In today’s volatile economic climate, venture capital firms need to be exceedingly careful when vetting the capabilities of potential recipients of investment capital. A key differentiator in superior performance is strategy execution—the organization’s ability to successfully link business strategy to day-to-day operations. According to a recent study by Cognos Inc. and the Balanced Scorecard Collaborative, the research and education division of Palladium Group, among organizations that have not established a formal strategy execution process, only 27% reported superior performance. Meanwhile, among organizations that have established a formal strategy execution process, 70% reported superior performance.
Traditional venture investor thinking puts most of the responsibility on the management team to successfully execute strategy, create value and carry out a financial exit strategy. However, even when the product strategy and market timing seem right, some management teams fail while others succeed. Why? The answer is that some pay more attention to the nuts and bolts of executing strategy. VC firms can help their early stage portfolio companies build strategy execution capabilities to maximize the probability of mutual success. For later stage investments, VC firms can use strategy execution to evaluate investment opportunities as well as to ensure the performance and value of their portfolio companies.
What are the best methods by which VC firms can inculcate their later stage investments with the necessary strategy execution skills? How do they maximize the return on these investments? The answer is to build an approach to strategy execution and track results. This simple three-part approach includes the following:
• Assessing strategy execution.
• Building strategy execution capabilities.
• Monitoring performance.
Assessing strategy execution capability
As many as 95% of organizations fail to communicate to their employees what the strategy is.”
George McMillan, CEO, Palladium Group Inc.
Evaluating strategy execution capability within portfolio companies is critical. Strategy management, key process management and resource allocation management are all key components of an assessment that identifies gaps in capabilities that can impede the business from achieving its critical goals. Filling these gaps at a high level involves building and improving resource management processes, aligning human capital and enabling companies with the appropriate technology and infrastructure.
The three key components of the assessment phase are as follows:
• Strategy Management. This begins by determining if the management team and employees understand the business strategy. This is a common pitfall. According to the Cognos/Balanced Scorecard Collaborative study, as many as 95% of organizations fail to communicate to their employees what the strategy is. The management team should regularly speak with investors about the business strategy and how the company is performing against it. The understanding and communication of the business strategy must be accompanied by the enactment of processes to revisit the business strategy regularly. This is the best way to ensure the business is both executing its operating plan and strategic initiatives and continuously improving its monitoring of that strategy.
• Key Process Management. VCs should ask probing questions to determine if the portfolio company understands which business processes are critical to executing the strategy. Management teams must rigorously focus on measuring these processes and understand their key drivers for successful execution. In this way, both management and investors will have the necessary insight to make informed operational decisions.
• Resource Management. The third indicator of a business’ probable success is whether it effectively allocates resources—staff, information technology and budget dollars—to support strategic objectives. This is a major problem, with 67% of HR and IT departments not linking their priorities to the company’s strategy, the Palladium/Cognos study reveals. VCs may also choose to explore what staff is in place to determine if these are the right people to support the execution of business strategy. As companies evolve, they must have efficient processes in place so they can easily re-allocate resources as strategy evolves.
Building strategy execution capabilities
Upon conclusion of the assessment phase, VCs should be well equipped to advise their portfolio companies on how to best tackle challenges. This involves a multi-pronged approach. First, management teams need to mobilize around gaps to form a focused, driven build team. Next, the teams need to pick an approach to ensure everyone stays on track. This could be achieved through self-service tools, advisory groups or consulting assistance. Third, the team should create a phased, realistic plan with incremental objectives goals and deliverables. These milestones help the team measure its performance and stay motivated. The build team should be cross-functional and have executive and investor support to carry out organization, process and technology improvements as deemed necessary.
Early stage companies are perfect candidates for building strategy, process and resource management capabilities before legacy culture, organization process and technology issues make it more difficult.”
George McMillan, CEO, Palladium Group Inc.
Early stage companies are perfect candidates for building strategy, process and resource management capabilities before legacy culture, organization process and technology issues make it more difficult.
Monitoring strategy execution performance
The evaluation of strategic, process and resource management is fairly straightforward. This involves engaging investors and the management team in regular and systematic strategy review meetings and gauging the achievement of key metrics and targets, such as new customer acquisitions, customer retention rates, profit variances, cash variances and employee satisfaction. Candid assessment of results yields improvement targets. Obviously, if there is an improvement program in place in which certain strategy execution capabilities are being built out, investors should continuously review scope, resource levels and issues.
Strategy maps and scorecards are effective tools to define, organize, communicate and monitor strategies. These tools have the advantages of being both simple and actionable. A strategy map, for instance, depicts key themes and objectives on a single sheet, and scorecards enable managers to track performance by establishing metrics and key performance indicators. They also effectively allow tracking of non-financial performance parameters that are frequently better indicators of eventual outcomes.
Ultimately, a balanced set of operational and financial metrics and performance and drivers will help VCs more accurately assess and optimize investment performance and projected outcomes.
George McMillan is chief executive officer of Palladium Group Inc. Prior to joining Palladium, he served as CFO and CEO of CMGI from July 2001 to August 2004. He has served in executive capacities for more than 20 years and has spent the majority of his career leading and driving business growth in professional service firms. He may be reached at george.mcmillan@palladiumES.com. The author wishes to acknowledge that James Leavitt contributed to this article.
Strategy Execution Checklist
No matter what stage of the game you are in, it is imperative that strategy execution is top of mind. Take the below quiz to find out where you stand in strategy execution.
STEP 1: ASSESS STRATEGY EXECUTION
□ Do employees understand the strategy?
□ Does the management team communicate the strategy to investors?
□ Does the management team regularly evaluate the strategy and how the company is performing against it?
□ Are there processes in place that can easily reallocate resources as strategy evolves?
□ Is IT, HR and Finance aligned to support strategic objectives?
□ Are the right people in the right jobs?
If you checked all six boxes you can move to step three.
If you have left any of the above boxes blank, please continue on to step two.
STEP 2: BUILD STRATEGY EXECUTION CAPABILITIES
Your portfolio company is not executing on its strategy. By marching to the below action items you will be on the way to improved success.
□ Mobilize a focused team on the gaps in strategy execution
□ Pick an approach.
□ Self-Service Tools.
□ Advisory Groups.
□ Outside Consulting.
□ Create a plan with deliverables.
Once there is a plan in place to execute on strategy, you must move to step three to monitor and evaluate the effectiveness of the strategy.
STEP 3: MONITOR STRATEGY EXECUTION PERFORMANCE
Executing strategy is never the last step. This is a continual process. By following the below objectives you will ensure above normal results from your investment.
□ Regularly evaluate strategic processes and resource management.
□ Engage investors and the management team in review meeting.
□ Gauge the effectiveness of key metrics through the use of a scorecard.