Think Functionally, Act
Strategically
When
a company competes on capabilities, its specialist leaders—in HR, IT, finance,
and elsewhere—play a new, influential role.
What should the role of the
corporate support function be in business strategy? Until recently, the answer
was relatively straightforward. System-wide, service-oriented functions existed
to carry out the many specialized tasks that every corporation needs to have
done. Human resources (HR) recruited employees, managed benefits transactions,
and oversaw evaluation and promotion practices. Information technology (IT) ran
and helped support the company’s computer systems. Finance carried out all
processes related to accounts, debts, and taxes. Learning and organizational
development offered training programs tagged to the skills the company needed.
Legal vetted contracts and managed issues related to compliance. And so on.
The
New Functional Leaders: Gaining a Stronger Seat at the Table
Find out how functions like HR, IT,
and finance can balance a new strategic role while still managing their own
house.
Though much has been written over
the years about the strategic importance of HR, IT, finance, and other support
functions, in most companies their roles have been primarily transactional.
They fulfilled day-to-day needs, met legal and regulatory requirements,
accommodated requests from business units, and put out the inevitable fires
that erupted when there was a conflict or urgency. When functional leaders were
asked to make improvements, it meant doing the same things more efficiently and
at a greater cost savings.
Recently, however, there has been a
leap in expectations. Over the past few years, CEOs, business unit leaders, and
functional leaders themselves have been asking support functions to deliver
more value to the organization at large. Instead of balancing services among
all business units equally, or striving to be best in class in everything,
support functions such as HR, IT, and finance are asked to be “fit for purpose”:
more closely aligned to the enterprise strategy. Functions that are more
directly related to individual brands and business units—which may include
operations, sourcing, marketing, sales, and R&D—have also been affected,
though not always in the same way as their counterparts at corporate
headquarters. This leap is occurring for several reasons.
First, market environments and
patterns have become less stable, and competitive intensity has increased. Many
companies—facing changes in customer demand, the emergence of innovative new
competitors from around the world, and greater macroeconomic uncertainty—are
raising expectations accordingly. Today’s functions must provide a far more
complex set of activities and expertise than they ever had to manage in the past.
For example, IT must design systems that mine “big data” to support real-time
consumer offers that change on the fly; HR must recruit a broad range of people
from around the world and design flexible career tracks to match their
diversity.
There is also a new opportunity to
raise the return on discretionary investment. Over the past decade, through
outsourcing and process improvement, many functions have become more efficient
in performing their day-to-day activities. Therefore, the resources dedicated to
routine, transactional tasks—managing HR benefits, dispensing IT equipment,
resolving finance discrepancies, maintaining mailing lists, and so on—have been
dropping. Such tasks now consume perhaps 35 percent of staff time, whereas they
once consumed 70 percent. This development enables functional leaders to
allocate more time, attention, and money to discretionary activities, the
strategic tasks that can make an organization more competitive.
In addition, the pressure to execute
flawlessly is increasing. Most functional departments have made great strides
in maximizing efficiency and improving operations. But they usually still have
a lot of room for improvement, forcing many functional leaders to look for new
paths to operational excellence and greater value, usually while reducing
costs.
Finally, many companies have become
aware of the power of distinctive capabilities, that is, the advantage held by
companies that do only a few things in the market, but do them exceptionally
well. Amazon’s success is based on its skill with online user interfaces,
logistics, and technology. Coca-Cola’s success depends on its prowess in
beverage creation, brand proposition, and global consumer insight. Hyundai
gained its enviable foothold in the U.S. automobile market through stylish car
design and marketing combined with disciplined quality improvement. Functional
leaders face the difficult challenge of supporting these complex new
capabilities while not compromising what they already do.
For all these reasons, the role of
corporate staff functions is expanding in many companies. These businesses are
investing more in their global corporate staff, and are deploying functions
such as marketing, R&D, and sourcing across all the business units in the
enterprise. Corporate functions already have a more prominent seat at the
strategy table than they used to, and are increasingly influential in setting
and executing the corporate capabilities agenda.
Together, these changes give
functional leaders a mandate to think and operate more strategically than they
did in the past. They are rewarded less for providing a service bureau that
fills all requests, and more for their effectiveness and discernment, for
emphasizing the activities that differentiate a company in the market, and for
finding less expensive or more comprehensive ways to deliver the rest. They are
also being asked to focus, for the first time, on resolving function-related
conflicts among different parts of the larger organization (for example,
conflicts over incompatible IT systems or redundant talent initiatives). Every
function, local or global, should define its role in light of the overall
capability agenda, and how it can be fit for purpose in driving that
agenda—instead of thinking first about how to fulfill its functional excellence
agenda.
Consider, for example, the story of
the finance staff at a large North American consumer packaged goods company.
For years, they had focused on a single dimension of their role: as the “cost
police” for the business units, processing transactions, tracking expenses, and
holding down costs, even when it meant constraining growth. Then, in the wake
of the Great Recession, the CEO asked the chief financial officer to cut
finance’s operating costs by 20 percent.
The CFO and his direct reports met
to consider the measures. Staff members were already stretched thin, and this
would stretch everyone further, possibly past the breaking point. The mood
around the table was glum. Then the CFO said, “If we’re going to do this, we’ll
do it in a way that delivers more value to the business—not less.”
Over the next few weeks, the CFO and
the top finance team met one-on-one with the managers of some of the largest
business units to talk about finance’s operating model and where the
department’s help was most valued. These conversations, which had never before
been conducted in that company, led to a quiet reorganization. In some
areas—such as due diligence for acquisitions and postmerger integration—the
finance team increased investments. For consultative cost management, they
designed a leaner operating model, incorporating new metrics for effectiveness
and value delivery. They also outsourced routine and transactional activities
such as standard financial reporting. Perhaps the most important change was in
the reorganization of the financial planning and analysis staff. Under the old
structure, these staff members had been embedded in business units around the
world; they replaced this structure with a centralized staffing model,
reinforced by service-level agreements with the heads of all the business
units. This gave the finance team a higher level of accountability for local
results than they had had before, while gaining efficiencies and cost savings.
The top leaders of the finance function took on more of an advisory role,
consulting with business unit leaders on key decisions—such as where they
should channel their investments for growth and how to manage and control
costs. That had the beneficial side effect of helping business units plan ahead,
reducing some of the urgent last-minute calls that drain every functional
group.
Within six months, the new system
had freed up more than 20 percent of the finance function’s budget—and a fair
amount of executive attention. This was particularly helpful in making and
integrating acquisitions; the success rate for “onboarding” new enterprises
grew visibly. Because finance now managed business unit costs more actively,
the cash available for reinvestment was identified more accurately. The
function’s new agenda provided the company with a clearer picture of the return
on investments; it helped the company overcome its ingrained reluctance to share information and services across
business unit boundaries. In short, finance now played the kind of strategic advisory
role that made a significant contribution to the company’s top line as well as
to its bottom line.
Choices and Commitments
If
you are a leader in a corporate function, you may have a similar story to tell.
The changes in your role may feel challenging or unfamiliar at times, but they
represent a golden opportunity for you and everyone in your senior team and
department. For years, you may have sought more opportunities to bring your
specialty to bear, not just in day-to-day services, but in defining and
developing the company’s distinctive edge. Now, the chance is finally here. In
fact, in many industries, it’s become an imperative.
To
be sure, you still have to manage your own house. Transactional tasks remain;
businesses continue to demand service. You are still judged on your operational
effectiveness and efficiency. Senior management may send mixed signals; it
isn’t always clear how to resolve conflicts between the day-to-day needs of
individual businesses and the long-range, in-depth efforts needed to build
distinctive capabilities. Many things that you would like to see improved,
including some highly important cross-functional initiatives, are outside your
control or jurisdiction, yet seem to require your involvement and influence.
Moreover, if your enterprise (like most) is struggling with incoherence—not
quite able to settle on an overarching direction that is appropriate for all
its products, services, and priorities—then the function you lead will
undoubtedly struggle as well. Different businesses will make contradictory
demands of you, you won’t be able to fulfill them all, and you won’t always
know how to bring them together. Managing these types of situations requires a
high level of leadership skill.
How,
then, can you take on this new strategic role, maximizing your effectiveness,
without being torn into pieces? You can accomplish it only by changing the way
your function conducts business, overcoming the inertia of embedded habits and
practices, and putting strategic activities first, before the usual long list
of critical tasks and service requests. That is the purpose of the new
functional agenda.
Like
many other strategic exercises, converting to the new agenda begins with a
statement of the value proposition: your company’s chosen way to play in the
market, how it intends to attract and hold customers. This is, of course, set
at the enterprise level, but it is incumbent upon you as the functional leader
to understand and articulate it in the context of your specialization. Will
your company distinguish itself as an innovator, launching technologically
sophisticated products and services? Will it be a value player, outpacing
rivals through lower costs? Will it provide a compelling customer experience?
Or will it forge some other way of delivering value?
In
every successful company, the value proposition is closely linked to the firm’s
most critical capabilities: the things it has learned, over time, to do
particularly well. Inevitably, functional leaders are involved in defining,
building, and maintaining these capabilities. Thus, you need a clear
understanding of the company’s overall value proposition, of the capabilities
required to fulfill it, and of the role your function plays. To start, divide
all the capabilities that your function provides into three broad categories:
• Basic
business capabilities are the capabilities needed to keep the company
running. These services—which include payroll, employee benefits
administration, and basic computing services—remain the responsibility of the
functions. They are critical but non-differentiating. They should be tightly
controlled for efficiency, and often automated, outsourced, or relegated to
low-cost shared services, thus freeing up resources that functional leaders can
redirect to differentiating capabilities
•
Competitive necessities are the “table stakes” that enable a company to compete
in its industry. In many companies, these include logistics, sourcing,
back-office processes, and integrated IT architecture. They are essential to
survival and success, but they can often be managed for cost and efficiency,
rather than for performance at a world-class level, or even at the same level
as competitors.
•
Differentiating capabilities provide a company with the distinctive
advantage needed to outperform competitors. Most of these capabilities are
cross-functional; they gain their power from the fact that different functional
proficiencies fit together in ways that other companies cannot easily copy. For
example, Procter & Gamble’s innovation capability, as chronicled during the
years that A.G. Lafley was CEO, was not related solely to its R&D function.
Financial reviews, product design and manufacturing, and immersive market
research were closely involved. The Swiffer WetJet mop was developed when a
launch team, in visit after visit to consumers’ homes, saw them struggling with
conventional mops. Truly differentiating capabilities demand (and deserve) a
major share of investment and attention from every function that contributes to
them.
As
a functional leader, you must recognize which capabilities fall into which
categories—and balance your resource investments accordingly. All three can be
costly to build and maintain, and many functions have gotten used to spending
more on competitive necessities and basic business capabilities than they
should. Differentiating capabilities get shortchanged as a result, and when
that happens a company can easily lose ground.
Being
best in class in every process or activity within a given function simply isn’t
possible, no matter how professionally satisfying; no function has the funds or
organizational stamina to be excellent at everything. Instead, you need a clear
sense of which category each activity falls into. There must be some activities
in which being merely adequate is appropriate, where “good enough” is actually
good enough.
This
can be a very difficult path. Many people within your function, and in the
business units you serve, will push back on the idea that their day-to-day
capabilities need less investment. In the short run, you still need to tailor
your approach to the individual priorities of every business, and to your organization’s
culture. But in the long run, if you don’t have a clear and consistent idea of
the right trade-offs and priorities, you will never muster the capital or
attention you need to fulfill your strategic imperative.
Blueprint for an Operating Model
With
a more conscious approach to channeling investment, the pressure to execute
effectively has increased. A functional blueprint is a plan spelling out how to
accomplish this: how you will deliver the most value to the organization as a
whole, how you will work together with other functions to ensure the delivery
of the greatest value, and how you will continually raise performance.
In
developing the blueprint, you should rethink decision rights (who has final
approval), processes, and tools. The way you measure performance should also be
explicitly defined, both at the functional
level and at the level of each function’s specific activities (see “Measuring Functional Performance,” below). The blueprint defines a
number of key elements that may have
gone unexamined in the past. For example, you may revisit the roles and
responsibilities in your organizational structure, along with existing patterns
of centralization and decentralization. Differentiating capabilities tend to
benefit from having global centers of excellence, or even an organizational
structure designed around them. Competitive necessities, which are requisite
for every company in an industry, may naturally involve more decentralized
operations—or, alternatively, may fit best in shared services. Many basic
business capabilities can be outsourced.
Collaborate with business leaders
and your counterparts in other functions to make these decisions. For example,
a distinctive product development capability may require setting up common
activities across IT, R&D, marketing, and sales. The marketing and sales
functions will need to improve their market-sensing capabilities to understand
what the customer wants, and R&D and product management will need to draw
upon those insights in designing new features. IT will be called on to provide
an underlying infrastructure to support knowledge transfer and collaboration.
What conversations do you need to arrange, among which individuals, to ensure
that these new systems and structures are in place?
Leading
from Within
If you are a functional leader, your
role is more challenging than ever before. You are a critical player in every
aspect of capabilities: identifying them; designing the processes, tools, and
practices that enable them; and executing the strategy through them. Your
personal leadership qualities—your interpersonal skills and strategic
insight—are a primary source of success not just for the function, but for the
enterprise as a whole. In your most important work, on differentiating
capabilities, you share authority with other functions and departments, instead
of maintaining unilateral control. You need a level of credibility and
integrity high enough that you can counsel business unit leaders, even telling
them hard truths—for example, that their priorities conflict with those of the
overall enterprise.
As the company becomes more
coherent, you may often be called on to help build or develop differentiating
capabilities—and to help discard investments that no longer fit. That may mean
shifting abruptly from a service bureau orientation, where your role is to
fulfill every request, to a more strategic approach, where you help set and
maintain priorities and sometimes have to say no. Even as its leaders espouse
greater coherence, your organization may not move smoothly in that direction.
Everybody tends to think that the number of projects should go down, starting
with everyone else’s projects. In those organizations that embrace coherence,
too much centralization can be a weakness; you will also have to guard against
top-down rules and practices in your function that stifle creativity and make
it hard to reach out to customers effectively.
A well-designed and well-executed functional
agenda makes all this easier. Once you can establish an open, well-communicated
set of priorities and an explicit, well-understood functional blueprint, you
will not be operating alone. By putting these together and talking about them
openly, you reinforce a higher degree of alignment between the corporate
center, the local business leaders, and your own team. As you gain practice in
saying no to multiple priorities, and focusing on the few most critical
capabilities, you enhance your own ability to lead. When the company moves in
the direction of a capabilities-driven strategy, and needs your function to
take part wholeheartedly, you and your team will be ready.
Every function’s first
priority should be to support the building and management of differentiating
capabilities. Therefore, it is essential to define and measure explicitly just
how much value each function is delivering. You can use four distinct
indicators to assess this value.
1. Quantifiable
impact. Measure all the
function’s activities against definable business outcomes that are aligned with
the company’s strategic priorities and tied to a specific time frame. A
centralized consumer insights capability, for instance, might be measured by
the reduction in the number of weeks required to develop new products during
the next 18 months.
2. Clear drivers of
value. Identify the sources
of your function’s greatest contributions to the enterprise. Improved demand
management might depend, for example, on having sophisticated analytical tools
that can provide streamlined access to data, greater scale, and the bundling of
expertise. Metrics should establish the degree to which these tools exist and
are used.
3. Cost-effectiveness. Continue to track the relationship between
expenses and outcomes. Your function’s contribution to the enterprise—measured
through financial performance improvement in revenue or profit—must outweigh
the cost of its activity.
4. Internal market
validation. Seek out and
incorporate feedback from your clients and constituents within the company, to
drive your function’s effectiveness and efficiency wherever possible. This may
include the use of charge-backs, service-level agreements, and make-versus-buy
assessments (analysis of whether to build a capability in-house or outsource
it).
Leading companies
deploy rigorous processes and tools to ensure the alignment of ongoing and
proposed functional activities and investments with the functional priorities
and the operating model, and to ensure maximum value creation. Within the
context of continuing pressure on support budgets, this helps functional
leaders allocate their resources to the activities with the highest value.
by Deniz Caglar, Namit Kapoor, and Thomas Ripsam
http://www.strategy-business.com/article/00158?pg=all
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