A Strong Case for M&A

The appetite for acquisitions among corporates and private equity-backed businesses continues to grow. This is driven by a combination of mounting pressure from shareholders and investors, who want to see tangible signs of growth, and the availability of cheap money. It’s created a seller’s market and, therefore, buyers need to thoroughly analyse a company’s compatibility, while also being careful not to overpay.

Richard Madden, Chief Executive of corporate finance house DC Advisory, says: “There’s an awful lot of money chasing a small number of good opportunities. As a vendor, it means that good businesses are going for full prices, which may not work so well for buyers – but only time will tell.”

According to research from professional services firm EY, which surveyed 1,600 executives in 54 countries, 56 per cent of companies intend to pursue acquisitions in the next 12 months (up from 31 per cent in 2014).

In such a competitive market, management teams have to build a strong case for an acquisition and be rigorous when assessing how it’s going to deliver value. Pam Powell, Non-executive Director of Premier Foods and soft drinks manufacturer A.G. Barr, comments: “You’ve got to start with your strategy… Any [proposal for] an acquisition has to be considered against… what’s needed in the future in terms of growth, the sector that you’re in, and the capabilities and resources that the business needs.”

It will also be necessary to define the advocates of a deal. Paul Budge, Managing Director for the UK and Ireland at distribution and outsourcing group Bunzl, says: “The operating company leader, who is going to take this acquisition on, is the person who [needs to be] accountable for its success.

“They are charged with, as I describe it, falling in love with the acquisition or not. You can’t hold somebody accountable if they weren’t part of signing up to it in the first place.”

Andrew Minton, Executive Director at Criticaleye, comments: “If an acquisition is to deliver long-term value it needs to be led from the outset by the executives who will ultimately be responsible for its success. It demonstrates to everyone within the acquired business that you’re serious about their future as part of the combined company, and that you’re not just looking for a quick win.”

All in the planning

A well-considered approach to identifying and prioritising targets will be needed. “If you’re entirely opportunistic you risk having a business or a set of businesses that don’t really fit together,” says Joe Garrood, Investment Director at private equity firm ECI Partners. “[It’s why you need to] have a framework that accounts for acquisitions.”

At standards and training provider BSI Group, country and sector managers are expected to analyse relevant target businesses and propose them to the Group Executive Team. Howard Kerr, CEO of the company, comments: “We have a current list of more than 200 companies that we have identified as fitting our criteria for acquisition. It doesn’t mean they’re for sale and it doesn’t mean we’re interested in them.

“It’s just a large number of companies we can work from because, in my experience, if you don’t have a healthy M&A pipeline, how do you know you’re actually buying the right company at the right time? The danger is that you [take the first opportunity] and reduce your ability to acquire a much better target afterwards [because] capital and management have already been deployed.”

Andrew Hosty, COO of manufacturing concern Morgan Advanced Materials, says: “The only reason I would acquire a business is to accelerate our strategy. They have to be doing something that clearly works alongside our company.”

In theory, this approach should make the deal quicker, although time and effort must be spent on due diligence. “Don’t compromise,” he adds. “You need to explain upfront: ‘This is what we’re going to do and this is how we’re going to go and do it.’”

Mark Brockway, Executive Director for Corporate Finance at EY, warns that the process shouldn’t become a box-ticking exercise. He says: “You need to prioritise what’s really important for the situation, such as the retention of a CEO. We helped a listed client incentivise the management of an acquisition target with new roles and equity-like incentives.

“The business had great clients, but the perceived risk was entrepreneurial management losing interest without a fresh challenge. They spent a lot of time just making sure they were happy before concluding due diligence.”

Managing the merger

Absolute clarity about why an asset has been acquired will make it far easier to implement an integration plan. “If the reason for buying is the cross-sell opportunity, that’s where you need to start. If it’s about efficiency of systems, then begin there,” says Joe.

For John Allan, Non-executive Chairman of retail concern Tesco, the trick is to start early and at the very top. He was Chairman of Dixons when it merged with Carphone Warehouse in August 2014 and says one of the key considerations before the deal went through was how the merged business was going to be run.

“We had a very intensive period of negotiation about board structure and the key management positions. We felt strongly that to get major benefits out of the merger, we needed to run it with an integrated management team,” he says.

“I think sorting those issues out before the deal transacted, while quite difficult at times, was the right thing to do. It meant that from the get-go we’d agreed the key principles of integration and people could then just start to get on with it.”

Rob Crossland, CEO of employment services group Optionis, comments: “It’s really important to quickly work out strengths, weaknesses, character fits, and which organisational disciplines that you need around the board table, and to make sure that people are comfortable with their new roles.”

The majority of acquisitions will carry an element of risk, especially when they’re dependent on people adjusting to a new organisation. It’s up to boards to smoke out lazily planned attempts to build market share, without any real thoughts about integration.

As Mark from EY says: “The main board has to sponsor the deal and be accountable. When issues come up, deals lose momentum or fall over quickly without that key individual [who is] prepared to put their reputation on the line.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

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Trust and Leadership in China

Big Western brands in China pay the price for failing to adapt to local market conditions. It’s a form of cultural blindness they would find unthinkable when operating in their home territories. As a result, they lose out to companies with senior management teams that understand what customers want and how to extract the best from employees.

Adequate thought has to be given to skills, training and leadership if foreign entrants are to keep pace with indigenous competitors that are moving quickly and at scale. Criticaleye spoke to executives that either work in China or conduct regular business there to explore what companies are doing to be successful:

1) Know What’s Expected as a Leader

The word ‘hierarchy’ crops up a lot when discussing effective leadership. Chris Riquier, CEO of Asia Pacific for market research company TNS, comments: “A leader in China needs to recognise they are in charge and be seen as such by the team on the ground. They need to gain respect, have extremely strong listening skills and be very perceptive, with a high level of emotional intelligence.

“You’ve got to have experience and an understanding of Chinese culture so you’re able to read a room and interpret what is communicated to you.”

There are nuances to take into account. Roger Steel, President of New Markets and Business Development in Asia for Sun Life Financial, says: “You need to listen to the way things work and have an incredible amount of humility in the face of innovation because China is innovating so fast.

“For example, in my industry of insurance, it’s almost a bit scary how good they are at creating new distribution channels.”

Ultimately, organisations require people that are at ease with the way business is done. Andrew Minton, Executive Director at Criticaleye, states: “As stakeholder bases become more diverse, you need to really understand your customers, employees, suppliers and the regulatory environment.

“It’s clear that the make-up of executive teams must reflect this diversity, otherwise they will struggle to navigate the different market conditions and will not perform at the highest point. This can’t be overstated for a market as varied as China.”

2) Map Your Talent Strategy 

Opinions about how to attract and retain people vary by sector. Barrie Goodridge, former Chairman and CEO of Edipresse Media for Asia, says: “Generally, getting quality talent in China is not easy…The growth they’ve had in the last 15 years has outstripped their ability to produce enough talent.

“My experience is it’s quite difficult to find internationally orientated people over the age of 45, and the younger people, if they speak English and have international experience, know their value. With our office in China, we had a very high turnover of people.”

It’s not helped by the fact that the cachet and lure of working for a Western brand isn’t what it used to be. Roger says: “If you’re super talented in China, you want to work for one of the big Chinese companies because they’re growing fast, they’re innovative and very dynamic.

“It’s increasingly difficult for Western companies to attract top talent, unless they have a very strong market proposition.”

Chris says: “At the senior level it can be difficult, but at the mid-level the economy is maturing and, to a degree, you’re starting to see more people with 10, 15, 20 years of experience. If you’ve got the right remuneration structures, it shouldn’t be a difficult proposition.”

According to some commentators, events that have occurred in China over the last 40 to 50 years, from the Cultural Revolution and the one-child policy to its re-emergence as a superpower, mean there are marked differences between the generations. This puts additional emphasis on gauging the mindset, motivations and values of employees.

Jingru Liu, Director of China Advisory Services for professional services firm BDO, refers to how “one of the largest Chinese IT companies trains its middle management staff, who were born in the 1980s, on how they’re going to manage people born in the 1990s.”

3) Don’t Rush into a Joint Venture

There are industries where a joint venture (JV) is mandatory. For other companies, a partnership won’t be legally necessary but it may seem a simpler way to combine resources, share knowledge and improve chances of gaining market share.

Ann Coughlan, Managing Director of Bupa Asia, comments: “China has multiple layers of rules and regulations, plus distinct cultural characteristics and consumer preferences. For some companies, particularly those without previous experience of doing business in China, JVs or partnerships can add a lot of value, insight and knowledge that you would not necessarily have as a foreign investor setting up on your own for the first time.”

Like any JV, it’s a case of remembering the basics:

• Conduct extensive due diligence
• Be clear about expectations and financial rewards
• Use advisors and make sure there is a break clause
• Adopt a hands-on approach

George Yip, Criticaleye Thought Leader and Professor of Management and Co-Director for the Centre on China Innovation at China Europe International Business School (CEIBS), says: “When strategic objectives are aligned it’s a win-win for the two of you. You have to be as sure as you can that the JV partner isn’t someone who is likely to turn into a competitor in the future – that is one of the biggest things to worry about.”

4) Results Take Time

New entrants to China can be dazzled by headline growth rates. However, supply chains, logistics, market compatibility, the cost of labour and knowing how to build relationships all require significant research and effort. It’s also easy to underestimate the impact politics has on the way business is done and decisions are made.

In this context, good risk management is another essential. The issue of intellectual property rights and piracy remains problematic, notably for businesses operating in industries designated as high-priorities for China’s economic development. If a JV / partnership is struck with a private or public company, it’s wise to adopt a cautious approach to commercially sensitive information.

On a positive note, there is a crackdown on corruption and it’s also acknowledged that China’s Government is more internationally focused than the previous leadership. This is creating greater openness in terms of how trade is approached, helping companies from an export and investment point of view, and there are hopes this will improve with China taking Chairmanship of the G20 Summit in 2016.

5) Study Where Your Company Fits

As the e-commerce giant Alibaba showed with the marketing magic of ‘Singles Day’, whereby an estimated $9 billion was spent in 24-hours last November, it seems plenty of Chinese consumers have cash to burn.

That said, such stories shouldn’t lull businesses into thinking it’s an easy market to crack. Jingru of BDO says: “China is not one market – it’s larger than Europe and it’s diversified. If a foreign player wants to enter China for anything consumer related, they would have to research by region to find the right market segment.”

Roger warns: “You do not want to go into China with ambitions to run a national business. Your first entry ought to be in one or two selected cities. Get to know the places before you seek to expand.”

When examining where to start trading, businesses are frequently advised to note China’s system of ranking cities into five tiers (one being the most advanced). But for Chris at TNS, there is a danger that focusing too much on this grading system could result in poor decision-making.

He explains: “China usually gets segmented by marketers and commentators as having its cities separated by tiers, all reflecting different levels of development, economic status and various other things. It’s an oversimplification – for a company entering the market, which is a small part of the overall Chinese economy, there may be little difference between a tier three and tier one city, in terms of category.”

It will depend strictly on what service or product a company is looking to trade. “They need to really come and do their own landscaping with the category they’re operating in, to understand the consumer and market opportunity,” he adds. “They can’t just rely on a consultant’s point of view.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

The 5 Essentials of Good Strategy

All too often the CEO and their top team are consumed by the day-to-day. Such is the extent to which they’re drawn into the business, they lack the bandwidth to really evaluate strategic goals and assess the future direction of the company. In the worst case scenario, the senior executives actually confuse talking about daily operational issues with deeper discussions about strategy.

Given how rapidly business models continue to change, a lack of forward thinking on boards can prove fatal. Criticaleye spoke to a range of business leaders to find out why strategy must be discussed and how it can be implemented effectively:

1) Create the Time and Space

Every board needs to allocate the time to have robust discussions about strategy. Andy Dunkley, CEO of clothing company Lee Cooper Brands, comments: “It’s certainly not easy to get a good strategy session done properly and get the balance with the operational team and the board.

“You’ve got to go back to basics and define what the company is good at… It’s all about starting off with a sound assessment of where you think you are, reviewing what you’ve done in reality over a period of time, then seeing where you think the opportunities are and consequently what issues will come up as you execute your strategy.”

These should be difficult and, at certain points, uncomfortable conversations. Charlie Wagstaff, Managing Director of Executive Membership for Criticaleye, says: “It’s essential to create an environment where executives are really challenging both themselves and one another about the future direction of the business.

“Far too many senior teams fall into the trap of failing to adequately test assumptions about strategy because they are unable to undertake a robust and candid evaluation of the business model.”

Lupus Maltzahn, Managing Director for Strategy in the UK & Ireland at Accenture, comments: “You don’t want to have full buy-in all the time… Having a way of getting other views, other voices, into the discussion is incredibly important.

“What makes a strategic discussion productive is actively searching for your blind spots. Often, the reason you end up making bad decisions is that you weren’t aware of them.”

This point is echoed by Andy: “The worst thing in the world is when you try and define a vision and everybody just says ‘yes’ – that’s not healthy… It’s very important to have an open and honest session.”

Mark Scanlon, Group CEO of Personal Group Holdings, a provider of employee benefits and financial services, says certain topics will often divide opinion: “We look at potential acquisitions that we have targeted… we’re not an M&A business but it is part of our strategy [for growth]. The discussions we’ve had on acquisitions makes some people uncomfortable and others excited, [but] you have to go through all of the issues.”

2) Build a 360-Degree View

Senior executives need to be honest about what the business is currently achieving and take a long hard look at how their sector is evolving. Simon Oates, Director of Strategy and Communications at Southern Water, says: “Successful companies are agile and responsive… The senior executives are constantly scanning the market and looking for insights. They are not only looking at how their products and services are landing with stakeholders, but how competitors are perceived as well.

“Customer preferences change, so you need to keep refreshing your understanding and knowledge of what you’re trying to achieve with what’s happening externally.”

Dominic Emery, Vice President for Long-Term Planning and Policy at BP, comments: “We always start off with the two bookends of the company strategy, which is around the purpose of the company and our investor proposition… and then everything has to flex within that.

“Useful inputs to our strategic thinking come from our economic, geopolitical and competitive outlook, and government policy. Those are the four primary dimensions when thinking about the opportunities and risks to our overall strategy.”

A similar point is made by Simonetta Rigo, Vice President for Global Brand, Marketing Strategy and Planning at Western Union: “Strategy is ultimately about making decisions on where and how to win, leveraging a combination of analysis, facts and judgement.”

3) Think Ahead 

“It’s important to ensure the demands of the short-term financial imperatives don’t overwhelm the long-term investment imperatives,” Dominic says. “For us, that’s particularly important at the moment, with the oil price the way it is.”

“For example we’ve chosen to reduce our capital expenditure, certainly for 2015, as a result of the reduced oil price. We haven’t decreased it so far that it’s going to compromise the future but enough to enable [us to manage] our cash prudently.”

Charlie comments: “If you simply focus on the short term you may be making decisions and encouraging behaviours which lead to quick wins, but actually harm the business over time.

“Discussing the short, medium and long term will enable you to have a meaningful dialogue and set a clear direction for the future. Then, when internal or external changes occur, you can adapt accordingly.”

4) Execute and Empower

The execution of strategy is where discussions become reality. Mark Astley, CEO of Millennium Global Investments, an institutional asset manager, comments: “Strategy is meaningless unless you can execute and deliver on it. It’s crucial that you have people who can implement strategy… It’s only real if you go and do something.”

No matter how great the strategy is, it will be tested so there needs to be room for adjustment. Andy says: “The key issue is balancing your day-to-day decision making with the strategy you’ve set… We don’t need to re-analyse it, we need to think about the execution and follow that through… You shouldn’t be reinventing your strategy with every decision.”

Lupus comments: “You have a direction of travel, an objective and [then] take the steps to get there. After a number of steps… you might change direction a little bit, calibrate and adjust. You need to mould your course that way.

“The reality is that if you made a successful strategy permanent in the way it is successful today, it would die the day after tomorrow because existing or new competitors have moved on. With that in mind, the question is: how do you keep the good parts of an existing strategy while at the same time ensuring it evolves?”

In order for the strategy to adapt leaders need to delegate effectively. “You have to make a concerted effort to push some of the power downwards in an organisation,” Lupus continues. “Those you devolve power to will sometimes make different choices to the ones you would have made or thought you wanted them to make. Getting comfortable with that, and recognising the strength that lies in that, is important.”

Simonetta says: “Being able to link the deliberate strategy to examples of successful emerging strategies builds champions for change in the organisation and provides a real-life source of learning and insight that would otherwise take longer to validate through research and analysis alone.”

5) Keep Communicating 

Clarity is integral when it comes to strategy. Sandy Stash, Group Vice President for Safety, Sustainability and External Affairs at Tullow Oil, says: “It needs to be written in such a way that it’s clear who’s accountable… You need the right people to understand what their accountabilities are, with the right tools.”

Andy from Lee Cooper Brands says: “It’s good to celebrate achievements as you go but you can’t over celebrate. It’s all about day-to-day decision making to… get it going rather than looking for a perfect strategy.

“Strategy is a step towards a goal but it always moves on. You never get there…. There’s always a journey that you have to motivate people with and move on.”

***

Evidently, there is no magic wand when it comes to developing good strategy. It’s hard work and it’s up to the non-executive directors and executives to ask the hard-edged questions so they are able to have frank exchanges about the future of the business.

As Sandy says: “The strategy is not the Ten Commandments: it should be something that’s evergreen and lives and breathes, influenced by both internal and external changes.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeUK

Sustainability and the Walking Dead

Talk of embedding sustainability into business strategy is all well and good, but executing on that is an altogether harder proposition. The corporates that lead the way adopt a longer-term approach to doing business, discussing issues such as human rights, the environment, labour and anti-corruption when making decisions. As a result, sustainable thinking is ingrained in the plans, policies and procedures of the organisation.

The United Nations (UN) Global Compact, the world’s largest voluntary sustainability initiative for corporates, has made a difference. Part of the success is because it’s based on concepts that businesses are familiar with, such as due diligence and risk management, but they’re applied in the context of human rights. Despite its achievements, a large number of companies still have a long way to go.

At the last UN Global Compact Leaders Summit, the majority of the executives attending recognised that sustainability was important for the future of their businesses. However, according to Chip Pitts, Criticaleye Thought Leader, Lecturer in Law at Stanford Law School and Professorial Lecturer at Oxford University, they need to take their initiatives to the next level.

He says: “Some companies, mistakenly in my opinion, think they’re doing everything they can, but a lot of the time they haven’t really. What they’re doing is often not completely in accord with the current human rights norms, or environmental sustainability norms. The key to getting sustainability right is really getting the commitment from the top and at all levels of the company, then focusing on the tough work of truly integrating and embedding it at every level.”

A common problem is a failure to align different parts of a business. For instance, the CSR department won’t have contact with procurement, and different incentive structures can encourage conflicting behaviour. For Chip, it’s all about execution and unless the thinking around sustainability is joined-up, the impact a company can make will always be limited.

“There’s a difference between the formal policy, the stated commitment and the ability to implement effectively on the ground where it counts, where it affects people’s lives and the environment,” he says. “Often, there’s a real failure in the implementation, but the companies that are doing it well are starting to align these concepts.”

Peter Lacy, Managing Director of Strategy Practice & Sustainability Services for Asia Pac at Accenture, says: “Sustainability should be managed not as a standalone, isolated corporate responsibility, but as an integral part of business strategy. It is a chance to manage reputation and grow revenue, while understanding risk more effectively.”

It’s a case of companies beginning to integrate sustainability into their products and service mix, in terms of R&D, marketing and branding. “Businesses such as Vodafone and Unilever are also putting pressure on their supply chains to drive significant environmental gains and efficiencies in their operations,” he says.

Lean and green

The idea of a business being able to do more with less has gained real traction in the boardroom. Sandy Stash, Group VP for Safety, Sustainability and External Affairs at Tullow Oil, says: “At the heart of sustainability is efficiency. An efficient business is a sustainable business.”

When it comes to best practice, Sandy says that companies from different industries can benchmark ideas: “We’ve learned a lot from the airline industry. You’d think there’d be no similarities between running oil platforms and onshore oil facilities and airplanes, and yet in the psychology and practice of running a safe and sustainable operation, there’s a lot our industry can take on board.”

The main barriers to sustainable thinking within corporates often come from basic misconceptions and short-termism at board level. Kevin Craven, Chief Executive Officer of UK Central Government at Serco Group, an international outsourcing company, says: “Sustainability is not about tree hugging but rather good business sense where everyone can benefit. Both clients and employees are really looking hard at businesses which genuinely integrate sustainable practices into their working ways – you cannot fake this by greenwashing your polices…

“Your planning horizons cannot be about the one-year or even the three-year cycle – they need to be longer so that the impact of your business on a community or the environment can be considered. Planning, rather than reacting, is always more economical.”

Gareth Llewellyn, Executive Director of Safety and Sustainable Development at Network Rail, says: “Being part of a sustainable business is about making money. From a commercial perspective you have to be profitable, otherwise you’ll go out of business and that can have quite a big economic and social impact on those who work for you.

“You also need to make sure that whatever product you use or manufacture doesn’t have a major or persistent environmental impact, because if it does you’ll be regulated out of existence whether you like or not. The other piece to this is the social impact: if society believes that you’re delivering your business in an unethical manner, Enron perhaps being a good example here, you will be forced out of business.”

Ultimately, for sustainability to be taken seriously, senior executives have to demonstrate how it will help deliver overall business targets. Andrew McCallum, former Director of Corporate Affairs and Business Support for Dana Petroleum, comments: “From a risk perspective, companies need to identify the social, environmental and economic considerations that might impact the successful delivery of the business strategy.

“There’s definitely a role for businesses to be involved in the communities where they operate. Helping to tackle relevant social and environmental issues should benefit the company and the community.”

If a sustainable approach is going to be more than an adjunct of the organisation, it needs to be driven from the top. After all, there is little point in discussing long-term intentions for society and the environment when the culture of a business is very much about hitting short-term targets. “Businesses need to execute on integrated leadership,” says Chip. “That means sustainability is embedded horizontally and vertically throughout the extended enterprise.

“Everyone needs to understand that it’s the ways things are done… The companies that don’t get this are truly the walking dead, they just don’t realise it yet.”

You have been warned…

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Reinventing the Role of the HRD

In the face of new technology, shifting demographics, the need for greater diversity and international competition, the boards of global companies expect a lot more from the Human Resources Director (HRD). While process and compliance matter, the fact is that the HRDs which provide the most value are the ones who understand why the talent and people agenda must be mapped to the business plan.

Matt Stripe, Group HR Director for food company Nestlé UK & Ireland, says: “The transactional element of the function can’t be ignored. You have to undertake performance development reviews, pay rises and so on, but that’s not the stuff that adds value to the organisation.

“What businesses are really looking for now, and I think line managers and business leaders are far more people-savvy than they’ve ever been, is for HR to participate in determining and shaping business strategy.”

Yetunde Hofmann, former Global HR Director for Imperial Tobacco, agrees that the “traditional terrain of HR” of policy, well-being, employee relations and health and safety, are not going to disappear. At the same time, because of HR’s critical role, it will need to align its agenda so it’s simultaneously operational and strategic.

In essence, it’s having the ability to facilitate the development of an organisation’s capabilities and culture in order to deliver on strategy. Debbie Hewitt, Chairman of retailer Moss Bros, comments: “HR Directors are increasingly around the top table… If you’re having the debate about whether they should be, you’re 20-years’ behind. Great HR Directors have a huge contribution to make in many places across the business.

“The challenge for a HR Director is to make sure they’re not at the board table just for HR. I take it for granted [that] they will do a brilliant presentation on talent, succession and HR strategy. Where I get massive added value from a strong HR Director is when they contribute to issues other than those specific to HR, such as if there’s an acquisition to be made or an investment – they can bring a unique perspective.”

Stuart Steele, Partner for Human Capital Consulting at professional services firm EY, says: “Chief HR Officers [CHROs], HR business partners and subject matter experts need to understand context… [and] have an appreciation of the organisation’s strategy, its competitors, [the wider] economic trends and how these are forecast to impact [the] current and future workforce. I meet practitioners who demonstrate this capability on a daily basis – however, they are probably still in the minority.

“Interestingly, we are increasingly seeing the appointment of CHROs who have not come from the HR function… In part, I believe this underlines the importance being placed on understanding business strategy and operations. As good leaders, these individuals are expected to be able to mobilise the HR function to develop and execute people initiatives in direct support of the business strategy and plan.”

Deborah Cooper, Director at search firm Warren Partners, says: “The strongest HR directors have had experience outside the HR function… They tend to have more business credibility and ask different questions, rather than having a narrow skill-set purely through HR. Those who are rounded and have broader business experience tend to be meeting demands more effectively.
“The most effective HRD is one who can bring strategic thinking, real enterprise vision and business understanding and not one who’s necessarily technically strong in siloed skill-sets.”

The role will continue to evolve in this manner, especially as the more process-driven elements of the function become easier and cheaper to outsource. For many HRDs, the question has to be: Unless they are involved in harnessing capabilities and culture to deliver against strategic goals, what value are they really adding?

A person of influence

The use of data and proper information management are a prerequisite for efficient HR functions. For Matt, the insights provided by technology to enhance performance need to be watched closely: “It’s exciting to think what analytics will give us in a very short period of time – we have bits of it, so I can pull off good information now but in the future, and we’re probably only talking a couple of years, you’ll be able to look at so much more.

“It won’t just be whether a business leader is delivering on their results; you’ll be able to add the 360 degree evaluation to that, plus some others tests to check on emotional and social intelligence, including an ability to measure employee stress levels. It will be a lot more holistic.”

Nicola Pattimore, HR Director for business process outsourcing concern Equiniti, comments that “the use of data analytics to help drive decision-making has increased hugely”. However, in order for this to be meaningful, HRDs need to be commercial in their thinking and strong-willed when presenting information to the top.

If this isn’t the case, there is the danger of data simply being used to create added layers of bureaucracy, or for HRDs to shy away from discussing harsh truths about performance. “It can be a lonely job because often you’re having to act as the conscience of the business, challenging senior leaders and sometimes telling them things they might not want to hear,” says Nicola.

“When you’re sat at the table with a CEO, CFO and COO, you need to be able to inform and help make strategic decisions. A lot of that will entail providing a perspective on people, but you need to have that impact and influence.”

Charlie Wagstaff, Managing Director of Corporate & Public Sector at Criticaleye, comments: “While being technically and commercially competent, effective HRDs are unerring in their focus on how talent can be utilised to deliver against the business plan, both for the short and long term.

“The very best HRDs are distinguished by their ability to collaborate and form partnerships across an organisation – they understand how to influence the CEO and the board.”

It’s a case of having a full appreciation of what levers need to be pulled in order to improve performance. Stuart says: “I aspire for CHROs to contribute to the determination of business strategy, however, where they can really come into their own is during the development of the organisation’s business [plan]…

“CHROs can also challenge untested assumptions around the business… As an example, if an organisation is [setting] up a new business in a new geography, should they implement along the lines of the existing operating model, or use this initiative as an opportunity to adopt a different approach?”

The difference in value lies in a HRD being involved in the formulation of plans, as opposed to merely responding to operational necessity. While some HRDs are functioning at this high level, it’s evident that others have a long way to go.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

A Matter of Reputation

Comm update_8 OctoberConsistency goes a long way to building a strong corporate reputation. If a CEO waxes lyrical about the pride the company takes in putting customers first, or eulogises about how it supports communities and tries to ‘give something back’, then the business cannot be found to be doing the exact opposite. That’s a sure-fire way to attract a swarm of negative publicity.

From environmental disasters, to rogue pricing and bad customer service, there are plenty of examples of companies which have seen their once gilded brands fall into the gutter. Nick Barton, CEO of CityWest Homes, a provider of housing management services, says: “The crucial thing to think about is how it might break down if things start going wrong. That’s when your reputation is so fundamental, because when things become uncertain people will cling to what they are most comfortable with. Trust is the fundamental part of your reputation.

“People will go with you, even if things are going wrong, because they believe you’ll do the right thing and will fix it. If there’s no reputation and no trust, you will lose your audience, market, investors, bankers, whoever, very quickly.”

Over the years, a company’s character will invariably be defined by the way it has operated. Ian Wright, former Corporate Relations Director at alcoholic beverages concern Diageo, says: “First thing, and absolutely critical to any corporate reputation, is sustained strong business performance; you can’t expect to be a well-regarded company without being good at business and without having a strong track record of success.”

Pam Powell, Non-executive Director at Premier Foods, notes that building trust is increasingly hard among well-informed, sceptical stakeholders. She says it’s necessary to devise clear policies around things like sustainability and to be able to demonstrate that actions are being taken to improve performance, as this is critical for maintaining corporate integrity.

It’s a case of devising a watertight communications strategy. Samantha Barber, Non-executive Director at electricity company Iberdrola, comments: “To have an engagement strategy with stakeholders who are onside and supportive is actually quite straightforward. It’s a completely different kettle of fish when you are interacting with those who are openly and vocally hostile to your company and brand. To make it work, it requires very active and constructive listening… and to have a respectful dialogue on all sides.

“With a really hostile stakeholder group, you may never be able to win them over completely to your side and they may never be openly supportive of your company, but what you might be able to do, through greater understanding between your corporation and that group, is neutralise the negativity and hence its impact on your corporate reputation.”

Tone from the top

Employees should be under no illusion about what’s expected of them. On the flipside, they in turn must be confident that the senior leadership team is going to follow the same rules and codes of conduct.

For Ian, “it won’t succeed unless the CEO is absolutely committed, otherwise people figure it out quickly”. If a CEO has a passion for excellence in customer service, it has to be bought into by his/her “executive colleagues… and then it needs to be transferred and made into a real feature across the organisation, including the board itself”.

Without that buy-in, things will go awry. Tim Kiy, MD of Operations for Marketing, Communications, Citizenship and Public Affairs at Barclays Africa Group, says: “Reputation is something that’s owned by every single person in the organisation but the tone is set from the top, primarily by the board and the executive committee.

“They have to understand exactly what it is they want in terms of both a culture for the organisation and the relationship with their customers, and that should be imbued in both the brand and the brand positioning.”

Tony Cocker, Chief Executive of energy company E.ON UK, comments: “It has got to start from the most senior levels then be nurtured and fostered at every level. To do that you’ve got to have the right behaviours; you need simple, clear strategies and people at the local level… need to feel empowered to do the right thing for the customers.”

Certainly, the external messaging has to be equally transparent and it pays to be on the front foot. Andrew McCallum, Director of Corporate Affairs and Business Support for oil and gas company Dana Petroleum, says: “Stakeholders, whether they’re customers or suppliers, governments, policymakers or campaigning groups, have become ever more powerful in influencing the reputation of companies and, in turn, their ability to deliver their strategies and goals.”

One of the main reasons for this, he continues, is that they are now able to communicate much more readily about issues. They’re able to do so pretty much in real time, through social media in particular, and “they can have quite a big bearing, these different audiences, on the level of trust that any company, brand, or government for that matter, enjoys”.

Earlier this year, E.ON UK was heavily penalised by the energy industry regulator, Ofgem, for mis-selling to customers. Tony explains that, when any organisation is under intense scrutiny, showing yourself to be accountable is crucial: “From a personal point of view, as the CEO, you have to represent the organisation and if you make mistakes, in my view you have to stand up and apologise for them personally, as we have done.

“Clearly, in this day and age you have to go on the television… in our case you also go in front of select committees which, again, is televised. You’re in front of a stakeholder and you’re talking to customers, so you are very much representing the company and I think your values, therefore, will have to be very true to the values of the company.”

Clarity, conviction and consistency, as ever, make all the difference, and when things inevitably do go wrong, it certainly helps to be able to own up to mistakes. “The critical thing is to ‘be’ – to behave identically to your desired reputation, not simply to state it,” says Pam. “Trust must be earned through consistent behaviour across millions of touchpoints, large and small alike.”

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Why Business Strategy is Changing

Comm update_2 MayA shift in strategic thinking is underway as boards come to realise that they must respond faster to the changes shaping the global marketplace. The old notion of a set five-year plan has been transformed by the use of more emergent strategies, where assumptions about the future are tested more frequently and, if a new direction is needed, the business is fluid enough to be able to adapt quickly.

“I am seeing a change taking place where the top-down, long-term view needs to be supplemented by more focus and agility in recognition of how you are going to achieve it, so the building blocks within corporate strategy are definitely becoming more dynamic,” says Ruth Cairnie, Non-executive Director of the FTSE 250 engineering firm, Keller Group, and former Executive Vice-President for Strategy & Planning at Shell.

Rebecca Lythe, Chief Compliance Officer at retailer Asda, comments: “Technology is moving so quickly and the landscape has changed in terms of how easy it is to do something quite disruptive, so mature businesses have to learn to be a lot more agile. It is still important to set a strategic direction looking some years ahead, but it’s how you get there, the time horizons within it and how you keep your strategy up-to-date which have all accelerated.”

The pace of change knows no bounds. Kevin Craven, CEO of the Services division at infrastructure provider Balfour Beatty, says: “You only have to look at what’s happened in the telecoms industry, where miles and miles of cables and wires in the ground have been replaced by mobile phones and masts. The entire economic model just shifted dramatically…

“No market is free from disruptive influences, so you clearly have to be monitoring your world and your customers and think about how you might respond to those shifts.”

Clearly, leadership teams must be better prepared when a disruptive shift does occur. “You should have at least envisaged the tough questions and how you might answer them, otherwise you’re not providing genuine value to your shareholders,” says Kevin. “One of the answers might be to say: ‘We need to close our doors.’ Another could be to sell to the innovator that’s tearing up your marketplace… [and] if you don’t want to go to those lengths then at least be prepared to be radical.

“For example, last year, because of a divergence with the group strategy, we decided to dispose of a business unit. It was one of the most profitable businesses in the group but it became clear that we were no longer the right parent for that business to achieve its potential.”

Big decisions

If CEOs delude themselves about the need to adapt, strategies will fail. Roger Martin, Criticaleye Thought Leader and Academic Director of the Martin Prosperity Institute at Rotman School of Management, comments: “The most common thing to do in the world of strategy in business these days is to complain about the V.U.C.A. world we live in – so everything is volatile, uncertain, complex and ambiguous – and then say that because of this it’s impossible to do strategy.

“But if an organisation doesn’t understand it has to make choices about where to play and how to win, it might as well not do strategy. That’s why more than eighty per cent of all strategic plans are pretty much useless.”

Peter Shore, Chairman of Arqiva, the UK’s national provider of TV and radio broadcast infrastructure, says: “Once a year we go offline for two days… to look at our individual industry segments from the bottom up. We look at where we are, assess our strengths and weaknesses, then from the top-down we try and assess where the big technical shifts or the big industry or customer shifts are going to be in our markets, and therefore where the big opportunities are for us to push our next investments.”

The board-level strategy has to be clear but the roll-out for a global business will not necessarily be homogenous, which does present some risks. Simon Dawson, Associate at leadership and organisational change consultancy Transcend, comments: “Emergent strategies are fine so long as there is connection across the organisation and rules to operate by. The danger is that people fall into a state of ‘self assembly’, whereby they go off and do their own thing believing they’re contributing to the whole strategy but, in reality, different parts of the organisation are moving in different directions.

“For example, when I worked in a telecoms business that was supposed to use emergent strategies, things were fine until the board got rid of the CEO as a result of the business underperforming. Then it quickly became clear that [the business] was just formed of little silos of people doing their own thing, none of which really connected.”

Communication must be frequent so that the vision remains relevant. Roger says: “As a business grows larger, the delusion of believing you can have uni-directional strategy set from the top just becomes more and more far-fetched.

“What you have to do is lay out a strategy direction from the top then say to the business units: ‘Here’s what we’re trying to accomplish as an organisation, please try and make something consistent with that.’ It’s then a process of going back and forth between the top and the bottom, which hones, refines, tightens and aligns your strategy.”

Ruth comments: “You need constant communication so that the view from the HQ about what the world is like, and whether the strategy can be implemented, is constantly up to date. You mustn’t be in the position where your assumptions are out of date, so it’s about constantly testing whether your assumptions are still valid and whether you are delivering on the strategy you set out; if not, an adjustment may be needed.”

For Rebecca, it’s about senior management being as candid as possible: “Strategy execution today means… having open and honest conversations within the leadership team about whether something has moved faster than you thought and, therefore, what the new implications are for the business.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

A Flatter, Faster and Fitter Business

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Strategic, board-level decisions often fail because they are ground down in the corporate machine. While senior executives must be smarter at overcoming this by engaging middle managers and explaining why certain decisions have been taken, there is also a bigger, systemic question that needs to be addressed around organisational design and culture so that the best ideas are driving a business forward.

Martin Hess, VP of Enterprise Services at IT concern Hewlett Packard, says: “We have taken out tiers of management to flatten the organisation’s structure, because one of the biggest frustrations is that decisions taken at the top basically don’t hit the bottom. Too many tiers of management dilute the message that comes from the top, so you’ve got to find ways in which you can communicate decisions that avoid that dilution.”

It does appear that a point has been reached whereby traditional structures, be they hierarchical or matrix, are proving increasingly inadequate for global businesses. If that is the case, anything that can simplify and bring transparency to the decision-making process should be welcomed.

Julian Birkinshaw, Criticaleye Thought Leader and Professor of Strategy and Entrepreneurship at London Business School, comments: “All organisations use, to some extent, business models and management models that they don’t question and have inherited. These are based on order and control, but this ends up constricting an organisation’s ability to function…

“There are alternative models emerging which are bottom-up, relying more on the ability of people to make decisions for themselves and working out a mode of operating that is successful.”

Informed decisions

Much has been written about how data and analytics can inform choices. While there has undoubtedly been a step-change in this field, it shouldn’t be seen as some kind of panacea for making tough calls. Martin says: “You’ve got to avoid the process whereby you filter only the information that supports that decision.

“It’s not a weakness to change. You make decisions based on the data… then you’ve got to create a model that is permeable, allowing other data sources to come in that might influence that decision going forward.”

The focus must be on flushing out any false assumptions you may have.

Simon Dawson, Associate at leadership and organisational change consultancy Transcend, says: “Be aware and open about your biases, both personal and organisational, that might come into play in decision making, whether it’s in interpreting data or having a gut feel about what to do.

“That might include being tainted by negative previous experience; the different perceptions of risk; whether levels of optimism are realistic or how people perceive themselves and each other.”

Caroline Brown, CFO of consulting and software service concern KBC Advanced Technologies, emphasises the need to balance data with personal judgement.  “I’m afraid I tend to go with the gut feel and really interrogate the data that doesn’t agree with that,” she says.

“I’m very sceptical about data most of the time. I wouldn’t go as far as to say [I pick the data that I agree with]… but data that is in contradiction of the gut feel gets interrogated thus, because it starts with the wrong assumptions and probably the wrong inputs as well.”

The volume of information now available means that executives can become lost in an endless maze of data analytics as they attempt to make the ‘right’ decision. “Companies which look at data and are obsessed by it can find themselves in a state of ‘analysis paralysis’,” warns Julian. “They get stuck in inaction, whereas the next era is one of action and conviction.”

For Geraint Anderson, CEO of electrical systems manufacturer TT electronics, it’s a matter of course to be working to clear data points but, he says, “it’s ultimately about whether I feel it’s the right thing to do… then making sure that I can back that up with data where possible”.

The right results

The crux for effective decision-making in any organisation comes down to leadership. “When decisions fail to take hold within an organisation it’s mostly down to culture and lack of communication around the context for the decision,” says Caroline.

Geraint says: “I keep HR directly informed and share and develop decisions and the direction with the rest of my team, bringing them together on a regular basis to assess whether we are still on the right track. It’s vital that you’re coherent and bring decisions together as a team and are not just being dictatorial.”

The common mistake is to announce a change, not communicate it clearly and then fail to revisit it on a regular basis. Clodagh Murphy, MD of Eclipse Internet, a division of KCOM that provides communications services to small and medium-sized businesses, comments: “Decisions often get taken in boardrooms and are cascaded out as ‘just do it’, without taking the time to explain the context of why the decisions have been taken…

“We’ve had bottlenecks where, to some extent, the capability of some of the middle managers just isn’t there to articulate the messages effectively… [and] we’re doing quite a bit around people development to try and overcome some of that.”

If decisions do appear to keep getting ‘stuck’ in a business, ultimately a CEO will need to see this as indicative of a more ingrained weakness around the leadership team, the culture and organisational model. At present, many companies are at a stage of reassessment, wondering how to reduce complexity so that everything is moving faster, but in a way that is based on clearly established values.

According to Julian, “we have now reached a point where an emphasis on collective knowledge has led to sterile decision making, devoid of emotion… Organisations now need to marry knowledge and emotion”.

It may prove to be an unbeatable combination.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk 

Why Social Media has Changed Innovation

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The sources of innovation are changing. As communication channels evolve, companies must learn new ways to open up to customers and collaborate with employees and third parties in order to develop ideas. Harnessing those insights so that experimentation and business strategy are aligned is a major headache, but it’s one that must be dealt with if organisations are to stay competitive.

Social media presents an opportunity to rapidly create communities with employees and customers, but for genuine engagement and innovation to happen something more sophisticated is required from businesses. Tulsi Naidu, Operations Director for UK & Europe at Prudential, says: “I suspect all businesses now are doing a range of blogs and Twitter-type interactions, but I’m particularly excited about our ‘colleague ideas’ portal which we launched about a year ago.

“It’s an open portal which started guerrilla-style through a home-coded collaboration forum by a bunch of IT colleagues, and is now being rolled out to over a thousand people. It has a lot of energy around it because people tend to dive in every day, look at their favourite ideas and post comments.”

Ruth Cairnie, Executive Vice-President of Strategy and Planning for Shell International, explains that a programme was introduced to capture innovative suggestions from employees and external parties. “Entrepreneurs in all kinds of organisations can submit their ideas to us and we have a team of people who vet those ideas, decide which ones would have potential, then they can be supported with investment and expertise to turn an idea into reality,” she says, noting that one such suggestion, relating to a floating liquefied natural gas facility, is “now on its way to become part of a world-class project”.

Ideas have to be shaped so that they inform the business strategy. Annette Burgess, Commercial Director of books and stationery wholesaler Baker & Taylor UK, says: “All stakeholders need to play an active role in social innovation, but I think there needs to be a gatekeeper in terms of looking at what points and which conversations should go onto these social innovation platforms. The difficulty is that as well as having all these meaningful conversation, not all ideas will be taken forward in this collaborative process, so somebody needs to steer the initial conversations.”

Paul Baxter, Social Business Leader at IBM, explains that the company engages in real-time conversations internally for the purpose of innovating. “It could be around redefining corporate values, which we have done, or it might be about thinking how we redefine our product or service proposition in the marketplace,” he says. “Everybody in the organisation will come online and contribute but, importantly, it’s not just an opportunity to gripe about anything that comes to mind, it is structured around key themes which are carefully moderated.

“In terms of how you derive insight from that mass of data, we use our analytical tools to look at what the hotspots are around the conversation, what the key influences are and then, as an output, we’ll make sure we go back to check that everyone is up-to-date with what the main insights are that came out of that very large online conversation, and which ideas are going to be taken forward.”

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Rock the boat

There has to be a leap of faith from executive teams in how ideas are encouraged and rewarded. After all, as much as introducing something ‘new’ is perceived to be good, the reality is that it can stir up friction within an organisation. “You need to welcome change and innovation, but many business leaders are absolutely terrified of it,” says Don Elgie, CEO of insight and communications company Creston.

In a number of industries, the pace of change is relentless. Simon Johnson, UK and International Group Managing Director for publisher HarperCollins, comments: “If you’re not creating fresh approaches, you’re in trouble. Our ability to do this is a key competitive advantage because, while we aren’t trying to become the biggest publisher in the world, we are trying to build the fastest, most creative, nimble and innovative business.”

Beyond driving ideas through social media and variations of crowdsourcing, the fundamental problem within a vast number of companies is how to create an innovative culture. It requires maintaining the traditional hierarchy, operations and efficiencies within the organisation while, at the same time, there is effectively a shadow business running alongside which is agile, flatter in structure and able to drive new strategy development and product innovation.

This leads to conflicts about culture, performance measurement (think of the traditional retailers fighting their ‘space vs online’ battles) and degrees of permissible experimentation. Where exactly is the line between hitting quarterly targets and securing the long-term future and success of the business? Just how far can innovation be pushed within an organisation so that it doesn’t just undermine day-to-day performance, but even produces ideas that render the existing business obsolete?

Each company has to decide on its boundaries and definitions of success. Simon comments: “It’s about avoiding the ‘innovators dilemma’. For a business like ours, which has been around for a long period of time, it’s vital that we are the disruptor and not the disrupted. That may mean at some stage disrupting your own business model, not just focusing on the short-term financial targets. Generally, incumbents have a predisposition to not evolve because they are worried about destroying their legacy business.”

This can be kept at bay if the focus is on the customer and defined goals. Tulsi comments: “We’ve made a point of saying everything must have a conclusion and being able to go in and look at the graphs that tell you how many ideas you have on there, what stage of the process they are in and whether they are under consideration, in implementation or have been stopped from further progress.”

If the engagement and passion are right, then ideas should flow. Costas Markides, Criticaleye Thought Leader and Professor of Strategy and Entrepreneurship at London Business School, comments that “ideas can come from anybody, anywhere, anytime so any processes that help to put this philosophy into practice are welcome”. Although there is nothing particularly new about this per se, he does acknowledge that the speed at which technology can be used to galvanise the ideas of numerous people does give a different twist to innovation.

Paul says: “Over the next decade or so, companies will start to think about how they foster, measure and reward collaboration and knowledge-sharing internally. Rather than just being about how much business you have sold or how much revenue you have earned, the extent to which people are collaborating and seen to be leading thinkers within the business, and the ability to put some objective measures around this, will be built into some of the HR scorecards of the future.”

No one is saying this is easy, but executives must be brave and experiment rather than assume that the old ways of creative thinking are going to provide the competitive edge going forward.