Exclusive Research

EXCLUSIVE RESEARCH

CEOs Confront a New Age of Leadership How CEOs successfully overcome internal cultural barriers to implement effective performance management

THE PERFORMANCE MANAGEMENT EXCHANGE

in partnership with THE POWER TO KNOW octo b er 2 0 0 7

in partnership with THE POWER TO KNOW

Today’s CEOs face a wider variety of challenges than ever before. These hurdles include game-changing advances in technology, the push to “go green” and the globalization of the world’s economy. One tool that can help CEOs manage their diverse challenges is performance management (PM). In fact, most CEOs acknowledge the value of PM, noting that it’s a very important strategic initiative, and that it can have a positive impact on shareholder value (see Chart 1, “CEOs Value Performance Management”). However, too many companies fail to benefit from all that performance management has to offer. Specifically, CEOs say that their biggest barriers to effective PM involve cultural factors, such as a fear of accountability, rather than technical factors like the development of appropriate metrics to measure. The good news is that CEOs are well-suited to lead cultural changes within their organizations, and there are specific techniques they can use to facilitate these changes. These are some of the findings of a new research study conducted by BusinessWeek Research Services and SAS. This study was conducted among a total sample of 317 CEOs, CFOs, CIOs, CMOs and COOs within large and midsize companies. In addition to exploring current perceptions, the study also sheds light on some PM best practices

C H A RT 1

CEOs Value Performance Management PM is believed to be very important and to have a positive impact on shareholder value 80%

59%

that CEOs can use to communicate with the other members of the C-suite and improve their corporate performance. It may be time for CEOs and their colleagues to take a second look at performance management.

CEO Priorities

Why do CEOs believe that performance management should be a priority? The answer probably lies in corporate agility. The vast majority of CEOs believe that their organizations are deficient in their ability to respond and react to market risks and opportunities. Only two in 10 CEOs describe their companies as being “very agile.” In addition, two-thirds of CEOs say that it’s very important for their companies to become more agile in order to reach their strategic goals (see Chart 2, “CEOs See an Agility Gap”). According to our research results, CEOs are the members of the C-suite who are most interested in improving agility. Specifically, CEOs are the strongest advocates for investing more resources into processes and initiatives that will increase their organizations’ responsiveness to market conditions. In addition, CEOs want to improve their organizations’ internal collaboration efforts and workflow processes, all of which are highly related to agility (see Chart 3, “Concern with Fundamentals That Drive Agility”). Since CEOs pursue these kinds of goals, it makes sense that CEOs want to pursue better performance management. After all, at their best, PM tools allow organizations to leverage data so that they can forecast the future, leading to better performance and faster responsiveness. Specifically, PM leverages organizational data to deliver fact-based insight, which is usually vastly superior to decisions based on internal politics or mere intuition. And organizations that implement PM in a systematic way can eventually develop “predictive PM,” in which they run experiments based on data to anticipate situations, proactively leverage opportunities and maximize profits.

Common Cultural Ground PM is a very important strategic initiative

PM has a positive impact on shareholder value

N=59 CEOs Source: BusinessWeek Research Services and SAS, April 2007 THE PERFORMANCE MANAGEMENT EXCHANGE

CEOs also want to pursue “smart growth,” or a kind of growth that focuses on both the top line and the bottom line. Specifically, more than half of CEOs say that they will focus on a balance between top- line and bottom-line growth during the next two years (instead of favoring one or the other) (see Chart 4, “The Aggressive Pursuit of Smart Growth”).

THE PERFORMANCE MANAGEMENT EXCHANGE Copyright © 2007 The McGraw-Hill Companies Inc. and SAS Institute Inc. All rights reserved. 

in partnership with THE POWER TO KNOW

Generating Cultural Change

C H A RT 2

CEOs See an Agility Gap



CEOs want to be agile, but see significant gaps 67%

20%

Being agile/responsive is “very important” to strategic goals

CEOs who describe their company as “very agile”

N=59 CEOs Source: BusinessWeek Research Services and SAS, April 2007 THE PERFORMANCE MANAGEMENT EXCHANGE

How do CEOs plan to achieve smart growth? Our results show that, on average, CEOs believe that performance management is an optimal tool for pursuing a balance of top-line and bottom-line growth. To gain a better perspective on the overall impact of performance management, BusinessWeek Research Services compared the views of CEOs from companies that are successfully executing PM with the views of CEOs from companies that are less successful with PM. Specifically, CEOs from PM-effective companies are more likely to enjoy the following kinds of corporate advantages: greater agility and responsiveness to opportunities and threats; enhanced innovation practices; acquisition of new customers and improved customer loyalty; new distribution channels; improved business alliances and partnerships; improved internal collaboration; enhanced up-selling and cross-selling; improved business processes and workflow; improved organizational effectiveness; and improved risk evaluation techniques. And CEOs are not the only members of the C-suite who are interested in achieving smart growth through the use of performance management; the rest of the C-suite shares the same goals. Therefore, the quest for smart growth through effective PM can provide common ground within the C-suite, and a way for all members to get on the same page.

As the leaders within their organizations, CEOs are perfectly placed to facilitate the cultural changes that are needed in order to execute effective PM. For example, CEOs can leverage the common pursuit of smart growth to foster greater support for PM initiatives. One of the greatest barriers to effective performance management is a fear of accountability. Many people are afraid that if their performance becomes transparent, they will be punished for deficiencies. However, to counter these fears, executives can publicize the kinds of benefits that PM can bring. After all, psychologists like B.F. Skinner demonstrated long ago that it’s more effective to inspire people through the use of rewards than by the threat of negative consequences. Part of the organizational cultural change process may involve convincing employees that the established performance targets and expected rewards are realistic. Chris McCann, CEO of 1-800-FLOWERS.COM, says that “the first challenge for us as a company was getting people to believe that we could achieve the results [and] targets that

C H A RT 3

Concern with Fundamentals That Drive Agility Few CEOs are satisfied with the performance of specific initiatives that can lead to agility (% indicating satisfaction with specific initiative)

33%

33% 28%

Business processes and workflow

Improved risk evaluation techniques

Internal collaboration

N = 59 CEOs Source: BusinessWeek Research Services and SAS, April 2007 THE PERFORMANCE MANAGEMENT EXCHANGE

THE PERFORMANCE MANAGEMENT EXCHANGE Copyright © 2007 The McGraw-Hill Companies Inc. and SAS Institute Inc. All rights reserved. 

in partnership with THE POWER TO KNOW

C H A RT 4

The Aggressive Pursuit of Smart Growth (% focusing on a specific type of growth) Focus on top-line growth Focus on top- and bottom-line growth Focus on bottom-line growth

36%

2007

2009

20%

48%

54%

16%

26%

N = 59 CEOs Source: BusinessWeek Research Services and SAS, April 2007 THE PERFORMANCE MANAGEMENT EXCHANGE

we laid out.” In addition to promoting the kinds of effective predictions and decisions that can be generated from PM, it can be helpful for executives to discuss specific smaller benefits so that everyone in the organization understands that both employees and the overall corporation will win when appropriate measurement takes root. CEOs who have organizational performance facts at hand can gain the trust of their colleagues and employees. Although the thought of revamping a performance management system can be intimidating, executives can make this change more manageable by pursuing a series of small incremental improvements. As the saying goes, the longest journey begins with the smallest step. For example, McCann used a three-step process to systematically improve his organization’s performance management system, focusing on different goals at different stages of growth. Specifically, 1-800-FLOWERS.COM first pursued “human capital development” in order to measure employee performance and put the right people in place. Next, the organization pursued “capability sourcing” to develop metrics for every aspect of its performance. Then, 1-800-FLOWERS.COM was able to focus on “PEP” or “performance enhancement programs.” In addition, to promote a culture of rewards and benefits, executives can publicize concrete real-world examples in which improvements were gained from the

measurement process. These examples can come within their own companies or from successes achieved at other companies. In order for organizations to achieve cultural change, it’s also important for them to have employees who have the right skills. McCann acknowledges that skill sets were an essential factor as his organization implemented new PM processes: “First, we needed to look and say, OK, do we have the skill sets in the right places and the people with the experience to help us transform the company? So it started with having to bring in a couple of people that had the right skill set.” Finally, the PM process can progress more effectively when leadership comes from the top. Successful PM involves change management, and everyone in the organization will be looking at the example set by the CEO. As Chris Rogers, Director of BusinessWeek Research Services, points out, “In order for an organization to really drive performance management, the executive leadership has to make it a high priority throughout the organization, among all business units and right down to each individual employee.” When the CEO sets the proper stage for performance management by finding common ground with colleagues and promoting benefits, the rest of the C-suite may follow along, creating the opportunity for everyone in the organization to become a PM believer.

THE PERFORMANCE MANAGEMENT EXCHANGE Copyright © 2007 The McGraw-Hill Companies Inc. and SAS Institute Inc. All rights reserved. 

in partnership with THE POWER TO KNOW

Developing a Culture that Embraces Performance Management

 t its best, performance management offers a fact-based A path to smart growth. n The comprehensiveness of smart growth can be used to drive internal support for PM. n PM programs can be driven from the executive suite, with the CEO as the leading advocate. n When CEOs set clear and obtainable goals, organizations can develop a culture that supports PM. n If the corporate culture is not ready for accountability, PM results will probably lag. n

Study Methodology

BusinessWeek Research Services (BWRS) launched a research program in February 2007 to determine C-level executives’ views on the use and value of performance management. This program was designed to develop ideas and insights on how companies can optimize performance

management to drive accountability through all areas of a business to achieve profitable growth. To capture this information, the project used both quantitative and qualitative methodologies, including online survey interviews in February 2007 with 317 C-level executives in large and midsize companies from across the globe. In addition, in-depth one-on-one phone interviews were also conducted with senior officials at large and midsize companies known to be actively involved in performance management, including 1-800-FLOWERS. COM, Allstate Insurance, Energizer, Holt Cat, ICO Holland, Maine Medical Center and TD Ameritrade. Interviews were also conducted with several leading industry analysts to provide context to the findings.

This research article was funded by a grant from SAS but was written by Chris Rogers and Marc Scheer, PhD, both of BusinessWeek Research Services. The editorial department of BusinessWeek was not involved in this project. For more information, please contact Chris Rogers at [email protected].

THE PERFORMANCE MANAGEMENT EXCHANGE Copyright © 2007 The McGraw-Hill Companies Inc. and SAS Institute Inc. All rights reserved.