Robert Kugel's Analyst Perspectives

Years ago I was given a tour of a company’s factory by the CEO who was credited with engineering its recent turnaround. We were walking along a gallery one story above the shop floor when he pointed down to it and told me that when he first looked down on this scene he saw people dashing madly back and forth. Rather than taking that as a good sign of a busy factory, he said it was a clear indication to him of how inefficient the operation was and why the company was losing money. He immediately went about realigning the factory’s layout to smooth out physical flows and re-examined its manufacturing processes, and soon the business was profitable. I think of using performance management to drive sustainability in the same way. Often an unorthodox, orthogonal perspective on how a business operates can reveal important opportunities for improving performance. Such a novel approach to assessing business activities can break through inertia and the entrenched mindset of “we’ve always done it this way” that stand in the way of improvement. Inertia drives (or impedes) a lot of what happens in most companies, but performance management can be used to overcome inertia. In terms of sustainability, the idea of “green” office buildings can conjure up images of grass-topped roofs and futuristic gizmos, but many of the biggest savings will come from more prosaic changes such as redesigning the fans used by heating and ventilation systems. How is it possible that after several severe spikes in energy prices over the past decades no one had done this before? We correctly assume that engineers are considering the optimal fan design, but as it turns out, “optimal” has meant stamping them out as cheaply as possible, not redesigning them for more efficiency. Since the contractors buying the systems are evaluated more on capital cost than on ongoing efficiency, achieving standard performance at the lowest cost was driving design considerations. Conservation and efficiency – and thus sustainability – are longstanding management issues as much as contemporary environmental and political ones. Conservation of any resource is a key to business success, and the important, large-ticket items are always under scrutiny. The smaller things? Maybe not – at least not in North America. Sustainability – at least in my interpretation of its intent – should be a sustained, concerted effort at eliminating waste and embracing methods that conserve. In theory this shouldn’t be a big deal except that, as anyone who has worked in a large organization knows, people usually have more important things to do – like their jobs. So one of the most important requirements for achieving an economic return from a sustainability effort is to make it part of an overall performance management approach, one that encourages as many people as possible to find ways to conserve as part of their jobs. Since “what gets measured gets done,” it’s important to include sustainability – an ongoing effort to conserve resources – in how companies measure performance. But making sure that individuals and business units take the time to identify opportunities to achieve savings is only half of what it takes to get results. The other half is having a structured process in place to ensure that people act on these opportunities. For companies in North America and to some extent in Europe, the great recession has brought about profound changes in staffing levels and has led to a substantial increase in labor productivity. As the recovery continues, increased demand makes it unlikely that corporations will be able to maintain these levels of productivity. I believe “sustainability” is one area where companies can continue to enhance productivity, and not just companies that focus intensively on a handful of resources. Using performance management is crucial to focusing everyone’s attention on the little things that collectively add up to ongoing improvements in profitability and, incidentally, environmental sustainability. Let me know your thoughts or come and collaborate with me on Facebook, LinkedIn and Twitter. Regards, Robert Kugel – SVP Research

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