Friday, February 11, 2011

How to make mergers and business sales a success - Articles - Employee Benefit Adviser

How to make mergers and business sales a success - Articles - Employee Benefit Adviser

  • Evaluating potential candidates for a business merger is about finding business partners that have complementary practices. That way both businesses benefit from not having to spend time or money on building a new identity.
  • Most merger failures result from poorly defined roles and responsibilities; the incompatibility of the principals; the lack of a shared vision for success; or no clearly defined, post-merger implementation plan.
  • What you think your business is worth needs to be realistic and defensible.
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The myth of smooth earnings

Many executives strive for stable earnings growth, but research shows that investors don’t worry about variability.

McKinsey Quarterly
FEBRUARY 2011 • Bin Jiang and Tim Koller

smooth earnings growth article, TRS, Corporate Finance
Executives like their earnings smooth—even in normal times, they will go to great lengths to achieve steady growth in earnings per share quarter after quarter. As the economy emerges slowly from recession, we encounter even more deference to the conventional wisdom that investors prefer smooth earnings growth and shun earnings volatility. Those who make such claims have long cited stable earnings growth as a rationale for strategic actions. …
Our research shows that these efforts aren’t worthwhile and may actually hurt companies pursuing them. If investors really preferred smooth earnings, you would expect companies that achieve them to generate higher total returns to shareholders (TRS) and to have higher valuation multiples, everything else being equal. Yet using different techniques, company samples, and time frames, all the studies we examined1 reached the same conclusion: there is no meaningful relationship between earnings variability and TRS or valuation multiples.
To illustrate these findings, we compared the TRS of 135 companies with above-average earnings volatility and the TRS of 135 companies with below-average volatility (Exhibit 1). While the median return of the low-volatility companies is higher, the statistical significance of the disparity vanishes when we factor in growth and returns on capital. More interesting, however, is the fact that plenty of low-volatility companies have low TRS, just as plenty of high-volatility companies have high returns. You can also see that the very volatile companies have more extreme TRS results.

  • Exhibit 1: Earnings volatility and TRS are not linked.

    • Investors, we believe, realize that the world isn’t smooth. … In fact, sophisticated investors tell us they get suspicious when earnings growth is too stable, since they know that isn’t how the world works.
      WalgreensImage via WikipediaPart of the explanation for the results of our research is that smooth earnings growth is a myth; almost no companies have it. Exhibit 2 shows five that were among the least volatile 10 percent of all large companies by earnings growth from 1998 to 2007. The one with the most stable earnings was Walgreens, with annual earnings growth between 14 and 17 percent from 2001 to 2007. But after Walgreens, we quickly ran out of companies to compare. We looked at 500 others and couldn’t find any with seven such years of steady earnings growth. In fact, we could find only a handful of cases where it held steady for at least four years.

    • Exhibit 2: Even among the least volatile companies, earnings growth is rarely smooth.

      • Most low-volatility companies follow a similar pattern. Anheuser-Busch, for example, had four years of steady growth, around 12 percent, from 1999 to 2002. Then, after 7 and 8 percent growth in 2003 and 2004, respectively, the company’s earnings dropped by 18 percent in 2005. This pattern is common. Of the 500 companies we examined, 460 experienced at least one year of earnings decline during the period.
        Investors expect the natural volatility associated with industries in which companies participate. ... Companies therefore shouldn’t try to reduce natural volatility, especially if it means reducing expenses like marketing and product development.
        Nor should they try to reduce volatility through more diversified corporate portfolios. The argument for them is that different businesses have different business cycles, so earnings at the peak of one business’s cycle will offset the lean years of other businesses, thereby stabilizing a company’s consolidated earnings. If earnings and cash flows are smoothed in this way, the reasoning goes, investors will pay higher prices for the company’s stock.
        The facts refute this argument, however. First, we haven’t found any evidence that diversified companies actually generate smoother cash flows. … Second, and just as important, we found no evidence that investors pay higher prices for less volatile companies. In our regular analyses for our clients, we almost never find that the summed values of the business units of a diversified company differ substantially from its market value.
        Investors expect the natural volatility associated with the industry in which a company participates. Instead of trying to manage volatility, senior executives should spend their time making decisions that fundamentally increase a company’s revenues or its returns on capital.

        About the Authors

        Cover of Cover via AmazonBin Jiang is a consultant in McKinsey’s New York office, where Tim Koller is a partner. This article is adapted from chapter nine of Value: The Four Cornerstones of Corporate Finance, by Richard Dobbs, Bill Huyett, and Tim Koller (Wiley, 2011). Tim Koller is also a coauthor, with Marc Goedhart and David Wessels, of Valuation: Measuring and Managing the Value of Companies (Wiley, 2010).
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        1 See Brian Rountree, James P. Weston, and George Allayannis, “Do investors value smooth performance?” Journal of Financial Economics, December 2008, Volume 90, Number 3, pp. 237–51; John M. McInnis, “Earnings smoothness, average returns, and implied cost of equity capital,” Accounting Review, January 2010, Volume 85, Number 1, pp. 315–42; and Ronnie Barnes, “Earnings volatility and market valuation: An empirical investigation,” LBS Accounting Subject Area working paper, ACCT019, November 2002.
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        Thursday, February 10, 2011

        Three steps to building a better top team

        When a top team fails to function, it can paralyze a whole company. Here’s what CEOs need to watch out for.

        McKinsey Quarterly
        FEBRUARY 2011 • Michiel Kruyt, Judy Malan, and Rachel Tuffield

        top team article, top team membership, Organization
        Few teams function as well as they could. But the stakes get higher with senior-executive teams: dysfunctional ones can slow down, derail, or even paralyze a whole company. In our work with top teams at more than 100 leading multinational companies,1 … we’ve identified three crucial priorities for constructing and managing effective top teams. Getting these priorities right can help drive better business outcomes in areas ranging from customer satisfaction to worker productivity and many more as well.

        1. Get the right people on the team . . . and the wrong ones off

        Determining the membership of a top team is the CEO’s responsibility—and frequently the most powerful lever to shape a team’s performance. …
        The key to getting a top team’s composition right is deciding what contributions the team as a whole, and its members as individuals, must make to achieve an organization’s performance aspirations and then making the necessary changes in the team. This sounds straight-forward, but it typically requires conscious attention and courage from the CEO; otherwise, the top team can underdeliver for an extended period of time….

        2. Make sure the top team does just the work only it can do

        Many top teams struggle to find purpose and focus. …
        …Too often, top teams fail to set or enforce priorities and instead try to cover the waterfront. In other cases, they fail to distinguish between topics they must act on collectively and those they should merely monitor. These shortcomings create jam-packed agendas that no top team can manage properly. Often, the result is energy-sapping meetings that drag on far too long and don’t engage the team, leaving members wondering when they can get back to “real work.” CEOs typically need to respond when such dysfunctions arise; it’s unlikely that the senior team’s members—who have their own business unit goals and personal career incentives—will be able to sort out a coherent set of collective top-team priorities without a concerted effort….

        3. Address team dynamics and processes

        A final area demanding unrelenting attention from CEOs is effective team dynamics, whose absence is a frequent problem: … Here are three examples of how poor dynamics depress performance:
        The top team at a large mining company formed two camps with opposing views on how to address an important strategic challenge. The discussions on this topic hijacked the team’s agenda for an extended period, yet no decisions were made.
        The top team at a Latin American insurance company was completely demoralized when it began losing money after government reforms opened up the country to new competition. The team wandered, with little sense of direction or accountability, and blamed its situation on the government’s actions. As unproductive discussions prevented the top team from taking meaningful action, other employees became dissatisfied and costs got out of control.
        The top team at a North American financial-services firm was not aligned effectively for a critical company-wide operational-improvement effort. As a result, different departments were taking counterproductive and sometimes contradictory actions. One group, for example, tried to increase cross-selling, while another refused to share relevant information about customers because it wanted to “own” relationships with them.
        CEOs can take several steps to remedy problems with team dynamics. The first is to work with the team to develop a common, objective understanding of why its members aren’t collaborating effectively. There are several tools available for the purpose, including top-team surveys, interviews with team members, and 360-degree evaluations of individual leaders. The CEO of the Latin American insurance company used these methods to discover that the members of his top team needed to address building relationships and trust with one another and with the organization even before they agreed on a new corporate strategy and on the cultural changes necessary to meet its goals (for more on building trust, see “Dispatches from the front lines of management innovation”). One of the important cultural changes for this top team was that its members needed to take ownership of the changes in the company’s performance and culture and to hold one another accountable for living up to this commitment.
        Correcting dysfunctional dynamics requires focused attention and interventions, preferably as soon as an ineffective pattern shows up. At the mining company, the CEO learned, during a board meeting focused on the team’s dynamics, that his approach—letting the unresolved discussion go on in hopes of gaining consensus and commitment from the team—wasn’t working and that his team expected him to step in. Once this became clear, the CEO brokered a decision and had the team jump-start its implementation.
        Often more than a single intervention is needed. Once the CEO at the financial-services firm understood how poorly his team was aligned, for example, he held a series of top-team off-site meetings aimed specifically at generating greater agreement on strategy. One result: the team made aligning the organization part of its collective agenda, and its members committed themselves to communicating and checking in regularly with leaders at lower levels of the organization to ensure that they too were working consistently and collaboratively on the new strategy. One year later, the top team was much more unified around the aims of the operational-improvement initiative—the proportion of executives who said the team had clarity of direction doubled, to 70 percent, and the team was no longer working at cross-purposes. Meanwhile, operational improvements were gaining steam: costs came down by 20 percent over the same period, and the proportion of work completed on time rose by 8 percent, to 96.3 percent.
        Finally, most teams need to change their support systems or processes to catalyze and embed change. At the insurer, for example, the CEO saw to it that each top-team member’s performance indicators in areas such as cost containment and employee satisfaction were aligned and pushed the team’s members to share their divisional performance data. The new approach allowed these executives to hold each other accountable for performance and made it impossible to continue avoiding tough conversations about lagging performance and cross-organizational issues. Within two years, the team’s dynamics had improved, along with the company’s financials—to a return on invested capital (ROIC) of 16.6 percent, from –8.8 percent, largely because the team collectively executed its roles more effectively and ensured that the company met its cost control and growth goals.
        Each top team is unique, and every CEO will need to address a unique combination of challenges. As the earlier examples show, developing a highly effective top team typically requires good diagnostics, followed by a series of workshops and field work to address the dynamics of the team while it attends to hard business issues. When a CEO gets serious about making sure that her top team’s members are willing and able to help meet the company’s strategic goals, about ensuring that the team always focuses on the right topics, and about managing dynamics, she’s likely to get results. The best top teams will begin to take collective responsibility and to develop the ability to maintain and improve their own effectiveness, creating a lasting performance edge.

        About the Authors

        Michiel Kruyt is an associate principal in McKinsey’s Amsterdam office, Judy Malan is a principal in the Johannesburg office, and Rachel Tuffield is an alumnus of the Sydney office.
        The authors wish to acknowledge the contributions of Carolyn Aiken, a principal in McKinsey’s Toronto office, and Scott Keller, a director in the Chicago office.
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        1 For the purposes of this article, we define “top teams” as groups of executives responsible for either an entire corporation or a large business unit or division, but not boards of directors or supervisory boards.
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        Monday, February 7, 2011

        Why 70% of All Changes Fail

        Repeated failures can kill an IT department’s reputation, but these three actions that can help IT leaders build support for their ideas and projects.

        Baseline magazine
        By Rick Maurer
        The Change Management Process's ActivitiesImage via WikipediaNearly 70 percent of all the changes in organizations fail—and IT is not immune from that alarming statistic. Every day, good ideas die before they ever get started, and organizations go through the motions of adopting a new system but actually keep using their old system.
        Obviously, all these failures are costly, but they are more than that. Repeated failures can kill an IT department’s reputation. This happened frequently in the past, when IT professionals overwhelmed clients with technical jargon and got them to agree to implement things they didn’t understand.
        Change Management process ITILImage via WikipediaWhen the dust settled, many of those projects failed. … Understandably, these failures left a bitter taste in the mouths of potential users of IT services.
        Savvy technology departments have learned from those mistakes. Here are three actions that can help IT leaders build support for their ideas and projects:
        1. Speak so they’ll understand you.
        Smart IT professionals don’t make the client speak computerese. Instead, they use plain everyday speech. This helps internal customers understand your project and become engaged in the process. …
        2. Listen and learn.
        Smart IT leaders are willing to be influenced. They realize that the internal clients are the real experts when it comes to what they need. The clients may not know what to ask for in terms of process, but they usually know what they want to have happen differently as a result of all this effort. …
        The willingness to listen to and be influenced by others may sound simple, but it’s the foundation on which business relationships are built. The clients trust that you won’t try to sell them a solution they don’t need. Consequently, when you do have an idea that could help their productivity or their bottom line, they are far more willing to give you the benefit of the doubt.
        3. It’s the people who matter.
        Smart IT leaders know that technical changes start and end with people. …
        … Some IT professionals inundate people with PowerPoint slides By communicating with their clients, IT leaders can find out why people resist change and why they support it. They can predict how the mere mention of a new enterprisewide system is likely to go over in a specific organization. And they know how to use that knowledge to create strategies that build support for change.
        Change is difficult, but it's not impossible. IT professionals who understand that the soft stuff is really the hard stuff get more of their ideas across.
        Rick Maurer is a change management expert, speaker and adviser. He is also the author of Beyond the Wall of Resistance: Why 70% of All Changes Still Fail—and What You Can Do About It.
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        Eight Ways to Ensure Outsourcing Success

        Here are eight suggestions to help make certain that your next outsourcing project will be successful.

        Baseline magazine
        By David Strom
        * Enterprise Business Relationships, including ORMImage via WikipediaOutsourcing isn’t new, but, by now, many IT shops have accumulated enough experience to use this service more effectively. According to Houston-based consultancy TPI, even though the overall outsourcing market is down 13 percent from last year, growth remains strong for U.S.-based contracts.
        Certainly, the cost-saving motivation is still significant: The cost for programmers and support services overseas can be less than half of what their domestic equivalents can be. Nevertheless, to achieve those savings, you have to know how to work with the outsourcing vendor.
        We spoke with several managers who have used outsourcers to build and augment their systems, and we came away with eight suggestions to help ensure that your next outsourcing contact—and contract—will be successful.
        1 Make sure there is a strong cultural fit between your two organizations. This involves both the country of origin of the outsourcer and your own corporate culture. …
        2 Top-to-top commitment. Senior-level management at both organizations should meet regularly and understand what success means in each other’s terms. …
        Just because your top execs meet, don’t expect them to be mind readers. “Don’t expect that your outsourcer has intimate business knowledge about your own operations,” says Scott McDonald, the CTO of FCI USA, in Etters, Pa. Spell it out in terms they can understand.
        3 One plan, one goal. Make sure that your outsourcer has the same measurements for success that you do. … Be open with the outsourcer if the arrangement isn’t working out, and figure out what is needed to fix things. …
        4 Putting the right work with the right partners. “… Part of this effort involves rightsizing your outsourcing needs, which means making adjustments when it’s time to add or subtract resources as your business grows or contracts. …
        Part of rightsizing is understanding what your actual needs are—whether you are outsourcing your infrastructure or your technical skills. …
        5 Allow your outsourcer to fail often and quickly. Part of this process involves putting in place checkpoints that are frequent enough to evaluate progress, and ensuring that the outsourcing team is on the right track. …
        6 Find the win-win. “We have to make the entire pie bigger, but not at the expense of my outsourcing partner,” says Kim Kehling, the director of global business services for Procter & Gamble (P&G), in Cincinnati. “You don’t get a win-win without thinking of your outsourcer as a partner.”
        7 Is the A-team in place? Do you have your best people managing the outsourcer, and do they have the outsourcer’s best team working on your project?…
        8 Don’t choose an offshore outsourcer that is too far or too many time zones away.
        Managing outsourcing involves a delicate balance among various factors, including personnel, costs, geography and culture. By using some of these suggestions, you should be able to avoid the pitfalls and enjoy the benefits of outsourcing.
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        Friday, February 4, 2011

        Managing for improved corporate performance

        Generating great performance requires a more dynamic approach to building and adapting a company’s capabilities than merely squeezing its operations.

        McKinsey Quarterly
        AUGUST 2003 • Lowell L. Bryan and Ron Hulme

        What does it mean for a company to perform well? Any definition must revolve around the notion of results that meet or exceed the expectations of shareholders. …
        Companies can find additional earnings in two ways: they can try to improve operating performance by squeezing more profit out of existing capabilities, or they can improve corporate performance by organizing in new ways to develop initiatives that could generate new earnings. By pursuing both of these approaches simultaneously, companies can take a powerful organizational step toward meeting the challenges of today’s hypercompetitive global economy.

        The limits of operating performance

        Top managers have traditionally chosen to rely on operating-performance tactics when times are hard and only during good times to undertake more fundamental performance-improvement initiatives. This predilection must change if, as we believe, the challenges facing companies are structural and persistent rather than cyclical and temporary. Companies that depend too heavily on improvements in their operating performance will run into real limits in the longer term. …

        The risk of reckless conservatism

        The instinct of companies facing pressures is to retreat to their core businesses, but this is not a practical strategy when the core itself is under attack. What is needed is fundamental innovation embracing not only where and how companies compete but also new ways of organizing and managing them. Making such changes is difficult. Implementing them calls for investment—not easy in an era of overreliance on operating-performance pressure.
        Companies typically attempt to boost their earnings by cutting discretionary spending so much that potentially productive long-term investments are compromised. Managers often can’t use their own judgment to make even "no-brainer" decisions that could yield important performance gains. … Some companies we know have deferred their spending on necessary but unbudgeted new sales personnel, though failing to hire such people means losing substantial revenues the following year and weakens their market position in specific product areas. Other companies have declined to consolidate call centers and to move them offshore—a move that would secure significant ongoing savings in operating costs—because doing so might mean overspending this year’s expense budget.
        Line managers often lack the freedom to spend money unless their companies seem likely to recover the investment within the current budget year. When such minor decisions are deferred, it is obviously unthinkable to undertake truly important projects, …
        … The truth is that in many companies, cuts to discretionary spending in core businesses have gone far beyond eliminating waste. Essential maintenance has been cut, and the penalty will be paid in lost revenues and higher costs in the future. In the worst cases, many companies have begun milking their core franchises so much that a future collapse in earnings and even a loss of independence are inevitable.
        Extreme operating pressures force managers to make do with existing capabilities despite the necessity of adapting to relentless change …

        Organizing for corporate performance

        One of the most effective ways a company can respond to today’s challenges is to put in place corporate-performance processes to complement their current operating-performance practices. By improving both kinds of performance simultaneously, companies can maximize their chances of closing the gap between the short- and long-term expectations of shareholders and management. Most companies will have to develop dynamic company-wide performance-management processes to make themselves more effective by allocating scarce resources to the best opportunities available. Such processes must be as disciplined as the operating processes used to manage current earnings.
        By definition, corporate-performance management involves corporate- and not just business-level managers.1 Unlike operating performance, which can be driven by "vertical" line-management processes, corporate performance requires "horizontal" processes involving company-wide collaboration to generate and share ideas, establish accountability, and help allocate resources effectively.2 Scarce resources now include not only capital but also discretionary spending as well as the talent and management focus needed to find, nurture, and manage new projects that could boost future performance. …
        Accountability for performance should reside in the corporation’s "top of the house," which is best able to determine what trade-offs between current and future performance are acceptable and is responsible for managing expectations of future results. The top of the house should be construed not as the two or three most senior executives but rather as the entire senior-management team, probably including major business leaders and key functional staff...
        Line and top management should be made collectively accountable for the trade-offs between short-term operating-performance objectives and the discretionary spending and talent investments needed to take on major new initiatives. …The resources needed to pursue them might involve separate discretionary budgets and full-time staffs drawn from throughout the company. Even a high-impact initiative involving only a single business should be a priority for the whole corporation.

        Finding the best new initiatives

        Effective corporate-performance management improves the way a company identifies and selects its best new initiatives, provides the resources they need, and ensures that once launched they are managed intensively. Consider a chief of technology contemplating a multiyear initiative to rewrite the legacy software of a core operating system that several businesses use, such as a demand-deposit system in a bank or a network-management system in a telecom company. Today, because of operating-performance pressures, such a project might never obtain funds, or the manager concerned might decide to undertake it on his or her own initiative, financing it by allocating the costs to several businesses and developing it over a period of two to three years. Senior management in the affected businesses might have little to do with the effort, only becoming involved when it ran over budget, fell behind schedule, or failed to deliver some of the promised results—or all three.
        Under the corporate-performance approach, by contrast, the company’s top 15 or 20 executives might meet once a month in a corporate-performance council to review and revise all ongoing projects. Ideas for initiatives would bubble up through the company, and the council would approve the most promising ones. The project to rewrite the core operating system would likely be presented to the council by the head of technology or by leaders of the businesses concerned. It would be subject to open debate before it began rather than executed in isolation. Sponsorship and accountability would be assigned early in the process, and the project would be subject from its inception to regular and frequent reviews, including formal scrutiny by the entire council.
        This kind of organization can link the generation of new ideas and initiatives more dynamically to oversight and action by senior and top management. The most relevant business or functional managers would typically sponsor new initiatives. Those cutting across the entire company might have top-management sponsors; those involving conflicts between different managers might be assigned to independent sponsors with fresh perspectives.

        A portfolio of initiatives

        Giving a top- and senior-management team the responsibility for deciding which initiatives to improve and which to reject ensures that a company’s corporate-performance projects reflect its broader performance agenda rather than pressures to meet quarterly earnings targets by managing day-to-day operations. A set of tools we have developed to categorize and measure initiatives (see sidebar, "The basics of corporate performance") can help managers convert the concept of corporate performance into an operational reality. At the heart of our approach is the development and management of individual new ideas into a corporate "portfolio of initiatives" that can drive a company’s longer-term performance by aligning projects with the fluid and risky external environment.3 All activities that could have a material impact on a company’s market capitalization become part of the process. We have found that, typically, 20 to 40 initiatives fall into this category.
        Ideally, the entire senior-management group would play a role in choosing which initiatives to pursue, to accelerate, or to discontinue; decisions would not be made by individuals or during one-on-one conversations with the president or the CEO. Of course, if consensus proved impossible to reach, top management would ultimately rule on the issues, but it is vitally important to have open debate on the critical ones. These decisions will determine the company’s long-term performance, so most of the senior leadership team must be involved in making them.
        A typical senior-management group would include top management, major line managers, and critically important functional staff managers, including the heads of the finance, human-resources, marketing, and technology departments—in other words, any member of management with important knowledge needed to inform the debate and to help implement decisions when they are made.
        Once formed, this senior-management body should convene at least once a month for a full day; a typical meeting might examine four or five initiatives in various stages of implementation. Every six months or so, the group might review the entire active portfolio of initiatives and determine whether baseline projections of their results met the long-term expectations of the company’s shareholders as expressed in its stock price.
        Certain initiatives, particularly those that could adapt the company’s core business model to changing circumstances, are essential to any corporate-wide portfolio. Such initiatives might include major technology projects, the redesign of the company’s core operating model, offshoring decisions, and major marketing changes. Strategic initiatives, such as acquisitions, divestitures, and the building of new businesses, are essential as well.
        A particularly important part of the portfolio mix should be initiatives to communicate with and influence the expectations of major stakeholders—customers, regulators, the media, employees, and, above all, shareholders and directors. The involvement of all parts of the company in this area is essential, since strong corporate performance means results that meet or exceed the stakeholders’ expectations.
        Executed effectively, the process will keep line managers under intense pressure to improve the operating performance of their units. But it will also enable them to propose initiatives requiring major discretionary spending and staffing to a group of executives with a broad sense of the company’s overall strategy and performance expectations as well as the power to commit the resources needed. Since managers with big ideas for improving corporate performance would be emancipated from the constraints of their own operating budgets to develop these ideas, they would be encouraged to come forward even if they had difficulty making their budgets. Indeed, the process might become so much a part of the corporate culture that managers wouldn’t be deemed to be performing well without sponsoring new initiatives and effectively helping to carry them out.
        This approach to decision making can also improve the way companies time and sequence their investments, for everyone involved in debating and reviewing critical initiatives will have the information needed to understand the relevant issues. Such an understanding makes it easier to set priorities and to make the right decisions at the right time with the right information.
        Besides developing and launching new initiatives in this way, the improvement of corporate performance involves knowing when to accelerate initiatives that are working and ruthlessly eliminating those that are not. The explicit involvement of all senior managers means that decisions are transparent to all, so it is easier to move quickly to capture new opportunities or to cut losses. The management of risk-and-reward trade-offs improves because a corporate-wide process elicits the views and knowledge not only of the initiatives’ champions but also of the entire leadership team. Often, skeptics can see the trade-offs more clearly than advocates can.
        Obviously, the resources required to undertake corporate-performance initiatives that involve discretionary spending and staffing must come from somewhere. To make this approach work, a company must carve out a discrete corporate-performance budget and form a project-management office to direct the process. The discretionary funds needed can come only from operating budgets, and the people needed to drive the initiatives will be recruited either by tapping internal talent or by spending money to recruit new talent from the outside. When an initiative succeeds and goes operational, its ongoing activities and staff are moved out of the discrete corporate-performance budget and put back into the operating budget. Unsuccessful initiatives are terminated.
        The corporate-performance approach, in sum, differs fundamentally from attempts to use a single process both to improve existing capabilities and to develop new ones. It involves major changes in the way top and senior managers collaborate and in their individual and collective accountability.
        A corporate-performance management process will not by itself solve the challenges that managers face today, but it can certainly help. Any decision to shift resources from operating-performance to long-term corporate-
        performance investments is difficult to make. The advantage of a corporate-performance management process is that such decisions are made explicitly and comprehensively by top managers responsible for driving a company’s longer-term performance rather than implicitly by line managers under intense pressure to meet short-term operating-performance demands.

        The basics of corporate performance

        To turn the concept of corporate performance into an operational reality—and to sustain it—managers must build new businesses, adapt existing ones, continually reshape corporate business portfolios for maximum growth, and, at the same time, keep an eye on crucial strategic functions. What is the best way of inspiring employees to develop and carry out new initiatives? How should a company communicate with its core shareholders to guarantee that their expectations are in tune with baseline management forecasts? How fast or how slowly should strategic change be pursued?
        The acronym BASICS can serve as a useful mnemonic for the approach we recommend below. Not all aspects of it may be relevant at a given moment, but our experience suggests that ignoring any dimension can greatly slow or even derail otherwise successful companies.
        Build new businesses. Our research shows that the most successful corporate performers of the past 20 years have put considerable emphasis on building new businesses instead of focusing on core areas that could not indefinitely sustain growth that was sufficient to meet shareholder expectations. For example, as IBM’s hardware operations came under pressure, beginning in the late 1980s, the company relentlessly focused on its Global Services unit, which now provides 40 percent of its revenues and 50 percent of its profits. And in the late 1990s, Wal-Mart developed what is now the largest US grocery-retailing enterprise.
        Adapt the core. CEOs put the future performance of their companies at risk if, in addition to building new businesses, they don’t adapt core businesses to changing markets. For example, National Westminster—thought of by many as Britain’s best retail bank in the mid-1980s—was taken over by the much smaller Royal Bank of Scotland in 2000 because of a failure to tackle the high cost base of the core retail business. Adapting core businesses to change, often by implementing best practices such as lean manufacturing and supply chain management, helps proactive companies avoid this fate. Change is sometimes driven by megatrends—for instance, outsourcing or offshoring. In other cases, companies (GE is a good example) proactively implement broad performance-improvement initiatives that single-handedly raise the bar for entire industries.
        Shape the portfolio and ownership structure. M&A, divestitures, and financial restructurings are rightly considered to be among the foremost tasks of corporate strategists. In the wake of the boom of the late ’90s, however, tough market conditions have left many companies gun-shy about major moves. Yet reshaping portfolios remains vitally important: research shows that companies that actively manage them through repeated transactions have on average created 30 percent more value than those companies that engage in very few.1 Furthermore, best-performing companies balance their acquisitions and divestitures instead of having a preponderance of either.
        Inspire performance and control risk. Management must guide individual and collective action so that they harmonize with a company’s overall strategy and values. Too often, attention is focused solely on formal systems and processes, such as organizational structures, budgets, approval processes, performance metrics, and incentives. We have found that an exceptional performance ethic can be built with a mix of "hard" and "soft" processes: fostering individual understanding and conviction, developing training and capability-building programs, and providing forceful role models.
        Communicate corporate strategy and values. Even if a company gets everything else right in its strategy, it risks dropping the ball if it can’t communicate effectively. The ability to anticipate the likely reactions of investors is particularly important: key shareholders have in recent years derailed the restructuring or merger plans of several companies, and large declines in share prices have claimed the jobs of many CEOs who failed to manage or meet the expectations of their shareholders. Tailoring communications analyses to this constituency’s perspective can work very well. Of course, investor communications are only part of the story. Building support among external constituencies such as consumers, regulators, and media as well as internal stakeholders, which include the board of directors, senior management, and employees, is critical to executing strategy successfully.
        Set the pace of change. Companies with otherwise successful plans often stumble by moving too slowly on strategy or too quickly on organizational change. Sequence and pacing are difficult to judge; the factors that affect them include management’s aspirations, external market conditions, and the organization’s capacity to execute a number of initiatives simultaneously. Decisions about the pace of change influence how many initiatives a company runs as well as their complexity. In a short-term turnaround, it is hard to run more than four or five key initiatives; in many cases, two or three are preferable. But in a two- to three-year corporate-performance program, 15 to 20 corporate-wide initiatives may be necessary.
        —Renee Dye, Ron Hulme, and Charles Roxburgh


        Renee Dye is an associate principal in McKinsey’s Atlanta office; Ron Hulme is a director in the Houston office; Charles Roxburgh is a director in the London office.
        1See Neil W. C. Harper and S. Patrick Viguerie, "Are you too focused?" The McKinsey Quarterly, 2002 Number 2 special edition: Risk and resilience, pp. 28–37.
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        About the Authors

        Lowell Bryan is a director in McKinsey’s New York office, and Ron Hulme is a director in the Houston office.
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        1By corporate-level management, we mean general managers who can trade off current versus future earnings and manage expectations for results. At many companies, only the CEO has such responsibilities, but in others they can be vested in group-level managers or in managers of large businesses.
        2The research budgets of pharmaceutical companies and the exploration-and-production capital budgets of petroleum companies drive much of the long-term performance in these two industries. Well-managed companies in them often administer such budgets with great discipline and intensity, which we think should be applied to all important initiatives that drive long-term performance.
        3See Lowell L. Bryan, "Just-in-time strategy for a turbulent world," The McKinsey Quarterly, 2002 Number 2 special edition: Risk and resilience, pp. 16–27.
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        SIFMA Asks DoL to Reconsider Fiduciary Definition Change

        February 3, 2011 ( - The Securities Industry and Financial Markets Association (SIFMA) has asked the Department of Labor (DoL) to reconsider its proposed rule that would redefine the term “fiduciary” under the Employee Retirement Income Security Act (ERISA).

        Logo of the Securities Industry and Financial ...Image via WikipediaIn its letter to the DoL, SIFMA noted that the proposal could critically impact the ability of individuals to reach a successful retirement, because the financial institutions most able to efficiently deliver investment assistance will no longer be able to do so without added cost to the plan participant or IRA account holder. If the agency will not reconsider its proposed rule, SIFMA requested that it carve out IRAs at this time to determine whether the unique costs and structure of IRAs would support a different fiduciary standard. …
        The seal of the United States Department of LaborImage via Wikipedia“In the midst of other regulatory initiatives in this area, we ask the Department to reconsider this proposal and work with other regulators to ensure regulatory consistency,” said Tim Ryan, president and CEO of SIFMA, in the letter.
        SIFMA contended that the DoL has not fully considered the costs of this proposal on small plans and IRAs and the manner in which their investment choices will be curtailed, or the costs on large plans that may be unable to engage in swaps, prime broker their assets, invest in alternatives, obtain futures execution and otherwise have their investment choices limited by the proposal. …
        A copy of the letter can be found at
        Rebecca Moore - SIFMA Asks DoL to Reconsider Fiduciary Definition Change
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