2005 – performance measures make a difference
The Work Foundation
held one of those stage-managed report launches
last week. You know the sort, where people find
a posh venue – in this case the new London
Stock Exchange near St Paul’s Cathedral
– only to experience all kinds of technical
glitches that send foreheads plunging disconsolately
in to cupped hands.
The venue itself
was difficult enough. After entering it in my
diary I went to London without my aide memoir
and wandered first in to the Work Foundation headquarters
just off Pall Mall. A colleague on another newspaper
faired slightly better in finding his way to the
old Stock Exchange Building.
Once in situ we
were entertained by the volatile cocktail that
often results when people and technology combine
in an effort to be slick and presentational. Microphones
cut out and the on-screen presentations of chief
executives were reduced to the vocal power of
a shrew with a sore throat.
None of this mattered
because the Work Foundation had come up with a
robust study of nearly 3000 companies with the
aim of taking companies one step closer towards
finding the missing link between productivity
Cracking the Performance
Code*, as Steve Bevan, the foundation’s
director of research admits, does not quite deliver
this elixir of business. But it does present enough
guidance, supported by meaty evidence, to put
any companies that are prepared to sit up and
take notice on the right path.
The report was
born of a national neurosis about productivity
that continues to undermine the UK government’s
confidence in the international competitiveness
of British companies.
For some time
the Work Foundation has been working on a formula
that it might use to assess corporate performance.
It has settled on something it calls its Company
Performance Index that evolved from consultations
with chief executives aimed at selecting a combination
of factors that underpin financial success.
To test the success
of the index it was applied to predict the share
returns of companies at either end of the scale
in the past year. Those that performed poorly
against the index returned a six per cent increase
in share value against a 26 per cent average gain
among those at the top of the index. This was
during a 13-month period when the average price
gain for the UK stock market as a whole was 14
With a formula
as predictive as that, you would think the Work
Foundation would be tempted to switch its emphasis
from think tank to fund management. “Unfortunately
we didn’t actually invest in the shares
or we would be rich,” says Marc Cowling,
the foundation’s chief economist, who created
The index measures
corporate effectiveness in five areas: customers
and markets, shareholders and governance systems,
stakeholder relationships, human resources practices
and the management of innovation and creativity.
Within these five measures, says Mr Cowling, the
indices covering people and innovation were the
best predictors of operational performance.
This is by no
means the first study to make the link between
HR and corporate performance, but the Work Foundation
is bullish about its robustness. It points out
that, unlike many other studies, it has factored
in other contributing areas to organisational
success. This enables it to deal, at least in
some part, with the sceptical responses of executives
who might ask, for example, about the relative
impact of advertising, brand exposure and new
products and markets.
As Mr Cowling
points out, the real skill of running a business
consistently is understanding the interrelation
of the various factors that make the enterprise
successful. “Most companies will have a
board meeting and notice that their absenteeism
levels are higher than the sector average, then
tell their HR department to fix it. But the real
problem might have something to do with boredom
because employees have too little opportunity
to express their creativity,” he says.
While the report
urges companies to keep their processes simple,
allowing higher degrees of informality, the degree
of complexity and weightings given to the index
suggests that the relationship between corporate
strategies can be equally complex. The report
will not satisfy those companies seeking an easy
One or two individual
findings might cause some surprises. Many companies
are forever working on their organisational structure
yet structure was found to be far less important
than management style. Open communications, less
formal processes, a value of quality over quantity
in work and a concentration on long-term outcomes
were highlighted for their positive impact.
Such issues tend
to be recognised by the most successful companies
and these include those used as case studies in
the report. What I continue to find puzzling,
however, is the failure of some companies to raise
their management systems beyond the mediocre.
It would be helpful,
therefore, to see the duffers exposed. Virtually
all large academic studies of companies, however,
have an arrangement where companies are only featured
when they give their consent. Companies that are
among the poor performers highlighted in the research
are likely to be embarrassed by the findings so
their names are not featured. But if an index
such as the CPI is used against the whole stock
market it will lead inevitably to performance
rankings where laggards are identified.
This may be no
bad thing since it will force more companies to
pay attention to issues other than their profit
and loss account. Executives at the report launch
had mixed views on the use of some generic measure,
say, of human capital management. But I see this
as the only way to ensure that companies will
raise their game in the crucial area of employee
The idea of the
OFR is to provide investors with ways of assessing
the future prospects of a company. One good way
to do so is to provide the means to compare companies.
Various organisations, including the Financial
Times, rank “best companies to work for”.
But this is not enough for investors who want
to see a clear relationship between employment
policies and profit.
The markets need
some consistent, broadly accepted measures. Ultimately
there needs to be some global standards in human
capital measuring. The emergence of the OFRs has
provided the UK corporate sector with a rare opportunity
to lead the international corporate community
if its response is to develop and adopt such measures.
The Work Foundation
index might be one solution. Another might be
a bundle of generic measures that are common to
all businesses. An employee turnover measure,
for example, might be unsuitable because of the
variable needs of different businesses. All businesses,
on the other hand, could be rated on their profit
per employee. One outcome of that, however, is
that companies could be tempted to get rid of
their less profitable employees, choosing to outsource
as an alternative.
The most significant
feature of the Work Foundation research is that
it has found a cocktail of indicators that can
differentiate the best performers from the rest.
The implications for investment and the challenge
for businesses to respond are clear, but only
if the markets are provided with a valid basis
to make comparisons.
* The report can
be downloaded from www.theworkfoundation.com