The keys to real performance improvement

Executive overview By Jamie Bonomo and Richard Balaban

If the title caught your eye because you are looking for a way to make this quarters numbers, you can stop reading now. This isnt about how to take another 2% out of your cost structure, nor how to cut Sales, General & Admin for the third time this decade, nor even how to drive reduced costs through leading edge supply chain approaches. While sometimes appropriate and effective, these are too often tweaks or catch-ups, or are done to shore up problems elsewhere in the business. They may work for a quarter or even a year, but sooner or later one-off fixes lead to a poorly functioning business design. We want to talk about real performance improvement. The kind that is hard to achieve but worth the effort because it is sustainable, it changes your competitive positioning, and it leads to real rewards for your shareholders, your employees, and you. In our over 40 years of combined consulting experience, we have seen it done right and have seen it done wrong. There are dos and donts that make a difference. If you are a P&L owner looking for material and sustained improvement in the performance of your business, then this article may be for you. We have made an explicit choice to keep this piece straightforward. We want to earn the right to talk with you. If what we have to say resonates and you believe it explains why youve been having difficulty achieving the results you want, then we should talk.

Our experience tells us that most attempts to improve performance are incomplete, or even misguided, and result in hard-won, but ultimately insufficient and unsustainable shifts in performance. Worse, they sometimes damage the long-term prospects of a business by fixing something thats not really broken, but is easy to change: headcount or SKUs or discretionary spending. Efforts that are functionally focused or centered around a cost component or are not adequately informed by the external environment (competitors and customers) just dont work very well because they dont look at the whole picture. And

looking at the whole picture requires new analysis. No new information equals no new insight. We believe business design thinking* is the right tool to structure this analysis and lay the foundation for building sustained performance improvement. It focuses on the right questions and develops new answers which lead to real changes in the fundamental performance of your business. Having earned the right to help many clients over the years, we look forward to earning the right to talk with you about what we do. This perspective is meant to be a start.

Note: *One clarification before we go deeper. Most businesses are a suite of several business models or business designs. It is important to understand just how many business designs you are actually running, how they relate to each other in the context of your business design portfolio, and how this interconnectedness should affect your priorities. Changes to individual business designs need to be evaluated based on both the impact to that business and the broader effect across the portfolio (shared resources, common operating system elements, etc.). But in order to keep this piece as straightforward as possible, we will focus our discussion on improving one business design at a time.

Why performance improvement is so hard

Every business has a business design. Whether thoughtfully and explicitly crafted or evolved organically over the years, every business reflects choices made on several important dimensions. We at Oliver Wyman have written extensively on this topic, but the essence of our ideas is captured in Exhibit 1.

Your Organizational Architecture: Suppose you were creating a new business, and made all of the decisions abovewhat keeps the business working within those decisions? What will keep Sales targeted on the right customer? How to ensure the value propositions are understood and delivered by operations? These are the critical, bottom line, have-to-know answers. In a well functioning business design, these choices are consistent with each other and mutually reinforcing. In a business design that is broken, any one of these choices could be wrong, or inconsistent with the others, or not executed well enough. Real performance improvement is hard because, to get it right, the quality and consistency of each of these key choices needs to be evaluated in concert. We believe most attempts to improve a business fail long term because they are not holistic in this way. Focused attempts to cut cost in one function are fine, if you know that the function is grossly bloated or out of control. But if that is the case, shouldnt understanding the root cause be more important than eliminating the symptom? Most times Sales, General & Admin costs are high because Sales, Marketing, IT or Administration is doing something that isnt valued or understood by a customer (either internal or external). But most of what these functions do is valued by their customers. The challenge is in finding the nonvalue-added activities and eliminating the associated resources and activity. Functionally led, narrow approaches come in many flavors. It is not just the overhead crowd that gets this wrong. When was the last time your marketing and manufacturing managers had the classic debate: 'your costs are too highyou have too many SKUs.' How does the P&L owner break this tie? Often they dont: both sides get beat up a little, both promise to try, and things get better for a little while. Six months, a year, two years later the debate is still alive. Sometimes performance improvement efforts are so internally focused around cost and headcount

Exhibit 1: The business design framework Business designs are blueprints that are highly tuned to changing customer priorities and competitive dynamics. They are internally consistent and mutually reinforcing.
Customer Selection and Value Proposition What high-value customer opportunity am I targeting with what unique and differentiated customer proposition?

Customer Priorities Current Future

Value Capture / Prot Model What prot model will I harness to capture from this customer?

Competitor Business Designs Traditional Emerging

Organizational Architecture How can I align all elements of my organization people, processes, structure, infrastucture, and leadership?

How will I build in sustainability to my Business Model? Strategic Control

What scope of activities and assets are required? Scope of Activities

Business design involves changes around: Your Value Propositions: Which customers, with what needs, you choose to serve; what you offer them, and how and why it is of value to them Your Profit Model: How do you make money? (Sorry if that sounds blunt, but we all too often find companies are polite to the point of minimizing the importance of this question.) Your Scope: What assets and activities should your business control to deliver its value proposition? Your Strategic Control: What amongst the set of choices your business makes keeps a competitor from creating (at least) equivalent value for the same customers?

that they forget to ask two (at the very least) more fundamental questions: What will my customers really value? What are my competitors doing? Many of the cost cutting missions that weve seen over the years assume you already know everything you need to in this regard. We often hear 'we know what our competitors are doing,' or 'we understand our product and customer profitability,' or 'we talk to our customers every day, of course we know what they want.' But these statements may be based on old data and dated perspectives, or the wrong questions being asked. You need to take a hard look before you believe them. The environment and the customer are constantly changing, and what was known yesterday may be wrong today. New information is needed to get to a new answer. Many organizations overestimate what they do know and underestimate what they can know. So they do not recognize the information gap that exists in the everyday operation of their business. They rely too much on legends, anecdotes and history, and not enough on new insights. Closing the information gap is critical to developing new insights that can challenge the status quo and improve performance.

Finally, real performance improvement is hard because it cannot be delegated. What emerges from the holistic view is a set of insights and answers that will require hard choices. These choices will force you to make trade-offs across functions and investment alternatives, and they will require you to change some long held beliefs about how your organization makes money. Only you can do that.

Business design thinking is the key to getting it right

'Why is the business design approach better? Cant we just fix what is broken?' No, you cant just fix a part. Successful long term efforts address all the key elements of a business design and connect the answers to each other and to the whole P&L. It requires doing some homework, setting an agenda, and getting things done. All good efforts follow this same basic three-step flow, which is captured in Exhibit 2.

Do the homework
All good business decisions are better made after solid homework. Start by clearly articulating your current business design(s). This is not always straightforward; some business designs reflect a series of choices made over time based on short term pressures and opportunities. Inconsistencies among the puzzle

Exhibit 2: Business design for performance improvement framework

Do the homework

Set the agenda

Make it happen

Customer facing

Structural dynamics

Business design performance insights

Performance agenda

Quick wins / identied initiative delivery

Continuous performance initiatives

Tail Management Dashboard

Customers

Cost / unit

Value

Cost % of sales

Time
$k % $k %

Profit

Capacity

Current business designs Key customer response drivers Customer protability proles Competitor business designs

Detailed cost mapping Economic drivers and leverage points Relevant competitor cost positioning, performance, plans

Disconnect in business besign / system Front to back economics Customers and supplier economics Performance initiatives list and ranges of benets

Deeper economic evaluation and scoping Investments required Initiative prioritization Linkages and integration aspects Phasing and timing

Maintaining the vision Financial commitments and conversion Actionable plan denition Monitoring and measurement tools

Guidelines and system / process development for continuous improvement Organization, people, culture, metrics / rewards change

pieces of the business design may be evident early on and initial hypotheses begin to emerge to focus subsequent analysis. Are you offering a low price without low cost? Are you offering a superior service without getting a higher price? Are you selling a relationship to a transactional customer? Key elements of the homework open a window into both the customer facing and the structural elements of the business, and how well they fit together. Detailed analyses around topics such as de-averaged profitability (real and relevant and not based on accounting standards or classifications), customer needs analysis (e.g., qualitative and quantitative, met and unmet needs), competitive positioning, and competitors business designs round out the customer facing perspective. If you already know all this, it will be a fast and easy exercise. And if you dont know, you cant begin to really improve your performance without it. The customer facing perspective is complemented by understanding the structural dynamics of making money in your business under different economic and competitive scenarios. This may include detailed cost modeling to understand where the leverage is for the business. What are the important drivers of relative cost? Is it scale, experience, reach, distribution or local market share, cumulative R&D spend or something else? How is your competition exploiting these drivers? Are these dynamics changing? Where will the future leverage be? How fast do you need to get there? This analysis is done with rigor and discipline. It has to be bulletproof against the toughest internal naysayer to make the case for change. This means challenging the current methodologies and results. New data, analyses, and insights need to be developed and proven. Remember, no new information equals no new insights and no real impact. The homework is the foundation of the performance improvement insights. Specifically, it highlights where the current business design is not internally consistent, where your offering is out of step with your customers desires, or where the competition is out-performing you in either the elements of their offer or their ability to execute better than you can against a similar value

proposition. It shows whether and how your business design and/or its execution can be improved, and hence your business performance.

Set the agenda

Two primary activities characterize the agenda-setting phase. First, the customer facing and structural analyses are tied together to form an integrated, holistic view of how the business makes money, and how we do things around here. Which customer facing decisions drive cost into the structure of my business? Are these valued by customers and am I able to capture this value through higher prices, share or margins? Does my structure limit my offering to the customer? How does this have to change? Should I reconfigure my legacy asset structure in some way? Outsource, or partner, or double down my asset bet? Does my organization support my business design? The second major category of analysis is to model the full economic value chain for my extended business neighborhood. This means understanding my value chain and my customers and my suppliers. How is my product or service used by my customer to serve his customers? What can we do to change the performance of our customers business? How can we capture some of the value created by doing this? Can you eliminate costs for your suppliers? There are many examples of how this thinking creates differentiated offerings. It can often lead to business designs that are much stickier with customers than traditional ones. Integrating your value offer into the customers value chain can make you that much harder to dislodge as a supplier. We now have a list of cost and value quantified actions to improve performance around which we can build an action plan; investment analysis, resource planning, identifying interdependencies and constraints, and program managementa phased plan that is ready for execution.

Make it happen
Doing the homework is hard and setting the agenda is critical, but actually executing the plan is where
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the biggest challenge lies. In a way, we all know this, but we usually shy away from acting on it. This is where true leadership is required. There is much that can be done along the way to anticipate issues and to prepare the organization for execution, but this is where you will ask people to change what they have been doing for a very long time. Working the people part of the problem is just as important as proving what needs to change, and should be done from the very start, and simultaneously. Good execution is all about the details. The old saw that 'what gets measured gets managed' is true. Depending on the complexity of the required changes, a detailed implementation plan is often constructed that establishes roles, responsibilities, metrics and key milestones. An implementation team may be convened to monitor progress and regularly report to leadership. In more straightforward situations, the formality of a team can be eliminated, but the disciplines of measurement and monitoring are integral to your success. Over the longer term, as some of the underlying concepts such as de-averaged profitability or customer research are proven to be valuable, they can be more formally routinized as part of the ongoing management system. New metrics, once established, can be incorporated into incentive structures, and rewards can be better aligned with the true drivers of success in the enterprise. Training programs can be developed to educate the workforce in using these new tools.

In our experience, the performance agenda will include a number of quick wins that deliver valuable bottom line improvements in the short to medium term. These initiatives are directly driven by the analysis and consistent with the overall program for sustained performance improvementas we have said previously, they are not tweaks or catch ups. Flawless execution is requiredthey are the first moves of your agenda. Their success will send a powerful statement of intent and set the tone of the overall effort. However, many people who think they understand the importance of execution put all their effort into it and limit their analysis to a team offsite where decisions are made based on what is already known. Thats the wrong take-away. Remember, no new information means no new insights. Youve got to do the homework first, set the agenda, and then execute well.

In closing
Real performance improvement is hard work. And the best chance for success, indeed the only good bet, is the right combination of a structured and holistic approach, together with robust analysis, and a tight hold on the process. It requires working the people side of the problem simultaneously with working the proof. We think that business design thinking is a very good guide. Taking the time to do the new analysis and challenge the old legends results in changes that have real impact and are sustainable. The effort is efficient and offers proof, not opinion, that you are asking your organization to do exactly whats needed. That has to be a better path forward for you and your team.

Oliver Wyman
Oliver Wyman is building the leading global management consultancy, combining deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm works with clients across a range of industries to deliver sustained shareholder value growth. We help managers to anticipate changes in customer priorities and the competitive environment, and then design their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities.

Richard Balaban, London

richard.balaban@oliverwyman.com

Jamie Bonomo, Pittsburgh

jamie.bonomo@oliverwyman.com

+44 (0)20 7235 5444

+1 (412) 355 8842

Both Richard and Jamie are senior partners at Oliver Wyman with 40 years of combined consulting experience in strategy and performance issues.

www.oliverwyman.com
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