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Obtaining Breakthrough Performance by Not Blindly Projecting Numbers

Obtaining Breakthrough Performance by Not Blindly Projecting Numbers

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Published by Shridhar Lolla
It is normal for organizations to project their growth, based on their past performance. However, this projection is often done blind-foldedly, without realizing the real extent of performance the organization can influence. The inevitable result, therefore, is that organizations fall pray to unexpected poor performance, very often.

It makes sense for an organization to know its capability and; therefore, be better at predicting performance that is in its control. When an organization gets into the habit of calibrating its capability, it knows the effect of the effort it makes; and thereby, will be in a good position to not only predict but also achieve its performance.

Thinking is the key capability of the organization, but is often undermined in terms of its impact on organizational performance. While all other capabilities essentially require significant resources and risks, by building a capability to think better, an organization can achieve breakthrough performance without taking real risk and without exhausting its resources.

This caselet, is a part of Respecting the Business series of CVMark. It shows how an organization engaged in better thinking can obtain breakthrough performance.
It is normal for organizations to project their growth, based on their past performance. However, this projection is often done blind-foldedly, without realizing the real extent of performance the organization can influence. The inevitable result, therefore, is that organizations fall pray to unexpected poor performance, very often.

It makes sense for an organization to know its capability and; therefore, be better at predicting performance that is in its control. When an organization gets into the habit of calibrating its capability, it knows the effect of the effort it makes; and thereby, will be in a good position to not only predict but also achieve its performance.

Thinking is the key capability of the organization, but is often undermined in terms of its impact on organizational performance. While all other capabilities essentially require significant resources and risks, by building a capability to think better, an organization can achieve breakthrough performance without taking real risk and without exhausting its resources.

This caselet, is a part of Respecting the Business series of CVMark. It shows how an organization engaged in better thinking can obtain breakthrough performance.

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Published by: Shridhar Lolla on Mar 19, 2011
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Obtaining Breakthrough Performance by Not Blindly Projecting Numbers

Most Business Improvements Need No more than Good Thinking Dr. Shridhar Lolla CVMark Consulting lolla@cvmark.com Early Draft , Needs Editing Mar 2011, Bangalore, INDIA (This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real life experience at EnggCons- an Engineering Solution Company; and several other companies ) Key words: organizational thinking, simplicity, breakthrough performance, performance Improvement, Core capabilities, Thinking Capabilities, Order Size, Sales, Order handling, focused execution, entrepreneur, entrepreneurship, business rules, business fundamentals, built to last, capacity building, entrepreneurial behavior, first generation entrepreneur, value system, culture, focusing behavior Definition: Prime Rule (n)= Non negotiable rules Prime Rule #030: Most often, Breakthrough Performance does not require huge resource and taking real risks. This is a sequel to following caselets: 0. The Saga of Startups 1. When sales Staff quit, Clients switch over 2. Sales is the prime responsibility of entrepreneurs 3. Not Succumbing to Pricing Pressure 4. Entrepreneur Agrees to do Sales 5.Temptation of taking large orders 6.Pitching Business Idea within 3 minutes 7. Startup Carnival 8. Taking Funds NOW or LATER 9. Not Succumbing to the temptation of every opportunity 10. When People Management is not a Prime Responsibility, Business Downfall is Inevitable

Copyright © 2010, CVMark Consulting, All rights reserved.

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________________________________________________________________________ It is normal for organizations to project their growth, based on their past performance. However, this projection is often done blind-foldedly, without realizing the real extent of performance the organization can influence. The inevitable result, therefore, is that organizations fall pray to unexpected poor performance, very often. It makes sense for an organization to know its capability and; therefore, be better at predicting performance that is in its control. When an organization gets into the habit of calibrating its capability, it knows the effect of the effort it makes; and thereby, will be in a good position to not only predict but also achieve its performance. Thinking is the key capability of the organization, but is often undermined in terms of its impact on organizational performance. While all other capabilities essentially require significant resources and risks, by building a capability to think better, an organization can achieve breakthrough performance without taking real risk and without exhausting its resources. This caselet, is a part of Respecting the Business series of CVMark. It shows how an organization engaged in better thinking can obtain breakthrough performance.

The workshop of EnggCons was buzzing with machining and assembly activities. Over the master walls in each bay, A0 size CAD drawings were carefully pasted, revealing the intricate designs of engineering projects and systems. Juxtaposing below them were the project schedules with yellow color highlights indicating status of the project on the critical chain. It was a big relief compared to last 4 months when the shop was running more than half empty. It was the last month of the financial year and hence, was the time to review things and take actions on the slippages. Ashogan joined me at Bay-6, when I was trying to understand the process of reproducing profile of a turbine blade. Soon, we walked into his office. He told, “Sir, we are behind by 30% compared to last year’s revenues and by over 60% compared to the projected revenue for the year. When I asked about the reasons, Ashogan told that there is a general slow down in the market. I walked up to the white board, took the markers and drew the industry trend. Looking back at him, I said, “The slow down in the Industry was 2 years back and the market has bounced back since then.” I then drew performance of EnggCons on the board and said, “Look at the performance of EnggCons, Actually, the year when the market performed the worst, you grew the most. But this year, despite market bouncing back, you went down.”
Copyright © 2010, CVMark Consulting, All rights reserved.

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In a new finding realization, he said, “Oh!, so our assumption of market slow down is not correct.”

Figure 1 There is no co-relation between the dip in industry performance and the dip in EnggCons Performance

He found himself in a fix, not knowing what exactly hit his performance. Further, his clients and suppliers both prospered this year. He knew that a lag of one or two quarters can occur with respect to the domestic industry or market but not a lag of 2 years. The laps must be a serious one. I returned to my Chair. When he kept mum, I took him down basics of performance improvement. First, I wanted to have management’s role understood and therefore, said, “Managers role is to ever improve performance of the organization. The degree of improvement is another issue, but managers must show improvement in performance of the business year on year. In order to do justice with their role, managers must find, what prevents them from improving; and they must be in control of such a constraint. This also means that managers must know what input they should influence so that they get the desired output.” I looked into his eyes and said, “Ashogan, performing better when everybody else is doing so in the industry and falling down when others are not, is not Business As Usual(BAU). You do not hire a manager just to row a boat down stream; but for his capability to row the boat (the company) upstream with equal successes.” Referring to his past performance, I told him, “It looks as if the past good performance of EnggCons was due to buoyant market conditions and not due to any effort made by the management.”
Copyright © 2010, CVMark Consulting, All rights reserved.

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I saw his face turning red, but continued, “Since your team does not know exactly what factors contributed to their high performance during last two years; they actually do not know how to influence the outcome and hence, situation went out of control this year.” I clarified, “The role of the managers is to steadily steer the organization to higher levels, despite the roller coaster behavior of the market. It must make progress, when the market is good; and then, continue to make progress, even when the market is down (since competitive edge of all other players would blunt out in adverse conditions, it must actually make comparatively much more progress).” Ashogan understood that he needed to make serious attempts to understand the factors that influence performance of EnggCons and establish a system to leverage these factors, otherwise his organization is doomed. It is not that EnggCons managers are not at all in the control of things. Indeed they made significant improvements in their business model that allowed them to grow at a CAGR of 40% during last 4 years, without adding additional resources. Ashogan summarized, “The issue we are facing is that first we do not have a sense of calibration of output to input. Hence we do not know how much improvement is expected, when we do some thing. In a way we have never validated our assumptions.” He controlled his breath and said, “Also, the opportunity to exploit by what ever innovation we did so far to improve our performance, is probably exhausted; and we now need to search out new parameters to improve our performance. Further, we are, perhaps, not aware of changes in market conditions and that have adversely affected our business.” He asked, “But how do we calibrate our capability, when we look at revenue as an output?” So we returned to another basic issue. I told him, “At any moment, the organization must fairly calibrate its capability, and entrepreneurs intuitively know their capabilities. It does not need to be very accurate. Let me explain.”

Then I said, “Look into the performance over past years or quarters or months, which ever is more reliable. Then, look at the revenue made during each bucket of the duration. It is a normal practice to compare and project the Revenues during different buckets of duration.” I took out my felt pen from the chest pocket, drew a graph on the broad sketch book, and said, “For example, look at the total revenue Graph. It is usual to compare the revenue year on year basis and say that the revenue grew by some percentages, (e.g. EnggCons grew by over 40% YOY and by almost 80% last year in terms of its revenues). And then use such observations to set future targets.”
Copyright © 2010, CVMark Consulting, All rights reserved.

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Figure 2. It is normal to predict performance targets based on historical total revenue growth

He prompted, “But the truth is far away from this as the revenue of this year shows.” I responded, “Yeah ! Let’s decipher the truth.” I drew three curves quickly and told, “The truth is that ONLY part (X) of the total revenue is obtained because of the inherent and base capability of the organization. The rest (Y) of the revenue is achieved because of the various unexpectedly favorable situations ( on which the organization does not have any influence). Hence X could be because the organization took a new strategy decision, started new campaign, deployed a new tactics etc. And Y could be because the general economy went up, the competitors closed down shop, customer decided to hoard etc. Now in reality, the component Y could turn NEGATIVE (unfavorable) instead of being positive, due to new regulations, new competitor, general economic condition, etc.

Figure 3 When an organization is in control of its capabilities, even adverse market conditions does not prevent it from growing

Copyright © 2010, CVMark Consulting, All rights reserved.

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The trend X is based on your capability and it rightly depicts your performance. If you recognize and identify your capability and it is very well in your control, then, the outcome i.e. revenue X, is predictably on growth with stability. The line Y, that is based on external factors, would fluctuate widely, some time up and sometime down. Hence, the total outcome or revenue can be fairly under your control, if and only if the proportion and rate of growth of controllable revenue (X) is far more than that of uncontrollable revenues (Y). But, if you are not in control of X and not able to influence the outcome there, and you are in a domain where Y fluctuates significantly compared to X, then the fortune of the company fluctuates violently. And it runs into the risk of extremely poor performance, as it happened in the case of EnggCons.

Figure 4 When an organization is not in control of its capabilities, its fortune fluctuates with external conditions and its future is threatened.

In summary, first, it does not make sense for managers to make projections based on total revenue without calibrating their capability to revenues. It is the prime responsibility of entrepreneurs to focus on what is under their control and influence the outcome by a level such that effect of the uncontrollable factors does not threaten but only reinforce the growth. And it is the job of managers to continuously increase share of revenue from controllable part of the business. Then I asked him, “Do you know, under a reasonably steady market condition, how much minimum revenue you can make? Or for that matter, under worst possible conditions?” He thought but replied confidently, “Yes, Of course.” I said, “Then you know what is your current capability. Now try to increase this controllable part of your revenue and keep a fair protective capacity to take advantage of outside opportunities. But your projections should always be based on your predictable capabilities.”{There is an advanced approach that deals with situations that are negative and yet the organization is
able to leverage those situations positively; we are currently not talking about such a capability in this article.}
Copyright © 2010, CVMark Consulting, All rights reserved.

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Understanding the Problem It was now time to get into problem solving mode. I asked Ashogan, “You said that we made less revenues this year, so were there less enquiries?” His partner Srini, who joined us in the discussion said, “Enquiries were good, much better than the previous year. We received more than double number of enquiries compared to the year before.” I knew this would be the effect of high visibility of the company Ads across digital media. The advertisement campaign launched last year had worked. (And they had delivered all orders in time in the current year, thanks to the productivity improvement and the spare capacity they revealed during past 3 years. I also checked the delivery dates quoted in the enquiries and they were reasonable.) Which meant that the conversion of prospects into clients went down dramatically. So, we see a problem, where the lead generation went up by about 100%, but the conversion ratio dropped by over 50%. I asked him to look into the list of enquiries and fish out why conversion rate was lower. As Ashogan spelt out a list of reasons: pricing, delay in client’s management decision, priority changes, new clients, emergence of competitors etc; the Pareto Chart revealed that price and delay in client’s management decisions, were the key reasons for low conversion ratio. But this did not clarify why this year was exceptionally poor, since there was no major change in pricing policy and the clients businesses were not doing badly. When he further looked deeper, we found that EnggCons also had clients, who accepted proposals with high pricing. Ashogan also told that most of the people do not tell the reason, why they are delaying or not converting. This gave us a feeling that the quality of additional enquiry generated this year may be poor, especially since the revenue from repeat customer business actually did not reduce. At one moment during discussion, Ashogan doubted about the seriousness of the clients and said much of the enquiries were, perhaps, non-serious.

Reasoning Out Issues If the Ad campaign has attracted several enquiries and the clients are not serious, EnggCons needs to find a way to sense seriousness of a client’s enquiry and filter out such enquiry without spending much time there. Hence, the leads need to be better qualified. This is an important aspect, since the proposal making takes significant time of Ashogan himself.
Copyright © 2010, CVMark Consulting, All rights reserved.

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We ran through the enquiries by organization and the reason they wanted the solution for, and we inferred that a majority of enquiries were, indeed, serious enquiries. Ashogan did not raise the doubt on ‘seriousness’ of the prospects for the first time. This issue was discussed several times earlier too. In order to ensure that serious clients are only followed up, EnggCons had introduced rigorous input adequacy process that demands clients to share confidential information. And since most of the clients shared confidential information that they would not so easily part with, it automatically ensured seriousness of the clients. It could also be that there is some undesirable aspect in the proposal submitted by EnggCons. This thought process gave a feeling that when the enquiries went up by almost 100%, if there was any adverse effect on the quality of proposal. We quickly checked a number of proposals and found them well drafted and adequate. That ruled out the quality aspect of proposal too. That we looked into the symptomatic problems, it was important to understand how the company works and then link the symptoms to actionable causes.

The working of the Business EnggCons is in the business of providing customized solution to engineering companies, and hence, its work varies from customer to customer and each proposal is different. Scoping of the work is a key exercise, where EnggCons uses an input adequacy template (requirement specification) to capture client’s needs. However, as in any solution business, the scope has a wide range that depends on how detailed one wants it to be. Typically, for EnggCons clients, the scope can vary as much as 1:10, and the pricing of their proposal vary from Rs 200k to Rs 3000k. EnggCons normally quotes on the top 60-75% of the customization scope. So, while last year, its Ad campaign pulled in a lot of customers, not much of them reverted because for their first experience for this type of need i.e innovative engineering solution. They, probably, felt that the price was high. However, Ashogan also told me, “Some of the clients actually had all negotiations done and secured discounts. But they have kept their decision pending.” So in net, what Ashogan said is that even when price is reduced clients did not place orders.

Copyright © 2010, CVMark Consulting, All rights reserved.

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Nailing Down the Culprit When we looked into the size of enquiries, we realized that average size of these enquiries was bigger than that in the last few years. And then most likely, the time taken for management decision is longer, which Ashogan had already suspected. I then explained Ashogan, “The average size of enquiry is increasing (and also you are not rejecting small size enquiry), which is from last years average of Rs 800k to this years enquiry size of Rs 1900k. Larger the order size, higher is the authority needed to take decision in hierarchical organization of the clients and; more involved and longer is the negotiation. “ I continued, “Normally client purchases can be categorized as discretionary, operational and capital purchases. When the order size was small a couple of years back, and since EnggCons solution is innovation based, it was very easy for the CXOs to use their discretion to take decision and move the order faster. The offerings of EnggCons are anyway not of operational nature. Now since the size of the order has increased, much of EnggCons offerings neither fall into Discretionary purchases not operational purchases, but into capital purchases of its clients. Hence now most of the proposals that EnggCons submits has to go through CAPEX approval process even if it has been initiated by the CXOs. Then I said, “It now explains the delay in decision making. Hence we have a situation where the order size has increased but the client segment (now based on ‘decision making’) has also switched. The impact of the delay in ‘decision making’ is more than that of the increase in number of enquiries. Further, longer is the time for decision making, the probability of acceptance is poorer.” So, how does Ashogan tackle the situation of growing order size on one hand and delay in decision making on the other hand.

Problem Definition The clue that we got from understanding the working of EnggCons is that its recent proposals have become CAPEX based purchases for its clients. This also has to be seen along with another underlying fact of EnggCons, which is that for a given enquiry, the scope is too wide and it must do something with this boundary condition. A connection must be established between these two aspects, i.e. CAPEX purchases and too wide scope of proposal. The problem therefore is how to shorten clients decision making cycle. Now Ashogan needs a solution that can hasten the decision making process of the clients even if it is a CAPEX purchase for them. There has to be one simple solution that will contribute significantly to the conversion ratio.
Copyright © 2010, CVMark Consulting, All rights reserved.

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Direction to Solution Since CAPEX expenses are pre allocated in the clients budget, the Budget of the client is known a priori. This is one fulcrum that brings stability to the selling and purchasing process. If at the input adequacy stage, EnggCons knows budget of the client, it is very easy for them to narrow down to the exact scope for each enquiry, however wide be the feasible band of the scope. By making a proposal that fits to the budget of the client, chances are that there will be less negotiation and less delay in decision making. And when there is a price that comes closer to budget and less delay occurs in decision making, faster the the proposal gets converted into a purchase order.

Figure 5. The Underlying Factors for the Poor Lead Conversion Ration

There is one more outcome. When the budget will be asked at the input adequacy level, it will be possible for the company to weed out non serious enquiries, that otherwise would take significant time of Ashogan and his team in preparing proposals. Thus both productivity and yield of lead conversion improve simultaneously.

Implementing Solution So, Ashogan agreed to make a small and simple change in the way he attends enquiry. He wrote down a new policy for his organization: No enquiry to be processed unless the client tells his Budget. This was a pretty raw and tough policy. He knew that some of the large clients have flexibility in budget and he was contemplating a way to identify and deal with them. Of course, he knew that one rule does not fit all. But he knew that in most of the cases the above rule will work out and he must make effort to align his enquiries to this rule.

Copyright © 2010, CVMark Consulting, All rights reserved.

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He realized that the rule, though, seemed simple, it was not easy to implement; and he needed to guard against any undesirable effect on the clients. Guess what happened, once Ashogan implemented the new tactics ? In less than 3 months, his conversion ratio more than doubled. The problem was clearly identified and the solution was Simple. The solution was simple but not very easy, since Ashogan had to find a way to identify the Budget of clients without sounding too ‘transaction’ oriented. He mis-stepped and enraged a couple of prospects, when he insisted on knowing the budget in order to make better proposal to them. But soon he learnt the ‘art’ of seeking this additional but critical information. And then, preparing a more targeted proposal became a Business As Usual practice at EnggCons. For Ashogan, it was a great validation of the power of identifying core problem in obtaining breakthrough performance, without taking real risk and without exhausting resources.

Copyright © 2010, CVMark Consulting, All rights reserved.

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Disclaimer:
CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA. It handholds entrepreneurs and promoters in road testing their business ideas and in delivering breakthrough performance. CVMark Consulting intends to serve business community through advisory, consulting and coaching engagements. As a part of its engagements, it regularly brings out insights, perspectives, research reports, newsletters, issue-oriented reports and other products. This caselet captures description and direction of solution to generic problem faced by business owners. It is intended to share experience of CVMark with a wider business community. This document in part or full can be reproduced subject to a reference to CVMark Consulting and to this document. Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on research conducted for this report. CVMark holds no responsibility for decisions made on the basis of content of this report.

CVMark Consulting Bangalore, INDIA

Clet:11-24

___________________________________________________________________
What do entrepreneurs and promoters do before they write business plan? They get their business idea road tested by CVMark.
For developing, innovating and executing your business model, call Tel: +91 94480 70081 or Email details to : lolla@cvmark.com . CVMark Consulting, #2304, Nandi Park, Gottegere, Bannergatta Road, Bangalore 560083, INDIA Web: http://www.cvmark.com

Copyright © 2010, CVMark Consulting, All rights reserved.

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