28 Jan 2017
We live in times of rapid change when businesses that assume they have a secure market are suddenly having their world turned upside down. With the most substantive impact coming from technology, many have assumed that large investments in IT and digital would act as a protection. In fact, many of the businesses who have made the largest investments, such as some retailers, are actually the ones experiencing the greatest disruption to their operations.
It is hard to describe disruption in a meaningful way, but I like Jack Welch’s famous quote “if the rate of change on the outside exceeds the rate of change on the inside, the end is near”. A disruption index can be described in terms of the ratio of the external and internal rates of change. But, how do you measure change and the transformation within your organisation (the numerator and denominator of this ratio)?
When I was putting the finishing touches on Information-Driven Business, I had the opportunity to share an editor with Douglas W. Hubbard who wrote How to measure anything. This book is a wonderful reminder that the only limit to putting a numerical value on any business problem is our imagination! Whenever someone argues that their change, driven by transformation, is too hard to measure, I’m reminded of this book.
Not only do I think that the change associated with any transformation can be measured, I also think that the first measure you think of is unlikely to be the best. For example, customer-service focused transformations often default to net promoter score as the main measure while overhead-driven transformations frequently rely on measuring the cost or headcount taken out of the business.
These are good measures, and should play a role, but they aren’t great denominators for the disruption ratio. What we really need to measure is sustainable strategic change in an environment where the very nature of corporate strategy is changing. On the one hand, top-down one-off strategy work is making way for ongoing experimentation combined with a small number of “crossing the Rubicon” moments. On the other hand, too little focus on the Rubicon leads to worrying about horse carcasses in growing cities, something I discussed when I wrote about the difficulty of seeing past today’s problems.
Customer transformations that rely too heavily, for example, on net promoter score, lend themselves to disruption by a better offer. I’ve seen numerous organisations get customer feedback after each interaction only to find it a poor correlation to customer churn. The issues are many, but can include a metric-driven incentive for customer service agents to provide exactly what the customer wants to hear but without any realism that it can actually be delivered.
When we talk about customer loyalty, that really means a build-up of value. Really thinking about this could result in some form of balance sheet recognition. Each time there is a genuine discount to the market, a real solution to a meaningful problem or a deeply insightful interaction there is value. Similarly, the balance sheet value of employee-generated IP is as much a meaningful measure of employee satisfaction and inventiveness as any engagement score or innovation survey.
A great resource which combines employee and customer engagement is Zeynep Ton’s work on The Good Jobs Strategy. Ton’s research very nicely identifies the relationship between the cost of staff, investment in their capability and the loyalty of customers. From here can come an approach to measuring a sustainable transformation.
Like many researchers, Ton has identified that transformation is as much about what you take away as what you add. Simply targeting the creation and launch of new products ultimately destroys organisational agility and adds complexity which stymies both customer service and future innovation. Radical decommissioning is one approach, but another is to measure complexity and target its gradual reduction as I’ve previously suggested by Trading your way to IT simplicity.
Regardless of whether it is customer service, supply chain, human resources, costs or products that you are trying to transform, the challenges are similar. While the strategic goals might be easy to describe, the real work happens when you try to design measures. Rather than setting once and assuming the measure is right, constant experimentation and confirmation is essential.
The attribute of a great transformation measure is that it doesn’t just correlate with the outcome you want, it is intrinsic to it. Given the complexity of changing a business, it is very likely that these outcomes will be complex and the measures you need equally sophisticated.