Andrew’s Blog

Strategy Execution Derailment

Yesterday, Carrillion plc went into liquidation with debts of at least £1.5 billion ($2 billion). The 43,000-person construction and support services company operates in the UK, Middle East, Caribbean and Canada and provides a wide range of services grouped under three key areas of capability:

Support services

  • facilities management
  • facilities services
  • energy services
  • rail services
  • utilities services
  • remote site accommodation services
  • road maintenance
  • consultancy businesses

Project finance

  • Investments in Public Private Partnerships

Construction

  • building
  • civil engineering
  • development

Although not a household name, the company is involved in the lives of millions, whether through cleaning hospitals, financing prisons, laying rail tracks or building bridges. Many will recognise the names of companies that formed Carillion or were acquired by it: Tarmac Construction, Wimpey Construction, Mowlem and McAlpine to name a few.

The company pursued “sustainable, profitable growth” through a three-pronged strategy, proudly stated on its website:

  • Winning high-quality contracts in our chosen markets
  • Delivering contracts safely, sustainably and to best-in-class standards
  • Developing and attracting excellent people and capabilities

Delivery of our services and strategic objectives continues to be driven by our customer-focused culture, integrated business model and centralised operating platform, which enable us to combine all our skills and resources so that we can compete successfully to win and deliver high-quality contracts.

This strategy is no less robust than those articulated by most similarly large and complex organisations. In spite of profits warnings over the last six months – and without the benefit of today’s hindsight – many stakeholders (including numerous shareholders and government customers) seemingly saw the company as a having a reasonable chance of recovery. The 2016 results reported steady dividend growth, earnings per share rising, profits increasing, revenues up 14 percent, £16 billion of orders and probable orders, and a pipeline of opportunities worth over £41 billion. Other leading indicators were divulged which similarly did not spell disaster: a +22 percent Net Promoter Score and a 73 percent employee engagement score.

However, it all went wrong very quickly and Carrillion has provided another stark case of strategy execution failure. Suggestions are already being made as to the high-level reasons for the demise. The company operated in a highly competitive environment, with government contracts in particular often bring awarded to lowest cost bidders, other considerations being weighted lightly. There is little room for pricing or contractual mistakes. Carillion has also been highly acquisitive since its creation and has reportedly struggled with the integration of its newly owned businesses. This should not come as a surprise: the evidence is that such struggles are extremely common and a fairly small minority of acquisitions go on to create additional value. The company’s cash flow problems were reportedly intensified by slow payments from some customers; payments on contracts that were some of the business’s most profitable (on paper). There is also the likelihood of bad luck or bad management affecting cash flow through the phasing of income; Carrillion’s is a lumpy business.

It will be most interesting to see what further underlying strategy execution problems the company faced, as the dust settles and investigations inevitably commence. A  strategic review of the company, summarised in an investor presentation a few months ago, provides some clues:

  • Short term focus
  • Too much complexity
  • Insufficient transparency
  • Too much data and a lack of meaningful information
  • Large Group overhead

The company recognised the need for transformation and had recently tried to refocus on “core strengths and markets” – although of course, in a business like this one, such refocusing takes time: it’s a ‘tanker’ not a ‘panther’. The business indicated a three- to five-year horizon for its transformation. A different leadership team, new operating model and de-layered structure had been introduced alongside various cost-cutting measures. The business also wanted to improve “line of sight accountability” and transparency.

It’s worth reflecting on the list of services above. For any business to offer such a broad range of services through so many routes to market and to customers in multiple industries and regions, there needs to be an extremely strong resource-side logic that binds critical activities together, focuses resource allocation efforts and uniquely positions the company to outperform others. I’m not certain what that logic was; it certainly isn’t pinpointed in the strategy statement above. “Large Group overhead” may be a reference to the difficulties and costs of trying to manage effectively such a sprawling empire and create economies of scale. It reflects a belief I have held for some years now: that by modern standards, companies really don’t have to become that big and complex, to become highly risky from a strategy execution perspective.

It will also be intriguing to learn more about the problem of short-term focus. With revenues increasing much more than profit and failing to generate sufficient free cash, our suspicions should be that performance measures, targets and/or contingent reward may have been misaligned and driven myopic self-interested decisions and actions. Again, research clearly shows how easily this can happen, and it will be a real shame if so many people’s lives have been affected by what is essentially an avoidable problem. The aforementioned investor update references construction contracts being agreed despite highly uncertain assumptions and their success depending on the performance of parties outside Carrillion’s control. It will be unsurprising if the interests of the firm’s ‘hunters’ and ‘farmers’ were deeply misaligned. I leave you with ‘The Banker’s Mantra’:

Revenue is vanity.
Profit is sanity.
Cash is king.

Ascent & Descent

I recently enjoyed flying First Class from London to Bangkok with a well known airline.  It was a treat for me as I don’t expect clients to pay for luxuries; Business Class is fine.  But it was an upgrade and a welcome one for a long flight.

What did I most enjoy about the experience?  The extra space was good.  The food was fantastic.  And the wine was superb.  But the best thing about the whole experience was the cabin crew: they were wonderful – attentive without being obtrusive, polite but not fawning and very slick in delivering the service.  I was impressed.  I could feel my satisfaction with and sense of loyalty towards the airline growing.

I reflected that in theory there was nothing to stop every cabin crew member being as wonderful.  But in reality, the best performers are selected for First Class and doubtless that ‘labelling’ nudges motivation even higher – but not all staff can work there, so the reverse effect might even be true for staff back in Economy.

Unfortunately, it was not long before my newly re-invigorated admiration of the airline was to take a blow.  Upon reaching my destination, I noticed a booking had appeared in my account that I did not make.  I do not wish to travel to Munich in August…though perhaps there was another customer who did.  So being a considerate fellow I emailed the frequent flyer club to let them know.  The response I received was thus:

Thank you for writing to us about your reservation query.  Your particular requirement needs to be handled by [our] Service Centre, as only they have full access to your booking details, including its historical data. Telephone numbers can be found at: [link provided]  Please don’t hesitate to let us know if we can help you with anything else.

So let me get this right…although the responder knew exactly which part of the company was best placed to deal with my problem and how to contact them, (s)he thought it better to get me to do the contacting, rather than forward my email internally.

This happens a lot – customers are expected to join up disjointed businesses.  Organisations need segmented of course, but bad design can leave the problems of reintegration on the customer’s side of the fence.  The right kind of systems, processes and training can sometimes avoid this, but all too often they don’t.  It seriously damages customer service and thus satisfaction.

I enjoyed First Class, but back on the ground the customer service experience means I’m glad I didn’t pay for it.  And that surely represents a strategy execution challenge for the airline.

Executive Dilemmas

Organisation leaders have endured a rough ride recently.  Barely a day passes when business chiefs are not accused of greed – the banking crisis seemingly leaving all private sector executives exposed to vilification.  Senior public servants are not immune either; attacked for allegedly irresponsible spending or precipitating one crisis or another.  How long before charity bosses are also metaphorically hung, drawn and quartered?

Of course, this aggression was triggered by genuine examples of incompetence and corruption.  Much of it relates to pay, which is usually sufficiently high that public abuse seems a small price for leaders to pay.  But setting reward aside for a moment, are the expectations placed on leaders fair?

I’m not sure they are.  Senior leaders face a far more complex and challenging environment than they did a few decades ago.  But more than that, today’s leaders face a tide of seemingly irreconcilable demands.  Consider a few of these cruel dilemmas:-

  • Modern leaders must build strong teams for their organisations to succeed – but also hold individuals clearly accountable and gallantly recognise where the buck stops.
  • All organisations should be learning organisations, eager to change given experience – but execute flawlessly or face stakeholder wrath.
  • Great leaders engage their people and build motivated teams – but are expected to markedly differentiate followers’ performance at appraisals, and manage out the ‘C-players’.
  • Performance must be reported diligently and risks declared faithfully – but even a hint of a potential problem in an informal email might become ammunition for future adversaries in unforeseeable confrontations.
  • CEOs are expected to post spectacular results within months of arriving – but simultaneously build sustainably high-performing organisations in the long-term.
  • Senior teams must judiciously predict long-term future trends and position their organisations to exploit them – but remain opportunistically nimble at the same time.

Perhaps the labour market is operating as it should; taking on this mêlée is surely worth a pretty price.  But can we rely on the market and its sparkling reward packages to deliver the best leaders?

CEO turnover has risen steadily in recent decades.  Whether they jump or are pushed, many leaders are relieved to leave behind the muddled demands from shareholders, customers, regulators, governments, staff, advisors, auditors, suppliers, analysts, the media, pressure groups and others who watch their every move and fiercely tug them in opposing directions.  Lifestyle choice increasingly drives career decisions.  Some promising leaders are eschewing conventional ambition and leaving the gruelling top jobs to others.  It is a tragic irony that such talent is diverted elsewhere when we need fine leaders now more than ever.

I’m not advocating that the Royal Society for the Prevention of Cruelty to Executives be set up.  But we should care about whether leaders can be successful.  We all want our pension funds to grow and our hospitals to save lives.

It’s tempting to seek external solutions: government intervention, less-greedy financiers or better management research.  But such hopes are surely long-term ones, and unrealistic if they depend on changing market realities.  Perhaps the answer lies with leaders themselves.  They can say, loudly and clearly, what to expect from their organisations: the time horizon over which they aim to maximise performance, the risks they will take, and the trade-offs that will favour one stakeholder group over another.  In short, they must say what will be sacrificed in order to excel.  Choice kills dilemmas.

Smartphone Market Share vs Profitability

It’s interesting to see today’s news reports of Samsung ‘overtaking’ Apple in the smartphone wars. According to Strategy Analytics, Samsung’s 2011 Q3 market share was 23.8% against Apple’s 14.6%.

Samsung’s growth is impressive, and not unexpected. However, these figures can be rather misleading. Apple’s executives often used to say that their goal was not to make the most computers, but to make the best. They have applied this principle to the iPhone too and positioned it firmly as a differentiated and premium-priced offering. If market share is not the goal, profit certainly is. According to Asymco, in 2011 Q2, Apple’s market share of the handset market was 5.6%, but its profit share was around 66%.

Furthermore, these figures ignore Apple’s related sources of additional profit – in particular the App Store (which in 2010 accounted for over 80% of revenue in the mobile applications industry) and of course iTunes, the money machine much supported by the iPhone’s extension of Apple’s ecosystem.

It’s difficult to tease apart all the trends in the industry. Nokia is obviously falling behind (though its partnership with Microsoft may help). RIM’s problems have been compounded by the embarrassment of its recent BlackBerry email outage. Samsung’s surge is being restrained in places through Apple’s relative success in the ‘patent wars’. And some of Apple’s recent share loss may have been due to customers awaiting the latest iPhone launch (whereas Samsung sold 10 million Galaxy S II phones in five months, Apple sold four million iPhone 4S units within three days of the launch).

In summary, Apple’s continued business success looks likely to continue for the foreseeable future. According to Asymco, iPad sales grew at 166% last quarter (with profit growth at 146%) and the Mac operating system share grew by 27.7% against 2.5% for Windows. Apple’s strategy execution success relies upon heavy integration of its hardware, software and services. Complacency would be foolhardy, but the ecosystem seems intact for the time being…

Strategic Foresight

Unlike most bloggers, I haven’t yet mentioned Steve Jobs’s untimely death earlier this month, despite being a big fan of Apple’s products and having enormous respect for his passion, leadership and achievements.

As those who have read Strategy Execution will know, I explored Apple’s approach to executing strategy in great depth in the book via a strategy execution map, because it’s a super example of strategy execution mastery.

So, time to pay tribute to Steve Jobs, by quoting various technology-related predictions made over the years…

“Everything that can be invented has already been invented.”

– Charles H. Duell, Director of the U.S. Patent Office, 1899

“I think there is a world market for maybe five computers.”

– Thomas Watson, Chairman of IBM, 1943

“I have traveled the length and breadth of this country and talked with the best people, and I can assure you that data processing is a fad that won’t last out the year.“

– Editor of Prentice Hall business books, 1957

“There is no reason for any individual to have a computer in his home.”

– Ken Olsen, founder of Digital Equipment Corporation, 1977

“I’d shut [Apple] down and give the money back to the shareholders.”

– Michael Dell, founder & CEO of Dell, 1997

“Next Christmas the iPod will be dead, finished, gone, kaput.”

– Sir Alan Sugar, 2005

“There’s no chance that the iPhone is going to get any significant market share. No chance.”

– Steve Ballmer, CEO of Microsoft, 2007

“The most compelling reason for most people to buy a computer for the home will be to link it to a nationwide communications network. We’re just in the beginning stages of what will be a truly remarkable breakthrough for most people – as remarkable as the telephone.”

– Steve Jobs, 1985

Who Got Fired?

In June I wrote about problems with the NHS’s embattled patient care records programme – which has since been cancelled.

We have’t had to wait long for another major public change programme to go the same way.  Last month, the UK’s Public Accounts Committee reported on the FiReControl programme – “an ambitious project with the objectives of improving national resilience, efficiency and technology by replacing the control room functions of 46 local Fire and Rescue Services in England with a network of nine purpose-built regional control centres using a national computer system.”

The project was launched in 2004 by the last government and following numerous delays and problems, was cancelled by the current administration at the end of last year.  The Committee reports that none of the original objectives were achieved.

Reading the report is an object lesson in the causes of strategy execution failure.  Most of the usual suspects are mentioned:

  • inter-departmental conflict (in this case between the Department for Communities and Local Government and local Fire and Rescue Services)
  • lack of decision-making involvement of those executing the strategy
  • unrealistically short timescales
  • key decisions were taken “before a business case, project plan or procurement strategy had been developed”
  • unrealistic costs and savings projections
  • poor identification and management of risks
  • lack of clarity over roles, responsibilities and accountability for outcomes
  • a high turnover of senior managers
  • limited leadership visibility or control over resources
  • the project planning lacked early milestones

The story reinforces a common observation I make in organisations of all kinds: it is often far too easy to get hold of cash and resources without first adequately demonstrating that the activities for which they will be used will actually add value.

It would be comforting if more leaders’ performance was judged in part by what they did not do and what they stopped from happening in their organisations.

The Committee says at least £469 million was spent and wasted.  An expensive lesson, then…

The Progress Principle

Last month’s Harvard Business Review included an interesting article by Teresa Amabile and Steven Kramer, reporting the findings of a long study into motivation. Amabile and Kramer invited 238 employees in seven organisations from a range of industries to complete daily surveys about their work lives. In total, they collected and analysed 12,000 surveys to uncover the patterns behind moods, motivation levels and what was happening at work each day.

The one big finding? That perceived progress with meaningful work tasks is heavily associated with motivation, productivity and creativity.

There are some questions worth raising about the research. For example, surveys can measure motivation reasonably well, but productivity and creativity are more complex variables to calibrate. Also, surveys are inadequate for uncovering clear evidence of causal relationships and their direction. Did progress cause motivation, motivation cause progress, something else cause them both, or was some complex mixture of these links at work? Amabile and Kramer speculate that there is a useful ‘feedback loop’ that managers should tap into – directly seeking to raise the scope for both motivation and progress.

I’m inclined to think that Amabile and Kramer’s conclusions hold water. Although their angle adds novel value, their findings chime neatly with much existing research, going right back at least to the work of Herzberg. It also fits well with research from the strategy execution field that underlines the importance of employee involvement in shaping strategy and its execution and maximising ‘line of sight’ between organisational and individual goals.

If progress is crucial to motivation, perhaps the most significant finding from this research is that managers don’t think it is – only five percent of them rated it as the most significant motivator (the majority rated it last in the list provided). They placed higher value on factors such as recognition, incentives and clear goals. This highlights a thorny problem. Not only must leaders re-learn what really motivates people at work and then begin the difficult process of adapting their personal behaviours to meet these needs. They must also think about how to reshape the designs, systems and processes that support activities at work, to ensure the sense of progress that individuals crave becomes possible. A significant personal and organisational challenge indeed…

Patient Wait

The UK’s National Audit Office recently published an update on the delivery of patient care record systems in the country’s National Health Service (NHS).  This initiative forms part of an £11.4 billion programme that launched in 2002 and was to have been delivered by 2007, with further enhancements being completed until 2010.  The care record systems are intended to enable selected health care providers to access full details of patients’ medical history and treatment and make critical information, such as allergies, more widely available.  Four large suppliers were engaged to roll out the systems to NHS trusts and GP practices in four separate geographic regions.

The programme has been plagued by numerous problems.  Delays were first announced in 2006 and in 2007, one of the major suppliers ran into serious problems delivering on its responsibilities and had its contract terminated and work transferred to one of the remaining three providers.  In 2008, further delays were announced and another supplier contract was terminated, resulting in wrangling over responsibilities for the problems – the supplier complaining of scope creep, the Department of Health (DoH) putting the extra work down to remedial rework.

In its main report, the NAO reports that “the creation of the Detailed Care Record has proven to be far more difficult than expected” (p. 6) and that “fewer systems will now be delivered to NHS organisations, although the cost of delivering care records systems remain substantially the same” (p. 8).

The report also recounts how the decision was made to reduce the consistency of the systems being developed in different localities, to allow for smaller, more manageable changes to be made to meet specific local needs.  In fact, “the Department [of Health] no longer intends to replace systems wholesale, and will instead in some instances build on trusts’ existing systems” (p. 8).

This means that the aim of creating a detailed electronic record for every NHS patient has not and will not be achieved.  Apparently the DoH has not commented on the implications this has for the overall benefits of the programme, but the NAO notes, “there is an increased risk of not achieving adequate compatibility across the NHS to effectively support joined up healthcare” (p. 8).

The NAO goes further and criticises the DoH for the way in which it has chosen to report progress, arguing that it creates an unrealistically positive impression.  The DoH apparently reports completion in terms of technical module development (not successful release, functionality or usage) for single NHS bodies (not the wide variety of organisations intended to be joined up) and allegedly ignores the degree of functionality of the systems and other original objectives of the programme.

The NAO concludes, “the £2.7 billion spent on care records systems so far does not represent value for money, and we do not find grounds for confidence that the remaining planned spend of £4.3 billion will be different” (p. 13).

Is this sorry tale simply an unsurprising operational disaster, or is it a catastrophic failure of strategy execution?  I think certainly the latter.  The introduction of streamlined and integrated IT systems to join up the plethora of sub-organisations in the NHS was and should remain central to its strategy.  Patients rightly care little about the arbitrary divisions within what is called and supposed to be a national heath service.  The inability of the organisation to communicate and operate effectively across its internal segments is a serious threat to its performance and the service and care that patients receive.  Although there are other vital elements to delivering first class health care, integrated modern IT systems are critical.

This programme was truly ambitious; it was the world’s largest civil IT programme.  That in itself should have rung alarm bells, given government departments’ records on managing complex change programmes.  The way in which it was approached was unusual – particularly inviting four separate suppliers to undertake what would ideally be the same work in different geographies.  It is little surprise that only two suppliers remain and that the complexity of the programme has necessarily been reduced.

Perhaps the most illuminating point, for those of us interested in the underlying causes of the problem, is they way in which success is being measured – not by benefits to patient care or even by cost savings – but by technical roll-out according to the schedule of an IT change programme.  That is not the raison d’être of the NHS, as I understand it.

Gridlocked

Is your organisation ‘gridlocked’ and unable to respond to the upturn?

In my recent book I suggested a disarmingly simple idea, about how capacity, capability and commitment are interrelated.

I had long recognised that these ‘3 Cs’ are important when diagnosing performance problems; a great many issues can be traced back to them.  I also knew that teasing them apart was tricky, and addressed that challenge within Chapter 4 of the book.  However, it was the nature of the relationships between them that really struck me. I said, on page 186:

These three performance variables – capacity, commitment, and capability – tend to substitute for one another in the short term and reinforce one another in the longer term. For example, if capacity is too low for a short period, highly committed and capable staff will usually overcome the challenges presented. However, in the long run, if capacity remains too low, commitment and capability will also fall away. Similarly, if capability is limited, high levels of capacity and/or commitment will offset the impact of this. However, in the long term, capability must rise to feed motivation and improve capacity management so as to control associated costs.

I think this rather subtle set of relationships is at work today in lots of organisations, in an important way.  With the financial downturn, lots of organisations tightened their belts.  They understandably stopped or slowed down investments and reduced the resources necessary for managing these investments.

Having learned from the mistakes of previous recessions, many businesses wisely chose not to slash workforces too aggressively.  They adopted more sustainable tactics, such as offering reduced hours, unpaid sabbaticals, deferred graduate entries and so on.  The rationale, of course, was that these firms would be better placed to scale up resources when the upturn arrived.

It is over-simplistic to argue that the upturn has now arrived.  Some sectors have seen little improvement in demand, whereas in others there are real signs of recovery. Have those lucky firms been able to respond quickly to demand?  My impression is that whilst some are doing well, many are struggling to get out of a kind of ‘gridlock’ into which they have slipped.  I keep hearing from organisational leaders who have great plans and the technical know-how to implement them, but not enough hands on deck – or sometimes not the right hands.  Many of them are also struggling with teams that are less engaged than several years ago – having witnessed unsatisfactory organisational performance, reduced rewards, downsizing and waves of re-structuring.

It seems that my suggestion about how in the longer-term, capacity affects capability and commitment, is holding true at this unusual juncture in economic development.  This has big implications for senior decision-makers.  It implies that they need not only to scale up capacity to meet new and anticipated demand but also push capability and commitment hard too. Furthermore, if my theory is correct, it may be necessary to develop overcapacity in the short term, to allow capability and commitment to recover.

The strategic importance of getting this balance right can hardly be overstated.  Businesses that fail to invest in the critical activities that support their unique competitive advantages – or worse still throw away underlying advantage in the process of cost-cutting – will in time be outperformed by those better placed to respond to the upturn.

Michael Porter made some interesting observations about these strategic challenges as the downturn began.  Have a look at the first few minutes of this YouTube video to hear him explain the challenge.

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