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Many companies are handicapped by being highly dysfunctional. Those that recognise this and do something about it, perhaps through adopting the Balanced Business Scorecard approach, can achieve extraordinary results.
Before its demise, Arthur Andersen achieved phenomenal growth by the appointment of senior partners with a particular skill for client development. These ‘rainmakers’ were given the space and time – normally several years - to grow accounts with major companies. All consultants, from whichever practice area, and all the back-end support staff, knew that what these ‘rainmakers’ asked for they were to get.
The result was a very well integrated business, focused on ensuring that its best prospects got the best service. And because they got the best service they bought more and more of their business services from Arthur Andersen.
First Direct was not the first company to provide telephone banking in Britain, but it has undoubtedly been the most successful. One key to its success was to operate it as a totally separate business, with a totally different brand identity, from its parent company, the Midland Bank (now HSBC) which then suffered a relatively lacklustre image. This meant it could focus on delivering everything its customers wanted without the baggage of having to be a High Street banker.
The key to success is to recognise that much of the real equity of the business nowadays resides in the business’s intangible assets, normally built up painstakingly over many years. These are embodied in the values, knowledge and experience of your staff and the relationships they have built up with your other stakeholders.
But this equity is extraordinarily fragile. While it takes years to build up, it can be destroyed in a very short period of time. Enron and Arthur Andersen are extreme examples but most businesses could point to their own less dramatic experiences, but with no less profound lessons.
Sometimes change is gradual as companies take customers or staff for granted. Sometimes it is more sudden, often triggered by a change of top management.
It is no surprise that share prices often take a sharp turn on the announcement of a change of leadership.
The biggest mistakes of new management are often to adopt a view of the business which fails to fully embrace the needs of the end-customer and a failure to listen sufficiently to those at the client-facing end of the business.
One company that managed to get it right during the 1990’s was Hewlett Packard. At the height of the IT boom, it was having to replace 20% of its entire range of products and services every year – in other words, it had to completely reinvent itself every five years! It could only do this by continually anticipating and responding to clients’ rapidly changing needs, and by listening to the people at the front-end of the business who were closely involved with delivering value to those clients. Nokia epitomises this approach today.
It was able to do this because it had developed a unique set of values, which made everyone extremely comfortable with the idea of continual change and client responsiveness.
By contrast, when Lou Gerstner joined IBM in March, he found a company that ‘had stopped listening to the outside world’. In an interview with the Sunday Times in December of last year he said: ‘It was amazing. We could go for hours in meetings and nobody would talk about a customer. I'd never been to a meeting before where we did not start with a customer!’
Often the worst thing that can happen in a service business is that new management is appointed, often with a finance or consulting background, but without real customer sensitivity, or any direct understanding of the nature of the underlying equity of the business they are joining.
When Railtrack was privatised in 1996, a new Board was appointed which included not a single engineer, despite the fact that the core equity of the business was its engineering capability.
Part of Marks & Spencer’s problems in the late 1990s has been attributed to its move away from its core values of consistent quality, boosting profits by buying from cheaper sources. On the re-bound it tried to move into the high-priced, high fashion end of the market before realising its real equity lay in holding the middle ‘quality at a reasonable price’ segment of the market.
The impact of such management changes is first felt internally. Look out for customer responsiveness and entrepreneurial values being eased out and replaced by tightly controlled processes driven by command and control type structures; strategic planning being replaced by budgeting; strategic goals being replaced by financial targets. The business priority switches from delivering more, and better, value to clients to boosting short-term sales; from supporting ‘rainmakers’ to reducing costs. As in IBM, internal meetings spend more and more time on back-end processes and less and less on what creates value for clients.
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