Dedicated to improving the relevance and effectiveness of performance and reward
parc
masterclass
Assessing the
Effectiveness of
Organisations:
Is your Company
Successful?
6 July 2006 Kent House, Knightsbridge
post meeting notes
Performance & Reward Centre
CountyMark House
50 Regent Street
London W1B 5RD
Tel: +44 (0)20 7432 4565
Fax: +44 (0)20 7470 7112
E-mail: enquiries@parcentre.co.uk
Web: www.parcentre.com
parc
masterclass
Assessing the
Effectiveness of
Organisations:
Is your Company
Successful?
6 July 2006 Kent House, Knightsbridge
Assessing the Effectiveness of Organisations: Is your
Company Successful? - Thursday 6th July 2006 - MG v2
Presenter
Sir Andrew Likierman is Professor of Management Practice at the London Business
School (LBS), non-executive Director of the Bank of England, Barclays Bank plc and
the Tavistock and Portman NHS Trust. His previous posts at LBS have included
Deputy Principal of Accounting and Financial Control. He is currently researching,
lecturing and consulting on how organisations can improve their choice and use of
performance measures.
Sir Andrew previously worked in both public and private sectors. In the private sector
he ran a textile plant in Germany and was Managing Director of the overseas division
of Qualitex Ltd. He also started and then sold his own business selling business
books. He has been non-executive Chairman of the Economists' Bookshops Group
and of MORI Ltd. In the public sector he was a Member of the Cabinet Office Central
Policy Review Staff (the "Think Tank") and recently completed a ten year period as
one of the Managing Directors of the UK Treasury. In his professional capacity,
Andrew is a past president of the Chartered Institute of Management Accountants and
has been a member of a number of official enquiries, including the "Cadbury
Committee" on corporate governance. He has written three books and over 150
articles."
Contents
Introduction
3
What does "success" look like?
3
TSR - "the indicator to beat"
4
Checklist exercise
5
Copyright © 2006 PARC Ltd. All rights reserved.
Published by PARC Ltd CountyMark House, 50 Regent St, London W1B 5RD, UK Telephone +44 (0)20 7432 4565
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Contents continued...
Implications for HR
6
HR: facing up to the analysts?
7
Measuring human capital
7
Measurement v assessment
8
Conclusion
10
Footnotes
11
Forthcoming events
11
Appendix 1
12
Appendix 2
17
Contents
2
Introduction
According to Professor Sir Andrew Likierman who led this Masterclass, "measures of
organisational success are primitive" and views vary between different interest groups
on how to define "success". He also argued that lack of robustness and coherence
here gives HR an opportunity to define its own role in determining what constitutes
success for the organisation and so influence assessments of business value.
This paper discusses these interrelated issues, drawing on Professor Likierman's
analysis and the experience of PARC members on what his ideas really mean for HR
professionals.
What does "success" look like?
The underlying presumption when seeking to define success, Professor Likierman
says, is that the organisation knows what success looks like through clearly defined
objectives which are shared and accepted by shareholders. This is not always the
case however. In some instances, objectives are not clear; while in others the views
of the management and the expectations of the market differ - leading to volatility in
the share price and overall market value.
He suggests that a useful starting point for defining organisational success is to ask
ourselves what it really looks like. Criteria such as size, as expressed through market
capitalisation1, provide a headline guide; while rankings based on whether the
organisation is admired by others2 are purely subjective "feel good" indicators and
have no real substance. Notions of "excellence" do not help determine what success
looks like either. Some of these derive from the organisation having robust support
systems. Others stem from the fact that an organisation has a charismatic leader
whose strong characteristics have captured the imagination - but with no evidence
that such attributes have actually enhanced organisational performance. In fact , over
time, they may well have detracted from success.
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Assessing the Effectiveness of Organisations:
Is your Company Successful?
TSR - "the indicator to beat"
For Professor Likierman, the total shareholder return (TSR) model provides the most
robust measure of success. It distinguishes itself from other models, based on a
broader range of stakeholders (including employees and Society as a whole) or a
management model (which is exclusively company focussed) simply because TSR
constitutes "the ultimate signal in a market economy".
However, TSR is not a perfect tool because of a number of interrelated factors i.e.:
• "Success" is relative - it depends not just on how well the organisation are doing, but on how
competitors are performing;
• It also depends on the organisation's ability to identify and compare itself with genuine comparators
i.e. organisations with broadly similar business models. This is not always easy because a true
competitor may not exist (as in the case of Microsoft) or the basis of comparability may have changed
over time (which, say, makes comparisons between Coca Cola and Pepsi Cola difficult today because
of moves into different product ranges);
• Past performance is not an indicator of future success. One member commented, "using TSR is like
driving by looking in your rear view mirror". In fact, Professor Likierman argues, there may well be an
inverse correlation between past and future success, insofar as, it is often easier to perform better
following a bad year.
• Markets do not reflect current value accurately because of lags between when a management
decision is made and when it impacts on the profitability of the organisation. Thus, it can be argued
that today's management is benefiting (or indeed suffering from) the decisions made by its
predecessors. This makes paying for performance problematic.
• The robustness of targets and plans and, in particular, whether management is able objectively to
assess its own performance against them is open to question. This is because of our "repeated
capacity to rewrite history and justify why things went differently than we thought they would at the
time plans were drafted";
• Our perceptions about the opportunities for the organisation at any point in time are usually unclear
because, regardless of the quality of our intelligence and ability to interpret what may be, perfect
knowledge of the future is not achievable. Aero engine manufacturers, Pratt & Whitney, provide one
example here. In 1973 it decided that it was too risky to make engines for the new Boeing 737. As a
consequence of this decision, this company gradually lost its dominant market position to RollsRoyce. A further example of an unseen opportunity is provided by the enormous growth and
dominance of the internet in our lives. It is hard to conceive that 1991 was the first time any message
was sent using the world wide web3.
parc masterclass
4
• Different perceptions of risks and their likelihood of occurring as defined by management and
analysts also play a part here. According to Professor Likierman, in most cases managers are more
cautious than analysts in these assessments. This is because managers will usually focus on
historical performance as a guide for the future, whereas analysts will look more at opportunities.
Professor Likierman suggested that seeking to determine whether a company is
"resilient" might provide a useful measure of success. He defined this notion as "the
ability to dynamically reinvent business models and strategies as circumstances
change". This is the subject of a new research project he is undertaking with
Professor Gary Hamel at LBS. PARC will follow this work as results unfold. He also
pointed to use of Price/Earnings (PE) ratios and BETA volatility as solid indicators
respectively of how the organisation is performing in relation to the sector and how
volatile shares are in the market. He did not, however, explain specifically how HR
professionals could make practical use of such knowledge in the way they plan or
develop policies, processes and procedures. TSR will be explored further at the
October PARC meeting when we will discuss "What Works in Executive Incentives?”
Checklist exercise
Professor Likierman ended his Masterclass by asking delegates, working in groups,
to assess the success of a particular organisation against a range of criteria, under
the following broad headings:
• Success for whom?
• Time frame for success
• Type of measure?
• Comparisons
• Risks
The full checklist is given in Appendix 1.
Each group selected one company to assess. These companies were Royal Mail,
Serco, Sainsbury's, Gallagher and BT. Two broad conclusions emerged from these
discussions:
• Different success criteria apply to different organisations e.g. the perceived influence of risk for the
5
Assessing the Effectiveness of Organisations:
Is your Company Successful?
Royal Mail, a nationalised organisation, vis-à-vis competitors and the wider market was much lower
than among the commercial private organisations selected.
• Overall assessments seem to have been made on "gut feel", or as Professor Likierman put it: "It
seems to me that there is little connection between how groups scored against the ["analytical"]
checklist and what they actually felt about the company". This, he observed, "was not untypical of
the way analysts behave"!
Implications for HR
Two broad issues were raised here by Professor Likierman and discussed by
participants i.e.:
• The opportunities created by the above analysis for HR; and
• The effectiveness of HR based metrics as evaluators and predictors of organisational success.
Professor Likierman believes that this analysis, coupled with his discussions with
senior managers and analysts, suggest that improved assessments of success could
be achieved through greater involvement of HR professionals in the process,
specifically because of his view that analysts focus on "sustainability of company
profit based on quality of management". It must be said that this view came as a
surprise to some PARC members whose organisations have witnessed sudden falls
in overall share value because of short-term assessments of a company's viability by
analysts. As Paul Willaims from Smith & Nephew said: "My experience is that analysts
are only interested in the short-term. They want to know about the age of the CEO,
how charismatic he is and whether there is a succession plan in place." Professor
Likierman clearly did not share this view. Speaking later on, in response from a
question by Vicky Wright of Watson Wyatt, about the impact of time scales on
success, he said: "Let's take an extreme view and assume that all of a company's
shareholding is dominated by a hedge fund. Does this really mean that they would
simply have a one month time frame when focusing on shareholder value? Surely not.
Their view is similar to that of management. They want a sustainable business
because they want the ability too sell shares on to another buyer at a profit."
parc masterclass
6
HR: facing up to the analysts?
However, Professor Likierman's thesis bears further investigation because HR should
be in a strong position to assess the quality of management in depth. There are, we
suggest, some doubts about the practicalities of HR engaging with analysts in this
way. In reality, an HR Director will only have access to the City through a Chief
Executive or Chairman who would clearly want to vet any comments before they were
made. They would be rightly concerned about market perceptions of credibility based
on glowing assessments of the management team - as well as such assessments
encouraging competitors to poach key talent. On the other hand, they would also be
concerned about the potentially negative impact of any management assessments
which were "nuanced" in some way. We would argue that a nuanced evaluation will
more often be the case in practice, especially where an intelligent analyst asks: "Can
you demonstrate how the management team could have been more successful to
date?" As David Lincoln from PARC noted: "We need to be able to quantify and
validate assessment of influential factors when talking to analysts." In summary, we
do not believe that direct interaction between the HR Director and the City is
necessarily a positive development. This is because it opens up a range of risks for
the organisation and the individual HR professional.
Measuring human capital
Professor Likierman also argues that while "intangibles" i.e. the value of people are a
major exclusion in conventional accounting, he does not believe that current efforts to
measure the value of human capital will work because of the level of complexity.
This view is of interest to PARC members because it raises two important questions:
• How valid are current approaches to measurement?
• To what extent does it matter if we cannot measure accurately?
There are a wide range of current approaches to measurement, some of which need,
in our view, to be applied with caution. Take for example the Watson Wyatt Human
Capital Index (HCI) which purports to have established a clear link between how an
organisation manages its human capital and its financial performance through its
development of "a simple set of measures quantifying exactly which HR practices and
policies have the greatest correlation"4. This tool is based on Tobin's Q, whose ratio
7
Assessing the Effectiveness of Organisations:
Is your Company Successful?
is calculated as the market value of a company divided by the replacement value of
the firm's assets. This is not an easy concept to grasp. Furthermore, in our
experience, some, if not most, of the respondents to HCI surveys are HR
professionals assessing themselves. This can hardly be seen as an independent or
meaningful measure. Further, the question of cause and effect is not established i.e.
has shareholder value increased because of the contribution of human capital, or is
the reverse true? HCI does not tell us.
The PARC view is that simplicity in measurement is the key and that any measures
used should be clearly focused on valuing people in the business as a whole, not the
HR function. Furthermore, as Professor Likierman argued, measures can only be
effective if there is clarity about what the organisation's objectives are because there
needs to be a clear line of sight between the objectives and the system of
measurement.
Measurement v assessment
The problem, and the challenge, for HR, is that the concept of measurement as such
seeks to impose a set of tangible, concrete indicators on what is essentially intangible
- such as, the quality of people, their past behaviours and their potential performance.
Our view is that this difficulty does not mean that we should stop trying to develop
metrics which are at least indicative of changes in performance on a range of fronts
so that we can assess and evaluate (rather than measure) how people contribute to
the organisation and whether the trend is positive or negative.
Some of these indicators will clearly be based in subjective notions, such as
improvements in "behaviours that support objectives", but if they are evidence based
by being linked to the delivery of individual targets, the contribution of the individual
can be assessed. Indeed, there is every reason to assume that by examining trends
in a range of such indicators over time, it should be possible to demonstrate a link
between what individuals do and how the organisation performs - on the
understanding that such information provides a guide to performance and contribution
rather than a fully fledged analytical tool.
We believe that such assessment tools do exist and are widely used. They are
reflected to an extent in the Sears' Employee Customer Profit Chain5, the EFQM
excellence mode6 and the Balanced Scorecard7.
parc masterclass
8
Genuine 360 degree feedback also has a role to play here. It includes input from
external stakeholders, such as customers and not just subordinates peers and line
managers. We acknowledge that this is not a perfect tool because, for instance it says
as much about how respondents see the world as it does about how the individual
has actually performed. However, such bias can be reduced by increasing sample
size beyond just a few individuals. Other "soft" metrics include staff attitude surveys,
customer and supplier focus group outputs and assessments from cross functional
"fish bowl" group exercises. There are some "harder" metrics too, including statistics
on retention of top talent, the organisation's health and safety and diversity records,
as well as the number of customer recommendations and complaints. All this
information helps the organisation and HR in particular to take a more rounded
snapshot of how people contribute to organisation success and how the organisation
is viewed externally. Although this focus may not be sharp, it is preferable to not taking
any snaps at all.
The approach adopted by the financial services company RBS provides a pragmatic
demonstration of how a range of measures can be used to assess rather than
definitively measure how employees contribute towards business results. As the
extract below shows, this includes, most notably, income per full time equivalent
employee and results from regular employee opinion surveys.
Linking staff performance to business results: the RBS approach*
“Underlying income per full time equivalent employee has grown from £646,000 in 2004 to £718,000 in
2005…
“Feedback from the employee opinion survey showed a significant improvement in engagement and
motivation across Manufacturing, after more than 1,500 people attended workshops on coaching,
developing and motivating their teams…
“The Group’s confidential global employee Opinion Survey is externally designed, undertaken and
analysed annually on behalf of the Group by International Survey Research (“ISR”). The survey
enables employees to maximise their contribution to the Group by expressing their views and
opinions on a range of key issues. The results from the 2005 survey, which 86% of Group employees
completed, demonstrated significant improvements for the fifth successive year. This year, for the
very first time, the Group scored above the ISR Global Financial Services Norm in every single
category. The survey results are presented at Board, divisional and team levels. Action plans are
developed to address any issues identified. With continuing year-on-year improvement, strong
divisional results and improvements in all leading indicators, it is believed that results are
sustainable, particularly given the Group’s focus on continuous improvement…
“The Group recognises that staff performance is central to the successful delivery of its overall
business strategy. Accordingly, the Group focuses on maintaining an employee proposition that
attracts, engages and retains the best available talent…
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Assessing the Effectiveness of Organisations:
Is your Company Successful?
“Utilising a wide range of recruitment channels, including an
open internal jobs market, talent forums and detailed Mike Haffenden's practical action plan for
succession planning, the Group ensures that the
HR to contribute to organisation success
recruitment and development of employees is closely
aligned to organisational requirements…”
* Source: RBS Annual Report and Accounts 2005
In the accompanying box, Mike Haffenden of PARC
proposes a list of practical actions for members to
take these issues forward. We suggest it is used
alongside the "Thinking Model" (Appendix 2)
developed by PARC for member organisations
seeking to introduce new/review existing tools to
assess how employee contribute towards
organisation performance.
Conclusion
Given all these potential tools and the challenges of
applying them, we would argue that it is best to
identify a few, rather than many, indicators that
support the needs of the business. They need to be
explained to the Chief Executive so that he
understands why they are important through a clear
business case that he can then articulate to others.
There are some challenging but necessary
questions HR needs to answer here, including: "Is
HR strategy a source of competitive advantage and
why?"
In the final analysis, organisations are communities
of people, not balance sheet abstractions, and if we
as HR professionals do not seek to evaluate how
those people are contributing to the success of the
organisation, we are surely failing in our
responsibilities.
parc masterclass
10
• Work out whether your organisation is
creating value and covering its cost of
capital;
• Work to ensure that the organisation
develops clear, well understood objectives
that are communicated well;
• Ensure cause and effect analysis for all
HR
initiatives.
Those
without
predetermined outcomes cannot be
evaluated;
• Underpin all HR initiatives with a theoretic
base. In particular, ask: why do we really
believe something will work? Is the
expectation that the activity will deliver the
projected output based on fact or just "gut
feel"?
• Professor Likierman's caution on lack of
proven efficacy in linking reward to
performance was well meant, but how
realistic is it to abandon entrenched
practices where large amounts pf
internal politics, self-interest are
involved?
• Ensure that HR activities ultimately
underpin TSR. This may be at a
secondary level but businesses that
want to succeed in the medium term
have superior TSR.
• Beware glib quick fix answers to
measurement
and
performance
questions.
• Avoid
over-complicating.
Many
organisation problems are relatively
straight forward and while we cannot
measure the output we know what we
are doing is right.
Footnotes
1 See for instance FT global 500
2 Most Admired UK Companies in Management Today 12.05
3 See for instance, http://www.zakon.org/robert/internet/timeline/
4 http://www.watsonwyatt.com/research/featured/hci.asp
5 In Harvard Business Review October 1999
6 http://www.efqm.org/
7 In "Balanced Scorecard: Translating Strategy into Action" Robert S. Kaplan, et al
Harvard Business School Press 1996
Forthcoming highlights from PARC's 2006/2007
Programme include:
• 7 September - The Rising Suns: Business Opportunities & HR Challenges in the Emerging Asian
Economies, David Learmond, Tim Miller, Robert Ward,
• 12 October - What Works in Executive Incentives? John Beadle, Paul Jackson, Paul Williams, Vicky Wright
• Early 2007 - Reinventing Retirement: Conclusion of year-long investigation into the employer's role
in improving savings and retirement options following the pensions crisis."
For information about future PARC events:
Please contact Claire Dyer at PARC, CountyMark House, 50 Regent Street, London
W1B 5RD, telephone: +44(0)207 432 4565, email: claire@parcentre.co.uk, website:
www.parcentre.com
11
Assessing the Effectiveness of Organisations:
Is your Company Successful?
Appendix 1: How would we know a company was successful? A checklist
1. Success for whom?
A view is necessary on which model to choose
- A shareholder model, where success is total return to the shareholders (TSR)
- A stakeholder model, success is measured for each stakeholder, including not only shareholders but
employees, customers, suppliers, Society and the Environment.
- A management model, where success is of the company.
2. What time frame?
There are three time dimensions to making an assessment
- The past provides evidence on the company's ability to deliver in the future, including against
objectives
- The present provides an analysis of how the company is placed to deliver in the future, including
against current objectives and budget.
- The future is the relevant period for current choices, both for shareholders (and potential
shareholders) and for the company.
Decisions are needed on
- the weighting between past, present and future
- the number of years, backwards and forwards
3. Which measures?
External include
- market numbers - market capitalisation, share price, dividends, TSR.
- market views - price/earnings ratio, analyst views.
- league tables - Most Admired, Best Place to Work.
Internal include
- financial - profit before tax, EBITDA (Earnings before interest, tax, depreciation and amortisation),
profit after tax, profit growth, earnings per share, cash
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12
- non-financial - number of employees, market share.
Judgements are needed on the relative importance of
- internal and external measures
- non-financial measures.
On profit, judgements are required on which figure and adjustments to use/accept
On share price, a judgement is needed on market efficiency
4. Which comparisons?
A judgement is needed on the relative importance of history, objectives, comparators
and opportunity
On comparators, a judgement is required on the choice of group
5. What are the risks?
A judgment is needed on the key risks faced by the organization, including the risks
of not taking action.
6. What other factors should be taken into account?
There are huge number of other factors which could be taken into account. A sample
is given on page 4 and a judgments are needed on which are most important.
In all of the above, a judgment is necessary on how much weight to give to outsiders
who indicate that they are influential
13
Assessing the Effectiveness of Organisations:
Is your Company Successful?
Checklist on success factors
One tick per line, a number at the bottom
Influence
High
Medium
Low
Shareholders
______
______
______
Other stakeholders
______
______
______
Management
______
______
______
______
______
______
Present
______
______
______
Future
______
______
______
External - market
______
______
______
Impact of market efficiency
______
______
______
External - other
______
______
______
Internal - profit
______
______
______
Accuracy of profit
______
______
______
Internal - Cash generation
______
______
______
Non-financial measures
______
______
______
Success for whom
(one high only)
Time frame for success
Past
Number of years ……..
Number of years ……..
Type of measure
parc masterclass
14
Influence
High
Medium
Low
With objectives
______
______
______
With industry
______
______
______
With wider market
______
______
______
Relative to competitors
______
______
______
Relative to wider market
______
______
______
Comparisons
Risks
Other influential factors (examples on attached page)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Overall score/10 _________
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Assessing the Effectiveness of Organisations:
Is your Company Successful?
Examples of other possible influential
factors
Market
Country-specific factors
Beta
Credibility of objectives
Clarity of objectives
Debt position
Composition of shareholder base
Dividend policy
Corporate governance credibility
Exceptional trading factors
Growth potential
Operational issues
History of relationship with market
Potential acquisitions
Index movement
Price levels
Information quality
Prospects for costs
Management handling of risk
Prospects for prices
Movements by major shareholders
Prospects for acquisitions
Newsflow
Quality of management
Opportunity for surprise
Strategic developments
Perception of current relative price - eg p/e,
price/book
Validity of comparators
Risk factors
Point in the cycle
Currency factors
Sector strength/weakness
Execution
Takeover potential
Hygiene factors
Transparency
People issues
Valuation (including "fair value")
Major changes (market, operations, people)
Company
Major projects
Accounting issues
Rating agency moves
Cash requirements
Reputation issues
Clarity of objectives
Competitors moves
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16
Appendix 2: PARC Thinking Model for Deciding on Employee Metrics to
Adopt©
Is the measure
Does it help us
open to bias or
determine how
manipulation and so
things change over
risks not being
time and make
credible?
judgements
Effective
about the
measures focus on:
future?
How leaders behave
Employee engagement
How work is organised
How employees are treated
Access to internal knowledge
Ability to learn new ways of
Is the
Does the
working
information
information
required
provided help
relatively easy to
us take actions
collect or is it just
to promote
not cost effective?
improved
organisation
performance?
17
Assessing the Effectiveness of Organisations:
Is your Company Successful?
Notes
parc masterclass
18
Dedicated to improving the relevance and effectiveness of performance and reward
parc
masterclass
Assessing the
Effectiveness of
Organisations:
Is your Company
Successful?
6 July 2006 Kent House, Knightsbridge
post meeting notes
Performance & Reward Centre
CountyMark House
50 Regent Street
London W1B 5RD
Tel: +44 (0)20 7432 4565
Fax: +44 (0)20 7470 7112
E-mail: enquiries@parcentre.co.uk
Web: www.parcentre.com