Mark Broussard’s Financial Return of the Performance Culture is a companion piece to Brad Peterson’s Creating the Performance Culture. Enjoy reading Mark’s article.
Financial Return of the Performance CultureTM
by Mark Broussard
The Performance Culture Model
In 2012, Strategic Asset Management Inc. (SAMI) introduced a scalable model of performance improvement based on organizational culture change. The Performance Culture model is constructed with four domains comprised of three elements each. One premise of the model is that financial performance of the company is directly correlated to the organizational culture. The organizational culture is defined by the set cumulative behaviors routinely exhibited by the organization during routine operations. The model is depicted in Figure 1 below.
The four domains of the model are; Performance, People, Purpose, and Predictability. The enabling domains of People and Purpose are necessary to develop the platform which guides behaviors with respect to the intent, values and focus of the company. The benefit domains of Performance and Predictability define behaviors which produce the tangible results of the organization. Every element and sub-element of the model establishes a set of behaviors which can be evaluated to determine the cultural state of the organization.
SAMI has defined four stable cultural states which can be correlated to the sustainability of financial performance. The four stable cultural states are defined as:
- Compliance (Planned)
- Objective (Proactive)
Every organization exists and operates in one of these stable states, which results in certain levels of financial performance. To change the stable state of operations, significant energy (financial investment) must be injected into the organization over a period of time. These are the two key variables, financial investment and time, which influence the ability to change the financial performance of the organization which will be described in more detail.
Just as there are many layers of culture in society; global, national, regional, and local, there are many layers of culture within organizations. To facilitate the application of the model based on need, the model was constructed in a scalable fashion to address layers of organizational culture from enterprise, division, function, process, down to individual roles. The evaluation of behaviors at any or all of these layers can identify opportunities to improve financial performance.
To properly frame the range of investment and return of implementing the Performance Culture, we must classify the organization to be engaged. The characteristics used for classification below can vary by industry, but, are sufficient for purposes of this paper. Organizations are classified as outlined in Table 1 below.
The ranges of investment and return quoted in the following narrative are from small to large.
Implementing the Performance Culture requires a mix of internal and external human resources to support the change process. Small organizations are typically resource constrained in their ability to support the process and are more dependent on external resources. Not ideal from a change management perspective, but, necessary to support ongoing operations and the change initiative. Large organizations typically have more flexibility to assign resources to support the process and develop deeper ownership of the proposed changes. Since the assignment of internal resources is highly situational dependent, the investments outlined are exclusive of internal resources.
The primary categories of investment to implement the Performance Culture are:
- Baseline Evaluation
- Design and Definition
- Behavioral Coaching
- Information Management
To understand the magnitude of the financial opportunity and the specific gaps that need closure, a baseline evaluation needs to be performed. The baseline evaluation is a data driven analysis that focuses on the current execution of business processes, the supporting behaviors, definition of the stable cultural state, and the resulting levels of performance. The baseline evaluation develops the value proposition and the justifying business case to proceed with implementation.
Category: Baseline Evaluation
Time Investment: 1 – 2 Months
Financial Investment: $125,000 – $500,000
The purpose of the Design and Definition phase is to design detailed business processes and define the set of supporting behaviors required to sustain a new level of performance. Most organizations start with some level of business process design, either formal or informal, that can be used to build improvements from. Large organizations usually have many well designed and developed processes that are typically functionally independent and not integrated properly. The design process is a critical change management step in implementation as the organization starts to; develop ownership of the process changes, recognize the functional interdependencies, define the necessary measurement and reporting, understand the new behaviors, and develop recognition that the new performance levels are achievable.
Category: Design & Definition
Time Investment: 2 – 3 Months
Financial Investment: $200,000 – $500,000
The largest category of investment to implement the Performance Culture is behavioral coaching. There are investment tradeoffs that can be made with ratio of internal versus external resources, time versus number of resources, number and sequence of assets, and organizational level of coaching. Despite these tradeoffs, the journey to sustainable behavioral change is largely a function of time and discipline. Behavioral coaching begins with specific and detailed training on the new behaviors and the respective business processes. After a period of time when the behaviors have been adequately demonstrated by the coaches, the coaching resources allow the organization to independently exercise the new behaviors. The coaches assume the role of subject matter experts, change management experts, and trusted advisors. The effectiveness of the coaching is dependent on the frequency and duration of the contact with the roles or functions being coached. For example, coaching of the leadership of the organization needs to be diligently scheduled and executed or it will be overcome and dismissed for “higher priority” issues and will not be very effective. Although the concept is simple, the execution is not easy! Organizations (and humans) will always want to digress to the previous stable state of operation. The energy to elevate the cultural state by changing the behaviors must be sustained over a significant period of time or the organizational inertia will overcome the change and no sustainable performance improvement will be realized.
The investment in behavioral coaching is mostly determined by two characteristics of the organization; number of staff to be coached and number of assets requiring engagement. The coaches must become a resident part of the organization and viewed as integral to the function being improved. All functions within the scope of the initiative must receive some level of behavioral coaching or we create a recipe for resistance to change. Given that we will encounter resistance and barriers, the behavioral coaches must be supported by a functional Steering Committee comprised of the organization’s most senior leadership. The Steering Committee must be a forum for the leadership to exhibit their new behaviors and hold the organizational accountable to achieve the new performance levels by challenging and eliminating resistance to behavioral change.
Category: Behavioral Coaching
Time Investment: 12 – 24 Months
Financial Investment: $1,500,000 – $10,000,000
The last category of investment to be outlined here is Information Management and it is a highly variable investment. Small organizations can suffice with very rudimentary and even manual information management systems in some cases. Whereas, large organizations need comprehensive and standard information management systems to understand performance and variations in performance between assets to sustain a Performance Culture. Most large organizations, and some medium, have already invested significant amounts in the implementation of enterprise management systems. The implementation of the Performance Culture may require minor configuration changes to support business process revisions, but, these investments are relatively minor and can be performed concurrent with implementation activities.
One aspect of the Performance Culture implementation which requires special attention is the measurement of behaviors and the effect on sustainability of performance. SAMI has developed a tool, APEX™, which is a proprietary software to document and measure required behaviors. The routine and periodic measurement of behavioral and financial performance during implementation is required to evaluate whether the organization has sustainably changed stable cultural states.
Category: Information Management
Time Investment: 1 – 6 Months
Financial Investment: $50,000 – $1,000,000
Summarizing the total investment for an organization to implement a Performance Culture:
Given the investments outlined above, the organization can expect substantial returns over the short term. Implementation experience indicates most organizations will ramp up to near steady state benefits in a period of three years.
The primary sources of return are:
- Production Volume
- Operating Expense
Higher production volumes are achieved by decreasing variability and increasing asset availability during implementation. The returns cited here are achieved in the absence of significant capital investment and are the result of functional process improvement supported by behavioral modifications. The improvements can only be sustained when the organization reaches the next level of stable cultural state.
Obviously, market conditions must be favorable (sold out, price stability, distribution capacity, etc.) for the organization to convert the additional volume into revenues.
Category: Production Volume
Volume Increase: 2 – 5 Percent
Financial Return: $5,000,000 – $50,000,000
Lower operating expenses are achieved by increasing the efficiency of the organization. The efficiency benefits can manifest themselves in increased staff productivity, reduced contracted services, reduced levels of material consumption, and reduced logistics fees. The improved understanding of; the overall mission, the functional interdependencies, and the renewed focus of the organization, allow for substantial gains across the organization.
Conservatively assuming operating expense of the company are twenty percent of revenues, the following returns have been achieved:
Category: Operating Expense
Expense Decrease: 10 – 20 Percent
Financial Return: $5,000,000 – $40,000,000
Existing Or New Assets
The scenario outlined above has been achieved in existing (or brownfield) assets that have reached steady states of operation. The Performance Culture model is just as applicable to new (or greenfield) assets and the organizations forming to support them. In fact, it may be more urgent in new assets as organizations are typically formed by recruiting resources from many and varied sources. These resources all arrive with some historical reference of their previous cultural state and the associated behaviors. To reach steady state operations in the most efficient and expeditious manner, the new organization must define expected behaviors to establish the desired cultural state.
The economics and timing are different for greenfield assets and organizations, however, the returns can be just as substantial. The returns will be largely based on cost and loss avoidance during the ramp from startup to steady state. The financial returns for a greenfield organization implementing Performance Culture will be defined in a future paper.
Summarizing The Financial Return On Investment
The Return on Investment (ROI) over a four year window for implementing the Performance Culture is substantial and represents a value proposition much greater than alternative improvement initiatives. Analyzing the investments and returns, ramped based on implementation experiences, we would expect an ROI of greater than 14:1 for any size organization.
Implementing the Performance Culture represents one of the most compelling business cases for any organizational initiative! The challenges of implementing the Performance Culture are many and difficult, but, the financial returns are worth the effort.
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