avoiding the growth-talent trap

Output: 06:37PM Apr 22 2014

Modified 06:36PM Apr 22 2014

Avoiding The Growth Talent TrapMiddle Market Drives Strategy by Focusing on PeopleScott Engler, Managing Director, Advisory, CEB Middle Market

Mark Clauss, Managing Director, CEB Middle Market

CEB Middle Market ReportQ2 2014

2

This study may not be reproduced or redistributed without the expressed permission of The Corporate Executive Board Company.

www.executiveboard.com/midsized

RETHINKING PERFORMANCE MANAGEMENT

© 2014 CEB. All rights reserved. CEB8811614SYN



CEB Middle Market ReportQ2 2014

Table of Contents

The Strategy/Talent Trap 3–7

High Expectations 8

Investing to Grow 8

Finding New Customers 9

Ramping up Capacity 9

Building and Buying Capabilities and Customers 10

Where Middle Market Is Different 12

Where Middle Market Is Forecasting More Growth Than Large Companies in 2013 12

Finance 13

Human Resources 14

Information Technology 15

Legal 16

Marketing 17

Operations 18

Sales 19

About CEB

CEB is the leading member-based advisory company. By combining the best practices of thousands of member companies with our advanced research methodologies and human capital analytics, we equip senior leaders and their teams with insight and actionable solutions to transform operations. This distinctive approach, pioneered by CEB, enables executives to harness peer perspectives and tap into breakthrough innovation without costly consulting or reinvention. The CEB member network includes more than 16,000 executives and the majority of top companies globally.

Introduction

Each quarter, CEB surveys hundreds of executives across the corporate suite to define the State of the Middle Market and uncover differences in sentiment between executives at midsized and large enterprise companies. This report details themes and key data findings from this quarter’s survey.

3







72% No

17% Do Not Agree

28% Yes

83% Agree

And CFOs see the danger signs. 96% of executives cite growth acceleration as important, but CEB research found that just 28% of midsized company CFOs have faith that their strategies will fulfill their growth mandates.

If 72% of CFOs don’t believe it, why should the people underneath those CFOs believe it? Underneath that lack of confidence is a shotgun approach to growth. 73% of CFOs don’t believe their companies are very good prioritizing and making hard choices. The result is that most companies try to grow as one CFO put it, “by throwing out a lot of bets on the craps table.” In fact, only 10% of companies have identified the long term capabilities needed to execute strategy.

That lack of strategic focus inevitably leads to lack of resources to fully fund ideas, (leaving what we call strategic unfunded mandates) they fail to track the initiatives and lastly and perhaps most indicative of failure they fail to fully consider the people capabilities needed to execute strategy.

n = 54.

Source: CEB analysis.

n = xx.


CFO’s with Confidence in Company Strategy

Business Risk Associated with Talent Decisions Has Significantly Increased Over the Last Five YearsPercentage of Business Leaders

The Strategy/Talent Trap

The pressure to drive growth continues increasing on mid-sized companies, in our recent survey of mid-sized companies, 77% of expect revenue to increase over the next 12 months with both the Middle Market short and long term indexes reaching new 18 month highs (see page 8). But even as mid-sized companies believe they are positioning themselves for growth, many are unwittingly setting themselves for failure and potential growth stalls by failing to fully resource their growth initiatives.

Driving transformational growth requires hard decision-making, resource commitment and corporate willpower that most companies don’t have. And when we surveyed out companies about their ability to 83% believe that there is now more business risk associated with talent decisions over five years ago.

4







Part of that problem is rooted in the disconnect at most companies between workforce planning and business planning. Often it’s viewed as an “HR activity” rather than a critical business activity. That disconnect often leaves large capability gaps when forecasting talent needs. Only 33% of organizations plan for future roles needed to support strategy.

n = 329 HR leaders.

Source: CEB 2013 Succession Management Survey.

67% Neutral or Disagree

33% Agree or Strongly

Agree

Few Organizations Plan for Future RolesPercentage of HR Leaders Agreeing They Forecast Future Leadership Roles

The result is that companies end up assigning “partial FTEs” to strategically important projects, fail to drive accountability and often leave giant capability gaps. In one strategic meeting a leader asked for a “strategic champion” to lead an initiative to which a colleague responded, “you mean scapegoat?”

Time and again our companies fail to think through and source their people capabilities needed to executive strategy often leading to catastrophic failures.

One of our companies attempted to execute an M&A strategy without having any integration capabilities and was forced to sell the company at a large write down four years later. Another decided to drive low cost production to South America without understanding the workforce needed to expand geographically. It failed leaving millions in wasted CapEx .

Fewer Than 3 in 10 Leaders Rate HR as Effective at Workforce Planning

Effective Leaders Ineffective Leaders

The resulting failures starts the blame game and the business often points at HR… fewer than 3 in 10 leaders believe that HR is effective at workforce planning.

5







Only 17% agree that HR helps them effectively plan their talent strategy. But our research found part of the problem is the leaders themselves and failing to learn and understand the basics of workforces planning and the implications.

6% Others

94% Fit with

Strategic Alignment

n = 329 HR leaders.


Reasons Cited for Lack of Confidence in Current Senior Leadership Team

Most senior leaders aren’t talking the lead in working with HR to drive workforce planning.

A final, not talked about piece of this puzzle is that our senior leaders, who may have worked so hard to get us where we are now, may not be the right senior leaders for the future. 94% of executives dissatisfied with their senior teams site misfit with strategy as the key reason.

What’s happened to most companies is change, both in the nature of business and the way companies win in the new environment. Business velocity is changing the nature of senior leadership. 74% of our companies have experienced high velocity changes in the environment. 80% have been given new responsibilities. And the result is that many of our senior leaders are finding them mismatched with strategy.

Companies whose business leaders are highly involved in workforce planning and development outperform companies whose leaders who aren’t by 12% in profit.

6







n = 895 executives.


26% To Come

74% At Least Every

Three Years

Leaders Must Be Prepared for High Velocity Changes in Job ResponsibilitiesPercentage of Leaders Reporting Frequency of Substantial Change in Their Job Responsibilities

In response our companies are now taking a capability approach to workforce planning and succession; assigning project risk AFTER resources are allocated and using strategic matrixes to unearth business talent risk as it relates to strategy.

That risk discussion revolves around the business strategy needed for the next 3-5 years, and the kinds of capabilities that are going to be most critical in order to achieve that strategy.

One language that every executive speaks is “risk.” When companies plot a capability matrix against their people, they often realize, that from a human capital perspective, they have unfunded strategic mandates. Great ideas, but no one to execute against some key strategies at a high level.

Collin F. Helen C. Stacia S.

Milli M. Jas K. Nick A. Carolyn S.

Strategy Roll-Up

Cost Reduction

M&A

Process Efficiency

Geographic Expansion

Product Innovation

Individual Roll-Up

Not Capable

Marginally Capable

Somewhat Capable

Leadership BenchStrategic

Objectives


Strategic Support Gap Identification Matrix

7







What a capability perspective also identifies is clear talent advantages in some areas to exploit.

The short story is that Companies focused on growth have to consider the implications for talent now, forecast needs, identify and act on key risks and where unable to help, prepare to curtail or cut off growth strategies that are doomed to fail or “doomed to mediocrity”.

The pressure to perform is clearly evidenced in the CEB middle market growth indices.

Smart companies, discuss potential changes to roles and new roles to understand from a strategy whether they think they’ve got the right people in place to deliver against that 3-5 year strategy and, if not, why not.

8







High Expectations

The near term growth pressure on our midsized companies reached an 18 months high in 2014 with 77% of companies (up 44% over last quarter) expecting revenue to increase over the next 12 months. That news was coupled with some easing in cost pressure with 65% of middle market companies (a 3% decline from last quarter) expecting cost pressure to increase during that same time.

CEB Middle Market Near-Term Growth Index

Investing to Grow

Among the long term growth drivers, M&A showed the largest jump, with 7% more mid-sized companies (48% total) now expecting to increase deal flow over the next twelve months. While R&D investment dropped slightly, the number of companies increasing capital expenditures—jumped 5% with 52% companies now expecting to increase long -term investment over the next 12 months. Qualitatively CEB believes that companies are trying to change their growth trajectories and are finally loosing the purse strings to fund transformational growth either through acquisition or larger investment.

CEB Middle Market Long-Term Growth Index

Source: CEB 2014 Middle Market Executive Confidence Index.

Neutral = 3.00

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

6.00

3.00

0.00

3.473.90 3.82

4.15 4.064.23


Neutral = 3.00

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

6.00

3.00

0.00

3.28 3.32 3.46 3.37 3.43

4.07

9







0% 50% 100%

783%

41%

21%

CEB Short-Term Growth IndicatorsPercentage of Midsized Companies Expecting Increase Over the Next 12 Months

Sales to Existing Customers

Sales to New Customers

Revenue

Marketing Budget per Revenue

Dedicated Advertising Agency Employees


Ramping up Capacity

The percentage of companies expecting to increase new products, orders and production decreased , but 10% more companies are expecting to expend capacity in the long-term.

Midsized Companies Expecting Increase Over the Next 12 Months

Introduction of New Products

New Orders

Production

Capacity

Introduction of New Products

New Orders

Production

Capacity


CEB Production IndicatorsPercentage of Midsized Companies Expecting Increase Over the Next 12 Months

0% 50% 100%

60%

76%

76%

40%

Midsized Companies Expecting Increase Over the Next 12 Months

Note: Second value refers to difference from Q4 2013.


56% (-4)

72% (-4)

59% (-17)

50% (+10)

Sales to Existing Customers

85% (-4)

Sales to New Customers

82% (+8)

Revenue 77% (-1)


40% (-1)


23% (+2)

Searching for New Customers

The number of companies with expectations for sales to new customers increased substantially (+8%). 4 percent fewer companies now expect higher sales to existing customers.

82%

GRAPHS NEED TO REFLECT THE NUMBERS ON THE LEFT

10







Building and Buying Capabilities

Expected M&A and CapEx activity drove the biggest uptick in the middle market long-term index in 18 months. 7% more companies (48% total) now expect to be active in M&A with 6% more companies expecting to increase CapEx in the next year.


CEB Long-Term Growth IndicatorsPercentage of Companies Planning to Increase Expenditures Over the Next 12 Months

R&D Expenditures

Number of M&A Deals

Capital Expenditures

Change in CEB Long-Term Growth Indicators

R&D:

M&A:

CapEx:


--%

48% (+7)

53% (+6)

0%

30%

60%

47% 48%53%

11








Note: Totals may not equal 100% due to rounding.

Lower No Change Higher

Energy Costs

Value of United States Dollar

Economic Growth: United States/Europe

Interest Rates

Consumer Confidence

Major Non-Energy Commodities

Foreign Competition

Economic Growth: Emerging Economies

Inflation

Unemployment

Access to Credit

Government Spending

3.9%59.4%

3.4%

4.6%

10.2%

36.7%

67.2% 29. 4%

55.1% 40.3%

64.1% 25.7%

51.1%15.7% 33.2%

58.5%4.1%

37.4%

42.3%11.3%

46.5%

45.2%28.7%

37.9%6.7%

55.4%

26.1%

50.2%9.3%

40.5%

54.7%3.4%

41.9%

52.6%32.5% 14.9%

North America 97%

Europe 24%

Asia and Australia 21%

Central and South America 7%

Where Do You Anticipate Growth in Revenue?

Sentiment Indicators

Middle Market Sentiment

Consumer confidence and growth in the US and Europe lead the macroeconomic factors impacting mid-sized companies.

Contrary to large enterprise companies, midsized companies are far more focused on revenue growth in North America and much less focused on Central and South America and Asia and Australia.

0% 100%50%

Fix labels

12







Middle Market Divergence Report

Higher

Revenue 6%

Cost Pressure (1%)

Head Count 21%

Revenue Industry 6%

Where Middle Market Is Different

To fuel growth mid-sized companies believe that investing in people will be a component of success and are staffing in anticipation of that growth. 21% more mid-sized companies now expect to increase head count vis a vis large enterprise

Where Middle Market Is Forecasting More Growth Than Large Companies in 2014

In addition to those four areas, midsized companies are expecting significantly higher increases than larger companies in the following areas:

Finance

■ Finance Department Budget

■ G&A

HR■ Average Health Care Cost per Employee

■ Average Total Compensation per Employee

■ Average Training Spend per Employee

■ Total Hiring Volume

■ HR Budget

■ In-House Training and Education

■ Benefits (Health)

■ Benefits (Other)

■ HR Staff

IT■ IT Software Expenditure

■ IT-Related Consultant Advisory Spend

Marketing■ Marketing Budget per Revenue

Real Estate■ Number of Work Spaces

■ Green Initiatives (LEED)

Sales■ Sales New Customers

■ Sales Existing Customers

■ Sales Head CountOperations

■ New Orders

■ Production

■ Labor Costs

■ Capacity

Difference Between Percentage of Middle Market Companies with Higher Expectations Versus Large Enterprise Companies

13







Midsized company finance departments are focusing on strengthening strategy development, improving business performance management to drive execution, and building processes and capabilities to increase the impact Finance has on business partner decisions.

Middle Market by Function

FINANCE

Percent Difference of Companies Expecting Increases Over Decreases in Each Area

To find out more about CEB Finance Leadership Council for Midsized Companies, click here.

■ Strategic risks account for five of the top 10 risks facing midsized companies.

■ Fewer than one in three companies believe their teams consistently derive business insight from data.

■ Only 5% of the data Finance provides is viewed as helpful by the organization. Source: CEB 2013 Middle Market Executive Confidence Index.

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The Top Five Areas in Which CEB Is Helping Finance Executives

60.0%

30.0%

0.0%

25.0%

44.2%50.6%

47.0% 47.6%52.5%

10.2%

Developing and Executing Growth Strategy

■ Reorient yourself as a strategic advisor.

■ Create a process that forces choice.

■ Embrace risk as a core element of business performance management.

■ Manage the strategy, not the business.

Improving Business Performance Management■ Build an integrated business performance management approach to drive outcomes

and action.

■ Select metrics and build dashboards that link to value drivers.

Building Effective Business Partnering and Analytics■ Focus FP&A activities on providing insight that challenges outdated business

assumptions.

Streamlining Budgeting and Forecasting

■ Increase process efficiency in budgeting and forecasting activities.

■ Focus on improving management reporting, operating reviews, and other business insight–focused processes.

Driving the Maturity of FP&A■ Develop a roadmap for the FP&A function that balances process improvement

efficiency and increases analytical acumen to drive growth decisions.

14







Today’s fast-paced, unpredictable, and highly networked business environment places a premium on flexibility and collaboration at every level of the organization. Leaders need to adapt quickly to this changing environment and prepare their teams to work as a cohesive unit while also driving individual performance. Unfortunately, many leaders have not evolved with the times, and as a result more than 30% of organizations would replace senior leadership team members if given the opportunity.

HUMAN RESOURCES

To find out more about CEB HR Leadership Council for Midsized Companies, click here.

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■ Employees reporting to managers who are effective at manager-led development have 25% higher performance levels, are 29% more committed, and are 40% more likely to stay with their organization.

■ Great Global Leaders:

– Are three times more likely to hit three-year performance goals

– Lead teams that have 12%

higher levels of discretionary effort

– Have 13% lower risk of attrition

than average leaders

■ Business leaders believe that just 35% of organizations are effective at talent management.

■ “Building a culture of innovation” is a priority for 54% of senior R&D executives.

The Top Four Areas in Which CEB Is Helping HR Executives

Measuring and Improving Employee Engagement

■ Provide employees with compelling, non-linear career paths that broaden development experiences and prepare them for multiple leadership roles.

Improving Manager Capabilities

■ Enable managers to coach their teams in the moment with tactical discussion guides and reference materials.

Helping Employees Collaborate Effectively

■ Effective peer-to-peer collaboration can raise engagement levels by up to 66%; train your employees to use and contribute to their network.

Driving Functional Efficiency

■ Benchmark your HR staffing, HRIT, and subfunctional expenses against peers’ to allocate resources effectively and make the case for targeted investments.

90.0%

45.0%

0.0%

57.9%

33.3%

80.6%

53.6% 50.6% 54.4%58.9%

15







0.0%

30. 0%

60.0%

38.1%

54.8%

47.6%

38.1%41.7%

INFORMATION TECHNOLOGYThe ideal skillset of an IT employee is changing fast. Traditional IT roles such as software developer or system administrator are diminishing in importance, and new roles—focused on helping the business easily find and analyze information—are emerging. But most IT functions are unprepared for this shift: only 20% have training in place to develop new-to-world IT skills. Progressive IT functions develop a long-term strategic workforce plan and create training and development opportunities that prepare IT staff for the function’s future.



To find out more about CEB IT Leadership Council for Midsized Companies, click here.

Discretionary IT–Related

Capex

IT Hardware Expenditure

IT Software Expenditure

IT–Related Consultant Advisory Spend

IT Maintenance Expenditure

■ Seventy-six percent of employees report a significant increase in time spent working with data and information.

■ Sixty percent report exchanging information with 10 or more people on a day-to-day basis.

■ Sixty-one percent of employees do not believe the support they receive from IT enables them to be fully productive.

■ Only one in five global IT leaders is effective at delivering value to the organization.

The Top Five Areas in Which CEB Is Helping IT Executives

Building a Strategic Workforce Plan

■ Understand changing IT talent needs.

■ Develop a plan to fill critical skills gaps.

Identifying and Developing Next Generation IT Talent

■ Provide learning opportunities that accelerate the development of next generation IT leaders.

Developing Business Engagement Skills

■ Structure your workforce to prioritize business engagement over technical proficiency.

Supporting Knowledge Work

■ Equip teams within and beyond the IT organization to collaborate, work globally, and generate insight from data.

Creating Strategic Roadmaps

■ Align your IT strategic plan with business strategy.

■ Embed review triggers in strategic plans to improve flexibility.

■ Cascade strategic goals across the IT organization.

16







LEGAL

The Top Five Areas in Which CEB Is Helping Legal Executives

Across midsized companies, the general counsel role continues to expand to encompass not only more traditional legal and compliance issues but also more cross-functional priorities such as a culture of integrity, ethical leadership, and enterprise risk management.

To find out more about CEB Legal Leadership Council for Midsized Companies, click here.

■ Seventy-four percent of general counsel want to spend more time executing their legal department’s strategy to support business goals and less time firefighting and responding to business requests for legal advice or questions.

■ More than 70% of legal departments spend one-third or more of their time reviewing and managing contracts. However, despite devoting substantial resources to contract review, more than two-thirds of legal departments are not reviewing the appropriate number of contracts.

■ The average midsized company’s total legal spend is 0.71% of revenue, down by nearly 4% from 2011. Although budgets continue to increase, budget growth rate (for both internal and outside counsel spending) will decline in 2014. Interestingly, legal departments in midsized companies are seeing increased appetite for legal technology investments.

Developing and Improving Your Compliance and Ethics Program

■ Build a coordinated, risk-based program that meets internal and external expectations for a formal and effective compliance and ethics program.

Building a Culture of Integrity and Ethical Leadership

■ Understand the effect of corporate culture on compliance risk and business performance, and proactively detect and mitigate risk by creating a values-based culture of integrity.

Identifying, Assessing, and Managing Enterprise-Level Risks

■ Formalize your risk assessment structure and process to assess, prioritize, and manage key corporate risks according to their likelihood, impact, and velocity.

Tailoring Legal Resourcing and Service Delivery to Business Risks and Needs

■ Understand business partner needs and expectations.

■ Rationalize redundant or wasted effort.

■ Align legal services to business goals and risks.

Accelerating Commercial Contracting Processes

■ Improve consistency and speed by selectively involving Legal where it can most impact risk and by simplifying agreements and processes for faster deal making.



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51%47% 45% 43%

37% 35% 35%

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0.0%

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60.0%

40.0%

23.3%

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Customer Loyalty

MARKETINGWhen it comes to differentiation, the best marketers recognize the limitations of business value and product- and benefit-focused marketing tactics. Not only do customers find business value claims hard to distinguish, but also such claims fail to appeal to customers’ need for personal value. Indeed, personal value has a much greater effect on purchase and willingness to pay a premium than does business value.


■ B2B buyers are even more emotionally connected to suppliers than B2C buyers.

■ B2B brands that establish an emotional connection with buyers based on personal value enjoy three times the purchase intent and eight times the willingness to pay a price premium over the competition.

To find out more about CEB Marketing Leadership Council for Midsized Companies, click here.

The Top Five Areas in Which CEB Is Helping Marketing Executives


Winning the Consensus Deal

■ Create content and messaging that appeals to diverse stakeholders’ common needs through new approaches to listening, content creation, and sales enablement.

Preparing for the Future of Marketing

■ Take a step back and reevaluate how Marketing creates economic value in the first place, refocusing on how to make and deliver what consumers want and enabling consumer networks to participate across the entire value chain—from need discovery to offer design to distribution to demand gen to service.

Making Smart Digital Marketing Decisions

■ Seek peer-based, vendor-free insight on adoption plans, benefits, and risks for the many different technologies out there.

■ Place the right technology bets.

■ Carefully evaluate risk.

■ Prioritize investments, and most importantly, think through how different technologies will help in achieving critical marketing objectives.

Understanding Customer Buying Behavior■ Tailor to distinct customer purchase needs and use key channels to build deal momentum to push customers through the purchase funnel.

Reshaping Customer Buying Criteria

■ Use content to teach customers something new about their own business, help them set decision criteria, and motivate them to take immediate action.

18







0.0%

50.0%

100.0%

52.5%46.9%

56.3%47.0%

21.9%

71.9%

59.4%

87.5%

21.9%

50.0%

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OPERATIONS

■ Only 35% of executives believe their S&OP process is even somewhat effective.

■ Each year, the average company spends 25% of the value of its inventory just to hold it.

■ Only 37% feel that Operations’ KPIs align with overall corporate objectives.

■ Functions that have a higher proficiency with metrics drive performance by 24%.

The Top Five Areas in Which CEB Is Helping Operations Executives

Operations executives are focused on finding and strategically aligning operations to support growth. Leading companies are fine-tuning processes for efficiency, rethinking design, and working closely with Sales to manage inventory and drive expansion.



To find out more about CEB Operations Leadership Council for Midsized Companies, click here.

Establishing Procurement Discipline

■ Formalize procurement teams to create a disciplined approach to spend management; manage cost, quality, and timing by defining the procurement policy, streamlining the purchasing process, building sourcing expertise, and managing supplier relationships.

Optimizing Sales and Operations Planning

■ Ensure the business understands supply constraints and tradeoffs early in the planning process, identify and pressure test inherent biases in demand assumptions from customers and internal commercial partners, and provide commercial partners and customers the tools and frameworks to quickly collect and assess planning inputs.

Improving Supplier Performance

■ Manage the supply base with an eye toward value; provide consistent management along with cohesive policies, processes, and decision rights that enable parties to work together effectively and collaboratively over the life of the relationship.

Sustaining Savings through Category Strategies

■ Create multi-year, strategic plans that generate sustained value in critical spend categories, build process discipline around category strategy development, and effectively develop procurement talent.

Building a Culture of Quality

■ Pursue activities that have a significant positive impact on creating a culture of quality and ensure employees “live” quality.

19







0.0%

50.0%

100.0%

84.6% 81.6%

36.8%

25.6%

69.2%

SALES

Sales New Customers

Sales Existing

Customers

Average Sales Cycle

Reliance Discounts Incentives

Sales Head Count

The best organizations focus on building a sales culture that allows for higher performance and retention levels and the ability to attract top talent. Companies have widely adopted the Challenger™ sales model and are now actively working to upgrade their team’s ability to drive customer behavior through insight.



The Top Five Areas in Which CEB Is Helping Sales Executives

■ Customers are delaying contact with suppliers until they complete nearly 60% of their purchase process.

■ Purely rational appeals to customers have limited impact on individuals and decision- making groups.

■ Leading reps are using emotionally oriented appeals to influence buyers to advocate on their behalf at customer organizations and move deals forward.

To find out more about CEB Sales Leadership Council for Midsized Companies, click here.

Influencing the Sophisticated Buyer

■ Enable sales teams to better access and influence today’s B2B decision-making groups.

Driving Sales Transformation

■ Teach reps to sell to an empowered customer who is capable of learning what to do on their own.

Getting in Early and Shaping Demand

■ Shape demand by teaching customers where they learn by executing four critical pre-funnel selling activities.

Building an Insight-Selling Organization

■ Enable your teams to replicate Challenger behavior through different-in-kind messaging, talent development, and sales process.

Partnering with Marketing to Move Up the Decision Chain

■ Help reps reduce cold-calling time by generating leads using social media.