Author: Karl-Heinz Oehler, Partner and Managing Director, Denison Consulting Europe
18 Dec 2019
With the combination of globalised markets, disruptive technology, political turmoil and the transformation of social structures, a growing sense of economic uncertainty has created inherent risk in the global economy. Identifying and understanding risk and the potential impact on organisational effectiveness is a critical issue facing almost all CEOs. If companies are to continue creating value for their stakeholders in these turbulent business conditions, they must adopt a new economic model – one of adaptability and resilience.
While many of the traditional approaches to coping with new realities have only marginally mitigated these new challenges, company culture has emerged as a potential differentiator and is now receiving more attention. As a result, more CEOs are highlighting the importance of a healthy corporate culture to sustain high performance in any circumstance.
Company culture can be influenced by those at the top, but ultimately grows from the bottom of the organisation
Many CEOs write that they expect human resources (HR) departments to function more strategically and to act as a business in itself. In reality, HR is only one piece of the organisational structure that contributes to sustainable performance. Company culture is inherently systemic, and managing the different (and at times, competing) functional interests and dynamic elements within a business is a balancing act for CEOs and C-suite management.
Take it from the top
Our rigorous research at Denison Consulting over the past two decades has provided evidence that a healthy company culture is a powerful enabler for better financial results. Almost all CEOs and management teams recognise the importance of building a high-performing culture that is appropriate for their industry. They know that employees deliver excellent results if they understand the meaning and purpose of their role and the work they perform. Leadership is not just about building a profitable business – it is equally about building meaning and purpose for employees. The HR department plays a critical role in this process.
The logical consequence for a HR department that acts like a business is that it becomes an integral part of the company’s value-creation chain – hence, its success is assessed in terms of its contribution to the company’s performance. Stakeholders (including employees) have a vested interest in sustained strong business performance. While CEOs are quick to say that human talent is their company’s greatest asset, it is important to mention the costs that underperforming staff can carry for businesses. A good HR team is crucial for getting this right.
Treating employees as assets means managing them is a business process that requires the same rigour as other aspects of the business. Unless the interdependencies between people and business processes are recognised as a means to make correct employee development decisions, it is difficult to
drive HR value creation.
Identification of the most appropriate key performance indicators is of the utmost importance in ensuring the right metrics are measured
Companies cannot achieve sustained success through just one aspect of their business. Results are derived from how effectively the different functional areas of a company interact and how employees cooperate in order to generate revenue. This is where the importance of company culture becomes clear.
Culture is created by the collective – it is the aggregate of committed employees aligned with a common goal. Every company has a culture that is specific to each functional unit. The challenge for leaders – namely CEOs – is to integrate and align those subcultures to drive financial results. Company culture can be influenced by those at the top, but ultimately grows from the bottom of the organisation; a high-performing culture is intrinsically linked with company strategy. A healthy company culture provides employees with the fundamental guidelines to achieve an organisation’s vision and goals. It also suggests the desired behaviours that define how employees at all levels should interact – something that is also called the code of conduct.
The purpose of any company is to create value. It therefore follows that silos are removed and all company functions are fully integrated and cooperate in the value-creation process. Business success is a function of alignment: it is about breaking corporate goals and objectives down into manageable and measurable units at functional levels.
The starting point for value creation is a company’s financial plan and the associated strategic drivers. One strategic driver, for example, is pre-tax profits, which are negatively impacted by turnover costs. Another driver is to achieve high scores in client and employee satisfaction. Once these drivers are acknowledged, potential solutions can be explored, while functional expertise can be leveraged to align, develop, coordinate and adopt the best solutions to achieve optimal results. When implemented effectively, this process helps senior leaders to be more business-focused, which translates planning into execution and thus produces tangible results.
As all HR processes have an impact on multiple touchpoints across a business, identification of the most appropriate key performance indicators is of the utmost importance in ensuring the right metrics are measured. This might mean only selecting key performance indicators that provide meaningful information regarding the functions that require change, thereby putting aside the many indicators that have anecdotal value at best. With an almost infinite number of measures to choose from, there is a real risk of selecting too many and failing to learn from any of them.
Constant communication between all parties, especially in the C-suite, is of paramount importance. Senior leaders don’t like surprises – they value predictability so they are able to mitigate risks in a timely fashion. Ongoing dialogue with leaders at different levels is a major differentiator in maintaining awareness, knowledge and focus about the status and impact of initiatives that drive financial performance.
Senior leaders don’t like surprises – they value predictability so they are able to mitigate risks in a timely fashion
Finally, there is compelling evidence that suggests finance and HR departments should find different and more creative ways to model the financial impact of HR interventions. It is all about mindset: do we treat HR as a cost or an investment? The answer changes according to what is measured – for example, few companies budget voluntary turnover costs into their annual plan, and yet this hidden cost often results in departmental budget overruns. Programmes and plans for turnover reduction can be wise investments to increase staff retention and reduce costs. Finding the balance between investment in these plans and retaining staff is a formidable challenge for HR departments and CEOs.
There has never been greater eagerness on the part of CEOs to build a company culture that unites employees in different departments around common goals. As predictability is increasingly associated with the management of risk, HR needs a working model of adaptability and resilience that is capable of managing rapid change in turbulent business environments. Operating like a business enables HR to step out of its comfort zone and tackle new corporate realities with confidence. It may feel daunting, but doing so provides an opportunity to become a key contributor in a company’s value-creation process.