Businesses encounter unusual challenges in the face of the unfolding economic crisis of which the duration and impact is yet unknown. Uncertainty is now “the new norm” for Russia and other countries integrated with it. Crisis is the time to revise the ways and means of how things are done. It is time for action, and this implies more than ever more efficient management systems.
CRISIS: THREAT VS OPPORTUNITY
Organizations are complex social systems with a high degree of inertia. This is why it is usually so difficult to challenge the status quo – the silent compromise on how processes are expected to flow regardless of their productivity and impact. In recent years of continued growth we have seen numerous cases when even farsighted managers or business owners who realized that something was going wrong, postponed addressing critical issues that required extra efforts (no “headache” approach). As with a person, crisis is a natural opportunity for any organization to leave their comfort zone, kill organizational inertia and look for sources of efficiency. For an effective leader the crisis will serve as a chance to consolidate a critical mass within the company around a changed agenda, and lead the whole company to radical improvement.
MANAGEMENT SYSTEM IS THE ULTIMATE SOURCE OF EFFICIENCY
As the saying goes “if the axe is dull and the edge is blunt, more strength is needed but skill will bring success.” Prudent management is the core driver for effectiveness both through expanding the pool of available resources and making efficient use of them. Simple and trivial as it may sound, the real challenge is in finding a systemic method to make it happen. This comes to questions such as “where to start?”, “what’s more important” and “how to assess the management system?” We found five management subsystems critical for this task - Strategy, Performance, Operational Planning, HR and IT. Businesses can substantially leverage these subsystems to achieve considerable gains in efficiency. This brief addresses each of those in the context of their impact on the performance of business in times of crisis.
STRATEGY: WHY AND WHERE YOU GO?
Many managers fall into the pitfall of trying to fix immediate problems through firefighting without linking the actions to a strategic approach and this threatens to downgrade the strategic position. Generally, two broad sets of factors significantly lower the barriers to reshaping market structure –technological disruption and economy wide crisis. Thus, a crisis may turn into a blessing for ambitious companies that think of changing market structure and reinforcing a superior position. Companies will face tough choices: downscale vs expand (crisis hits not only you but also your competitors), keep vs upgrade the business model, diversify vs specialize the activities; engage in mergers and acquisitions vs building up protective strategies. Strategy should become a process of continued strategic analysis, dialogue and decisions rather than a rigid plan or predefined sets of actions. But most companies fail not because of poor strategies but because of poor execution. A motivated team with a shared vision and ruthless execution discipline is critical. Strategy is no more a prerogative of a few at the top, but it should be more than ever an agile and inclusive process to thoroughly consider all major aspects of internal and external realities. For example, we have worked with a bank during the 2009 crisis that significantly increased its market share and maintained profitability primarily through instituting an inclusive process of strategy discussions and adjustments and sharpening its focus on the SME and consumer lending segment.
PERFORMANCE MANAGEMENT: WHAT YOU MEASURE THAT YOU CONTROL
Crisis times urge fundamental reviews on how and what we measure, analyze and accordingly react on. Even companies with rigorous performance appraisal systems may face this challenge as business goals and priorities, as well as the definition of success change during a downturn. The common problems we observe are:
- Tracked performance indicators do not reflect the key success factors of the new reality.
- Tracking is an ad-hoc process (certain processes are not tracked at all).
- Most key performance indicators are tracked formally.
- The company’s strategic goals are disconnected from individual performance measurement throughout the organization.
- Top management's main focus is only on short term targets.
- Short term goals are not linked to long term performance.
- Poor practice of performance reviews.
For example, in one of the companies, the top line financial metrics showed great performance, but the more fundamental indicators we advised to track such as customer satisfaction, new product launches, employee motivation index and turnover ratios showed significant mid-term threats. With an effective performance management system companies are able to create effective strategy execution mechanisms, align the entire organization towards achieving set targets with a laser sharp focus.
OPERATIONAL AND FINANCIAL PLANNING: EFFICIENCY GAINS DUE TO BETTER COORDINATION
Planning is a harsh challenge in crisis times when most variables are unknown and it is particularly difficult to make realistic forecasts. For many businesses it is hard to overcome the temptation to dismiss planning and react on an ad hoc basis. Nevertheless, in such cases the business is at risk of narrowing the line of sight as case specific reactions may turn out to be irrelevant in a wider context. Every day businesses lose value due to poor planning and lack of coordination. Situations when procurement teams are not aware of plans for sales, inappropriate capital budgeting, unaffordable dividend policies, wide spread planning fallacies and other pitfalls. The result is irregular supply, compromise in quality, foregone opportunities and cash shortage. With all apparent difficulties at hand, the planning process may evolve to a much more flexible process and a source for creative solutions. If appropriately handled, the process can lead to collective efforts in finding relevant solutions such as reengineering of business processes, costcutting initiatives, innovative approaches, etc.
HR: ALIGNMENT OF INTERESTS IS KEY TO SUCCESSFUL EXECUTION
Usually strategic or operational plans or KPI systems fail when the interests of people across organizations are not aligned to corporate goals. To achieve these leaders can use two powerful levers - corporate culture and compensation mechanisms. Culture defines performance in the long term, and best compensation systems reflect performance driven motives. We have seen many organizations achieving radical shifts in a short period of time due to intelligently designed staff compensation mechanisms. It is not only about linking pay with performance it is about creating fully aligned companies. Achieving alignment helps execute painful initiatives popular during a crisis such as downsizing overstaffed units, reshaping the organizational structure to eliminate redundancies, and outsourcing or insourcing certain functions, stretching the sophistication of tasks, minimizing internal politics and mobilizing efforts around healthy ambitions.
IT: BEST DECISIONS ARE DATA-DRIVEN
In this era of big data, many businesses are still managed by gut feeling and intuition. As an example, old fashioned information systems make teams spend excess time to perform routine communication tasks. This is value destructing in the face of competition. On the other hand, we observe businesses having complex information systems, but those are not aligned to strategy and, for example, a part of the critical information (such as customers, costs, etc.) is scattered across systems. Thus, the real challenge is to find the right set of IT solutions fully synchronized with business needs. IT is usually an expensive investment, but, paradoxically, a crisis can be the optimal time for making such an investment, as buyers will have stronger bargaining power and the requirements from systems can be formulated much better given the imperative of efficiency.
TIME FOR SYSTEMS THINKING
The pressure on business leaders is tremendous as they are expected to deal with numerous problems both internally and externally. Whereas some leaders choose one time solutions and act situationally, those who apply a systems thinking approach and invest their time in developing efficient management systems will have better chances to be amongst the winners once the waters of the economic tsunami have settled down.