Tim McConnell and Michael Woods examine how portfolio companies can avoid organizational entropy, the silent killer of business performance. Are you assessing a company’s value for a possible acquisition? Are you looking for a full or partial liquidity event for your portfolio company? Are you realizing the full potential of every business investment? Tim McConnell and Michael Woods look at seven organizational design tips to fully realize superior returns in middle-market private companies.
This article is reprinted with permission from the February 2015 issue of PSX: The Exchange for People Strategy, an eMagazine that brings you cutting edge views and perspectives on all things related to people strategy.
Organizational entropy is the silent killer of business performance. The second law of thermodynamics, ENTROPY, is the measure of disorder in a system and a natural process of degeneration. It is an automatic and unavoidable trend toward chaos (and failure). In plain English, things fall apart all by themselves without ongoing attention. Entropy is happening (somewhere, if not everywhere) in your portfolio companies, right now.
Seven Organization Design Tips for Value Creation
Are you assessing a company’s value for a possible acquisition? Are you looking for a full or partial liquidity event for your portfolio company? Are you realizing the full potential of every business investment? Let’s look at seven organizational design tips to avoid entropy and fully realize superior returns in middle-market private companies.
Plan for Battle: Business is a war with your competitors. You win the war by creating value, by differentiating your businesses through product and process innovation, reduced costs, improved efficiencies, growth and strong management teams.
Battle planning is the visioning and execution of your investment growth objective. Your weapons are financial and human capital. Your skilled workers are your elite troops. Entrepreneurial units are your special forces.
Your Managing Directors are your generals. Designing a portfolio company for battle is more than hiring good people. Competition requires a combat attitude; arranging plans, structure, troops and processes to consistently win fights. Victory is achieved when you sell at a profit.
Match the form of the portfolio company as closely as possible to its goals. Poor organizational structure results in friction, conflict, unclear roles and misused resources. Structural over-complexity causes slow strangulation.
It confuses employees, suppliers and clients, hinders product advancement and limits profits. Bottom line – it’s too expensive and slows down productivity. The configuration of functions, positions, skills, processes, talent and performance to business priorities is crucial to achieving growth objectives. You may have had the right model earlier, but it deteriorates over time. The cure for corporate entropy is ongoing alignment; achieving and maintaining direct connectivity between growth objectives, business strategy, structure and process.
2) Maximize Agility and Innovation
Business agility is the rapid response to change. It is the ability to quickly identify and adapt to market, environmental and technological changes in productive and cost-effective ways. It is being responsive to a VUCA (volatile, uncertain, complex and ambiguous) world. Continual enhancement and adaptation (and the skills to do so) are vital to every portfolio company.
Let’s compare three corporate icons. On one end of the scale we have Kodak. Kodak has become a Darwinian poster child, a classic example of failing to adapt to changing technology and customer needs and falling into bankruptcy. On the other end of the spectrum we have Cisco and DuPont (for example) who are proactively and energetically shifting, realigning and transforming to stay in the forefront.
3) Simplify Decision Making
Effective decision making is a key aspect of real-time command and control. Great businesses make great decisions. We know of one company who prides itself on being a world leader in innovative, high impact, speedy and cost effective solutions. However, their decision-making process is bureaucratic and stultified. Projects run months behind schedule. Executives focus on divisional success and resist corporate-wide initiatives. Middle managers concentrate on perfection, with multiple rounds of word smithing for every PowerPoint presentation. Instead of clinically moving from decision point A, to B to C to reach result D; they often over-research point A, over-analyze Point B, second guess themselves on Point C, and then go back to Point A to start over – never reaching D. All of this costs time and money.
View the decision making process as an entity unto itself. Do you know the decision making abilities within your portfolio companies?
4) Streamline Processes
Map out the control environment (major functions and activities) within key businesses; R&D, engineering, manufacturing, sales, marketing, distribution and back-office administration. Identify and link the hierarchy and key roles (jobs / positions) that perform each process step. Simplify workflow. Ruthlessly eliminate redundancies by removing layers, approvals, steps, and tasks that do not directly add value.
5) Optimize Geography
Are your portfolio company operations local, regional, national, international, global, multinational, or transnational? You know where their locations are, but do you have the optimal geographic model for key markets? A global company sells worldwide but is centralized, concentrating core work activities in one location (to emulate effectively in satellite locations). An international company creates centers of excellence or hubs for each major product or service worldwide. A multinational operates in a decentralized manner, with customized operations in specific regions.
Transnational companies are the highest form of corporate evolution, with centralized operations in the home locale mixed with the economic efficiencies of distributed optimal sourcing. Optimal sourcing locates operations in the place that brings the greatest advantage in terms of client / user contact, cost efficiency and/or skill need.
6) Manage Talent
Portfolio companies are in dire need of skills to support future growth. This growth is the foundation of value creation. Managing your talent and talent stream is vital to equity appreciation. Achieve the biggest bang for your buck by having the right people in the right numbers with the right skills in the right place performing at a high level – every day.
▪ Apply the principles of supply chain management to Staffing and Recruitment programs.
▪ Fully integrate strategy and business planning with workforce planning. Do they have the appropriate mix of staff with skills in management, finance, procurement, engineering, sales and marketing etc. and does this mix continuously align with strategic priorities?
▪ Take the long view towards talent optimization, not just short term band aid fixes to reduce next quarter costs. Layoffs aren’t a panacea.
▪ Create a flexible workforce. Not every worker has to be a full time, permanent employee with full benefits.
Regular organization design tune up’s are essential to improving a company’s operating model, to be clean and clear of ENTROPY. Just like our bodies become out of shape without regular exercise and our car engines start running roughly without semi-annual servicing, portfolio companies also face this reality. Avoid organizational entropy – the silent killer of business performance; realize the full potential of your business investments and maximize superior returns.◘◘◘
Tim McConnell is Managing Partner of McConnell Consulting (Organizational Architects) Inc. in New York. He can be reached at Tim@McConnellConsulting-NY.com.
Michael Woods is President and Financial Services Consultant with Woods Holdings in New York. He can be reached at firstname.lastname@example.org.