High Failure Rate Seen for Performance Improvement Efforts

More than four out of 10 of senior executives in study cite disappointing results; operational excellence remains elusive

More than four out of 10 of senior executives in study cite disappointing results; operational excellence remains elusive

Lexington, MA  November 11, 2004  More than 4 in 10 (43 percent) of 276 senior executives surveyed in a major new study said that performance improvement initiatives undertaken at their companies over the past three years failed to achieve their objectives.

The results emerged in a study conducted by the Economist Intelligence Unit and sponsored by Celerant Consulting, which specializes in operational performance improvement projects. According to the study, almost half (45 percent) of the surveyed executives said their improvement initiatives at the company or business-unit level performed below plan, while fewer than one-third performed above plan.

"We have found  and this survey confirms it  that considerable slippage occurs between what are often quite good plans for improvement and their actual execution," said Bill Jeffery, Americas president for Celerant. "Even though most companies know what they must do, the difficulty in achieving operational excellence remains the most significant barrier to making the improvements necessary to fulfill strategic objectives."

Entitled "Strategy Execution: Achieving Operational Excellence," the study queried executives from companies in the oil and gas, retail, manufacturing, life sciences, healthcare, chemicals, telecom and consumer packaged goods (CPG) industries.

Almost half of the respondents overall, and 60 percent of executives from large companies, cited improving operational efficiency as critical to achieving their strategic objectives. Some 61 percent identified improving customer satisfaction as their top objective, while almost half (49 percent) cited increasing shareholder value.

"It's clear that these executives understand that the best way to improve customer satisfaction and increase shareholder value is to improve operational efficiency," said Jeffery, "but they are finding it difficult, despite the wide range of improvement initiatives they are pursuing."

Depending on industry sector and company, the range of improvement initiatives that organizations undertake varies and encompasses IT outsourcing, business process optimization (BPO), lean manufacturing, process automation, supply chain rationalization, IT implementation, corporate organizational realignment and Six Sigma.

In executing improvement initiatives, retail companies struggle most, with just 20 percent considering their initiatives to be successful, while even in the most successful industry  oil and gas  barely over half report success.

Interestingly, in order to manage and track improvement initiatives, organizations increasingly use a range of techniques, with steering committees (43 percent) and balanced scorecards (41 percent) leading the way. Measures used to gauge the success of initiatives range from earnings before interest, taxes, depreciation and amortization (EBITDA) to return on investment (ROI), return on invested capital (ROIC), economic value-added (EVA) and earnings per share (EPS).

The preferred measures of success also vary by industry and company size:

  • While almost two thirds of respondents overall in the chemicals, manufacturing and retail industries rely on ROI, only 57 percent of small companies in those industries  versus 75 percent of large companies  emphasize it.

  • Healthcare, telecom and CPG companies rely most heavily on EBITDA to measure the success of their initiatives.

  • Life sciences companies emphasize EVA and EPS.
Despite the importance of operational efficiency and the range of techniques to track and measure strategic initiatives, the study uncovered a number of troubling barriers to improvement:

  • Only one in three (34 percent) executives considers their current performance management systems and processes to be effective.

  • Only a little more than a third of respondents indicated that they completely measure strategic initiative performance by using timely and accurate operating data.

  • Over half (56 percent) the respondents indicated that they lack the right amount of operating data to make effective decisions regarding operations performance.
The survey found widespread agreement across industries that communication with frontline employees is the key ingredient in making initiatives work. At the same time, such communication was most frequently cited by executives as the most difficult area to master.

"Top-performing companies excel at cascading their critical imperatives down into their operations by establishing clear communications from senior managers to frontline employees in a way that makes improvement an important achievement for everyone," said Jeffery. "And they're equally good at making initiatives work from the bottom up by listening to the recommendations of those employees and taking advantage of their hands-on experience with the real work of the company."

Looking forward to 2005, almost two-thirds of top performers overall expect to continue to grow their revenues, the majority of those being small and midsize enterprises versus large organizations (62 percent versus 44 percent, respectively). Conversely, about one fifth of bottom-performing large organizations and about one tenth of small and midsize businesses expect declining growth.

Among all respondents, the top three initiatives for 2005 include pursuing corporate organization realignment (15 percent), business process reengineering (14 percent) and major technology implementations (11 percent).

A total of 276 executives from the United States (94 percent of respondents) and Canada (6 percent) took part in the study from September to October. Fifty percent of participants were C-level executives, and all had operational responsibilities. Their distribution by industry was: life sciences (12 percent), oil and gas (16 percent), manufacturing (17 percent), chemicals (11 percent), telecoms (11 percent), healthcare (11 percent), consumer goods (11 percent) and retail (11 percent).

Fifty percent of respondents represented companies with over $500 million in annual revenue. For purposes of the survey, small and midsize enterprises (SMEs) were defined as companies with less than $1 billion in annual revenues; large enterprises were defined as companies with over $1 billion in annual revenues.

Top performers included organizations that have outperformed their industry in revenue growth and report success at executing strategic initiatives over the past three years.

For more information on the challenges of enterprise performance management in the age of real-time data, read "The Reality of Real-time Performance Management," the Net Best Thing column in the October/November 2003 issue of Supply & Demand Chain Executive.