Senior consultant and author Yves Morieux pointed out that the increasing complexity of the business environment leads to an increasing number of requirements, and to an increasing number of key performance indicators. Fixating a bunch of indicators, people may get dragged into the depths of detail lose sight of the broader picture, thus adding to the complexity of management. Jack Welch, the distinguished former CEO of GE, pointed out: “Too often we measure everything and understand nothing”.
The enterprise has to create sufficient and sustainable value, and, in order to do so, it must create value with others and for others. The value created in the business must be evaluated, and the performances evaluation system (PES) must be must be clear, comprehensive, and congenial so as to serve the enterprise and as appropriate also its stakeholders. The PES is it not an objective but the means leading to actions that will improve or even innovate the creation of value in the business.
The PES should be s.m.a.r.t., i.e. systemic, measurable, actionable, relevant to the people concerned, and timely. Systemic thinking is not new, but its application remains inadequate. The PES may adequately measure the old but strategies and market may change and challenge the rigidity of the traditional PES. And so, Peter Drucker warned: “If we measure the new wit the old tools we will not be able to perceive the new”. These few comments to remind that the PES is as important as it is intricate. Let us not forget that the way we measure affects the way we manage, and the way we perform. Sometimes, the PES is designed to serve the senior management, not to serve front-line personnel. So, the management should drive the measures that serve and that connect different levels and functions, and not the other way around. And so, to widen our perspective on the subject, let us take a look at the 5 performance evaluation systems.
The financial reporting system is the official PES, and it is regulated by national and by international authorities. It is supplemented by the following methods that have been developed by academics and consultants. The Balanced Scorecard, launched in the 90s, has been adopted and adapted by some corporations. The models of the EFQM and of the IIRC are less known, and my model of the <5 corporate capitals> is quite new. In this paper, I outline some of the key features of the aforementioned 5 PES, and then present my <5 corporate capitals>, and then I set out its unique benefits as well as its contribution to Agile Management.
This paper uses some excerpts from my new book “The Platform of Agile Management and the Program to Implement It” referenced below.
N.B. The PES is only part of the advocated “The Review-Evaluation-Recognition System”, which connects to the 6 management processes listed in the acronym S.P.I.D.E.R., and that I will discuss in my next paper.
-1- The financial reporting system
The financial reporting system (FRS) should provide the enterprise, and as appropriate its stakeholders, namely: the personnel, the customers/consumers, the suppliers, the shareholders, a fair view on the company’s robustness, reactivity, and results, as well as with a systemic appraisal of the outlook.
Organizations base their performance evaluations on the figures reported by the financial accounting. The financial accounting is a time-tested method since Franciscan friar already used the double-entry accounting system some 500 years ago. Financial performances indicators provide a common denominator, and common language that enables business-leaders to consolidate various types of performances. Financial figures look trustworthy because they are clear and concise, however they are far from immune to manipulations. Sandbagging arranges for comfortable results, and unsatisfactory results can get dressed up. Figures can lie, and liars can lie.
Financial reports present the lagging indicators that cannot be changed, while the leading indicators are the ones that can be acted on. Financials are precise and deemed reliable, and they may lower the attention of the managers to short-term financial results since they serve as a basis for the management reports and for the recognitions and rewards. Thus, some career-minded managers tend to shun innovations and initiatives where the financial results are uncertain, and where the results will only show up with big delays. Yet, it is difficult to build a sustainable long term by fixating the short term !
Last but not least, the major limitation of the FRS is that the financials are based on the conventional accounting, which ignores the intangible resources, which are the ones that drive our innovation-based economy. Prof. R. S. Kaplan and Dr. David P. Norton observed some time ago. ““Over 75% of the firms’ market value is now derived from intangible assets, which are not captured by financial metrics”. Leif Edvinsson provided a reasonable explanation for this gap: “The market value does not reflect the business wealth because we do not have a suitable and widely acceptable system to measure the value of (all) the strategic resources”. The relevant authorities have only accepted a reporting that is essentially based on generally accepted accounting practices, and the alternative PES discussed in the following sections has not changed their fundamental position.
N.B. Some of the global auditors have published guides to the performance indicators.
-2- The Balanced Scorecard (BSC)
Several authors – including McNair’s “The Performance Pyramid” (1990), Maisel’s “The Balanced Scorecard Model” (1992), Adam Robert’s “EP2M” (1993), and Kaplan Norton’s “The Balanced Scorecard” (1996) – proposed their model to present a broader and better balanced measures of company performances, which includes the evaluation of intangibles.
The BSC places at the center of its model <vision & strategy> that drive the <financial>, the <internal business processes> as well as the following 2 intangible resources, namely: the <customer> and <learning & growth>. The <financial> interact with <customer> and with the <internal business processes>; <learning & growth> interacts with <customer> and < internal business processes>.
First of all, the BSC is a good model of a management system, which puts <vision and strategy> where it should be, namely at the center of the managerial thinking. It specifies the objectives, the measures, the targets, and the initiatives. As opposed to <objectives>, the <targets> could show intermediate achievements or the enablers. Kaplan & Norton propose the same 4 types of criteria for the management of their 4 management-components, but the criteria themselves can differ.
Oddly enough, there are no performance criteria for the vision and for the corporate strategy. Moreover, there are many more intangible resources that the two featured by the BSC, and the one that are mentioned are too broadly stated to enable their proficient management. Moreover, in addition to the internal business processes, there are external business processes, and on top of them there are the strategic processes.
Kaplan & Norton supplemented “The Balanced Scorecard” with “The Strategy Focused Organization”, “Strategy Maps”, “Alignment”, and “The Execution Premium”. Prof. emeritus Kaplan is also the author of “Time Driven Activity Based Costing”. Kaplan & Norton founded a consulting and management training company, “Palladium”, which they sold and then retired. As a modest author, I want to pay my respects to Kaplan & Norton for their seminal work.
-3- The model of the EFQM
Fourteen leading companies set up the European Foundation for Quality Management (EFQM) in 1988 to promote Total Quality Management (TQM) and help European industry. The EFQM proposes a method for company self-assessment, which separates the enablers from the results.
This method features questions on the following 9 points. On the side of the enablers we have the leadership, which drive the personnel management, the policy and strategy, and the resources, and the processes. On the side of the side of the results we have personnel satisfaction, customer satisfaction, impact on society, and business results. The answers to the 9 aforementioned points are qualitative as well as quantitative, and they require a reasonable level of maturity as far as TQM is concerned.
I certified to present the EFQM self-assessment to companies a long time ago, and I do not know whether there have been major revisions. At any rate, the model has its merits. It is comprehensive, and it is well structured. I like the distinction that Tito Conti, one of the architects of this model, made between the enablers and the results. Paraphrasing Prof. Kaoru Ishikawa, I submit: “Manage the enablers and the results will take care of themselves”.
The model did not distinguish between the business processes and the strategic processes, it did not distinguish between the tangible and the intangible resources, and it does not include the satisfaction of the suppliers.
I believe that the EFQM self-assessment can help organizations ensure efficiencies through continuous business improvements. I understand that TQM is still widely used in Japan. In Europe and in the USA, many enterprises have switched to Six Sigma, which is narrower but goes deeper in the management of selected processes, or emphasize innovativeness, swiftness, and most recently on strategic and organizational agility.
-4- The model of the IIRC
For completeness sake, I mention the model that the International Integrated Reporting Council (IIRC) published in 2013. The IITC is an assembly of some auditors, investors, and executives that advocate a reporting system that provides a better explanation on how the enterprise creates value in its business. I understand and like their advocated purposes, but I do not see very well in the IIRC model a structure of a management system comparable to the one of the Balanced Scorecard or of the EFQM model.
The IIRC model features the input of 6 capitals, namely: the financial, the manufacturing, the intellectual, the human, the social, and the natural capitals. These capitals are processes by activities – they do not use the term <processes> - that are steered by mission, vision, governance. The ensuing outputs show on the aforementioned capitals.
I am not really comfortable with their definition of the 6 capitals, there is no clear distinction between the tangible and the intangible resources, I do not see very well how they interrelate to one another, there is no clear distinction between the strategic and the business processes, and I do not see how they all integrate a management system, I do not find I do not see a performance evaluation system. I have not seen anything further to the framework they published in 2013, and do not know where the IIRC stands.
-5- The 5 corporate capitals that form the business value
For years my work focused on TQM, then Stewart’s “The Intellectual Capital” led me to shift my focus on the capitals, and in particular on the intangible resources. Processes are a means to add value to the capitals. In my “Connected” Thomson Business Press 2000, I show
a model where the Human Capital drives the Financial Assets, the Marketing Capital, the Time Cycles, and the Organizational Capital. I improved on that model in my “Innovate out of Crisis” Trafford 2009, which starts with the input of the <Corporate Capital>, of the< Talent Capital>, of the <Market Capital>, of the <Life and Time Cycles>, and of the <Financial Capital>. These inputs are processed by the strategic and by the business processes, which add value on the aforementioned capitals. I have kept improving and publishing the revision of my model of the 5 <corporate capitals> in the following 3 books.
I have taught my models to post-grad MBAs, but I have not tried to promote their adoption by industrial associations or by the competent authorities. Hereafter, I will outline my model as presented in my new book, “The Platform of Agile Management and the Program to Implement It”, and then show how it supports Agile Management.
My cursus featured the presentation of the model of the 7S presented by Peters & Waterman in their best-selling “In Search of Excellence”. It led me to develop my model of the <organizational capital>, which features the following 5 <s>: on the top level the strategic fundamentals, the style of the leadership or corporate culture; and on the lower level the systems of management i.e. my SPIDER Web recently published on LinkedIn, the structures of the organization, and the shared critical competencies. On the left side of the model the strategy and the systems drive rational and result-oriented behaviors, on the right side of the model the style and the structures drive relational and emotional/creative behaviors. The shared critical competencies are invested in the tasks planned by the strategy and assigned to structural units.
As can be seen, my <organizational capital> sets out the strategic and organizational personality of the enterprise. It shows the uniqueness of each enterprise, and it should leverage its unique strengths, thus, while an intangible, the <organizational capital> is or should be a most important asset. As an intangible resource, it does not show on the balance sheet, but wise investors and the external partners of the enterprise pay a lot of attention to the <organizational capital>.
The <organizational capital> is broader and more detailed than the <vision & strategy> of the Balanced Scorecard. Placed at the center of my model of the 5 <corporate capitals>, it drives on the top level of the model the <life and time cycles>, the <talent capital>, and on the lower level the <financial capital>, and the <market capital>. The senior management should pay particular attention to the <life and time cycles> and to the <talent capital>. It delegates to the operations the day-to-day management of the <financial capital> and of the <market capital>.
I refer the readers to my new book referenced below for the detail on my <corporate capitals>. Let me just point out briefly some of the benefits of my model.
Firstly, only the <financial capital> concentrates on the tangible assets, the other 4 <corporate capitals> are intangible resources. Financials are available and the traditional markets are supplemented by venture capital, and by cryptocurrencies. The difference in terms of performances and their sustainability can be achieved on intangible resources.
To put the intangible resources in the proper perspective, allow me one of my favorite quotes.
“Sometimes what counts cannot be counted,
and what can be counted does not count”. Albert Einstein
Secondly, the interactions among financial assets are easy to see. However, also the interactions among the intangibles among my <corporate capitals> can be estimated by the people who do the work. This becomes very clear when planning the allocation of the shared critical competencies that should support the assigned tasks, and when reviewing their effectiveness as critical success factors.
Thirdly, the intangible resources can be designed to support the strategic and organizational agility necessary to sustain success in our turbulent times.
Dulcis in fundo as the Latin used to say, or the best at the bottom. Unlike the Balanced Scorecard and the IIRC, my model breaks down each of the 5 <corporate capitals> in 5 <capital components>. Headings are great, but only if they are followed by content, and content has to go into the detail. Thus, the <capital components> help to get into the detail and to deploy the necessary tools and techniques. So, when discussing the <organizational capital>, one of the <corporate capitals>, I showed its 5 <capital components> or the 5 <s>.
Let us take another example, the <talent capital> breaks down in the following <capital components>: interpersonal competencies, ideation, investigation, imagination, initiative. When programming a project, I advise to look at the different the types of <talent capital> necessary and to determine which ones are critical, and then to look for the people that have the right mix and power of talent to contribute.
To enable strategic and organizational agility, Agile Management breaks down the organization in networks and teams, the strategic activities in tasks, which are assigned to the teams. The teams have to plan and to deploy the right combination of <capital components> to get their job done, and in their frequent reviews they must evaluate the results obtained at least on the top <capital components> invested. Teams have to work with other teams, and they must understand the <capital components> deployed by the other teams. Thus, getting into the detail of the <capital components> enables all the teams to gain a better understanding of who does what how. Such understanding is a key to an effective cooperation, and to the optimization of the shared critical competencies.
Now then, let us refer to our model and see how it plays out on the PES.
Since the <business value> is created over value-chains, the strategy has deployed them on the plans, goals, and means over the structures, i.e. over the teams on the value-chains. As opposed to the financial reporting system and to the EFQM model, the PES advocated here looks at the objectives and at the results achieved on the relevant <capital components>. Different teams may focus on a different combination of <capital components>, however all <capital components> are compatible, and they all get consolidated at the higher levels, namely the networks and then the management of the value-chain.
The teams will check whether the <capital components> received from the up-stream are consistent with the plan, should this not be the case some modification to the program may be necessary. The teams will set out the program to meet the requirements of the team downstream, and in their frequent reviews they will check if the performances are on schedules, what has gone well, what has not gone as expected, what is not really well understood. Generally, the shared critical competences are lodged on one or several of the <capital components>. Processes are designed, reformed, and operated by talents. Of course, the effectiveness of the shared critical competences has to be monitored.
Actually, the PES must lead to remedial or reinforcement actions, which can lead to a reform of the plan.
The speed, the scope, and the scale of changes have increased the complexity of the internal and of the external relations of the enterprise, thus complicating substantially the evaluation of performances. Consequently, the <why>, the <who>, the <how> of the PES must be revisited and rethought. Kaplan & Norton’s Balanced Scorecard promoted innovative models and methods that enable business leaders to broaden the scope of their PES.
Roughly two decades later, while teaching strategic management at the Swiss federal institute of technology Lausanne, I built on some of the doctrines of the Balanced Scorecard, and I developed the model and the method of the “5 corporate capitals> that form the <business value>. Since, I have expanded on it to better respond to the needs of the self-managed teams and to the needs of strategically and organizationally agile organizations.
Of course, like all new models and methods, also my <5 corporate capitals> need comments and insights. Eventually, it will need the support of the business leaders and the blessing of the competent authorities. It will also need other people to leverage the introduction of new practices. So, I will look forward to your comments and questions to be discussed on my LinkedIn group <Agile Management Innovation>.
Mounting pressures from the top management of large organizations and/or from the global auditors should lead the pertinent professional associations and the financial operators to call for a new reporting system. As Gen. D. D. Eisenhower used to say “impossible is nothing” and innovating the current management reporting system is indeed possible because the <significant stakeholders> need better and broader communications to manage their relations to the enterprise. So, we show hereafter our approach designed to provide a comprehensives evaluation of the <business-value>.
N.B. Members of this group should join also my LinkedIn group <Agile Management Innovation> where they can discuss with their peers their comments and questions on the subject of this paper. I will only follow discussions on my LinkedIn group, and I will continue to leave some of the other groups I currently participate in.
Willy A. Sussland “The Platform of Agile Management and the Program to Implement It” 2017
B. Lev & F. Gu “The End of Accounting” Wiley 2016
Boulton, Libert, Samek “Cracking the Value Code” Harper Business 2000
Olve, Roy, Wetter “Performance Drivers” Wiley 1997
Kaplan and Norton “The Balanced Scorecard”HBS Press 1996