Corporate Training Magazine

(The Dollars and Sense of) Managing Multiple Performance Time Horizons
Vol 1 Issue 2- Nov 2005

By Mark Robbins

Pressures on companies to perform come from all directions. Financial markets focus on quarterly results. Corporate boards are under scrutiny from shareholders to deliver immediate returns. These external forces exert influence on management teams to forsake long-term health in search of short-term gains.

Yes, short-term performance plays a role in longer-term strategies and serves to build management confidence in longer-term organizational strategy, but organizational health is dependant upon long-term value creation. Despite the pressure, companies need to find a way to break out of the short-term trap.

In a report published earlier this year, Ian Davis, worldwide managing director of consulting firm McKinsey & Company, identified three steps/factors that will help companies manage the multiple time horizons inherent in today's business environment.

First, a company's strategy should consist of a portfolio of initiatives that consciously embrace different time horizons. Companies do, of course, have different business units with distinct strategies. But few strategies direct a company in a way that will enable it to adapt to events and capitalize on opportunities as they arise. Some initiatives in the portfolio will influence short-term performance. Others will create options for the future‹the development of new products or services, entry into new markets, or the restructuring of processes or value chains. A key management challenge is to design and select those initiatives and options to ensure, on a risk-adjusted basis, that the company's underlying health remains strong.

Second, companies need organizational processes to support a focus on both performance and organizational health. Companies with a long-term value orientation are always relentless about setting short-term performance commitments and delivering on them. But such companies also define what they are doing to ensure their long-term health and how they will measure their efforts to do so. Emphasizing innovation is one key to a company's long-term strategy and specifically measures the proportion of sales coming from new products.

Different companies will identify the health and performance metrics‹product development, customer satisfaction, or the retention of talent‹appropriate to their industry or situation. But executives should insist on a balance of metrics that cover all areas of the business while grabbing every opportunity to talk about these metrics, both internally and to analysts and investors.

Career tracks and incentives‹money, recognition, promotion‹should reflect the time required to deliver on longer-term goals; the current trend of rotating people in roles every two or three years isn't necessarily good for corporate health. Moreover, companies ought to be mindful of the different leadership qualities needed to manage for performance and health. Corporate health typically requires new skills, not necessarily the reinforcement of the capabilities and leadership traits that worked in the past.

Third, companies need to change the nature of their dialogue with key stakeholders, particularly the capital markets and employees. That means first identifying investors who will support a company's strategy and then attracting them. There is no point, for example, in talking about the company's health to court entrepreneurs or hedge fund managers looking for the next bid.

A management team should then spend serious time with analysts, explaining its views on the outlook for the industry and on how the company's strategic stance will create a source of sustainable advantage. Management will also need to highlight the metrics it has developed to track the company's performance and health. Just talking vaguely about shareholder value without a time frame or without addressing the specifics of the business is not meaningful.

Companies might also be wise to separate discussions about quarterly results from those that focus on strategic development. And they should ensure that analysts spend time with operational managers. When it comes to forming judgments about sustained performance, the calibre of these managers is often the crucial factor.

Communicating with employees is just as important. The complaint that "we don't know what's going on" often reflects an emphasis on communicating results rather than long-term intent. It is no coincidence that a hallmark of great, enduring companies is that they make their future leadership generations feel involved in their long-term development.