The Five Keys To Building A High-Performance Organization

A Gartner review of the practices of successful companies in a variety of industries reveals five characteristics that are key to success

“What we found is that HPOs share five characteristics. They set ambitious targets and consistently and continuously achieve those objectives. They display a strong sense of purpose through shared values both inside (among employees) and outside the organization (among customers, suppliers, and other stakeholders). They have a strategic focus and alignment so that employees know how they are contributing to the results of the organization. They have the agility to adapt to changing circumstances quickly. And, finally, they have a common and shared business model throughout the organization.”

This article is an example of the tremendous amount of good research currently being conducted by the business process improvement community that can be leveraged to design performance metrics for the supply chain.

“The Mission: Set Ambitious Targets

“Many organizations claim that the primary function of a strategy is to describe how to maximize shareholder value. We feel that this is not fundamental enough. Strategies come and go over time. In high-performance organizations, the fundamental performance drivers are described by the mission statement. Corporate strategy is what links the mission statement with the personal objectives followed by employees.

“Pinpoint Shared Values

“Every organization has values, whether they’re spelled out or implicit. “Values” are not soft. New employees that join an organization and do not fit into its value system usually depart soon afterward. If the employees and management of an organization do not share the same values, every change proposed within the organization will be heavily debated and implementation will require significant effort. Even when values are agreed upon internally, if those values (i.e., what binds the organization together) do not align with customers’ values (i.e., what attracts customers to the company), the organization will struggle to innovate successfully. In HPOs, managers and employees agree on the company’s internal values, and those internal values match customers’ values.

“How To Execute

“The execution of a good strategy is at least as important as having that strategy in the first place. A company with no strategy but excellent execution may, in fact, be better off than a company with a good strategy that is badly implemented. Therefore, the first step in developing alignment is to put in place a measurement system to provide feedback on whether a strategy is working. There are many types of measurement systems; each has advantages and challenges. Regardless of which a company chooses, implementing it at the executive level and collecting feedback is not, by itself, enough to create focus and alignment. The measurement system has to be cascaded deep into the organization.

“Every company has two management loops. The first (the inner loop in exhibit 4, below) deals with operational, day-to-day, short-term management issues. Its performance indicators are known; typically they involve the speed, cost, and quality of processes. These metrics are monitored consistently. The second loop of management (the outer loop in exhibit 4) is more hands-off. New targets are determined, and different performance indicators may emerge as the environment changes or as ways to further optimize processes from the first loop become clearer. The problem within many companies is that the two loops of management are often disconnected. Each has its own set of performance indicators, and those metrics are only implicitly linked. Operational management, which is responsible for the first loop, may be unaware of the issues in the second loop, and vice versa.

“In high-performance organizations, however, the two loops are aligned. Corporate strategy is not only translated into high-level plans, but also linked to first-loop indicators. And these monitoring indicators are, in turn, explicitly linked to the feedback process. HPOs also have trigger-based processes that invoke the loops. If the organization’s strategy changes, new targets and process optimizations are communicated to the people responsible for the first loop of management so that they can update their management methods. If changes in the environment are picked up by the first loop, these immediately invoke the second loop of management to respond quickly. The different people responsible for the two loops communicate, and executives can see developments registered by the operational first loop in the context of the slower-moving — but further-reaching — second management loop. This whole process is part of an emerging trend called “business activity monitoring.”

“Data and Process Standardization

“For organizations that seek to become HPOs, it’s not enough to introduce an aligned strategy, define the mission statement of the organization, and identify the company’s values. Processes must also be efficient. Limited resources must be leveraged to maximize their value. At the very least, the organization must strive to become more efficient structurally than the competition. This is possible only if best practices, processes, and systems are recognized throughout the organization and if every part of the company follows a common business model. Very few companies realize this ideal.

“Management processes and systems can be standardized only if they share data and performance indicators. Most organizations are stymied in their standardization efforts because they have trouble agreeing on definitions for the data that underlies the performance indicators.

“Agility Is Key

“An abundance of research suggests that most organizations fail at executing strategies designed to improve their position in the market because the external environment changes faster than strategies can be devised. High-performance organizations achieve a high level of agility so that they can identify change and respond optimally — or, even better, set the pace for change within their industry.

“There are four primary ways to create agility in an organization. One is by centralizing processes, data, and systems companywide. This approach is usually highly IT-centric, but it ensures that changes need to be executed only once. This speeds up change processes and eliminates the chances for error. A second method for improving agility is through smart sourcing. Standardizing as many product components as possible and using subcontractors to produce and deliver those components can lead to a dramatic decrease in new-product-development time, so companies can respond quickly to market trends. A third model for improving agility is mastering the channel, as Wal-Mart is well-known for doing. The concept of “just-in-time inventory” is crucial here. If the organization monitors the complete value chain, it can react instantly to changing buying patterns. Products that sell faster than others can be restocked immediately. This approach also reduces waste of resources on excess capacity. Finally, project-based management can improve an organization’s agility. If corporate functions such as HR can be fluidly deployed as needed by strategic initiatives, rather than being housed within rigid departmental structures, teams can be formed and dissolved more rapidly to pounce on opportunities or respond to threats.

Procurement ROI

The Hackett group reports that “Overall, world-class procurement organizations now see procurement operations costs that are 20% less than typical companies (0.68% of procurement spending versus 0.85%), and operate with nearly half the staff (44.9 staff/billion of spend versus 89.2). They also see 133% greater return on the cost of procurement operations than typical companies, generating $6.3 million in spend savings for every $1 million spent on procurement operations, while typical companies generate only $2.7 million in savings.”

Their strategy to achieve this ROI is as follows:

“World-class procurement leaders establish their organization as a strategic function, one that is fully integrated with other relevant parts of the business,” states Hackett procurement practice leader Christopher S. Sawchuk. “They take a wider view, understanding the implications of procurement policy for suppliers, internal and external customers, and shareholders. Their staffs lead crossfunctional teams to establish which goods and services are most beneficial to the company, taking a broad array of factors into account, not just purchase price.”

To retain and keep staff with the skills to perform these functions, world class procurement organisations typically pay 41% more than other organisations and have far lower ratios of clerical staff to professional staff.

Connecting with others (Pt. 1)

The most important skill a vendor manager has is the ability to connect with others. A VM spends their day coordinating people with opposing interests. Those that succeed are able to find common ground and entice the parties to inhabit that ground. Those that fail are not able to do so. Those that fail miserably drive the parties from the common ground into opposing bunkers.

The connection skill-set is not difficult to build for those so inclined. Guy Kawasaki returns to this topic time and time again. Two of his best posts relate to what he calls “schmoozing” but that I would call “relationship building” (’schmoozing’ has conotations of bald self-interest whereas ‘relationship building’ reflects the symbiotic nature of the act) and ‘effective emailing‘.

Accenture survey on supplier relationship management

A recent Accenture survey on supplier relationship management contains some interesting nuggets of information.

“Researchers sought the views of some 229 senior global procurement executives in 14 countries through both Web-based and paper-based questionnaires. …

The “survey noted that companies have an opportunity to achieve an additional 2 percent savings by increasing their focus on supplier relationship management. Supplier relationship management leaders achieved savings of 3 percent on their total annual procurement spend from supplier relationship management activities whereas all respondents achieved 1 percent. This translates to average benefits of €67 million (US$79 million) and €18 million (US$22 million) respectively for supplier relationship management leaders and all respondents, offering a tangible prize for those that focus on supplier relationship management…

“So what about the skills required to deliver supplier relationship management? According to our respondents the most important skill is the ability to work crossfunctionally. Could this be a potential “wake up call” for chief procurement officers? Since supplier relationship management leaders, successfully gaining from their supplier relationship management activities, indicate that they bring together people inside and outside procurement to work on supplier relationship management, should more organizations be encouraged to follow
suit? If procurement organizations were to take a broader role in supplier relationship management and break out from the purely administrative contract activity, then what greater value might be achieved? …

“Other skills that respondents valued as important were considered to be having a sound knowledge of cost drivers in the process, a creative mind to identify new opportunities to seek value and interpersonal skills to build long-term relationships. This requirement for crossfunctional skills is ratified by the focus companies are affording to joint product development activities, where procurement generally plays a role in supporting different areas in the business as they work with suppliers.

“Often, production or design departments work with suppliers and the procurement specialists are asked for support in identifying the best sourcing approach for a particular product and service or perhaps they are asked to advise on the supply market and support negotiations with suppliers.

“All respondents picked the following as most important:

1. Monitoring and reporting suppliers’ performance
2. Conducting joint process improvement projects with suppliers, i.e., logistics solutions, Just-in-time, quality assurance
3. Effective logging of contract information (although interestingly, this conflicts with where the procurement functions are focusing their resources)

In comparison, for the supplier relationship management leaders, the top three most important processes subtly adjust to:

1. Effective logging of contract information
2. Monitoring and reporting suppliers’ performance
3. Conducting joint process improvement projects with suppliers

Industry Leader Breakdown

“Accenture has been working with senior supply chain executives for more than 20 years. Supported by the results of this survey, we believe that organizations can achieve world-class supplier relationship management by:
• Segmenting their supplier base
• Developing specific strategies for each supplier segment
• Creating comprehensive plans and performance monitoring processes to drive and track performance for each segment aligned with sourcing goals
• Developing robust supplier relationship management processes to consistently deliver quality outputs
• Developing the organization to include supplier relationship management roles performed by skilled professionals
• Using technology appropriately to enable supplier relationship management processes and performance management
• Constantly monitoring, assessing and setting priorities.

“The path of partnership is never an easy one. Leaders that have embraced supplier relationship management from a more strategic and holistic standpoint, however, are clearly winning in the marketplace— and not purely through cost reductions. Companies can realize other benefits beyond savings, including reduced risk, increased speed-to-market, and access to new technology and solutions. Supplier relationship management, although not a panacea, can help companies differentiate themselves in an increasingly competitive landscape. Successfully harnessed, supplier relationship management can channel innovation into an organization and help businesses move one step closer toward achieving high performance.

Litigation Invoice Review: List of what to look for

The ICalm Group has produced an excellent list of what to look for when reviewing a solicitor’s invoice:

1. Does each entry identify the date service was rendered, the individual who rendered the service, the individual’s hourly rate and position (partner, associate, paralegal, etc.) an understandable description of the particular service rendered, the amount of time (expressed in tenths of an hour) and the corresponding dollar charge for that time?
2. Do descriptions of service list each task separately? If several activities by one timekeeper on one date are combined in a single entry (example: “prepare for, travel to, attend and summarize deposition” 5.3 hours) it will be difficult to evaluate whether or not the time for each task is appropriate.
3. Do descriptions of service describe with particularity the activity in which the timekeeper was engaged or are they vague and imprecise, such as “attention to discovery”?
4. Are the descriptions of service consistent? Is the same activity described in more than one way, depending upon the date or the timekeeper (example: “draft motion to compel plaintiff’s production of construction records;” “work on construction records issue”)?
5. Do the descriptions of service include initials, abbreviations, names or case issues with which you are not familiar (example: “meeting with GJT re indemnification”)?
6. Do the descriptions of service refer to activities you did not authorize (example: “review report of defendant’s psychiatric expert” when you did not authorize retention of the expert)?
7. Do the descriptions of service refer to motions made without your prior approval?
8. Do the descriptions of service refer to activities that are unnecessary or premature (example: preparing page and line summaries of depositions when settlement is likely and no trial date has been set)?
9. Are there frequent intraoffice conferences among two or more timekeepers, each of whom has billed for the time?
10. Have two or more timekeepers billed for attending the same deposition or proceeding?
11. Does the bill contain a sub-total (hours and dollars) for each timekeeper?
12. Is the total number of timekeepers consistent with the size of the case (for example: it is the unusually large and complex case that will require five or more timekeepers)?
13. Are all of the timekeepers listed in the current bill the same as the timekeepers listed in the last bill? If some names no longer appear or others appear for the first time, why has staffing changed?
14. Are work assignments among timekeepers assigned in such a way that there is overlap or redundancy (for example: two issues to be researched, each of which requires review of the same file or records)?
15. Do descriptions of services include tasks that you or someone in your office has done or could do in this case?
16. Are the hourly rates of each timekeeper listed in the current bill the same hourly rates that appeared in the last bill? If rates are higher, was there an advance written request for and written approval of the increase?
17. Are the hourly rates of each timekeeper consistent with the individual’s experience, position and expertise?
18. Are the tasks appropriate to the experience, position and expertise of the timekeeper (example: document summaries prepared by partners vs. paralegals)?
19. Is the amount of time billed for each timekeeper category (partner, associate, paralegal) disproportionate to the complexity or magnitude of the case?
20. Do disbursements include charges for word processing or secretarial/clerical time?
21. Are disbursements sub-totaled by category (Westlaw, Lexis, messengers, photocopies, interpreters, etc.)?
22. Is the rate and basis of each disbursement reported (example: 869 copies @.10 each = $86.90)?
23. Are the services and disbursements of outside vendors consistent with your guidelines?
24. Are any disbursements billed at greater than actual cost?
25. If allocation of time or disbursements is appropriate (among multiple parties or multiple files) is the amount reported the correct proportionate share?

Aberdeen article on contract management

In late 2004, Aberdeen reported on the Best Practices in Contract Management (Registration required) - Another Tim Manahan gem. Here are their ten tips for establishing a good contract management system:

1. Audit internal contract management processes, systems, and controls before investing in a contract management solution.
2. Create a compelling business case with both benefit and crisis.
3. Ensure proper executive and stakeholder support for both contract management initiative and automation investment.
4. Define detailed functional requirements for a contract management solution –
   and stick to them.
5. Dedicate and empower a contract management program champion.
6. Establish a contract management governance council to ensure support from
   functional and business unit leaders.
7. Clearly define and communicate procedures and protocols for the complete contracting and contract administration.
8. Where possible, use templates to streamline contracting cycles, minimize risk,
   and maximize compliance.
9. Measure program performance and market results.
10. Identify areas for continuous improvement.

Aberdeen identified the following business drivers behind contract management initiatives:

• Uncertain global economic conditions and continued pressures to reduce costs and improve financial and operational performance.
• New regulations – such as the Sarbanes Oxley Act – require companies to establish and document business controls, procedures for tracking and reporting material business information, procedures and systems for ensuring compliance and auditing.
• Globalization is increasing the types and complexity of contracts as well as the risks inherent in trading relationships.
• Outsourcing, licensing, and channel agreements are growing both in number and complexity.
• Insufficient human resources and systems infrastructure to effectively locate, execute, and optimize contract performance.
• Increased availability of packaged enterprise software applications designed to automate and improve contracting, contract administration, and contract compliance and analysis processes.

Aberdeen also outlined the components of a compelling business case:

“Most enterprises have gross misconceptions about their contract management competence. And in most cases, enterprise executives fail to understand the magnitude and impact insufficient contract management is having on their company’s financial and operational performance. An internal audit helps bring these issues to light. However, securing sufficient resources and budget for improving contract management operations will require development of a well-defined business case that accomplishes the following:

• Defines and baselines existing contract management performance, including both strengths and weaknesses the internal audit uncovered in the areas process, organization, knowledge/visibility, technology, and performance metrics.
• Quantifies the current “costs” of underperforming areas of your contract management program. Such costs include the costs of missed contract milestones (e.g., overpayment, penalties, inaccurate prices, missed revenue accelerators); costs of risky contract language (e.g., elongated payment cycles on customer contracts, short payment cycles on supply contracts, evergreen renewals, inadequate intellectual property (IP) or brand protection, maverick contracts); costs of inefficient processes and controls (e.g., long contracting cycles; lagging contract execution, missed renewals, and regulatory violations and fines).
• Details a blueprint for contract management improvements, including prioritization and timeline of actions, resource, systems, and budgetary requirements, protocols and governance requirements.
• Estimates the financial and operational benefits of executing such improvements. Such calculations can be developed by leveraging benchmark information from third-party sources, such as industry associations, such as the IACCM, industry analysts, like the Aberdeen Group, and contract lifecycle management solution providers.

Supplier adoption of e-procurement initiatives

An article on e-procurement solutions highlights the fact that one of the most neglected areas is that of supplier adoption.

There are three topics that are certain to grab any supplier’s attention:

• The opportunity to gain additional sales;

• The ability to increase margins;
• Getting paid more quickly.

Barriers that need to be overcome:

• The perceived technical complexity;
• The level of investment required;
• Security issues;
• A perceived focus on price rather than overall quality of service.

There are three main issues that must be addressed to achieve effective electronic trading between customer and supplier:

• Access to the supplier’s electronic list of goods and services (i.e. the catalogue);
• An alternative method for suppliers who do not have a catalogue (e.g. service suppliers);
• The ability to send and receive electronic business documents (i.e. purchase orders and invoices).

Tim Minahan Joins Procuri as SVP of Marketing

From the Press Release:

Tim Minahan Joins Procuri as SVP of Marketing; Recognized Supply Management Authority and Former Aberdeen Analyst Will Drive Procuri’s Market Leadership

Tim Minahan, one of the industry’s most respected supply chain analysts, will join Procuri, the leader in OnDemand supply management, as senior vice president of marketing.

In this newly created position, Minahan will help shape the strategic direction of the company’s growth and execute a long-shared vision: to help companies source, contract, and manage supply relationships that reduce costs, optimize performance, and mitigate risks. He will spearhead all global marketing initiatives and partnership and alliance strategies that expand penetration for Procuri’s OnDemand solutions among companies of all sizes.

Minahan joins Procuri on March 1, after having built AberdeenGroup’s Supply Management Research practice into one of the most influential of the top industry analyst firms. As Aberdeen’s chief services officer, he defined the firm’s research focus on critical supply management and technology issues, from contract management to strategic sourcing as well as the specific challenges and opportunities of the growing mid-market. He is frequently called upon for industry insight by leading broadcast, business and trade media.

“The supply management market is at a critical inflection point: Globalization, cost pressures, and increasing supply constraints and risks have made supply management improvements a priority for companies of all sizes, industries, and geographies,” said Minahan, who will report directly to Morel. “New OnDemand and Software as a Service delivery models are also causing enterprises to rethink how they license and deploy business applications. For years as an analyst, I have witnessed Procuri’s growth as a leading provider of OnDemand supply management solutions. I’m excited to help Procuri develop and execute real-world strategies and solutions that enable enterprises of all sizes to accelerate and sustain supply management results.”

Theory of ERC

Gary Bolton and Alex Ockenfels prepared a paper entitled the Theory of ERC which postulates that a person’s contracting behaviour can be predicted if you know their level of financial gain and their propensity to deal fairly with others.

“In this paper, we describe a simple model we call ERC to denote the three important kinds of behavior the theory captures: equity, reciprocity and competition. We show that ERC is consistent with a wide variety of experimental observations gathered by many independent investigators. ERC is simple to apply – in part, because it is not a radical departure from standard modeling techniques. The major innovation is the premise that, along with the pecuniary payoff, individuals are motivated by a ‘relative’ payoff, a measure of how the pecuniary payoff compares to that of the other players. Different games present different sets of tradeoffs between pecuniary and relative gains. What ERC demonstrates – and the point we will stress – is that a simple model of how pecuniary and relative motives interact, organizes a large, and seemingly disparate group of experiments as one consistent pattern of behavior.”

People are fitness maximisers

Herbert Gintis argues in Why the Beliefs, Preferences, and Constraints Model? that humans are very good at maximising fitness despite decades of psychological results arguing that humans under certain circumstances do not decide wisely.

This is critical to keep in mind during the development of any vendor management system.