Why Some Growing Middle-Market Companies Start to Lose Pace
Andy Caine reflects on Green Peak’s learnings from the Organizational Health Service Line as to the critical drivers of underperformance in middle market companies.
At Green Peak, we specialize in helping middle market companies ($10-500M in annual revenue) build the organization and talent infrastructure needed to accelerate their growth. Within this “niche” we see a wide array of companies, many of whom are continuously outperforming their investors (and often their own) expectations. In those cases, our role is to help them “tighten the lug nuts” and make the right investments so that the business does not come apart as it accelerates into new channels, customer segments, and geographies.
However, there are other clients whose growth has stagnated and are no longer meeting their investors’ expectations. In 2015, we launched a new service line to help these companies identify, in an analytical way, the specific weaknesses that are undermining their performance. We call it our Organizational Health Service Line, which involves a baseline assessment of 44 organizational dimensions, and a mobile “pulse survey platform” to track the tangible impact of ongoing initiatives.
In closing 2016, I looked through our growing client database to determine what dimensions of middle-market organizations are most strongly correlated to their performance. Since the majority of these companies are privately held, we used the achievement of board-approved financial objectives (e.g., growth, EBITDA) as our performance metric. The results were intriguing. The companies who met their goals seemed to excel on different organizational attributes, making it difficult to identify any clear correlations. However, on the flip side, companies that failed to meet their financial objectives had two things in common:
1. Executives Fail to Hold Each Other Accountable for Subpar Performance.
Every company that scored in the bottom quartile on the question, “Do executive team members hold each other accountable for their performance?” was failing to meet their performance targets at the time of our initial assessment. On the surface, this is not a new insight. Patrick Lencioni’s book, The Five Dysfunctions of a Team, outlines how the “avoidance of peer accountability” undermines an organization’s focus and ability to deliver results. Still, a 100% correlation between a bottom quartile score on executive accountability and performance seemed profound. As an organizational and leadership psychologist, the question this begs, “What is holding these executives back from challenging each other for the good of the company?” The obvious answer is that challenging one’s peers is uncomfortable. This can be particularly true at small companies where the experience of making it through the start-up, survival phase breeds a high level of loyalty. Inevitably, some executives struggle to make the jump from managing a small team of scrappy generalists to a more seasoned team of functional experts. “Calling a spade a spade” in such situations is always difficult. However, the data suggests that another factor is equally at play.
2. The Company fails to “operationalize” its strategy into tangible goals that align efforts and resources.
At all but one of the companies who underperformed, employees rated their organization in the bottom quartile at “translating the company’s strategy into clearly defined operational goals and milestones.” This data called to mind a recent technology client. The company’s strategy centered on upselling their existing customer base into a higher quality, higher margin service with greater recurring revenue. The sales strategy relied on customer service representatives to upsell their existing customers during inbound service calls. However, the customer services team’s yearly goals focused on enhancing productivity by minimizing call times. The measures of success for these interdependent teams were in direct conflict with each other. This is just one example of what I see with a shocking level of frequency. The objectives of the business units and functional teams are not aligned with the enterprise strategy or each other’s goals. They are playing different sports, where they each claim (and truly believe) that they are winning, yet somehow the enterprise is losing. The enterprise’s priorities are not cascaded into mutually supporting initiatives, or the timelines for deliveries of these initiatives are misaligned. The ability to resolve these issues “on the fly” is much harder than the start-up phase and frustration among the executive’s festers. The result is a lot of finger-pointing but without the ability to hold anyone directly accountable.
What to do about it:
We commonly advise two simple additions to these company’s strategy development and performance management processes. First, institute a cascading change story as a part of the yearly goals setting process. In the first session, the CEO briefs the strategy to the senior leadership team. In the second session, each senior executive “briefback” the CEO and their peers on their business unit’s objectives and how they are directly aligned with the enterprise strategy. Two members of the executive team are tasked with asking questions, testing their assumptions, and challenging the presenter on the ranking of their priorities. Once aligned at the executive team, the process is repeated at the VP/junior company officer level. Simple, right? However, few companies invest the time to ensure that they are playing the same game.
Second, make sure the results of this process are clearly documented and available for reference. Where possible, consistently publish progress against each executive’s goals via a common performance dashboard. Transparency provides a strong step towards accountability – sometimes the simple answers are the most effective.