Billion dollar projects and strategic initiatives are becoming the norm. It wasn’t too long ago that a ‘big’ project was somewhere in the $100MM range. What remains a curiosity is that there is more involved in getting a home loan for $500k than there is in getting executive or board approval for a billion-dollar initiative.
40 percent of all strategic initiatives generate zero value to the business.
Getting a loan for a house applicant is scored based on three different items; the application score, personal revenue score, and an all-encompassing credit score. Decisions are driven on math, not opinion. Strategic initiatives, on the other hand, remain being evaluated more heavily on the cost benefit and political capital of the sponsor.
The net result is that well over 40 percent of all strategic initiatives generate zero value to the business, and executive decision making has the same risk profile as a venture capital firm. The bottom line is that in a climate where the majority of S&P 500 companies are missing their earnings expectations, executives continue to apply industrial era management theories, which are generating massive waste.
Market velocity is outpacing the approval process.
Many structured processes are out of sync with the changes in market need, resulting in low value efforts and frustration in operating units. Current metrics show that while many companies are building 3-5 year plans, strategy is being altered or adjusted every 4-6 months. That means there are 2-3 strategic shifts per year.
Every time the market shifts, it diminishes the value of any initiative that is in flight. Current metrics show that product launches fail at a rate of 12:1, and that approximately 80% of re-engineering initiatives fail. For those that are leveraging a ‘save-to-grow’ strategy to increase purchasing power, many are finding that the projected ROI is well below target (58% failure rate).
Initiatives to meet strategy need to be harvested faster.
The next generation of strategy execution will be driven by harvesting employee initiative concepts immediately through ideation platforms, such as Engine™. In the vast majority of initiatives, by the time that a strategy is released and employees have gone through the rigorous and formal write-up process to get funding approval, up to 9 months have passed. By that time, the window for execution has shifted, creating a ‘seat of the pants’ approval process that is not metric driven.
What is most interesting of all is that among a group of analytical personalities, decisions are not being made based on specific data.
Capturing data in real-time and identifying the most effective path to execution can give companies 6 months back in their process, which allows them to stay in sync with market movement and velocities. In addition, it informs companies of the specific initiatives that have no chance of ever succeeding, regardless of how good the ideas behind them seem.
Adding an execution capability score to the process, such as ReM Score™, can build out a healthier pool of initiatives that focus the business on initiatives that can generate targeted returns.
What is most interesting of all is that among a group of risk-measuring and analytical personalities, decisions are not being made based on specific data. This is similar to the time when getting a loan was based on someone doing reference checks, evaluating how long they have known the applicant, and subjectively assessing the potential for risk.
The primary cause for this is that institutions do not measure their readiness accurately, with data driven metrics. Data driven metrics, rather than conjecture, can clearly identify if the initiative is ready to go, has to be delayed, or needs to be terminated all together. Making decisions based on business cases and financial forecasts only tell the part of the picture that addresses value, and do not address capability and capacity to deliver on the promise.
The management theory for the 21st century is about measuring execution capability against the value proposition. Agility and speed to market, based on precise decision making will eliminate waste from the corporate profile, and will quickly become the new norm for executive decision making.
What needs to be kept front of mind is that when a decision to fund a strategic initiative is made, that the funding decision is a ‘loan’ into operations. Calculating the ability to repay the loan is the new metric of execution capability. For every dollar wasted on bad initiatives, eight dollars in top line must be generated to create that dollar to waste. With companies missing earnings expectations, recovering 20%-40% of those dollars by not funding bad initiatives can have a significant positive impact on market perception, management perception, and acceleration.