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7 topics to catalyze executive team discussion in the second half of the year


Learn more about seven major themes worth executive team attention:

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Email Page to a Colleague

Dear members and prospective members,

Over the past three decades, the Corporate Executive Board has created an unparalleled network of business leaders spanning more than 3,000 leading institutions around the globe. While we host conversations with more than 5,000 CXO-level executives annually, we typically channel insight from the network through our individual membership programs, such as the CFO Executive Board, the Corporate Leadership Council (HR), the Marketing Leadership Council, and the CIO Executive Board.

Today (and periodically going forward), I want to review the agendas of individual executives we are privileged to serve and elevate a set of broad organizational themes that we think worthy of the executive team agenda. Across the first half of 2007, we have identified seven major issue areas that meet the bar:

In an era of intangible assets and heightened reputation risk, employee behavior matters more than ever. But substantive evidence now exists that greater investments in compliance programs don’t reduce employee misconduct.

Question for the executive team: How do we refocus the (increased) compliance expense base to yield actual reduction in potential misconduct?

Improving the performance of the “massive middle” of our performance curve is worth about $200 million dollars to the average Fortune 1,000 company, but the bulk of our energy goes to the performance “tails” (i.e., stars and laggards).

Question for the executive team: Can our management and compensation systems drive productivity gains across the core of our employee base, particularly in key knowledge work areas like Sales?

The growth (and now public ownership) of hedge funds and private equity firms will result in convergence between traditional sources of corporate finance and traditionally “alternative” financing.

Question for the executive team: Beyond short-term defensive tactics, do we have a plan for leveraging these asset classes to fuel and fund our growth?

"Moore’s Curse" (increases in demand and ancillary costs that more than offset technology cost gains) threatens to swamp the returns from IT investments at most companies. But controlling costs by “standardizing everything” threatens key elements of competitive advantage.

Question for the executive team: Do our IT and business leaders have the appropriate tools to determine (with precision) where the returns are?

As we have centralized, standardized, and (sometimes) outsourced the transactional elements of corporate administration, “business partners” have proliferated in our corporate functions…business impact has not.

Question for the executive team: Can we manage our "shadow consultancies” to deliver real business returns?

Lean manufacturing disciplines have broken the cost/quality trade-offs for (at best) 15% of our organization’s cost base.

Question for the executive team: How can we apply lean principles to our customer-facing and internal processes?

In an era where our dependence on suppliers for quality, availability, and innovation accounts for a substantial portion of our competitive advantage, we spend 1 dollar on supplier management for every 50 we spend on customer management.

Question for the executive team: Do we have a clear view of why a supplier would choose to do business with us?
Continue reading below to view more detail on each of these issues.

Sincerely,


Thomas L. Monahan, III
Chief Executive Officer
Corporate Executive Board

In an era of intangible assets and heightened reputation risk, employee behavior matters more than ever. But substantive evidence now exists that greater investments in compliance programs don’t reduce employee misconduct.
Question for the executive team: How do we refocus the (increased) compliance expense base to yield actual reduction in potential misconduct?

Companies are now highly sensitized to the cost of ethics infractions by employees, but most are just starting to size the (potentially enormous) impact on their own organizations. Complicating these efforts is the fact that more than half of all misconduct is never reported at large organizations, suggesting that potentially serious wrongdoing flies under the radar of senior management.

Despite greatly increased focus on managing these risks, most corporations have made very little progress in reducing the likelihood of misconduct, due primarily to the misconception that investment in compliance controls is the key to reducing risk. Instead, risk reduction is achieved, lowering employee fear of retaliation—the most important predictor of whether misconduct is being reported and (more surprisingly) whether it is actually occurring. The five key drivers of misconduct we identified in an unprecedented quantitative study covering 245 potential explanatory variables are:

1. Fear of retaliation and discomfort in speaking up;
2. Colleagues willing to compromise ethics for power and control;
3. Direct managers' lack of trust in and respect for employees;
4. Amount of variable compensation; and
5. Commitment to job exceeds commitment to company.

More revealing than the list of top predictors is one factor that did not make the list: proliferating compliance controls. This area, a focus of significant investment for many companies right now, appears to have limited influence on observed misconduct levels.

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Improving the performance of the "massive middle" of our performance curve is worth about $200 million dollars to the average Fortune 1,000 company, but the bulk of our energy goes to the performance "tails" (i.e., stars and laggards).
Question for the executive team: Can our management and compensation systems drive productivity gains across the core of our employee base, particularly in key knowledge work areas like Sales?

Every year since 2000, one membership program of ours after another has independently reached a similar conclusion—employee experience does not transfer well from one company to another. Rather, tenure in a company drives value creation, either through better problem avoidance or enhanced opportunity recognition. Time in seat really does matter, and the more of it the better.

While employee tenure represents a powerful lever to drive broad organizational performance improvements over time, two organizational capabilities—effective performance coaching and the ability to design compensation systems that truly motivate outstanding performance—can drive performance improvement in the near term. Unfortunately, these capabilities are in markedly short supply. Of 10 major management competencies CEB measures, coaching usually ranks the worst.

Efforts to improve performance through coaching fall victim to poor leader skill sets and inadequate focus. Contrary to popular senior leader thinking, you don’t just "pick up" good coaching skills along the way. Coaching is a specific, learned competency, not an instinct. And importantly, senior leaders who have not learned to coach effectively should not coach at all. Overwhelming quantitative evidence generated by CEB research teams shows that ineffective coaches, even enthusiastic ones, do more harm than good.

Moreover, merely having the ability to coach isn’t enough; this capability must be properly deployed. Large scale performance improvements require you to “move the middle” because that is where the bodies are; above-average coaching of your middle-performing sales staff, for example, will drive an 8–19% lift in overall sales performance.

Compensation—the largest single expense for most companies—is also an underutilized weapon to achieve performance improvement in the "massive middle"; fine tuning compensation programs can reliably deliver 20–30% improvements in productivity at the same expense level.

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The growth (and now public ownership) of hedge funds and private equity firms will result in convergence between traditional sources of corporate finance and traditionally “alternative” financing.
Question for the executive team: Beyond short-term defensive tactics, do we have a plan for leveraging these asset classes to fuel and fund our growth?

You can’t avoid the gaggle of articles on hedge fund and private equity activity. With mammoth deals (and pay checks), angry politicians, agitated employees, and the occasional collapse, there’s drama here for everyone. In the short term, senior leaders will have their eyes on activist shareholders and potentially unwanted acquisitions. As you prepare for potential assaults, don’t worry about your cash holdings. Our research strongly suggests that weak operating performance (not cash holdings) explains why companies end up as targets.

But what about the long run? Interactions with our network lead us to make a few predictions:

  • Greenspan, in general, is right—the academic research 20 years from now will find that, on balance, these investment vehicles spread risk and provide a positive macroeconomic lift.

  • So member companies should incorporate them into capital planning in two ways:

On the investment side (e.g., pension and cash holdings), the organizations that best take advantage of these alternative investments will develop strong capabilities in assessing complex counterparty risk and will treat these investments as illiquid assets.
On the borrowing side, hedge funds and private equity will increasingly diversify from acquisitions to public and corporate financing, providing a new source of capital to organizations, and they will use novel financial products that enable companies to pursue more aggressive growth bets.

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"Moore’s Curse" (increases in demand and ancillary costs that more than offset technology cost gains) threatens to swamp the returns from IT investments at most companies. But controlling costs by “standardizing everything” threatens key elements of competitive advantage.
Question for the executive team: Do our IT and business leaders have the appropriate tools to determine (with precision) where the returns are?

Internally, our research team pays homage to Gordon Moore’s (astonishingly correct) prediction that the cost of computing would halve every 18 months by transforming his law to a "curse." The curse is that reduction in computing costs is driving up two other costs that are harder to see, and therefore, harder to control.
  • Hidden Cost #1: The rate of increase in the ancillary costs of IT (real estate, power, environmental costs, and labor) appears to be growing faster (for the first time) than the rate of technology-cost decline.
  • Hidden Cost #2: The relatively low perceived cost of IT is causing business leaders to lose sight of Pareto points in the deployment of key technologies. In areas like corporate reporting, for example, the fact that Finance and IT can make seemingly endless amounts of information available has obscured honest dialogue about whether they should. As a result, complexity costs are rising for managers

Leading organizations are carefully analyzing where, when, and how they get paid for complexity in their organizations and working to simplify and streamline where they do not.

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As we have centralized, standardized, and (sometimes) outsourced the transactional elements of corporate administration, "Business Partners" have proliferated in our corporate functions…business impact has not.
Question for the executive team: Can we manage our "shadow consultancies" to deliver real business returns?

To their credit, the highest-cost corporate center functions (Finance, HR, and IT) have relentlessly found ways to drive efficiencies in transactional processing. Over the past decade, by automating, standardizing, outsourcing, and offshoring, most companies have radically shifted the cost of core support processes. While much work remains, the next wave of productivity from these functions hinges not simply on squeezing further automation efficiencies, but on boosting effectiveness. Suddenly, "business partnership" is the new mantra among the leaders of corporate functions, as they invest heavily in roles designed to engage and advise the line (e.g., HR generalists, IT business analysts).

The challenge to leadership teams is that the returns from these investments differ markedly across comparable organizations. Research from our programs suggests that—properly deployed—these capabilities can yield 10% profitability boosts. Improperly developed and deployed, they represent a deadweight loss to the organization.

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Lean manufacturing disciplines have broken the cost/quality trade-offs for (at best) 15% of our organization’s cost base.
Question for the executive team: How can we apply lean principles to our customer-facing and internal processes?

Even manufacturing companies that have seen the transformative impact of lean principles on their capital and labor productivity have been slow to migrate these insights to the customer facing parts of their businesses. Many service and retail companies have not applied these principles at all.

Leading organizations are rethinking traditional metrics like first call resolution, customer satisfaction, and loyalty with an eye toward reaping the same productivity improvements on the revenue line that manufacturers have been able to achieve on the COGS line.

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In an era where our dependence on suppliers for quality, availability, and innovation accounts for a substantial portion of our competitive advantage, we spend 1 dollar on supplier management for every 50 we spend on customer management.
Question for the executive team: Do we have a clear view of why a supplier would choose to do business with us?

The largest untold story of the past 20 years has been the steady movement of activity outside the company and into its supplier base; corporate performance at nearly all large companies is dependent on extended supply chains for raw materials, pre-assembled systems, customer service and support, branding and marketing, fulfillment, and even the vast majority of administrative activity.

In this world of dramatic interdependence, managing suppliers for a welter of outcomes beyond simple price levels is potentially a dramatic source of competitive differentiation. Yet most organizations have invested far too little managerial capacity and strategic focus into distinguishing themselves from competitors as "customers of choice" in the eyes of the suppliers that are best positioned to help them drive competitive advantage.

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