Building sustainable profitability from the bottom up

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Build on solid foundations

Business leaders and commercial architects share a common goal when they set out to create. They both strive to design structures that serve a purpose and are strong enough to endure for years. Architects concern themselves with the forces of nature while business leaders face the challenge of focusing human potential sufficiently to successfully engage markets in a positive return.

The superstructure of a large building rises into the sky only because its foundational pillars reside solidly upon bedrock. Even the observational floors with a lofty view of surrounding terrain remain reliably stabile due to their weight being transferred floor-by-floor down through the core of the building to the foundation pillars and, ultimately, into the bedrock which must be strong enough to support the entire weight of the building. Without a strong foundation, such a structure would eventually suffer from the Leaning Tower of Pisa syndrome and be deemed uninhabitable or worse, collapse.

Building codes and standards guide in transforming the architectural vision into reality. By design, they help ensure the integrity of the overall structure and safety of inhabitants once the building opens for occupancy. Ignoring the building codes and standards during design and construction can result in defects or weaknesses that may eventually threaten the integrity of the overall structure. Unless remedied in a timely fashion, the structure may not be able to support its own weight let alone serve the purpose for which it was intended. This could potentially result in a very costly situation for the business whose operation relies on that building.

The similarities between a physical structure and an organizational structure are astounding. They are so similar that it is possible to overlay the key elements of an organizational structure on the image of a building—starting at the bottom with an authority and accountability framework (bedrock); trust and respect (foundational pillars); employee engagement (base); productivity, safety, and customer service (core); and sustainable profitability (observation floors).

It is important to understand why these particular elements represent the essential components of a strong business enterprise and why it makes sense for them to be arranged in the manner indicated.

Sustainable Profitability

As sustainable profitability is generally the goal of all commercial enterprises, it makes sense to position it at the top and useful to have a full understanding of what sustainable profitability means. Sustainable profitability refers to the idea that under most common operating conditions, the enterprise will stay in business and keep generating a reliable profit.

Keep in mind that companies can be profitable and still not be sustainably profitable. Many popular enterprises which may appear to be successfully profitable are far from it. They have simply dodged catastrophe in the past. This does not guarantee they will continue to dodge catastrophe in the future. One unchecked vulnerability can leave an organization susceptible and it may just be a matter of time until a crisis exploits that vulnerability.

When catastrophe does befall a seemingly successful business operation, post-crisis analysis may reveal there were significant weaknesses in the organizational structure. Unfortunately, in many cases a shiny, well-manicured external shell can obscure these defects from public view which were obvious to employees at various levels within the organization.

Catastrophic structural failure is the anomaly while slow deterioration is much more common. Unfortunately, many otherwise competent executives, concerned about maintaining a competitive posture in the market, fail to operate their organizations at optimum capacity due to the degradation of key elements of the organizational structure. Addressing both the potential of catastrophic failure and slow deterioration of key organizational elements is an essential function of good management and a requisite component of maintaining sustainable profitability.

Customer Service, Productivity & Safety

The sustainable profitability of an organization is supported primarily by three key organizational elements: customer service, productivity, and safety. Each are equally important and a weakness or failure in any of these elements can produce a serious vulnerability in the sustainable profitability of the entire organization.

Customer service which translates into sales revenues is central to sustainable profitability. Sales revenues are generated through the provision of goods and services to customers. Good, reliable customer service represents a key element of the corporate brand and reputation. While a commercial enterprise cannot effectively control all of the various forces at play in the market, it must manage acquisition, conversion, and retention of customers by ensuring that all interactions with customers and the quality of service and goods provided produce a satisfactory or better customer experience. Quality issues in production, failing to meet customer expectations, unsatisfactory customer interactions, and even a tarnished brand can impact how willing customers are to engage with the company. And this can clearly influence sales revenues and have a negative impact on profitability.

Productivity represents the process of turning the efforts of workers into useful products and services. This is a function of hiring the right people with the right competencies or providing quality training, placing them in the right positions, guiding them with the right processes and procedures, motivating them with the right incentives, and a whole host of other factors. The bottom line is that productivity is the engine that drives the provision of quality customer service. Without it, sales can potentially drop and as a result profits will not be sustained.

Safety cannot be overemphasized as a key contributor to sustainable profitability. Think downtime, lost revenues, damaged facilities, medical costs, lawsuits, fines, low morale, and compromised reputation to name a few of the possible consequences when safety is compromised. Years of profitability can be wiped out in seconds if safety is not fully incorporated as a core element of all operations. Safety is positioned in the middle of the superstructure because unless it infiltrates every element of the business at all levels then gaps can appear that ultimately question the sustainable profitability of the entire operation.

Employee Engagement

Employee engagement provides the ground-level foundation that supports customer service, productivity, and safety. All activities performed by employees at all levels within the organization hinge upon employees being fully engaged in their work. Conversely, lack of engagement deteriorates customer service, productivity, and safety. These relationships are well described by James L. Heskett et al in the article “Putting the Service-Profit Chain to Work” published in the March-April 1994 issue of the Harvard Business Review. Unfortunately, the foundations of employee engagement are not readily understood in many corporate circles and, therefore, not acted upon by management in a manner that enhances engagement.

Over the past several decades, the rush to manage labor expenses by treating the workforce as a commodity has contributed to the deterioration of employee engagement. People do not appreciate being treated like equipment that can be powered up when needed and discarded otherwise.

The well-respected Gallup Management Journal performs an annual Employee Engagement Survey that quantifies disengaged employees consistently at approximately 70% of the workforce. This is astounding when considering that Gallup further indicates that engaged employees outperform their peers by 147% which represents a hefty increase in productivity. Disengaged employees are also more easily distracted which contributes to safety issues.

When considering the implications of employee engagement, think in terms of its impact on customer service, productivity, and safety—the three key elements of sustainable profitability. Engaged employees are more likely to provide better customer service, operate at a higher level of productivity, and have fewer lost-time accidents. This is obviously more advantageous than the alternative.

Trust & Respect

Trust and respect surface as the most important foundational elements of employee engagement. They are key elements of the corporate culture which can be summarized as this is how we behave here! Conditions management has created in the workplace environment either support trust and respect or discourage it.

When employees trust and respect management, and management trusts and respects employees, a team spirit is generated. As a result, many other factors in the workplace that would otherwise degrade employee engagement are often tolerated. People rarely contribute extra effort for someone they do not trust or do not respect.

Stress tests the strength of trust and respect. Little can be done about stresses driven by market competition other than succeeding in the market. However, stresses created within the organization by office politics, poor communications, inexperienced management or malfunctioning systems tend to have a more negative impact on employees. These stressors tend to erode trust and respect for management and can generally be avoided by good management.

Trust and respect have to be earned. Regaining trust and respect once it has been lost represents a significant challenge that requires both time and effort as trust and respect are built through the demonstration of consistent behavior particularly in the fulfillment of job responsibilities and taking proper responsibility for successes as well as failures.

Authority and Accountability Framework

An effective Authority and Accountability Framework resides at the bedrock level in all organizations because a business organization cannot operate efficiently without clarity in knowing who has authority to take what actions and who will be held accountable for the results. Consistency in fulfilling assigned duties and accepting responsibility for both positive and negative results serves as the primary means for building trust and respect between management and employees as well as between coworkers.

When management believes it is accountable only for successes and abdicates accountability in the face of failures, employees quickly lose trust and respect for those individuals. They come to believe that since their managers are in positions of authority, they must represent the expected culture. They come to model similar behaviours which further deteriorate respect for management in general. Insisting on accountability for middle managers and not for executives leads to managers insisting on accountability for line employees and not for themselves. This has a critically damaging impact on trust and respect, and consequentially employee engagement.

Sufficient attention must be devoted to the establishment of an effective Authority and Accountability Framework, if one does not exist. This includes creating a language of accountability and authority that is commonly understood and regularly used. This will help to ensure clear and effective delegation of single points of accountability for doing the right work at the right time. Used properly, it will also ensure there is clarity across the organization of the accountability and authority for cross functional work. The regular use of the accountability framework is critical, as even well-documented accountabilities and authorities gradually fall out of sync with reality due to changes in the market, internal processes, and personnel. A periodic review and update is required to maintain proper alignment.

Building Sustainable Profitability

Bringing the key elements of a sustainably profitable business operation together in an effective, efficient manner rests with the CEO. Only the head of the organization has the accountability and authority to ensure that all of these elements are in place and in balance with each other.  The CEO must then require that the executive management team do their part with middle management to ensure that the entire organization is in harmony. Employees can then align their behaviors with these efforts. Ultimately, it is senior management that has the authority and responsibility for infusing these processes into all levels of the organization.

Dysfunctionality, particularly in the delivery of products and services, may be the first indicator of a problem with the overall structure. The tendency might be to address the symptom or an individual instance, not the root cause.  University of Manchester Professor Emeritus James Reason, a noted specialist on human error, reminds us that “reform of the system as a whole must be a continuous process whose aim is to contain whole groups of errors rather than single blunders.”

It is essential that the CEO and the senior executive have a solid understanding of how each key element contributes to the overall function of the organizational structure, track symptoms to their root causes, and address any dysfunction at that level. All elements of the organization must be strong and vibrant, otherwise, the integrity of the entire system may be adversely compromised.

A critical link in this system is managerial leadership. This is the practice of each employee in the organization who has accountability for a team, doing the managerial leadership work they are accountable for doing. Heskett stresses the importance of the reinforcement of leadership at each step of the service-profit chain. It is not a leap to understand that managerial leadership contributes to both trust and respect and, in fact, drives employee engagement.

The manager is the employee’s connection to the organization. Managers, and managers of managers, right up to the CEO, need to manage their teams to ensure that they understand the context for their work, are delegated clear objectives, receive the resources to do their work, and receive appropriate feedback. No one else can do this work.   

Just as a physical building requires ongoing inspection and maintenance to ensure its continued integrity and ability to serve the purpose for which it was constructed, organizations of all sizes require a similar level attention to an authority and accountability framework; truth and respect; employee engagement; productivity, safety, and customer service; and sustainable profitability. All systems must be functioning perfectly at all times; otherwise, they have the potential to weaken the overall organization. Any weakness or failure left unattended can eventually result in long term, even irreparable damage that could eventually bring down the entire organization.

Management’s job is to ensure that each of the key elements of the organization is maintained in top operating condition and contributing to the sustainable profitability of the organization if the long-term viability of the organization is to be assured.