I once had a client executive team that was ready to make a big investment to fight some proposed healthcare reform legislation. To the executives it felt like the right thing to do. It would have cost tens of millions of dollars. They were urged on by their industry’s trade association.
One could presume that members of the leadership team thought that either the firm’s or their personal reputation would be bolstered, or both. A little more probing revealed that it was only part of the team that was in favor of the investment. Other members of the leadership team were either distracted or disinterested.
After asking the pro-investors why they thought the expenditure was worth it, no compelling answers emerged. After a little more evaluation, it was confirmed that the action would directly reduce profits for the year. Yet other than general comments about why it was “a good thing”, there were no identifiable benefits to shareholders or stakeholders.
Then it was observed that no other competitor was willing to make a similar investment!
Now, the opportunity to look good for what may have been ego or ideological reasons started to look like a gift to the firm’s competitors. Since the CEO was behind the idea, it looked like a train wreck waiting to happen.
Suddenly it was discovered that due to an internal policy, the decision had to go to the Board for final approval. We had already learned that some members of the Board had already given the CEO their OK.
On short notice we were able to assemble an analysis of the impact of the investment compared to no investment. It showed a mixed impact on reputation, a negative impact on earnings, and a negative impact on competitive position.
This case reveals the importance of being able to demonstrate the value created or destroyed by an issue as well as the reaction to that opportunity or threat. Without a sense of value, the decision to invest is based on other indicators, that while perhaps interesting, are not particularly relevant to the decision expected.
Here, thanks to a policy and process intended to manage risk, value won out over ideology.
Value Management is the third pillar of Radical Influence. It is heavily dependent of the first and second pillars, Situational Awareness, and Issue Management. Situational Awareness allows you to recognize and interpret an issue in current context. Issue Management provides structure for understanding what the organization faces, and how to respond, if at all. Value Management helps separate the big stuff from the small stuff and supports management decisions about priorities and investments.
Let’s look at some key questions to demonstrate why focusing on value is, well, valuable:
1 - Why focus on value?
It is fair to say that being responsive, informed, and easy to work with, are all table stakes for influence functions today, as with all corporate staff functions. Putting those attributes aside, what remains is the results of the function’s programmatic activities. Either they are worth the budget dollars spent on them or they are not. Some folks refer to this as producing an adequate return on investment (ROI). That is, that the benefits of the programmatic activities exceed the influence function’s annual budget to the extent that they would happily make a similar investment in the future (such as next year’s budget for the function).
2 - What is the work that produces value?
First, they provide information to decision makers. It might be news oriented, as politicians and the public change their minds. It could also be factual or technical in specialty areas, such as, the underlying chemical and biologic processes at play for an ongoing environmental debate.
Second, staff functions directly support critical decisions by using their expertise to analyze a situation, interpret the context for the company, and summarize the results of that analysis.
Based on prior knowledge and understanding, the function is now prepared for its third way to add value: offering advice and recommendations to executives. Leaders do not have the time, knowledge, or the inclination to personally stay updated on the latest developments to be able to make critical planning and operations decisions on their own. They depend on corporate functions to do much of this work for them.
The final path to delivering value is through program execution. Corporate functions make things within their wheelhouse happen, either as a standalone resource or in conjunction with other operating units across the organization. The influence function may only plan things for execution by the line organization, or may conduct all steps of a program independently, or any mixture in between.
3 - What kind of value and for whom?
Value comes in many different flavors and the perception of value depends on the taste buds of the recipient.
Owners and shareholders usually focus on profits, but depending on current business strategy, revenue growth may be more highly prized. If taking a long-term approach, building or protecting a strong reputation may be a priority. In the short-term, on-strategy behavior is more appreciated than off-strategy behavior, as uniquely defined by the company’s business plan.
For issues that affect profit, there are only four types of impact. Issues are either positive or negative in their impact on the company and considered to be either risks or opportunities. In addition, they affect either revenue or cost of the business, sometimes both. If considered in terms of their potential impact, then influence functions help the business by protecting or growing revenue, or depending on the situation, by saving or avoiding costs. These concepts are further explained in a previous RIN blog, 'It’s Time to Start Wrapping Up Both of Your Annual Value Report’.
By uncovering baseline numbers that reflect recent experience, each issue can be estimated in terms of its potential impact on company profits. Just add the expected change to the baseline of prior experience (such as last year) to determine the impact. Make simplifying assumptions and disclose them freely so that executives can trust your numbers. This modest step enables management analysis and underpins recommendations on priority and resources. If staff functions do not bring new information to executives along with analysis to form recommendations, they are not doing their job. It is only the staff function leader, that presents the situation and asks executives what they want to do, who is viewed as not providing value.
Customers, stakeholders, and other observers are also recipients of value. Influence functions play a strong role in making sure that such needs are not ignored.
4 - How much value?
It can be as simple as taking an easily identified baseline number (a certain cost, for example) and calculating the incremental change to estimate the impact of an issue. The process does not require heavy math or many internal reviews and approvals.
Rather than pursue perfect accuracy in estimating the impact of an issue, the more important question should be, “How much value is at stake compared to other issues?” Without this perspective, you are at a disadvantage to provide impactful advice to executives.
Senior management leaders make a lot of critical decisions on estimated numbers. However, before they use those numbers, they understand how the figures were generated. Through this investigation, executives learn the strengths and limitations of estimates, and how the numbers compare to other parts of the business or prior experience.
Some companies estimate every proposed bill or regulation, or stakeholder concern because they have a large and complex portfolio of issues that needs evaluation in order to set priorities. Others set a threshold amount and only estimate the profit impact if it passes certain criteria such as size. Others invest executive planning time to reach consensus on the relative position of every component of the issue portfolio.
5 - What kind of management decisions are informed by value-oriented advice from influence functions?
Recommendations from staff functions are intended to precipitate a decision by executives that often drives subsequent action. Decisions related to influence functions could be:
- Whether to respond to a risk or opportunity, or simply ignore it
- Selecting the best strategic path and overall stance to take in responding to the entire portfolio of issues facing the company
- Choosing priorities and allocating resources for advocacy efforts
- How to respond (when a response is warranted and it is high enough priority)
In theory, influence functions could just rely on executives to express priorities. The staff could ask the executive, “Well, we explained the background, now what do you want to do?” Doing so would relegate the influence function to acting solely as the operators of advocacy and public relations programs. The reality is that such tasks can often be contracted out.
So how does an internal influence function create value? Through its recommendations, mainly. As top executive roles continue to become more fragmented and complex, good staff functions improve their skills to take some of the load off the executives. A colleague of mine once said that the definition of completed staff work is to proactively provide a recommendation, not a question!
Being able to create value is not something that is written into the influence functions mission as a grant. The reputation of an influence function is something that is earned through the quality and worth of its recommendations to executives. Growing into higher levels of performance is a journey that takes years where each step of improvement yields greater value.
The journey can be broken down into several stages of maturity as shown in this exhibit.
|Stage||Description||Management Process Features||Issues and Programs|
|1. Traditional||Execution only – tactical focus on what you are told to do by executives.||• Priorities determined by those outside department|
• Tax may be the only department to quantify impact of issues
• Isolated staff function with occasionally strong links to proponents in the business
|• Issues not valued and compared|
• Bills and issues are treated separately
• Few programs, generally reactive and fighting fires as threats arise
|2. Aware||Able to generally segment big impact issues from insignificant ones. Can be tactical and strategic when requested for big issues.||• Large business issues beyond tax are quantified|
• Responsibility for advocacy is shared between GA and business leaders
• Some structured efforts to engage business leaders
|• Some issue differentiation, mostly qualitatively|
• Isolated programmatic activity
|3. Practicing||Some relative quantification of impact of issues, topics, or projects. Can be strategic and provides reliable tactical execution.||• Strategic priorities are discussed and can affect advocacy and reputation shaping priorities |
• Business units provide formal feedback on influence function performance and value
|• Impact of some issues are quantified|
• Portfolio of organized programs of activity with measures that may be proactive and anticipatory
• May report ROI annually
|4. Radical||Able to recommend priorities based on context and analysis. Thoroughly strategic with reliable tactical execution using best practice and always innovating on ways to communicate value.||• Strategic priorities are supported by recommended programs from influence functions|
• Issue portfolio and potential bills and regulations are regularly quantified and characterized to aid decision making
• Influence function and business units both describe that they are business partners
|• Priorities determined within influence functions based on analysis and recommended to the business for discussion and agreement|
• Bills and issues are on a continuum of time and impact
• Business and functional planning are integrated
• Prioritized continuous improvement initiatives based on prior results
Some executives over-personalize and simplify the concept of value to a simple question. “Am I adding value?” It is asked almost as if the existence of a mindset about value is sufficient to meet executive expectations.
In reality, executives expect to see management processes and relevant tools to create clarity on what type of value is involved, for whom, when, and the probability of success.
Executives expect this because that is what is expected of them. Explaining each of these aspects about value can set the foundation for specific recommendations for adoption.
Using the tools of value management to demonstrate an analytic and systematic way of thinking will yield higher quality management decisions, and greater value creation for the organization.
Tools for analyzing choices, estimating the impact of issues to be able to compare them, to vote for priorities, and choose among competing strategic responses are collectively much more than a mindset. They are the tools of value creation for influence functions.
Reaching high levels of “value attentiveness” and analytically grounded strategic advice to executives takes practice. Small improvements add up over time.
If you are interested in understanding value from an executive perspective, visit our podcasts page for several interviews with Gautam Mahajan, the Co-founder of the Journal of Creating Value and the Creating Value Alliance. For more about calculating the profit impact of issues, check our our webinar on Value Management for Influence Functions.
The next pillar RIN will explore is Business Partnership. If value or Value Management is the “what” of influence function activity, then Business Partnership covers “how” that value is discovered and delivered. Stay tuned for our next installment of this series.