Operational Transparency - A Business Ethics Path to Competitive

Advantage

Firms, and the managers within them, are always looking for that next source of
advantage over the competition, while at the same time struggling to address
current internal inefficiencies, conflicts, and performance issues. Having one foot
in the present to address the issues of the day, while planning and preparing for a
successful future, is a constant dilemma facing today's manager.

Historically, transparency has been seen more as an ethics practice for third party
analysis of an institution's finances and practices; however, the more widespread
study of business ethics and organizational behavior is pointing to operational
transparency as a management practice that can both address those daily
management issues, and also become an internal source of sustainable competitive
advantage that is difficult for competitors to imitate.

This article will explore the concept of operational transparency and suggest
management practices in the areas of strategy development and implementation,
decision-making, and performance management to achieve transparency, improve
performance. and create a source of sustainable competitive advantage.

Transparency

Transparency is a trust building mechanism generally used to "open up" the books
or practices of an organization to stakeholders with a "right to know". Much has
been written about transparency in public companies and governments, but even
with the importance of trust in all business transactions and relationships, little is
published about how to use this trust building mechanism to improve
organizational performance at the operational level. When employees know the
true how and why behind organizational strategy, decision-making, and
performance management, they generally feel more trust toward the management
of their organization and thus can become more committed and engaged in their
work.

Although fear of strategic information falling into competitors' hands from internal
sources can limit the potential for complete transparency, strategic sharing and
coordination of key internal operating information can create trust in the system
and a knowledge of how each player contributes and is impacted by the system.
The creation and requirement for transparency and sharing of information in
strategy, decision-making and performance management establishes an
environment where goals, and the resources and behaviors used to achieve them,
can be aligned for greater cooperation and performance.

Transparency in Strategy

Drawing from the resource-based view of strategy (See Barney 1991) and the
concept of strategic leadership (See Ireland & Hitt, 2001), managers can build a
competitive advantage by doing a better job of choosing between competing
alternatives and aligning internal resources than their competitors. At a high level
this breaks down to openly communicating and aligning organizational priorities,
visibility to functional area contributions to those priorities to those who need to
know, and a visible connection between each employee's work activities and those
organizational priorities.

However, this is not solely an executive concern, but instead, each manager and
employee is critical to this strategy's success, and it can be implemented solely at
the functional or team level in the absence of organizational support. However,
when each manager and employee understands the organization's priorities and has
specific information about how they contribute to them, and those contributions are
directly aligned with related contributions firms, can achieve improved teamwork
and performance.

Transparency in strategy can be achieved at any time, but the best starting point is
during the annual planning and budget creation cycle, specifically when executives
and managers are submitting goals to be eligible for quarterly bonuses. All too
often, this critical time passes with a rush of activity, but little sharing of
information or coordination from above or among functional area managers. The
worst case result is a broad range of unrelated or conflicting goals that do not
reflect the organization's stated or unstated priorities.

A best case scenario would have executives outlining the key priorities and
performance objectives as a team, and then negotiating each functional area's
contributions to those outcomes. Critical to the success of this negotiation is single
ownership of goals and firm commitments from each manager about the inputs
they will provide to the others as a result. A general example of this would be an
organizational priority of increasing sales by 20%, a sales goal of 1000 units per
month, and operations committing to processing the requisite number of sales files
to a set standard each month. The same process is followed for projects falling
outside the core business operations, and these commitments become the
foundation for bonus goals and budgets. This information is then becomes the
strategic operations plan shared across the organization to those who "need to
know", and becomes the core performance management and accountability agenda
for regular (weekly/monthly) management, team, and employee meetings and a
key measure for evaluating alternatives in the decision-making process..

Transparency in Decision-making and Change Management

The visible outcomes of decision-making at all levels are very telling about the
firm's and individual managers' values and priorities. Although not all strategic
decisions can be played out in a public forum for competitive and confidentiality
reasons, the outcomes of those decisions (changes to organizational structure,
design, resource allocation, product direction etc.) should be communicated as
thoroughly as possible including the rationale and criteria behind the decision to
help employees understand the decision and make a better connection between the
firm's espoused values and those used to make important decisions. Additionally,
those decisions related to changes to organizational policy, procedures, and
systems should be folded into a change management process that provides
transparency to how the decisions are made, provides for functional area input, and
thus builds stronger trust and commitment to both management and the decision
outcomes.

A best practice in transparent change management systems begins with executive

support and devotes an administrator to act as a conduit for proposed changes and
facilitate a monthly meeting with leaders of the various functions (internal
stakeholders) to review executive summaries of the proposed changes and approve
or deny the proposed changes based on the business merit and impacts on internal
and external stakeholders. The approved changes then move to a more
operationally focused group of internal stakeholders to discuss at a more detailed
level how the changes would impact their function and identify the tactical plans
and resources necessary to schedule and implement the changes as smoothly as
possible. The executive summaries and outcomes are communicated to the internal
stakeholders and maintained on an internal website that provides employees with a
quick glance summary and detailed information about coming changes and plans.
This type of system demystifies the origin, rationale, and content of change,
ensures involvement and coordination and in essence makes change management a
transparent process rather than an unpredictable event.

Transparency in Performance Management

The translation of high level strategies into cascading goals and performance
management has been addressed in models such as Management by Objective
(MBO) and the Balanced Scorecard. However, a primary goal of transparency in
performance management is to achieve visibility, alignment, and accountability
across the organization's goals and objectives. This is achieved through the strategy
process above where the quality and quantity of inputs and outputs required by
each of the internal stakeholders to make their contribution to the overall firm
goals are negotiated and translated into single owner outputs. These negotiated
goals form the basis for performance evaluation and goal vs. actual outcome
become a priority agenda item at the weekly management, team, and one on one
employee meetings so that issues threatening the agreed upon output can be
addressed proactively and teams can work internally and across functions to
address both challenges and opportunities related to meeting and improving the
related performance. The transparency to the specific goals and outcomes and
active management and communication of those results reduces role ambiguity and
negative conflict and creates a high performance environment where employees
can feel that their contributions are being fairly evaluated against their performance
expectations, and those of their colleagues.

Conclusion

Leaders who can build trust and commitment among their employees through
effective management practices have a definite source of competitive advantage.
This article briefly discussed some actions firms can take to make their key value
creation processes more transparent and effective. Through the creation of
transparent systems and processes for strategy development, decision-making, and
performance management, firms can not only achieve higher levels of performance
through alignment and accountability, but also achieve higher levels of trust and
commitment from employees who will be able to better understand and participate
cooperatively in the pursuit of the firm's values and priorities in daily operations.