Building Organizational Agility
The geopolitical turbulence and global economic volatility over the past few years have bolstered the view that uncertainty is the new normal and is here to stay (or rather, to continuously change) for the foreseeable future.
To be competitive in an ever-changing dynamic – fluctuating commodity prices, exchange rate movements, changing regulatory and political climate, new and non-traditional competition, evolving consumer needs and more – businesses need to be nimble and equip themselves with a strong degree of adaptability.
The level of agility with which decisions are made to translate trends, insight and market information into action, do impact the success of an organization. A research study conducted by the Mass¬achusetts Institute of Technology over a decade ago found that agile firms (defined as those who could adapt and innovate during times of change) grew revenues 37% faster and generated 30% higher earnings than non-agile firms. Given the pace and intensity of change in the last decade, it is quite likely that the performance gap between agile companies and their competitors has widened even further. In the current business environment, agility is not a “nice to have” but a core business necessity for sustainability.
Mid-size firms have an inherent agility advantage as compared to both larger and smaller competitors. Their flatter organization structures, limited silos, aligned incentives across functions, breadth of resources and existing investments in communication infrastructure enable better information flow and faster decision making.
But what does ‘being agile’ mean for businesses? It doesn’t mean action for the sake of it. Knee-jerk reactions to changes in external market conditions or internal dynamics can make things worse at times of uncertainty. Agility doesn’t mean that at the first sign of crisis, existing initiatives are shelved in order to have all hands on deck to battle for survival. Rather, it means having the foresight and processes to be able to respond to change proactively in a disciplined and structured manner.
US General George Patton famously said, “Sweat in peace, so you don’t bleed in war.” That mantra is equally applicable for organizations. The more you prepare to be nimble during periods of stability; the more you think about “what if” scenarios; the more flexibility you build into your processes, the better equipped you will be to handle phases of uncertainty.
To enhance their agility quotient, companies need to focus on a few different things:
1. Balance long-term and short-term perspectives. For public companies, the pressure of meeting quarterly targets can impact and even cloud good decision-making. Lack of long-term perspective can make organizations reactive rather than proactive. At the same time, having a ‘fixed-in-stone’ long-term plan can jeopardize a business when core fundamentals around the business model are changing. It’s important to have a long-term plan and vision for the business, but also to have the flexibility for a plan B where you can reassess market opportunities and reprioritize initiatives. Agility in decision-making and execution of the right priorities enables companies to not only protect their own customer base in times of uncertainty but also expand into new customer segments and markets.
SeaLink Capital Partners (SCP) encourages its portfolio companies to develop a line of sight estimate for the current year financials, on a monthly basis. This discipline enables companies to spot leading indicators of change, reassess market conditions and modify priorities accordingly.
2. Minimize silos and strengthen communication. Ensure strong communication within and across the company. The first signs of impending change or a new trend are usually spotted by employees who are out in the field. Do they feel empowered in your organization to share those insights and do they believe that their inputs receive due attention? Are goals across divisions of the company aligned? And is there a culture that encourages transparent and honest communication? During times of crisis and uncertainty, it is all the more important for leaders to have open, honest and direct communications with employees regularly. These conversations can reaffirm confidence and reduce any anxiety that may have crept in. Just as importantly, they make employees feel comfortable and empowered to share their own ideas and thoughts with management, thereby strengthening the virtuous cycle of identifying and leveraging market insights.
Borrowing from the book, Power Score (authored by Geoff Smart, Randy Street and Alan Foster), research indicates that organizations and teams that run at full power are differentiated by three key factors – having the right set of priorities; the right people on the team; and the right relationships that achieve results. Each of these three factors is equally important for success and strong communication is the groundwork for all of them. At SCP, we encourage a frequent assessment of the Power Score both internally as well as with our portfolio companies. Having open, transparent discussions to identify gaps in any of these factors and determine ways to address them is essential to ensuring the success of teams within any organization.
3. Automate non-core activities. Related to the above point, standardize and automate activities and processes that are not impacted by external changes to free up resources to focus on market insights, identify new opportunities and execute the right set of initiatives. This has benefits that go beyond agility, including lower error rates, greater product/service consistency and higher utilization rates.
In a previous SCP thought piece, we discussed the importance of having an efficient ERP system, which would increase transparency of information, integrate data across functions, and enable faster and better decision-making.
4. Instill a culture of wise frugality within the organization. During times of crisis, many companies rush into cost-cutting mode. That almost never works. The damage of excesses is already been done, and the move negatively impacts employee morale. We have come across many companies that were able to tide over periods of external crisis due to their judicious control over finances in the preceding years.
Wise frugality also means understanding where pinching pennies is detrimental to long-term success. For instance, we advise companies to never cut costs when it comes to making strong hires, or investing in infrastructure that will make the business more competitive.
5. Focus on cash. The one metric management at all companies should focus on is cash generation from the business. Cash flows generated are used to service debt, provide returns to shareholders and reinvest in the business for future growth. During periods of volatility and uncertainty, access to external sources of capital becomes limited. Companies that have established a strong focus on internal accruals by managing operations, inventory and payment schedules have a significant advantage in navigating those uncertain periods and ensuring long-term sustainability.
6. Hire ‘athletes’. Athletes in an organization are distinguishable based on their grit, resilience, perseverance and focus on continuous improvement. They believe in the vision of the organization and are open to developing new skills with a long-term focus in mind. When you hire, look out for these skills. Employees that embody these attributes will be the ones that can help steer a firm through times of change.
In an ever faster evolving environment, the ability to adapt to anticipated and unanticipated change will differentiate businesses that emerge stronger from those that remain a shadow of their former selves. Is your organization well prepared to deal with the new normal?