Episode #117 transcript

Managing Natural Tensions: The balance of value

Every organisation inherently has a number of natural tensions between different group and functions - finance vs marketing; sales vs operations; operations vs asset management; IT and…virtually everyone!

Rather than trying to eliminate these tensions, leaders should concentrate on using them to get better outcomes. It’s through nurturing and managing natural tensions that you’ll find a balance - this will improve your decision-making, and ultimately, create the greatest value for your organisation! 

One of our regular podcast listeners, Paul, sent in a great question on this topic, and to give this article context, it’s worth reading in full:

"I'd love to hear some wisdom regarding conflicting measures of success. One of the challenges I experienced in leading in the education sector is aligning these measures. So while we have a clear vision statement, different people within the organisation have different success measures, which at times can create conflict. For example, a classroom teacher will measure success through improved learning outcomes for students. Well-being coordinators, measure success through reductions in students' anxiety, which can actually be in direct conflict with lifting student performance.

The Director of Learning is accountable for meeting the regulatory requirements that are external to the school. Now, the compliance demands that the Director of Learning places upon the teachers, often reduces their preparation time and therefore impacts student learning outcomes. 

The Deputy Headmaster seeks to engender high levels of staff well-being. However, competing pressures for regulatory compliance, driven by the Director of Learning may in fact diminish staff well-being. And of course the Headmaster, who's the CEO, meets success through hitting budget goals and enrolment numbers. 

Now this has impacts on resourcing in other parts of the college. Enrolment numbers can often increase class sizes, increasing teacher workload.”

This is an excellent summary of some of the natural tensions you have to deal with, whether you’re in the education industry, or any other industry. Virtually every organisation has competing value drivers. The trick for CEOs is to establish and develop a clear hierarchy of value drivers, recognise where the natural tensions emerge, and manage these effectively.

An organisation with good working culture will have leaders through all the different layers, working with each other to ensure that the primary value goals of the organisation emit, rather than trying to just satisfy their own narrow self interests. 

As with most topics we cover, there are no black-and-white answers to this, but there are principles and philosophies that you can employ to liberate your judgement to effectively manage and balance the natural tensions in your team.

So I’m going to cover three key points in this article: 

1. We’ll start by understanding a little more about what value means in this context

2. I’ll look at some of the classic tensions that exist in every organisation and;

3. I’ll finish with a few tips for aligning the value drivers across competing teams and roles

WHAT DOES VALUE MEAN FOR YOU?

Ultimately, this all comes down to one thing; value. When you define what actually represents value in your organisation, you have to do it from the top down. 

So think of it like filling the proverbial jar with rocks of different sizes. First, you put the big rocks in, that's the highest value stuff. Then you put smaller rocks in that fill some of those gaps. Then you're pouring in gravel and then finally sand until the jar is full. So you start with the big licks of value and progressively work towards the lower order things. When you're defining what creates value, start from the top down, because any lack of clarity makes it extremely difficult for lower level leaders to do their jobs. At the highest level, you can more readily recognise the natural tensions. 

Let's have a look at a common example. One of the primary measures of value for a publicly listed company is total shareholder return or TSR.

Now TSR is a combination of dividends paid from earnings and capital gains made through increases in the share price. TSR’s are generally measured over a multi-year period and it's often used to determine long-term incentive awards for management teams and so forth. It can easily become a focal point that absorbs senior leaders in any organisation of this type. Now, whereas the simplicity of the TSR value focus is compelling, it takes real judgement to know what the appropriate level of investment is in supporting activities. 

For example, many banks have been found to have inadequate governance, which has threatened their licence to operate. How much is the right amount to invest in governance compliance and risk management? How do you ensure that the long-term interests of shareholders are being satisfied, not just their short short-term interests? It's not always guaranteed that the long-term is secure just because there's an annual increase in TSR. What investment needs to be made in customer satisfaction and service and the ongoing development of new products in order to maintain market share?

How much should you invest in the systems, leadership and culture that will ensure your business is still competing effectively in five years time? If you have high risk operations in the community, how much should you invest in environmental safeguards to ensure you don't have a Chernobyl or an Exxon Valdez or a Union Carbide Bhopal on your hands? I mean quite often these things aren't obvious, until they are. But if you're accountable for setting the highest order objectives, in other words, you're either the CEO or you're on the executive team, be really clear about what the main game is. 

In every organisation there's revenue and there's costs, and that's almost identical for every industry. Of course, the sources of revenue can be unique to specific businesses based on ownership structure and of course the industry you're in. 

But how do you optimise this both short-term and long-term? 

Understanding the big value drivers is essential, that’s the first step. It's important to bring everyone's focus to the role they play in delivering the highest order objectives. Now, the centre of an individual's world is not necessarily the same as the centre of the organisation's world. This is a critical concept here. This is about communicating the relative importance of everything that's going on in the organisation. Many leaders make the mistake of trying to make everyone feel as though what they do is of equal value. Well, it's not. Every role in the organisation should be absolutely necessary in achieving the overall results, because if it's not, it shouldn't exist, but they're not all equal either. Just remember that the best movies have main characters and they have supporting cast and you need everyone to make it work, but don't be afraid to value those different roles and functions appropriately.

CLASSIC NATURAL TENSIONS

There are some classic natural tensions that exist in pretty much every organisation, so let’s start with my favourite - finance and marketing. The marketing team can generate endless ideas, how to do things differently to capture customers and to capture market share, but nothing is free. And finance wants to know that any additional investment will generate profitable business and that the risk reward balance is appropriate. Marketing will often see finance as a handbrake. You know, the kill-joys who stop us from doing the exciting and value adding stuff that we like. Sometimes finance is called the ‘Department of No’, because they get a reputation for squashing any initiative that marketing can come up with. Likewise, finance often sees marketing as a bunch of cowboys who operate with little regard for the overall financial health of the business. So this is a natural tension that has to be nurtured.

Then there's operation and sales. Now in order to sell products and services, many sales teams make two fundamental mistakes. The first is that they can tend to over promise what a product or service will deliver. In other words, they write checks with their mouths, that the delivery arm of the organisation simply can't cash. They might promise service levels that can't be cheap, for example, and then operations and service departments are often left to pick up the pieces. The second mistake that sales teams often make is they look only at the top line outcome, the revenue, without understanding overall profitability. So they're likely to make concessions during the sales cycle that can render a customer unprofitable right from the get go. They're focused on the sales targets and revenues, not the overall profitability of the portfolio, and this is even how their incentive structures are generally set, so it's little wonder that this occurs. The natural tension between operations and sales has to exist and it has to be managed.

Let's look at legal and commercial. Commercial people love doing deals, I know I'm one of those guys. They tend to be extremely optimistic about risks and assumptions, and they overestimate the upside while underestimating the downside of any potential deal. Why? Because they want to do the deal. Legal people, by nature, are typically more conservative. Let's not do anything that might cause us to take on legal risk and spend time thinking about the scenarios that may unfold if something goes wrong. Whereas the commercial person believes that nothing will actually go wrong, ever. So you need to balance legal prudence with commercial savvy. 

Another great example is that in any business operating physical assets, there's a natural tension between operations, asset management and finance. Think of an investment that has to be made into a major piece of equipment. Finance wants the business case to stack up. I need to understand the investment and return that's going to come out of whatever we do with this asset. Operations wants to invest as much as possible because it makes ongoing reliability and performance of the assets better and makes their job ultimately easier. But the engineers in the asset management department often want the most elegant solution because they're engineers. Now, the trick for the CEO is to understand the balance of these factors because they're all right, to an extent, but finding the sweet spot between cost, reliability, and asset longevity can be tricky. You only want to invest into an asset to the extent to which that investment can be earned from the market in which it operates. Just like selling a house. You don't want to overcapitalize and gold plate something when it doesn't generate any greater sale price in the market.

Finally, my favourite, as a former Chief Information Officer, there's the tension between IT and pretty much everyone else in an organisation. Many businesses see IT as a cost rather than a potential source of competitive advantage. It's perhaps a necessary evil, and this isn't helped by the fact that the vast majority of IT professionals, even at the executive level, don't align their investment cases adequately to business outcomes. Even when they do, they often can't articulate it sufficiently to win the hearts and minds of their major stakeholders. So you're always going to have some conflict and tension around things like IT, because it's not obvious what's going on, what the links to value are and why you should be doing it in the first place.

HOW TO ALIGN VALUE DRIVERS ACROSS COMPETING DOMAINS

I’ll preface this by saying that the higher up you are in the organisation, the easier this is going to be for you to do and the bigger role you have to play. The first thing is don't try to eliminate the tensions. They are there for a reason. They're productive if you can harness them properly. Your natural tendency will be to try to resolve any tension, to smooth it over, and if you're not comfortable with conflict, you're really going to struggle with this. But if you are comfortable, you have a much better chance of being able to use the conflict productively to achieve that balance that's so essential in getting high quality outcomes. On the other hand, don’t let the tensions become personal, that's where you have to step in. Make sure the individuals work together respectfully and constructively, but also recognise the differences and the tensions between their areas.

The second tip is create high visibility for any constructive tensions. These natural tensions can be enormously valuable in the decision-making process. I mean, ultimately, you want a range of competing views so that you can wrestle with issues to more effectively execute any decision-making process. In Episode #113 of the podcast ‘Unlocking Diversity: The Power of Difference’ we talk about how to use the natural talents and different opinions, perspectives and experiences of people to get better inputs into the decision-making process. And this also applies to the natural portfolio tensions that you find already exists within your organisation, naturally. Nurture, understand and involve your people to bring these out. 

The third tip is always go for the highest value. Did I mention that value is important here? What you can't afford to lose sight of though, as we saw in our total shareholder return example, is that value does come in many different forms, and there are always going to be some trade offs here, so short-term value versus long-term value. Licence to operate versus profits that we can take from the market. Community impact, building the foundations like leadership and culture, and making today's gains sustainable. 

So building processes, systems, and capabilities to manage these things over time. Eliminating key person risk. Bringing in the right expertise and building competitive advantage. All of these things create and support the ultimate value proposition of the organisation, so make sure you go for the highest value first and support it appropriately. 

The fourth tip is make sure you give your people guidance all the way through. Help them work through deadlocks. When two peers are arguing, bring clarity to them by letting them know how you're weighing the priority of competing factors. So for example, you can say things like "We can't ignore the legal risk here, but, it's not sufficient to warrant missing the opportunity to enter this new market. So what will we have to do to mitigate this risk as well as we possibly can, and still proceed with the marketing proposal?" Be open with your people about where their issues sit in the pecking order. 

And finally, number five, priority rank the natural tensions based on value. Let's go back to Paul's original question to talk through this one, because it was so well couched. If you want your College to exist in 10 years, you'd better be able to enrol new students. That sounds suspiciously like a key value driver, student enrolments! Without students, you don't have any need for teachers, or Directors of Learning, or Well-being Coordinators. And in most industries, it's the customer that keeps you employed. Nothing else. The hard bit though, is working out what factors drive new student enrolments. Is it brand reputation? Is it the amount of advertising and promotion you undertake? Is it the quality of the most recent academic results from the leaving class? Is it the number of sporting championships you've won in certain popular sports? Is it the size of the tuition fees? Look, it may be a combination of all of these things, but once you decide what it is that drives value, then, and only then, can you start balancing these factors together. 

This is going to give you a clue as to how much emphasis to put on each area and subsequently, how much to invest in it. It will also act as a really handy guide in working out how to resolve any of the tensions that exist in different areas of the school community. 

It’s a really tricky situation to successfully navigate, but no matter what your industry, the critical foundation is to clearly understand and communicate to your people, what it is that really creates value. Once you've done that, it'll be much easier to articulate the relative importance of the different functions within the organisation, and this is going to enable you to realise the potential of any natural tensions, while making sure they don't become a destructive force that holds your organisation back.

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