keller price beyond performance webex

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Beyond Performance: An overview of our approach to sustainable transformational changeEdited transcript and slides from a webcast on December 13, 2011

This webcast explored some of the research and client work from the past decade that went into the presenters’ 2011 book, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage. During the session, authors Scott Keller and Colin Price discussed why most organizations are wired for mediocrity, which organizational capabilities are tied to measurable performance improvements, how to find the unique recipe of capabilities that will most benefit your organization, and how to implement change so you can thrive in the long term.

Beyond Performance: An overview of our approach to sustainable transformational change 2

The big idea

COLIN PRICE:

The starting point was analytical data: essentially, we looked at 500 organizations over a ten-year period and got data from 600,000 people in those organizations. And we found that the organizations that distanced themselves from their competitors focused on both performance and health. Now the most important word in that phrase “performance and health” is the middle word, “and.” We’re not suggesting, and the data do not suggest, that winning organizations focus on health instead of performance. But winning organizations focus on health as well as performance. Now, I guess we’re all familiar with what performance is. Health is not the profit today but, as we define it, the capacity of the organization to produce superior returns tomorrow through the ability to align, execute, and renew faster than competitors.

Let me unpack that a little bit. We took 500 organizations and we measured their health over ten years. Some of them were low health; some of them were high health. We then correlated health to a whole bunch of different performance metrics.

Source: Scott Keller and Colin Price, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage, John Wiley & Sons, 2011

Performance

What an enterprise delivers to stakeholders in financial and

operational terms (e.g., net operating profit, total return to shareholders, net

operating costs, stock turn)

Exhibit 1 The big idea: Companies need to manage performance and health with equal rigor

Health

The ability of an organization to align, execute, and renew itself

to sustain exceptional performance over time

“The narrow pursuit of shareholder value was the dumbest idea in the world”

– Jack WelchFormer chairman and CEO of GE

Financial Times, August 2009

“We have not achieved our tremendous increase in shareholder value by making shareholder value the only purpose of our business”

– John Mackey Founder and CEO of Whole Foods

Reason Magazine, October 2005


You see the EBITDA margin, growth in the value of the enterprise, and growth in the top line. And what you find is that the answer is basically two. That is, we found that healthy organizations had roughly double the chance of outcompeting and winning in terms of performance over the competitive-advantage period.

EBITDA margin

Growth in enterprise value/book value

Growth in netincome/sales

Exhibit 2 Organizational health and company performance are mutually reinforcing drivers

6848

31 x2.2

625231 x2.0

585338

Strong

x1.5

Medium2Weak1

Likelihood that companies with specified level of health have above-median financial performance%

Health

1 Also referred to bottom, mid, and top quartiles in the health assessment.2 Comprises 2nd and 3rd quartiles.

2.2x

2.0x

1.5x

Managing health is not something you can wait to do in the future: it is about the actions you take today to perform tomorrow


Exhibit 3 The business benefits of a balanced approach to performance and health during transformations are proven and profound

35%

65%

34%

51%

19%

43%

15%

25%

8%

19%

Performance-heavyapproaches

Balanced performance and health approaches

Bank 1Profit per business banker

TelcoChurn reduction

Bank 2Retail banker cross-sell ratio

RetailerSales-to-labor ratio

Coal mine Increase in tonnage

Source: Company data in longitudinal studies (2 years) of control groups vs. experimental groups controlling for all possible distortions of trial


Organizations that focused on performance alone benefited, but organizations that managed to add the elixir of health on top of performance—not instead of it, but on top of it—managed to roughly double the degree of impact.

Let me just define health in a little more detail and introduce the nine dimensions of health we use.

Now, as nine things are hard to remember, if you read them vertically—direction, leadership, and culture and climate—that’s alignment. If you read it around the middle, that’s execution. If you read it horizontally, that’s renewal. So, these three concepts of alignment, execution, and renewal are what we focus on in terms of thinking about health. We haven’t found any organization that is distinctive or elite on all nine of these dimensions.

The recipe for success seems to be: to be able on all of these dimensions and to choose two or three or four to be truly elite on. Let me talk you through one of them, just so you get the feel for it.

AlignmentStakeholders are clear on vision, strategy, and expected behaviors

ExecutionActivities enable the company to execute strategy and deliver results

RenewalA steady stream of exploitable opportunities is created to ensure the company can evolve with the market

Direction

Coordination and controlAccountability

External orientation

Innovation and learning

Capabilities Motivation

Culture and climate

Leadership

Exhibit 4 Organizational health has nine critical dimensions that need to be proactively managed for organizations to transform successfully



I’ll start at the top, with direction. An ailing company doesn’t have a strategy, or it has a strategy that isn’t worth the name. It doesn’t resolve the tough issues. An able company has a strategy that’s reinforced by its performance-management processes and systems. And an elite company has what an able company has but builds on top of that the ability to create meaning or purpose and a deep degree of engagement around the vision. The elite is not an alternative to the able; it builds on it.

So how do you get to a high degree of health? I’m going to turn to my colleague Scott.

The five frames

SCOTT KELLER:

When we ask leaders where they want more help, more tools, and more insight, on performance or health, by and large, leaders say, “We want more on health. We don’t feel as equipped on the health side as we do on the performance side.” And so in the rest of this presentation we’ll focus heavily on the health side of the equation. Now, why do leaders want more on health? One way to explain it is, well, it’s harder—it’s the soft stuff that we don’t learn a lot about in our management training. That’s true. In addition, there is one aspect of health that relates to each of the steps of the change process that makes it particularly hard: there are a number of ways that we, as human beings, are what is called predictably irrational. That is, there are ways that a really smart, rational person, when thinking about human behavior, will get it wrong every time, because people don’t react the way you would think they would. This idea of predictable irrationality transformed the field of economics with behavioral economics, and we feel that the field of change management and organizational behavior can in the same way be transformed.

Exhibit 5 Where is your organization healthy?

Able EliteAiling

Direction Crafts and communicates acompelling strategy, reinforced by systems and processes …

… and provides purpose, engaging people around the vision

Creates a strategy that fails to resolve the tough issues

Leadership Shows care to subordinates and sensitivity to their needs (high support) …

… and sets stretch goals and inspires employees to work at their full potential (high challenge)

Provides excessively detailed instructions and monitoring (high control)

Culture and climate

Creates a baseline of trust within and across organizational units …

… and creates a strong, adaptable organization-wide performance culture

Lacks a coherent sense of shared values

Accountability Creates clear roles and responsibilities; links performance and consequences …

… and encourages an ownership mindset at all levels

Creates excessive complexity and ambiguous roles

Coordination and control

Aligns goals, targets, and metrics managed through efficient andeffective processes …

… and measures and captures the value from working collaboratively across organizational boundaries

Establishes conflicting and unclear control systems and processes

Capabilities Builds institutional skills required to execute strategy …

… and builds distinctive capabilities that create long-term competitive advantage

Fails to manage talent pipeline or dealwith poor performers

Motivation Provides motivation using incentives, opportunities, and values …

… and taps into employees’ sense ofmeaning and identity to harness extraordinary effort

Accepts low engagement as the norm

Externalorientation

Makes creating value for customers the primary objective …

… and focuses on creating value for allstakeholders

Directs the energy of the organizationinward

Innovationand learning

Able to capture ideas and convert them into value incrementally and through special initiatives …

… and able to leverage internal and external networks to maintain a leadership position

Lacks structured approaches toharness employees’ ideas


QUICK ASSESSMENT


Aspire: Where do we want to go?The first step involves setting as explicit an aspiration on organizational health as you would on performance.

We see three key things that will help leaders set an aspiration on health. First is measuring organizational health, that is understanding the nine elements of organizational health, and knowing how you do on those things. The second part is knowing what to do about it. It’s one thing to know if you have high blood pressure, for example, and it’s another thing to know what caused it.

Measure organizational health

Set the right health aspirations

Involve a broad leadership coalitionA runner, a boxer, and a swimmer are all

healthy, but in very different ways.What kind of health aspirations are right for your organization?

Exhibit 6 On the health side, it is important to set the right organizational aspirations

Underlying practices that drive health

Direction1. Shared vision2. Strategic clarity3. Employee involvement

Capabilities21. Talent acquisition22. Talent development23. Process-based capabilities24. Outsourced expertise

Motivation25. Meaningful values26. Inspirational leaders27. Career opportunities28. Financial incentives29. Rewards and

recognition

External orientation30. Customer focus31. Competitive insights32. Business partnerships33. Government and

community relations

Innovation and learning34. Top-down innovation35. Bottom-up innovation36. Knowledge sharing37. Capturing external ideas

Leadership4. Authoritative leadership 5. Consultative leadership6. Supportive leadership7. Challenging leadership

Culture and climate8. Open and trusting9. Internally competitive10. Operationally disciplined11. Creative and

entrepreneurial

Accountability12. Role clarity13. Performance contracts14. Consequence management15. Personal ownership

Coordination and control16. People performance

review17. Operational management18. Financial management19. Professional standards20. Risk management

Outcomes

Exhibit 7 Health aspirations can be set by breaking down the nine outcomes into 37 management practices

Direction

Coordina-tion and control

Account-ability

Externalorientation

Innovationand

learning

Capabilities Motivation

Culture and climate

Leadership

Results achieved, i.e., “How effective is the organization?”

Practices that are followed, i.e., “What does the organization do?



Exhibit 7 shows the practices that underlie the dimensions of health. So you can understand what you’re doing a lot of, what you’re doing a little of, and how that relates to your overall health. Understanding this is fundamental to being able to think about setting the right aspiration for organizational health.

The next point is that some of these practices work in combination.

If you look at the left side of Exhibit 8, you can see what most management literature has already shown. It says that if you look at the different ways you can motivate people, there are a lot of ways to do it that are about equally powerful. But there’s one way that’s a little less powerful, and that’s incentives. We were able to go beyond that type of analysis and ask, “Wait a second, what if we analyze motivation and its practices in the context of all the other management practices? Are there any interdependencies? Are there any complementarities that we can understand?” And it turns out there are a number of ways all these practices interact, as you can see in Exhibit 7. So we started looking for any magic formulas, trying to find out if there are recipes that taste better, so to speak.

What we ended up with is something that is unique in terms of being able to answer the question of how you get healthy. We found that there’s not one recipe that’s the winning recipe for health. There are actually four recipes that companies can choose from. And 80 percent of healthy companies are very clearly one of these archetypes, as we call them.

Success in individual practices is important to the overall motivation outcome

… results in the following % likelihood of being top quartile in overall motivation

Career opportunities

Meaningful values

Inspirational leaders

Incentives

Being top quartile in the following individual motivation practices1 …

… results in the following % likelihood of being top quartile in overall motivation

Competitive environment

+

The stand-alone practice from the left plus a “competitive environment” …

Being top quartile in both incentives and competitive environment is a potent combination

Exhibit 8 Practices work in combination MOTIVATION EXAMPLE

% likelihood that a company will be top quartile in motivation if it is top quartile in this individual practice

1 Analysis conducted on 4 out of 5 “motivation” practices.

55

48

54

55

61

95

58

61



There’s not necessarily one perfect archetype for an industry, or even for a strategy. But there are a bunch of wrong ways to go by focusing on a number of practices that don’t combine well. Focusing instead on a set of practices that do combine well—any one of these recipes—helps companies succeed and endure. So, setting an aspiration requires (1) knowing your health both in terms of the outcomes and practices and (2) choosing which archetype makes the most sense for your company.

The last point on how to set an aspiration is to involve a broad leadership coalition. And this relates to the predictable irrationality I mentioned earlier. Most leaders understand that they should involve people, but they tend to underplay the importance of that. In fact, research has shown that if you involve people in the right way, you get five times the commitment that you would otherwise have. And that’s a pretty good return on investment by any standard.

Assess: How ready are we to get there?When it comes to assessing the change readiness of an organization, on the performance side, it’s all about the capabilities people have; on the health side, it’s all about understanding the mindset shifts needed within the organization. There’s a tool kit we call the discovery process, which basically involves asking “why” a lot.

Leaders act as a performance catalyst; they set high expectations and help the organization achieve them

Shaping market trends and building a portfolio of solid, innovative brands keeps us ahead of the competition

Discipline, sound execution, and continuous improvement are the foundations of great performance

Our collective talent and knowledge is our most important asset—our success depends on us developing it effectively

Exhibit 9 Four sets of management-practice combinations—or ‘archetypes’—quantitatively deliver higher impact than other combinations

Top 6 practices for each archetype

Leadership driven Market focus Execution edge Knowledge core

1 Talent acquisitionKnowledge sharingBusiness partnershipsCareer opportunities

2 Role clarityCreative and entrepreneurialCustomer focus Open and trusting

3 Consequence managementEmployee involvementCompetitive insightsPerformance contracts

4 Rewards and incentivesTalent development Government and community relationsInspirational leaders

5 Personal ownershipInternally competitiveFinancial managementStrategic clarity

6 People performance reviewPersonal ownershipCapturing external ideas People performance review



Instead of going through the process I’ll just give you an example. Salespeople who are on the frontline who are asked to do more selling often have a mindset that says, “I’ll give the customer what they want.” That’s a good mindset, and those salespeople do a good job, but the great salespeople have a very different mindset. They have a mindset of, “My job is to help the customer understand their unarticulated needs.” That mindset means salespeople will ask a number of profiling questions that you often want salespeople to use but they don’t. And just by shifting the mindset, a number of very positive sales behaviors kick into gear. This discovery process is tailor-made so that whatever performance goals you’re going for, you can uncover the mindsets that help or hinder getting there.

The next idea is to focus on just a few mindset shifts that are most critical to meeting your performance and health aspirations. Often, we find, it’s one or more of these three.

Current state Desired state

Where are we, and what do we want to achieve?

What changes to practices do we need to make to achieve the desired outcomes?

What changes in mindsets do we need to make to achieve sustainable changes in behaviors?

What changes in behavior do we need to make to breathe life into desired practices?

Mindsets(e.g., “Keep my head down, watch my back”)

Mindsets(e.g., “Keep my head down, watch my back”)

Outcomes(e.g., accountability)Outcomes(e.g., accountability)

Outcomes(e.g., blame)Outcomes(e.g., blame)

Practices(e.g., no clearperformancecontracts)

Practices(e.g., no clearperformancecontracts)

Practices(e.g., clear performance contracts)

Practices(e.g., clear performance contracts)

Behaviors(e.g., ongoingperformance dialogue)

Behaviors(e.g., ongoingperformance dialogue)

Mindsets(e.g., “If it is to be, it is up to me”)

Mindsets(e.g., “If it is to be, it is up to me”)

Behaviors(e.g., minimal performance dialogue)

Behaviors(e.g., minimal performance dialogue)

Exhibit 10 The discovery process dives deeply into an organization’s inner workings



The last idea is assessing both what’s working and what isn’t. And again, this is one of those predictably irrational truths: we are much more likely to be motivated to improve when our strengths are being pointed out at the same time as our weaknesses. We wouldn’t say just focus on strength, but we would say focus equally on strengths and weaknesses.

Architect: What do we need to do to get there?How do you create a plan that will shift those critical few mindsets? What can you as a leader practically do?

Create the right context

Expect and leverage irrationality

Use performance initiatives to influence changes in mindset and behavior

!

Exhibit 12 On the health side, implementation should be architected using the key levers that drive people to change

Understanding how to make change happen at an individual level

“I am responsible for quickly and efficiently meeting the needs my clients express”“Probing my clients about their financial situation would be prying into their private affairs”

“I know what’s right for my area, and no one else can achieve what I can”

“There is a lack of clarity regarding accountabilities around here”“I show up at each meeting so I can watch my back”

“I am responsible for bringing the best of my company to clients and addressing their needs, whether they are articulated or not”“I need to understand my clients’ full situation before I can give them the best advice”

“I can learn from others, and there is great value in ‘mining the seams’ together”

“I seek to clarify my and others’ accountabilities if they are unclear”“I trust others to do what they are supposed to do in a fair manner”

Exhibit 11 Ultimately, organizations should focus on a vital few mindset shifts

From transactional … … to relational

From silos … … to collaboration

From blame … … to accountability



Here again we have three big ideas. First is to get the context right, second is to use performance initiatives to influence the shift, and third is to expect and leverage irrationality.

This is what we call the influence model.

This model can be used to take any performance initiative—aimed at things like sales-force effectiveness or supply-chain management—and think about building into that initiative a compelling story, the right reinforcing mechanisms, the skills required for change, and role modeling, so that the performance initiative includes moves toward the culture shift we want.

Act: How do we manage the journey?COLIN PRICE:

The next frame is how you actually make these changes happen. We all intuitively know that most organizations just have too much stuff going on: too many initiatives, too many counterproductive, redundant, overlapping, well-intentioned attempts to do the same thing. Because there’s so many, things don’t get done. To be more effective, the first step is to take a structured approach. The second is to get lots of people focused on the same things, and the third is to measure as you go along.

The structured approach looks really complicated, but it’s actually dead simple.

Skills required for change Top 300 leaders’ “enterprise

assets” New leadership behavioral

standard 360-degree feedback and “field

and forum” training on creating value across silos

Reinforcing mechanisms Multiple cross-business

councils Compensation and

consequences linked Customer metrics and

measurements built into all key business processes

A compelling story Quantitative customer-loyalty

analyses shared broadly, proving value/link

Transformation story Coordinated, memorable

communications campaigns

Role modeling Top-team participation in

customer-metric reviews Top-team members co-lead

cross-business customer-centric initiatives

Influencemodel

CLIENT EXAMPLEExhibit 13 Leaders can use four levers to influence mindsets


Think about your own organization. You should be ready to answer three questions at three different levels. At level one, the top level, what are we trying to do in this organization? What’s the mission or the aspiration or the direction or the vision, whatever you want to call it? Jumping to level three, what are all the things you need to do: all the tasks and finished actions to drive both performance and health? What we found in the winners, the organizations that were higher on both performance and health sustainability, is that they could also answer question number two, which is what are the relatively few themes, five to eight themes, which capture all of the level-three actions, and which make meaning for people?

If you’ve answered all these questions, the next question is how do we get this done? Health is almost a social movement.

Exhibit 15 Build ownership for change by combining military and marketing tactics

Manage the transformation like a military campaign …

… as well as a marketing campaign

Viral tactics unleash change that is largely self-directed, mobilized by a cause beyond individual gains

▪ Core team plus voluntary connectors

▪ Big aim, open approach

▪ Celebrations, change campaigns

▪ Empowered

▪ Based on wisdom

▪ Simple rules, opportunistic, go with the energy

▪ Activists

Direction setting, decision-making and sign-off processes, funding, risk mitigation, and performance management

Governancerigor

Problem-solving approach, project management, cross-initiative integration, and best-practice sharing, tracking, and adjusting

Projectdiscipline

Role descriptions, accountabilities, performance contracts, and decision-making authorities

Role clarity


Level 1: Transformation headline Level 2: Performance and health themes Level 3: Specific initiatives

To become a highly competitive integrated company, recognized as one of the top 5 energy producers worldwide and as the employer of choice in our industry

Health themes

Col

labo

ratio

n

Alig

nmen

t

Cus

tom

er fo

cus

Acco

unta

bilit

y

Perf

orm

ance

them

es Expanding production

Integrating the value chain

Maximizing downstream

Improving efficiency and safety

Health themes

Perf

orm

ance

them

es

Cro

ss-b

usin

ess

coun

cils

Sto

ry c

asca

de

Dat

a sh

arin

g

Tale

nt-re

view

ov

erha

ul

Pricing

Learning

Vendor consolidation

Lean

Exhibit 14 Adopting a three-level structure brings coherence to the journey


CLIENT EXAMPLE


It’s a way of getting people to behave differently in relation to the environment that they’re in. And you can’t just rely on telling people to behave differently. You have to spot their enthusiasms. You need to light forest fires. You need to connect people who are committed and engaged. Many change programs we’ve seen are strong on the left side of Exhibit 15, but a little bit weak on the right side.

Finally, measurement sounds intrinsically boring, I know, and it’s the kind of thing that people like us who write books say you just need to do. But there’s more to it than that. You measure in order to adjust.

Health is an adaptive process. What we’ve observed in winning organizations is they measure at four levels. Are you implementing the level-three initiatives on time and to quality and cost goals? You’re doing those things to drive health. So is health improving? You can measure it with surveys, focus groups, questionnaires. Then, you’re improving health to improve performance, so you need a way to measure performance. And finally, you’re doing all of those things to drive enterprise value, which you can measure too.

Advance: How do we keep moving forward?The fifth of the five things we’re talking you through is in a way the most difficult. Essentially what we’re finding is that if the way your organization changes is slower than the rate at which your industry changes, you’re in deep trouble. And in all of this work what we’ve identified, we hope, are a bunch of really helpful tools and tips and techniques to enable organizations to increase their “corporate metabolic rate.”

Track progress of initiatives to ensure delivery on time, on budget, and to required quality

Monitor key health indicators to ensure initiatives have the desired impact (e.g., surveys and customer forums)

Measure performance to ensure improvement is taking place (e.g., revenue, cost, cash flow, and risk)

Monitor enterprise value or shareholder value as the ultimate outcome1

Exhibit 16 Implement effective evaluation mechanisms by measuring impact on four levels

1 Or impact on key stakeholders for not-for-profit and public-sector organizations.

Enterprise value

Performance

Health

Initiatives

Measuring at all four levels enables organizations to link causes with effects and to act on early warning indicators



Central to all this is leaders. Everything we’ve been talking about calls for leaders to inspire people, to shift their behavior in pursuit of competitive edge. Now, the world is full of leadership theories. What we looked at is not theory but the behaviors that leaders in healthy organizations actually engage in.

There are five arenas in Exhibit 17, and each one of them has got some sub-arenas. Think about yourself in each of these arenas and you can come up with a little scorecard.

Central to leading organizations, the left column of Exhibit 18, is leaders working on themselves.

Source: Joanna Barsh and Susie Cranston, How Remarkable Women Lead, Crown Publishing, 2009

Looking at problems in new ways to find better solutions

Actively shaping networks to heighten one’s sense of belonging, ability to influence change, and personal growth

Taking personal accountability for one’s life experience and setting aside fears to step up to opportunities

Actively managing experiences to achieve maximum “flow” in the work day

Finding an inspiring purpose that is built on strengths and using it to generate hope and action

Framing▪ Self-awareness▪ Learned optimism▪ Moving on▪ Adaptability

Meaning▪ Happiness▪ Core strengths▪ Purpose

Engaging▪ Voice, taking action▪ Ownership▪ Risks and fears

Connecting▪ Inclusiveness▪ Reciprocity▪ Network design▪ Sponsorship

Energizing▪ Sources and uses▪ Recovery▪ Flow

Personal and professional

context

Exhibit 17 The centered-leadership model includes five arenas

Exhibit 18 Centered leadership starts with self-mastery and expands to create specific skills enabling individuals to lead others and the organization

▪ Communicate inspiring visionand change stories

▪ Recognize and shift system dynamics for greater accountability

▪ Engage multiple stakeholders through appreciative inquiry

▪ Motivate others to action▪ Turn difficult conversations into

learning opportunities▪ Build relationships based on

trust and emotional mastery▪ Engage system support for

teams▪ Sustain and renew via coaching

and sponsorship

▪ Use personal vision to motivate yourself

▪ Take accountability to regulate your mindsets and behaviors to create desired change

▪ Manage energy and attentionto maintain productivity

▪ Develop a strong support network

▪ Leave your comfort zone and commit to opportunities

Leading self

Leading theorganization

Leading others

Source: Joanna Barsh and Susie Cranston, How Remarkable Women Lead, Crown Publishing, 2009


There’s a kind of authentic intent behind all of this. Healthy organizations are not ones that just pretend to engage their people and pretend to make a difference for their stakeholders. They mean it authentically.

• • •

It’s the role of leadership to not only drive performance in this quarter but also to have the foresight to understand how the organization needs to evolve and develop over multiple quarters. So where at all possible, work on health for your organization. Work on it sooner rather than later.

Scott Keller is a director in McKinsey’s Southern California office. Colin Price is a director in the London office. Their book, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage, was published by John Wiley & Sons in 2011. For more information, see www.mckinsey.com/beyondperformance.

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