© 2006, 2007 Translating Good Governance into Operational Excellence: Does your Organization have the Capability to Execute its Strategy? Dr. John W. Alden

© 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”


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.”


Open Standards Frameworks Focus

Does your Organization have the Capability to Execute its Strategy?


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!


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


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


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


Low Maturity OrganizationsLow Maturity Organizations

People capability variationPeople capability variation

Transaction workers: +/- 100%Transaction workers: +/- 100%

Knowledge workers: +/- 1000%Knowledge workers: +/- 1000%


Management Visibility

In OutLevel 1

In OutLevel 2

In OutLevel 3

In OutLevel 4

In OutLevel 5

Exception(s)Exception(s)


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


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


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


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


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

++

--

++

++


Operational RiskOperational Risk

ItemMean1&2

34&5


++


Organizational CapabilityOrganizational Capability

ItemMean1&2

34&5


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

++

++

++


People ProcessesPeople Processes

ItemMean1&2

34&5


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


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?


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?


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.


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)


IT Risk is not well understood IT Risk is not well understood

IEEE Spectrum-Compilation by Robert Charette


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


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


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


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


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


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


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

Documents

© 2006, 2007 Translating Good Governance into Operational Excellence: Does your Organization have the Capability to Execute its Strategy? Dr. John W. Alden