Month: May 2016

Digital transformation

I listened to an HBR webcast not too long ago which posed the question as to whether larger organisations should now be appointing a ‘Chief Transformation Officer’ (CtrO), or a ‘Chief Digital Officer’ (CDO). It’s an interesting subject for a couple of reasons. A ‘C’ level title obviously has gravitas and seniority associations with it but it also might suggest something of a more permanent nature, somewhat distant from the project or programme director nomenclature more commonly used in transformation leadership. Somewhat more important is the discussion about the function and role a CTrO or CDO might fulfil. Where exactly would it fit in the panoply of organisational structure, governance and control?

Many organisations still see ‘transformation’ as something ephemeral, a project or programme which moves the organisation from an old paradigm to something shiny and new. It could be anything from an organisational restructuring exercise to launching a new operating model, or developing and rolling out a new IT platform. In the past it has often been seen in a project context with a beginning, middle and an end. A concept is developed, business case funding and objectives approved, a plan created and implemented, and the whole thing is handed over to operational ‘business-as-usual’ people. Job done; transformation complete!

This is no longer a tenable approach. Transformation is now a continual challenge. Not only is it perpetual in nature but it is occurring at an ever-shifting and accelerating pace. Business models that have worked for years or decades are at risk of being blown out of the water by competitors that are more fleet-of-foot, and who have a better grasp of the benefits of the latest technology and customer experience requirements. Organisations must therefore embed a culture of transformation into their DNA to survive. Leadership and direction is now a constant need, which does indeed suggest some single unifying force is required to help pull together the vision, strategy and execution on an ongoing and constant basis.

So what exactly would the function of a CTrO or CDO be?

As few, if any, actually exist at this time we need to define exactly what need such a function would address. We already know a lot about the broader issues it would face but we still need to work out exactly what the role it would play in resolving these challenges. Central to the role would be leadership in the vision of how organisations are able to adapt to the challenges and opportunities of technological change. It is not however purely strategy, nor is simply an extension of IT or entirely focused on the change management implementation aspects of transformation. It is a blend or synthesis of all three. Leadership and vision is required but a good understanding of technology is also required, as are some sound capabilities in the execution area. A CtrO would need to work with IT, strategy and senior functions to both contribute and help translate the broader longer term strategy into actionable plans. It would need to help source new ideas, internally and externally, and leverage the capabilities of IT and other support functions in constantly re-imagining and helping shape and re-build the operating model, using the best technologies available. Above all it is a unifying force, one that strives to help strip away silo thinking and working. In fast track world of the second decade of the 21st Century, it could well be the most important role that doesn’t exist.

I am writing this listening to the latest Radiohead album, streamed on the Amazon Prime service. The hard copy CD version is not due out for another month but the tracks are already available, for a fee… Amazon are a pretty solid case study of how end to end digital thinking has managed to improve the digital customer experience. It is a far better service than I have had in the past and it started me thinking about what exactly is meant by a ‘digital transformation’.

‘Digital transformation’ is something of a misnomer as it’s really about far more than the IT aspects of digital. It is about speed, vision, capability, culture, change management, working together, unification and integration. It is about technology stretching into all parts of the organisation with the objective of creating an agile, continuous improvement focused culture, one which strives to create the ultimate customer experience. But it is also even more than this. It can also be about process improvement, perhaps achieved by digitising processes, enhancing the ability of employees to work, or general performance improvement. ‘Big Data’ and robotics are likely to play an increasing role in this space as will the ‘Internet of Things’.

Organisations who master the art of perpetual incremental transformation will naturally evolve their business operating models as their markets and customer requirements change. Digitally constructed organisations will constantly re-shape their internal control structures. New products and possibly whole business areas become far easier to identify, develop and launch. The technology platforms are the glue that binds together the vision with operating model and customer delivery experience. Decisions become easier in the sense that they become more data driven rather than trial and error guesswork. Organisations who successfully integrate discrete systems into single seamless delivery platform have a far greater chance of meeting the ongoing threat of market challengers. Not only are they able to defend themselves but the development opportunities are almost endless. The challenged become the challengers.

Which brings me back to Amazon. Having crushed competition in the consumer goods space what is there to stop them making some serious inroads into the world of services? They epitomise a digital leader and clearly have the skills, vision and capability to exploit an obvious world class fulfilment platform. Amazon Prime TV may be an early example of what is to come. What, for example, would stop Amazon applying for a banking licence, making inroads into insurance services or having another go in the travel area? How would these sectors respond?

Technology is constantly offering both opportunities and threats, but it is how quickly organisations are able to adapt that will define an incumbent’s chances of survival. Perhaps above anything else digital transformation is about the speed organisations can adapt to changing and more demanding customer requirements.

Reporting Changes

I am always on the lookout for subjects that might have an impact on my professional world of business performance improvement and change management. The ‘Management Control Cycle’ or ‘Management Operating Framework’ refers to the way in which organisations forecast, plan, undertake work and report on work. Most operate the cycle although more from an intuitive approach rather than structured method. I tend to think of it as a four quadrant cycle, linked but with a specific theme and application in each.

The ‘Reporting’ quadrant is where performance is measured and it’s here you find the KPIs (key performance indicators) and what I like to term OPIs (Operational Performance Indicators). OPIs are essentially useful indicators that help manage the business but which are not the main drivers i.e. they are not the high impact KPIs. Reporting is obviously of critical importance to any organisation because as we all know, if you can’t measure it you don’t really have much control.

Enter the EU.

A couple of years ago a new EU sponsored ‘Non-Financial Reporting Directive’ (the ‘NFR Directive’) was approved targeted at businesses with more than 500 employees. The intention is that in December this year it will be passed into UK law with a view to its regulations taking effect from January 2017. The directive basically creates an obligation for these larger entities to provide additional information to the ‘extent necessary’ for an understanding of the undertaking’s business, its social, employee and environmental circumstances, bribery and anti-corruption related matters and human rights.

A ‘non-financial’ statement will be incorporated into the management report and will include information on the company’s business model, policies, outcomes and risks relating to the NFR Directive and any relevant non-financial key performance indicators. Additionally listed entities will be required to outline their diversity policy relating to age, gender, education and professional backgrounds, and explain the absence of a policy if relevant.

To some extent parts of these requirements have been in place under various bits of law for some time but this looks like a kind of aggregation or consolidation regulation. Its implications are obvious in the sense that organisations are going to have to find ways of improving their tracking of a new set of ‘relevant’ KPIs and they don’t have much time to work it out. Creating appropriate policies may be a fairly straightforward process but developing meaningful KPIs on bribery, anti-corruption, human rights, ‘social and employee’ related matters and the environment are not without challenges. Some organisations may have been recording this data for some time but the difference between the past and next year is the formality of regulation and of course the fact that the results (currently) look like they will need to be published in the annual report.

There might be a debate on whether some or all these new KPIs can be published on a website, or secondary report, rather than within an annual report but until that is resolved we probably have to assume that the rigors and accuracy standards of financial statements will apply.

This may not be a performance improvement issue in the productivity sense but it’s certainly part of the ongoing impact of regulation on the change management environment. At organisational level the accountabilities for tracking and reporting on this data need to be determined as do the associated processes, formats and data capture mechanisms. It’s yet another example of how macro-level drivers affect the micro-world of change.

Ref:

http://ec.europa.eu/finance/company-reporting/nonfinancial_reporting/index_en.htm#legal-framework

Peak Oil redux

According to Goldman Sachs global oil supply went into deficit during May 2016 which probably explains the speculative behaviour on the paper derivatives markets. Oil prices in both WTI (West Texas Intermediate) and Brent rose during March, April and May, anticipating equilibrium later in the year. After an extended period of declining and low prices it looks like oil prices will lurch upwards, no doubt followed by prices at the pump.

During 2015 an unbelievable number of oil analysts were predicting many years of low prices, apparently confusing short term politically driven oil output policies with the fundamentals of the oil industry. They seemed to compound their errors by extrapolating US shale production forecasts using the sort of assumptions only appropriate to conventional onshore oil production. Anyone who knows anything about the economics of fracked oil knows that increasing or even maintaining production depends very much on establishing an increasing stream of new wells. Fracked wells typically peak in output in year two of production which is why we may well see some significant falls during 2017 and 2018. Even a significant increase in price may not be enough to stimulate the sort of production levels seen in recent years.

Short term it looks like oil prices will moderately increase but it’s the 2020s we ought to be preparing for. In true Spinal Tap fashion Saudi Arabia may have recently turned up the output dial to eleven in its strategy of containing Iran and hurting the US shale industry. But this policy can’t last given the unintended consequences of dismantling OPEC and depleting its foreign currency reserves at an alarming rate. It will need to scale output back not only for its own immediate domestic budget reasons but also because it doesn’t have infinite supply. Saudi has been increasing production in a world where current reserves are simply not being adequately replaced, not just in the Middle East but globally.

Peak conventional oil production is generally accepted as having occurred in 2006. Which is why there were many articles about Peak Oil during the 2006 – 2010 period. For a time it did look like all types oil, onshore, offshore, tar sands etc. might peak between 2012 and 2015. Oil market speculation pushed prices up to $140bbl in the period leading up to the global banking crisis in 2008 and the financial world took a breath. The US FED’s reaction to the credit issues in the banking sector had consequences for the oil industry. Trillions of US dollars were printed to bail out the banks but it was inevitable that some of this would find its way into the oil sector. An estimated $350bn helped finance the technology and infrastructure that made US shale happen. With prices between $80 and $120 hedge funds queued up to invest in aspirational US shale companies and an inevitable boom in output transpired. US shale has bought the world some time. A fortuitous set of circumstances and the profit motive added perhaps ten years to the Peak Oil window originally forecast for 2012 – 2015. Few are brave enough to forecast a new timeline but one thing for sure is that it will happen, and probably in our lifetimes.

Peak Oil is not about oil running out. There are billions and billions of barrels of the stuff all over the world, both discovered and undiscovered. Peak Oil is about output, price and EROI (Energy Return on Investment). Peak Oil is therefore about the affordability of oil in terms of its uses. We may have billions of barrels of oil offshore and in the Canadian tar sands but can we afford to extract it to run cars with? Can we afford the ongoing costs of cleaning the Canadian environment after the water and energy intensive process of converting it into usable energy? What is the point of having tens of billions of oil reserves if the energy we get from it equates to the energy we have to deploy to get the stuff out? This is what Peak Oil is really about. It’s not about running out of oil per se, but is about running out of affordable oil. Thus, as is suggested by recent price action we have probably already run out of oil at $30bbl. Even an artificially induced supply glut could not force the price below $30bbl for more than a few days.

A point also missed by the many oil analysts conditioned by the artificially induced supply glut of the last eighteen months is indeed whether we have actually run out of $60 or even $80 oil. If $60 to $65 is the break-even level for US shale then perhaps this this really the current Peak Oil price level. On the other hand most of OPEC oil producing nations and Russia need oil above $80bbl in order to meet their budget and social welfare commitments. Venezuela, for example, is generally recognised as having the largest oil reserves in the world and yet is edging perilously close to failed state status. While the nominal cost of actually producing oil in Venezuela is reputedly less than $15bbl, the implications of its social programmes suggest that ten times that amount is needed to keep its government and economy above water. Perversely its output has dropped by 300k – 400kbbls/day in the last twelve months, just at a time when it needed income the most. Theft, lack of maintenance and electricity problems have all contributed and are all aspects of an economy that doesn’t work when oil prices are too low.

The point here is that the current price of Peak Oil is not necessary set by a large volume producer such as US shale. Without an increase in prices Russia could be the next Venezuela, or perhaps even Saudi Arabia. Neither economy is working effectively at $40 to $50 oil; both are depleting reserves to keep their respective government and social programmes intact. Both need prices to rise before they effectively run out of reserves. With a prolonged period of low prices there is more than a chance that they will be forced to either borrow substantial amounts or face a Venezuela style meltdown which could have similar and concomitant impacts on oil output.

Where then is the actual 2016 Peak Oil equilibrium price? We know that it is above the $25 – £30bbl range; the market has already told us that. But when we factor-in all the political and economic dynamics of the oil market, is it actually $60, $80 or even above $100? Notwithstanding shale it is clear that the recent surplus is anomalous and artificial. Not only has output and pricing strategy created short term difficulties but it has also sown the seeds of a more structural supply deficit in the 2020s. The oil business appears to need prices in the $80 – $100 zone to justify ongoing investments in exploration and field development and to keep OPEC economies afloat in 2016. Unfortunately, not only have the low prices of the last eighteen months curtailed shale oil investment but conventional and offshore E&P (exploration and production) has also plummeted. This recent lack of investment in E&P will have consequences in the early 2020s and possibly even sooner. Watch for the headlines to switch from forecasts of oil at $25 (even $10bbl!) to oil at $150 or even $200bbl.

So why do I as a change and transformation specialist take such an interest in oil? I see the oil industry as something of a nexus point. Oil remains our most important commodity and still provides the energy that powers the world. Significant changes in the availability and price of oil have dramatic and often fairly immediate consequences for economies and organisations working within those economies. A global shortfall in output of a two or three million barrels of oil per day will have a major impact on its price and the price of everything that relies on oil for its production. A one to two million excess of supply over demand had the effect of reducing price from over $100bbl to nearly $25bbl at one point. A deficit will not only reverse this but when availability is an issue could well power the price way beyond that reversion point. Shale output may start-up again but the investors who recently lost money on their original investment are likely to be a lot more circumspect about pumping even more billions into such a volatile industry. Iran, seen as potentially a gap filler also needs billions of external investment before it could offer the sort of output extant before UN sanctions were imposed.

Thus it is not beyond the realms of possibility that prices will be back in three figures in the coming years and potentially higher than the $140 reached a few years ago. In the absence of a shale-like saviour these prices will have major implications for how organisations will operate. They will have transform themselves to work within a new oil energy restricted paradigm. Alternative energy investment will need to be accelerated, other operating costs reduced and alternative models of operating developed. Oil stands at the nexus of business strategy and change and will continue to do so until the world truly develops an alternative energy infrastructure that significantly reduces our reliance on this highly volatile energy source.

There are many Peak Oil sceptics around but I am obviously not one of them. Shale has bought the world some time and tens of billions of E&P investment might buy us some more but from where I am standing in 2016 that doesn’t look very likely. Peak Oil may not be a ‘now’ issue but I would be surprised if we get to 2025 without it hitting the financial headlines again.

Getting more from your sales incentive framework

Towards the end of 2015 I was asked to undertake a review of the sales incentive framework of a large international organisation. The review extended into most of the world’s geographic regions and covered almost 650 sales account managers and specialists. In retrospect it was probably one of the most interesting and challenging reviews, and brought back memories of the time I spent in B2C and B2B sales environments in the mid-1990s and early 2000s.

With the help of another member of the team undertaking a survey, some external benchmarking and data analysis, the review was delivered and recommendations broadly accepted. During my tenure in performance improvement consulting I have produced quite a number of reviews and, at least for me, a key component of a review is to have a good understanding of best practice, or my new preferred term: ‘sound and reasonable practice’. In other words if you are to undertake a review you really need to undertake it against some form of exemplar framework. This may not always be possible, as proved the case a few years ago when working on a local council strategy report. In the absence of a tried and tested exemplar framework defining sound and reasonable practice, researching and reaching an understanding of alternative options, or how others work might be a second best approach. But I digress.

The most interesting part of the review was in fact validating my understanding of what sound and reasonable practice in sales compensation actually is. With some background in both business and consumer sales functions, and indeed having had accountability for a sales commission function I did think I knew a bit about it. This proved to be only partly accurate. In the last ten to twenty years some aspects have in fact changed but others have not, and it is also necessary to consider the context of the sales function, its size and industry.

The premise of the review was that sales performance could be improved and costs potentially reduced by identifying changes to the incentive framework. Over time it had evolved and become more complex than it needed to be and more challenging to effectively manage. Its market had also moved on. Many opportunities to improve were identified and the client was provided with a roadmap towards evolving the incentive framework in a direction that was more likely to meet its cost objectives and market needs.

This particular client was far from unique in omitting to validate its sales incentive framework on a fairly regular basis. In the ten years I spent in sales functions I don’t actually recall any external review of the sales commission schemes. Changes were made regularly but usually originated from the ‘good ideas’ department of the sales function or imported by sales people joining the organisation. Costs were certainly challenged by Finance but these challenges were often fought-off by germinating fears about sales performance. In other words cut incentive costs and sales performance will fall. A growing sales force and increasing scheme complexity had to be met with automation. One member of the support team’s role was just to develop the sales commission scheme. His Excel modelling was first class but I’m afraid there was probably far more trial and error than there ought to have been.

My recent foray into the world of best or sound and reasonable practice has established that these ‘exemplar’ reference points are available. As suggested earlier, due consideration should be made of nature of the sales function (B2B/B2C), the industry within which it operates and, to a degree, its size. I qualify this last point because all sales functions, no matter what their size, ought to have a good grasp of good practices one of which is to ensure that the schemes in operation are written down, as simple as possible and easily communicated and understood by the people to whom it applies.

This is not exhaustive list but some other sales incentive areas to look at would include thresholds, quota, pay-mix, upside potential, payment frequency, complexity, caps, performance measures and eligibility. Then of course there is the administration, system and cost aspects to consider. Governance and change control are also important. How do schemes change, why and who actually authorises these changes? We are now far further forward than we were twenty or thirty years ago and sound and reasonable practices are better defined than they used to be.

In conclusion, it may already be self-evident for those working within sales but the incentive framework and schemes adopted are not the only driver of sales performance. Sales culture and leadership both play their parts as do the standard of communications, training, coaching, data quality and general leadership. However, the right approach to remuneration is still key. You can have the best of everything else but if the incentives don’t work for the sales teams or it is too costly for the organisation then there probably isn’t a long term future for the business. Both cost and ‘sales excitement’ objectives need to be met.

Feel free to get in touch if you think your organisation might benefit from a review of its sales incentive framework against internationally recognised sound and reasonable practices.