If you want to beat the competition in today’s business environment, being good isn’t good enough. You must be great. And you can’t be great if your organization doesn’t engage every employee in driving the operational and financial performance of the business.
In short, you must create an organization of employees who think and act like owners.
Here are five steps to take to accomplish this goal:
- Teach the fundamentals. Teach your employees the fundamentals of business and finance. More importantly, teach them the fundamentals of your company’s business and finance.
When employees don’t understand the finances of their company, they make mistakes and assumptions. The mistakes come from not understanding the ramifications of their actions relative to financial importance. The assumptions are that the company is making a 50 percent profit, and that all of that money goes into the executive team’s pockets — or they assume the company is going bankrupt.Having the CFO teach business and financial information may not be the most effective approach. Financial professionals often can’t communicate financial concepts to lay people without losing them.Instead, employ training methods that are fun and interactive. Link financial concepts to personal finances. Examples might include refinancing your mortgage (restructure debt), changing your long-distance company (review vendor relationships and purchasing policy), and taking care of your car (preventative maintenance on equipment to increase its life and reduce repair costs). Include exercises in training around real-life company issues (waste, inventory, control and safety that affect profitability and equity value.
- Identify key performance indicators. The reason most employees feel disconnected from financial performance is that the only mechanism to keep score in their company are financial statements (income, cash flow, balance sheets). Financial statements are only about dollars and cents. They don’t focus on the “people stuff” that makes dollars and cents happen, so employees don’t connect tasks to financial performance. Also, most people can’t read financials, so they’re of little practical use. Finally they are historical documents — important, to be sure, but not leading indicators of financial performance.
Survey your employees and management team to find out where they believe the opportunities for improvement lie. Do a financial trend analysis of your company. Compare your performance to other companies in your industry. Have a facilitator (without a personal agenda) lead a team of key personnel through the process of Key Performance Indicators (KPI) identification.Operational KPIs are important because these are the measures that most employees understand. By focusing on these and then pointing to the financial results of driving them, you can effectively link tasks to financial results over time.
- Maintain high visibility and high accountability. Create an organization of high visibility and high accountability by using your KPIs to monitor performance and keep score.
Create scoreboards with your KPIs, and assign the responsibility for monitoring them to the individuals with the greatest impact on them (not your CFO!). Ask those individuals and/or teams to forecast results against budget, rather than simply looking at historical data. (if there is some unease about sharing a high level of financial information throughout the company, lower-level (departmental) scoreboards can focus primarily on operational measures.
- Have fun! Regularly involve employees in creating and participating in Rapid Improvement Plans (or games, if you prefer). RIPs are mechanisms designed to focus employees on areas of opportunity that (1) improve financial performance; (2) create a learning environment; (3) drive equity value and fund incentive plans; and (4) make work fun.
Select a KPI that has significant opportunity for improvement and build your Rapid Improvement Plan around it. One example: A company in San Diego had a problem with obsolete inventory and created a game called “Ice Age” to eliminate it. The game board was a small sandbox in the office containing several toy dinosaurs, each representing $10,000 of obsolete inventory. The objective of the game was to make the dinosaurs extinct. The company specified a specific time frame, insured that results were quantifiable and identified the participants and activities needed to “win” the game. The prize was inexpensive because it was understood that when employees won, they were funding their incentive plan and driving stock value.
- Tie incentives to KPIs. If you have (or want to have) an incentive plan, make sure that it’s clearly tied to your organization’s KPIs. Most incentive plans don’t work because they’re overly complex. They’re tied to financial performance yet participants don’t understand finance. As a result, there is no connection between activity and bonus, and the plan becomes nothing more than an entitlement. Creating a good plan isn’t difficult. The trick is teaching people that it must pay for itself, how they can drive it and that it is their plan, not yours.
Select one or two KPIs to drive the plans that (1) everyone can impact, such as profit before tax, and (2) people can understand. You may want to select something from your income statement (to drive profit) and something from your balance sheet (to drive cash flow). Determine a threshold that insures that the company’s financial needs are met before the plan is funded. Identify other design elements (how often plan pays out, who participates and when, is there a cap or not, etc.). Finally, provide the financial acumen training and tools your employees need to fund the return.
Employees can’t make intelligent decisions without the proper information. And they can’t make intelligent decisions if they don’t understand how those decisions impact the company’s profitability and stock value.
Vistage speaker Brad Hams is founder and president of Ownership Thinking, LLC, based in Denver, Colorado.