: Delivering High Performance-Wiley
Business Journals and Reports: Harvard Business Review, “Managing Human Sigma” and 2005; “Toward a Theory of High Performance,
2005 PWC CEO Complexity Study, 2006 PWC and UK Institute of Internal Auditors, 2007 Accenture Outlook, 2003-2007 Bain, Annual “Management Tools Survey”, 2007 IBM CEO Expanding the Innovation Horizon, 2006
The McKinsey Quarterly: “The halo effect, and other managerial delusions”. 2007 Number 1 “Cracking the complexity code”, 2007 Number 2 “The link between profits and organizational performance”, 2007 Number 3 “Managing for quality: An interview with Armand Feigenbaum “Managing your organization by the evidence”, 2006 Number 3 “The state of the corporate board- A McKinsey Global Survey 2007”, Web-exclusive June 2007 “Anatomy of a healthy corporation”, Web-exclusive 5-2007
New Sources: Washington Post-various Wall Street Journal-various Fortune-various Business Week 2007 Advertising citing “The New Risk Environment”, Conference Board Study on Enterprise
Risk Management, 2007
Experts: Dr. Bill Curtis (Process) and Dr. Robert Charette (Enterprise Risk Management) Bio’s available on www.capabilitymeasurement.com
Top Related