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Make. or break. How leaders keep promises in business

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While CEOs make promises about what their organisation can deliver, it

is their senior managers who keep these promises on their behalf. This

paper discusses three major tools for CEOs to align their teams behind

public promises and turn strategy into reality >>

12 | 2008

or break

Make

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Contents

Introduction 4

Other people’s promises 6

Uncover the logic – organising for the strategy 8

Turn up the volume – incentives that shout 10

Heroes and villains – making the vision real 12

Body language 13

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Leaders make promises. A major part of their job is to convince

shareholders and stakeholders that the business can achieve

meaningful goals and results. Much of the value of the business

rests in the credibility of these promises: there is a fine line between

enough ambition to excite and enough realism to deliver.

So, imagine this. You are the chief executive of a FTSE 350 business. It is your annual strategy presentation to your top two hundred managers. This is your chance to explain the vision and win commitment.

A sea of people confronts you; keen, sceptical, distracted, curious... What’s going on behind those faces?

According to recent Hay Group research, in an average company, of those two hundred people looking back at you:

64

ƒ of them don’t understand the strategy well enough to implement it 74

ƒ expect to kick many significant decisions back upstairs 12

ƒ will actively resist or sabotage the plans behind the scenes (38 more are simply bored by them)

88

ƒ will only co-operate with their colleagues if they are absolutely forced to 158

ƒ don’t believe that the business can fully deliver on all its commitments.

How confident are you, that your promises

will be met?

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1

A sea of people confronts you; keen, sceptical,

distracted, curious...

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Other people’s promises

A company’s credibility is its history of keeping promises. While chief executives make the promises upon which their businesses depend, it is not really in their power to keep them. In fact, it is their managers who keep the promises – or break them – on the CEO’s behalf. The way that the CEO connects with that group, and shapes their roles through structures and incentives, is therefore the true source of credibility.

We talk about the ‘top two hundred’ as the critical group, though clearly the actual number varies. We mean senior managers below board level: heads of business units, senior staff roles, major programme managers, etc. It is these managers who, in their turn, communicate the vision to front line roles. The effects of confusion or conflict among the ‘top two hundred’ are magnified as they cascade the message down.

Given the active role of senior managers in keeping promises, it is essential that chief executives ‘reach through’ their direct reports and connect with that group directly. Yet the pressures of the CEO job – in particular its outward focus on negotiating acceptable promises – often stops them from making these connections. The glamour of the investment community, politics, media and pressure groups is a distraction from

the time consuming conversations which build a visceral understanding of strategy. The ivory tower is a constant danger. We talk here about credibility and

promises, rather than execution. Execution is a part of credibility, but it is still possible to win the execution battles and lose the credibility war. The question is whether the sum total of executed projects is the same as the promises being made. This is not a given. Aspirations are usually turned into tangible projects by senior managers. These may be the wrong projects. If they don’t see the big picture, if they don’t care about the picture, if they pursue their own interests at the expense of the organisation, then there is a real chance of the company being very successful at the wrong things. The current economic crisis sharpens the credibility challenge. On one level, it creates an opportunity – or excuse – to renegotiate promises, but there are two pitfalls. First, you can do this only a few times before credibility is damaged: drip feeding bad news is far worse than a clean break. Leaders who are out of touch with the capacity of their organisation risk being surprised. Second, the crisis may require a new strategy for the new conditions. In sustained good times, habit can stand in for clarity about what needs to be done. That’s an option which is rapidly disappearing.

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Chief executives are, therefore, charged with ensuring that their organisation has the capacity to keep their promises. This partly means bringing those promises inside and bringing them to life. It also means lining up the other powerful forces that help shape managerial behaviour. From our experience it is not the traditional ‘execution’ capabilities that make the difference. Programme management, performance management and measurement systems matter, but they are not enough.

For sustained credibility, a chief executive has three major tools for turning strategy into reality. Used together, they become a powerful ‘voice’ for the strategy, yet

two of them are rarely considered part of the CEO’s domain. Ultimately they are all different ways of communicating but sometimes actions speak louder than words. They are:

Aligning the organisation with the

ƒ

realities of the strategy

Shaping incentives (formal and

ƒ

informal) to communicate the strategy Making the vision real for senior

ƒ

managers and front line employees These are the tools that make a strategy clear, resolve ambiguities, build trust and create legitimacy.

5

“The expectations of the market are so transparent to me. They are my day job. I didn’t see that this wasn’t shared by the whole business. Nor did people automatically assume they were legitimate just because we said so.”

79% of senior managers expect their

organisation to fall short of meeting its

promises this year. And more than half of

them are uncertain about progress so far

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The first reliable method of securing promises is to hardwire them into the shape of the organisation itself. This has the advantages of immediacy and endurance. Yet this is not a recipe for restructuring as an end in itself – there is a justified cynicism about the manoeuvres that often seem to follow a change in senior personnel. If strategy is to come alive through structure, we need something more than rearranging the lines on an organisation chart.

Organisation design – structure, policy and process – is a kind of communication, a signal of priorities and relationships. An immediate dive into the detail of reporting lines and accountabilities destroys the clarity of the message. Organisation design expresses a logic, a theory, of what does and doesn’t matter. It defines the

basic building blocks of the organisation and reflects what we think about how our customers’ world is structured. The fact that the marketing and knowledge management functions are in a single department, for example, expresses a view that marketing is about the transmission of ideas. The decision to orient around product lines versus customer types may emphasise technical excellence over relationship management.

The danger is that the logic of an organisation is often inherited, unexamined and untested. Without a debate around the principles of the design, at a conceptual level, it is hard to make conscious choices that fit current needs. It is also hard to build a consensus among leaders.

Uncover the logic – organising for

the strategy

“Personally I thought we’d agreed the structure. We had the charts to prove it. It turned out that – of the seven people in the room – we had eight or nine different views of what it meant in practice. We went back to basics, describing how we should deliver our strategy from our customer’s perspective. We all get it now.”

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63% of senior leaders spend less than half their

time thinking about the business as a whole

So how do we have a debate on

organisation principles? An organisation that is geared to deliver its vision starts with translating its strategy into the factors that are critical for success. These need to describe how the organisation best serves its customers through an ‘operating model’. This is a high level picture of decisions, principles and assumptions – the way the organisation delivers value. It enables an ongoing conversation about why the organisation is shaped in a particular way; one which is more easily separated from the power politics of actual positions and territories.

In terms of keeping promises a

conversation about the operating model has a number of advantages. It builds a shared understanding among managers; it strengthens the ability of the structure to actually deliver the strategy; it provides the basis for an ongoing dialogue about how the business creates value; and it enables radical rethinking of the design of the organisation based on purpose rather than tradition.

To keep their promises, chief executives need to translate strategy into a structure that allows the company to best serve its customers and wider stakeholders.

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Turn up the volume – incentives that

shout

The second set of tools for keeping promises throughout a business are incentives. This is not a technical issue, to be delegated to the compensation and benefits manager or remuneration committee. The general reward strategy in an organisation is an issue for the top table.

Reward matters in this context because, again, it is a strong signal. What we measure and what we pay for, communicate our priorities. When they contradict what we say, people are more likely to follow the money. One organisation we know recently removed a measure of customer satisfaction from their performance targets, in order to simplify them. The first question they were asked by staff: “Is customer satisfaction not a priority any more?” At least staff asked the question, in other organisations people may just assume.

There are two areas in which to act: Making reward louder

ƒ

Eliminating the reward gap

ƒ

Reward serves two functions: attraction/ retention and signalling. It can only serve the second function if it is connected to

performance. The higher the percentage of the wage bill that is variable, the harder that spend is working on communicating the strategy. Many organisations have less than ten per cent of their investment working in this fashion. This is a shame: variable pay provides both attraction and signalling, but money spent on base salary and benefits does not signal strategy. Your reward policy can whisper the strategy or it can shout it aloud. One way to keep more promises is to increase the volume. However, this is not enough if the measures and targets themselves are wrong. Many businesses have a ‘reward gap’ between the strategy that emerges from their incentives and the strategy they promise their stakeholders. Think of it in terms of ‘gaming’ the incentive system. What is the easiest or most reliable way to earn the biggest payouts? If everybody did this what strategy would the business effectively be pursuing? How far is this from the intent?

The tools here are, of course, not just financial. Promotions, praise, development, quality of leadership are all types of incentives that can be connected to the promises a business has made.

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“I’ve been asking people, ‘do you know what it takes to increase your bonus?’ Most people said no, the rest said it was out of their control.”

A big issue here is line of sight. The evidence suggests that many incentive plans are poorly understood by their recipients. Some targets are too broad and, therefore, don’t indicate the individual behaviours and actions required of a specific role; some are too narrow and don’t connect to the big picture. The major tools to address this problem are disaggregation or translation – either breaking the end results into smaller units more closely influenced by individual behaviour or moving down from the end results into the intermediate steps and actions that contribute to them. A high volume incentive system is not an argument for the uncritical reward of reckless behaviour in pursuit of targets,

regardless of ethics and caution. We can see the consequences of this in the meltdown of venerable institutions in the banking crisis. Companies must reward the way things are done as well as the results achieved; they should account for the risks inherent in someone’s approach, not just whether it worked this time. Failure to do so favours luck over judgement. And, as Barings, Enron, Bear Sterns and Lehman all discovered, luck turns.

Chief executives who want to ensure their promises are kept have a powerful tool at their disposal if they ensure that their company’s reward policy talks loudly and accurately about their strategy.

50% of senior leaders feel that incentives do not

reinforce the organisation’s strategic objectives

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If a ‘high volume’ reward strategy and conscious operating principles are two powerful tools for keeping promises, where does leadership fit in? It gives soul and meaning to the other drivers, lifts them up from mere technical policies to become coherent steps to achieving a purpose.

CEOs rightly spend a lot of time facing outwards, negotiating the promises that secure resources and freedom to act. If this means they become isolated from senior managers then there is real danger. Without undermining or compromising the authority of their direct reports, they also need to connect directly to managers throughout the business to help the strategy come alive.

The first and most important step is to open up the process of strategy creation to inspection – to reveal the decision making processes, the dilemmas and concerns, the choices and rationales behind the headlines. This creates legitimacy; it is also a form of coaching. It is important to be clear about sacrifices. Strategy is as much about what is not done as about what is done. Too often, these are fudged in communications because they carry pain for those whose aspirations won’t be met. Yet failure to do so is a major source of ambiguity and conflict.

Consistent repetition is a much neglected

well beyond the point they assume is reasonable. Our research shows that one third of senior managers feel they don’t understand the strategy well enough to implement it fully. Messages get lost in translation as they cascade down the organisation or become overwhelmed by routine distractions. CEOs must also personally check that the message has arrived, uncorrupted, at the front line. Not everyone gets excited about financial targets. For the full commitment of managers to be released, CEOs need to get beneath the headline metrics. As goals, market share, profitable growth and customer satisfaction rarely distinguish between organisations. Rather: what is our challenge? What is our contribution to society? What are the principles and distinctive ways in which we will rise to the challenge and make the contribution?

The most powerful form of

communication is the story. Stories have heroes and heroines; they have a prize; they have a looming threat to that prize (even a villain; it worked for Apple). The protagonists pass through obstacles posed by the threat and draw on their character to win the prize. In good stories they change and grow in the process. This is just a little bit more exciting than being a, “world class supplier of service solutions through delighting our customers and operational efficiency.” A narrative structure forces honesty; it doesn’t shy

“I’ve got in the habit of assuming no-one I meet knows what the strategy is. We’ve spent so long as a top team debating the issues and implications that is easy to forget that others don’t have that insight.”

Heroes and villains – making the

vision real

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Body language

There is a widespread problem in

translating external promises into internal engagement and understanding. We have presented three tools that go beyond execution to align the whole organisation behind public promises.

The emphasis is on signals – and how some actions communicate more loudly than words. We are familiar with the notion that the content of what we say is only a fraction of what people actually hear. We can think of incentives and structures as being the body language of strategy. In conversation, there is a risk that body language and tone contradict the content of our message. This is also true

of organisational body language. We have shown ways in which we can think differently about incentives and structures to ensure they match our strategy. Content still matters, we still need a vision and articulated strategy, but we should reserve words for what they do best – telling stories that inspire and inform.

Doing so greatly increases the probability that the promises we make in public will be kept by our organisations. In today’s economic climate, the survival of the business may depend on making promises more tangible inside the organisation.

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About the research

We surveyed 100 senior leaders below board level in FTSE 350 companies. We asked them for their responses to their CEO’s strategic vision and promises to shareholders. We asked whether they felt the promises could be met, how supportive they were of them and what the barriers were to implementing them.

Further information

If you’d like feedback on the impact of your leaders; if you’d like to unearth the operating principles behind your structure; or if you need an analysis of your reward strategy, give us a call.

Jennie Wright t 020 7856 7172

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Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organise people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organisations realise their potential.

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