Executing Strategy: The Critical Role of Culture Part II: Creating a Performance-Based Culture

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1 White Paper Executing Strategy: The Critical Role of Culture Part II: Creating a Performance-Based Culture James Creelman, Jade Evans & Sebastian Rubens y Rojo In Part One of this two-part white paper, we explained how to build a strategy-aligned organisation and the importance of leadership and corporate values in making that happen. In Part Two of the white paper we outline the key ingredients of a performance-based culture and the critical role of employee engagement and sense of meaning. A case study on Palladium client du demonstrates good practice.

2 The Elephant in the Room 24% Actively Disengaged Employees 2 Executing Strategy: The Critical Role of Culture Organisational culture is the Elephant in the room. Big, powerful and capable of trampling under its feet anything that it doesn t like, it is rarely addressed because despite its size it is virtually invisible. The extent of its influence, however, is not: untamed, dysfunctional and unethical behaviour, bickering between coworkers, poor customer service and employee disengagement from the goals of the organisation are plain for all to see. By making the Elephant visible, organisations have opportunities to shape behaviours and attitudes that support the strategic and operational aims of the enterprise. The mighty Elephant will be tamed. One measure of whether the Elephant is tamed and encouraging the appropriate behaviours required to implement strategy and deliver operationally is employee engagement. Simply put, do employees enjoy working 13% Engaged Employees Figure 1: Employee engagement levels, 2012, Gallup Inc. 63% Not Engaged Employees for the organisation and are they willing to do all that they can to ensure its success? Employee Engagement Just 13% of employees are engaged at work, according to the market research giant Gallup s State of the Global Workforce study of employees from 142 countries. 1 The Gallup study describes these engaged employees as involved in, enthusiastic about and committed to their work. However, the bulk of employees worldwide (63%) are not engaged, meaning that they lack motivation and are basically sleepwalking through their workday, putting time but not energy or passion into their work. Even more alarming, 24% of employees in this study are actively disengaged, indicating they are unhappy and unproductive at work. Indeed, according to Gallup these employees aren t just unhappy at work they re busy acting out their unhappiness. Every day, they undermine what their few engaged coworkers accomplish. They become the invisible Elephant that tramples anything positive that might be in its way. Worryingly, actively disengaged workers outnumber engaged employees by two to one (Figure 1). Engagement and Financial Success Engagement affects the bottom line. Compared to bottomquartile performers, Gallup finds that top quartile companies achieved 21% higher productivity and 22% higher profitability, as well as a host of other benefits, such as 37% lower absenteeism. Consider the cost of active disengagement : Gallup estimates, for example, that for the USA alone, active disengagement costs between $450 billion and $550 billion per year. Imbuing Engagement Hiring and developing great managers and building up and leveraging the strengths of every employee are the two keys to employee engagement, according to Gallup. Great managers work to ensure that employees have enough latitude in how they do their jobs to develop a sense of ownership over and pride in their work, which at Palladium we call a sense of meaning. The best managers do this by clearly defining the outcomes for which employees are responsible, then letting them find their own route toward those results. 1 The State of the Global Workplace: Employee Engagement Insights for Business Leaders Worldwide, Gallup Inc 2013

3 A Performance-Based Culture It can be reasonably argued that great managers releasing the energy and capabilities of staff is the essence of a performancebased culture. A performance-based culture is one in which employees are committed and enabled to finding ways to do things better and find new solutions for customers (and note that, according to Gallup, organisations with engaged employees and engaged customers experience a 240% boost in performancerelated business outcomes). It is a culture in which day-to-day performance improvement is expected, rewarded and hardwired to the strategic and operational goals of the organisation. It is a culture in which performance standards and behaviours are set by the top and where employees are allowed to flourish and find meaning in their work. Whichever way you look at it, culture is about people, and in any setting, be it at familial, social or organisational, the culture is more successful when the people within the specified group feel a positive connection to that group and when the individual feels that what they do personally and with others has a substantive impact on what the group is aiming to achieve. In short, finding a sense of meaning in what they do enriches both the employee and the group. Sense of Meaning Palladium s own ongoing multi-year research supports the assertion that sense of meaning is a critical aspect of creating a strategy-aligned and performance-based culture. Our proprietary Leadership for the Execution of Strategy Framework, in which culture and sense of meaning play a prominent role, is explained in Palladium s 2014 Global State of Strategy and Leadership Survey Report. 2 In this paper we emphasize the critical importance of culture and of leaders being able to engage employees (and the financial and other benefits of being able to do so). Parallel and aligned research has focused on sense of meaning : that is, the degree to which employees believe that they have a positive role to play in delivering organisational and team outcomes. Global Research Our research (which included a global research project with the Australian Research Council, Monash University and the University of Queensland, as well as the cited survey) focused on how sense of meaning can affect an organisation s ability to successfully execute their strategy and particularly its influence on how organisations perceive the barriers they face in executing. We found that sense of meaning directly impacts not only organisational performance but also, importantly, the perception of the manageability of these barriers and therefore the success of the strategy itself Global State of Leadership and Strategy Report, James Creelman, Jade Evans, Caroline Lamaison, Matt Tice, the Palladium Group, 2014 Executing Strategy: The Critical Role of Culture 3

4 Building the Foundations The research showed that developing a positive sense of meaning in an organisation is much more complex than empowering employees and fulfilling their immediate expectations. There must first be a foundation on which to build. In order to foster a positive sense of meaning, employees need to understand the vision for the organisation: Where is it going? What does it look like? Then they need to understand how the organisation is going to get there: What is the strategy? They then need to understand how they contribute to the strategy and what their role is within the organisation s success. Last, but by no means least, they need to understand how all of this affects them personally: How will it help them fulfill their personal and team aspirations? Once this foundation is in place, positive sense of meaning can follow. Employees who are experiencing a real sense of meaning feel they are key players in the execution of strategy. Meaning can be broadly defined into three key areas: workplace meaning, team meaning and personal meaning. Workplace meaning: The culture of the organisation and its link to strategy Our research shows that organisations that provide a clear strategy, strengthened by active support from the C-suite, are 6.1 times more likely to have a high sense of meaning than organisations without a clear strategy. However, these organisations are few and far between. The vast majority of organisations significantly underperform in this key area, with leaders failing to provide a consistent and meaningful workplace. More than 75% of organisations reported that the strategies and directions of their organisation have not been stable and consistent over time; nearly four out of five do not believe that their managers are passionate at work; and 77% confess that they are not granted opportunities to develop unique skills and attributes. In organisations with high sense of meaning these figures drop dramatically to 53%, 31% and 35% respectively. This instability and lack of engagement leads to employees feeling disenfranchised within their organisations. Team Meaning: How the team interacts with the organisation, other teams and the individual, and how the enterprise engages team members in the execution of the strategy An overwhelming majority of organisations that we studied are not satisfied with the level of cooperation among their teams. 87% reported that people within their organisation fail to cooperate, support and care for one another. Moreover, almost three out of four experience feelings of anxiety or distress that do not subside rapidly after work problems or disputes are resolved. This is alarming in many ways but particularly in light of the fact that, according to Palladium s research, cooperative teams make organisations 3.7 times more likely to be among the top performers of their industry. It also confirms Gallup s finding that actively disengaged employees experience high levels of anger and anxiety while completing their daily work. Anger and anxiety are the staple diet of the invisible Elephant. 4 Executing Strategy: The Critical Role of Culture

5 Personal Meaning: The engagement between the organisation and the individual s vision for their own future Just as Gallup finds a high level of disengaged employees who simply go through the motions each day, Palladium finds that the vast majority of executives show a palpable lack of connection to or even interest in their work. In fact, a startling 81% are not content in their role, nor do they feel that their work enables them to fulfill their aspirations and ambitions. The number of executives who do not feel their work enables them to fulfill their aspirations and ambitions drops by a massive 33% in organisations that are outperforming their competitors. The research indicates that fears about the job market rather than a genuine sense of meaning keep many executives in their current position, possibly driven by the fact three quarters of executives we questioned believe there is little demand for jobs in their industry. In organisations where the executives are actively disengaged, it is virtually impossible to foster a strong sense of meaning. Leadership must live and drive the desired culture in the organisation. Lack of Trust In a performance-based culture, employees want to get things done and the structure and decision rights of the organisation ensure that things can get done. Unfortunately, such a situation is very much the exception rather than the rule. Only 32% of survey respondents state that employees are granted autonomy over how they should fulfill their goals. Just one in three respondents believe that their leaders prefer employees who challenge them. This startling lack of trust that leaders display has a significant impact on morale and performance. Our research shows those organisations that do value unconventional approaches in their teams are 3.9 times more likely to outperform their competitors in terms of organisational performance. Opportunities While this research may seem to paint a bleak picture of sense of meaning within organisations around the globe and, by implication, of the scarcity of performance-based cultures (only 16% of organisations believe they are genuinely able to sustain a positive culture), it also provides an exciting opportunity for organisations. In this highly volatile business environment, leaders need to instill a culture that is performance-based, with people at their sides and on their side who are dynamic, responsive, innovative and committed to organisational success. Leaders must find and enable people who are prepared to put in the all-important discretionary effort and find a sense of meaning in their work. Executing Strategy: The Critical Role of Culture 5

6 Case Study: du Founded in 2005, du is a UAE-based integrated telecommunications provider. By this time, the UAE telecommunications market had a very high penetration rate of approximately 130% (on average, in the UAE, each person had more than one mobile device). To establish and maintain a viable position in what was a very competitive marketplace, du adopted the Balanced Scorecard to support its focus on strategy, with the aim of creating a performance-based organisation and culture. The Balanced Scorecard was used to establish two key enablers of future progress: the commitment of the leadership team and the creation of a best-in-class reward system to align the behavior of the workforce with the strategy. Du s Strategy Map and scorecard reflect the importance of employee engagement. In 2006, the strategy was to launch mobile services with nationwide coverage, and du attracted bright talent from over 70 nationalities to launch the operations. To ensure that all the employees had a common understanding of company objectives, the CEO organised town hall meetings with all the employees on a quarterly basis. The CEO used the Balanced Scorecard to communicate the company s strategic objectives and progress against these objectives. Since the time of the company s incorporation, du has cultivated a culture of rewarding performance by linking employees variable pay to performance as per the Balanced Scorecard, thereby ensuring focus on achieving strategic objectives. The CEO believed that strong leadership commitment and a robust rewarding system are ingredients to effective strategy execution. As a best practice, Performance-Based Variable Pay (PBVP) is the foundation of du s employee performance management and compensation. The variable pay scheme is designed to encourage and motivate higher performance by linking compensation to performance. The higher the position in the company, the higher percentage of the PBVP is linked to company performance. This encourages the executive management to ensure that the company s strategic objectives are met through a successful strategy execution process. To increase individual alignment, each employee is able to align his or her individual objectives with the company s strategic themes and strategic objectives. This feature allows everyone in the company to better understand how they contribute towards corporate objectives and strengthen accountability. Du also has other reward schemes. For example, a Brand Value Award is presented to employees who display the company s values Honest, Confident, Friendly and Surprising in the most profound manner. The nominees for this award are chosen by their peers and the employees with highest number of nominations are presented this award at the CEO event. So are du employees engaged, and has this driven superior financial performance? Du is a global top quartile performer according to Gallup s employee engagement survey, and engagement results are aligned to a manager s bonus system. Since 2007 the company has witnessed a significant revenue growth from AED 1.5 billion to AED 8.8 billion in 2011, with a compound annual growth rate of 55% in five years of operations. The company also experienced significant growth in EBITDA in 2010 and 2011, with increases of 90% and 45%, respectively. Finally, average Revenue per User (ARPU) has increased from AED 97 in 2010 to AED 105 in Du was inducted into the Palladium Hall of Fame for Executing Strategy in Executing Strategy: The Critical Role of Culture

7 Human Capital Development to Execute Strategy In recognition of the importance of culture and employee engagement, Palladium, with the thought leadership of Dr. David Norton, has developed a Human Capital Development to Execute Strategy framework. This framework is based on the pillars of Engagement (employees understanding the strategy), Alignment (personal goals linked to the strategy), Readiness (strategic job families have the necessary skills and competencies), and Culture (the organisation adopts the set of values required by the strategy). Supported by compelling research by Palladium and others, this program plots the causal relationship between these four human capital pillars and ultimate financial or mission success (Figure 2). The framework emphasises the importance of leadership development and of employees understanding the strategy. Organisations with strong performance-based cultures have leaders who understand how to execute strategy. They ensure that their employees understand the vision for the organisation and their personal role in delivering that vision and therefore the strategy s success. These organisations are reaping the rewards in organisational performance and strategy execution. These organisations have, in the words of change author Dr. James Belasco, taught the Elephant how to dance. 3 Financial Perspective Customer Perspective Internal Process Perspective Strategic Measures Human Capital Development Programs % of employees who understand the strategy Strategic Communications % of employees with personal goals linked to strategy Personal Goals Financial/Mission Objectives Customer Objectives Internal Processes Operations Customer Management Innovation Social & Regulatory Engagement Alignment Readiness Culture % of Strategic Job Families with necessary competence in place Strategic Job Families Competence Testing & Certification % of strategic change agenda accomplished Strategic Change Agenda Leadership Development Incentive Compensation Figure 2: The causal relationship between the four human capital pillars and ultimate financial or mission success. 3 Teaching The Elephant To Dance: Empowering Change in Your Organization, James Belasco, Crown Publishers, Executing Strategy: The Critical Role of Culture 7

8 About the Authors James Creelman is the Director of Research for Palladium. Based in Dubai, James has more than 20 years of experience as a consultant/trainer in enterprise performance management. James is the author or co-author of 24 books and major reports, including the books Doing More with Less: Measuring, Analyzing, and Improving Performance in the Government and Not-For- Profit Sector (2014), Risk-Based Performance Management: Integrating Strategy and Risk Management (2013) and Creating a Balanced Scorecard for a Financial Services Organisation (2011). Jade Evans is an engagement manager for Palladium s strategy execution consulting arm. In over a decade of experience across public and private sectors in Australia, Asia Pacific, the Middle East and the US, Jade has developed and managed more than 1,000 comprehensive leadership consulting projects, combining strategic thinking with practicality, innovation and leadership to deliver pragmatic solutions to complex issues. Jade is also a recognized expert in leadership development, organisational change and organisational culture and is a member of the Palladium Leadership and Change Management Practice. Sebastian Rubens y Rojo is a member of Palladium s strategy execution consulting arm. Based in Dubai but born and raised in Argentina, Sebastian recently joined Palladium after five years in the Abu Dhabi government, initially working at the Executive Council s PMO and then heading the Strategic Planning and Special Projects division at the Abu Dhabi Education Council, where he also led an HR transformation project as an Advisor to the Director General. His work experience includes human capital and strategy consulting, teaching and clinical psychology. 8 Executing Strategy: The Critical Role of Culture

9 Palladium develops and delivers solutions that create positive impact for communities, businesses, societies and economies. We transform lives and create enduring value by working with governments, corporations and non-profit organisations. Palladium is built on the idea that progress is supported by four key pillars: International Development Strategy Executing Consulting Impact Investment Training and Events We create positive impact through more than 100 current projects with more than 2,000 employees operating in over 90 countries.