Organizational Culture Increases Organizational Value

Organizational Culture Increases Organizational Value

Stronger performing organizations are generating a greater return on assets.

Can the culture of your company affect the value of your organization? Recent professional studies show that it does. In a study by Daniel Denison, of the Institute of Management Development in Lausanne, Switerland, of 102 publically traded companies (see Fig. One), the organizations with stronger performing cultures outperformed the weaker performing cultures over a three year period. The weaker performing cultures floated just around their industry average while the high performing cultures outpaced the industry average.

In terms of performance, this tells us that stronger performing organizations are generating a greater return on assets and, in turn, have a greater amount of capital available to reinvest into areas such as research, innovation, sales, product development, etc. Therefore, how do you manage your culture? The following offers a unique approach to managing the culture of an organization.

First let's illustrate what culture is costing an organization based on the study above. For example, take two competing companies with $100 million in annual revenues and Assets of $150,000,000. Both are of equal size; however company A (top 25%) is generating profits at an ROA of 14%, or $21 million while company B (bottom 25%) is generating an ROA of 4%, or $6 million. What this tells us is for every dollar invested and retained, company A is receiving an above market return on its investment and is better positioned to reinvest in assets and research to drive its performance and gain even greater market share. Additionally company A's stock value and performance will significantly outpace company B creating even more value to the firm.

Figure One: Return on Assets over time (Source: Denison Consulting)

What is interesting is that Return on Assets and other measures (EBIT, ROI, cash flow) are monitored rigorously throughout the year. It is safe to say that business leaders track these financial metrics on a monthly basis. But, how often do we stop and consider the human aspect of producing these numbers? This study on organizational culture and others like it show corporate culture clearly plays into many of these measures.

But, how often do we really look at our corporate culture or, for that matter, manage it? With everything being equal, you would think organizations would look to their workforce to differentiate the brand and become a competitive weapon.

Measure

So, how does the process begin? First, you need to understand the culture. A culture survey is a great start to get a good snapshot of the organization. The study above uses the Denison Organizational Culture Survey. The survey results will offer insights into the strengths and weaknesses of the organization and allow for a more targeted approach to culture change. Probably the biggest value of bringing in a culture assessment is that it brings issues to the forefront which may often get ignored or people just don't want to address them. It will also create a common language around culture. Leaders will often say it wasn't so much the results that had the biggest impact, but the conversations that came out of the results.

Keep it Simple

After reviewing the results, there are always two or three issues that surface. Many times, the leaders are already aware of these issues, but without concrete data never move to action. So, with data to validate, an action plan can be created. It is important not to bite off too much. When organizations try to tackle all issues at once, they usually fail. One organization found, through the survey results, that the employees didn't really understand where they were going. It was clear to the leadership team where they were headed, but it became blatantly obvious the mission and vision of the company had become the company's best kept secret. The action plan moving forward was simply to create some clarity around the mission of the organization.

They began by strengthening their vision, developed a strategy, and began communicating it to their employees. They also developed individual objectives for employees and tied them to the corporate plan. The CEO began to hold regular town hall meetings where employees could get "face time" with him. By focusing on a key lever (communicating the mission), they reconnected the employees to the mission of the organization. Furthermore, they boosted their culture scores substantially. The end result of their efforts on culture changes was after a few years they were ranked as one of the top 50 HMOs in the country and eventually made it to the top ten. The key was instead of focusing on everything and having little impact; they could focus on a few things and have a big impact. It worked.

Communicate

An important step in the process when using a culture survey (or any type of employee survey) is to communicate the results to the organization. Employees are being given the opportunity to give their input so it is important to let them know they have been heard. What is fed back to the employees does not have to be comprehensive, just the high level overview and the key take-aways. While communicating the survey results, lay out the plan on how the leaders will address the key issues. An example would be on May 8th employees were asked to complete a survey. The reason is the leadership of Company A was looking to gauge the culture in order to look for ways of improving how we work. We met with an expert in the field and reviewed the results. Based on the review, the key take-aways were X. Following the review, the leaders and managers of the firm will be developing action plans. This should be done by July. Each manager will be walking you through the high level results at your local staff meeting. This is a key priority and we appreciate your participation.

Create a New Channel

Finally, a great way to engage the employees in the process beyond the survey is to create a culture council. This is usually made up of a cross section of employees throughout the organization. These are people who are willing to go the extra mile to help create a better organization. Keep in mind, the council should be fully supported by the leadership team to be successful. Without upper management's support, the initiative will fall short of expectations -- if not fail completely.

Another key, early on, with a culture council is to involve an outside resource to help guide the team. The reason is there may not be a lot of trust present in the early stages and the outside consultant acts as a buffer and a catalyst between the culture team and the leadership team. However, if done right, the successful consultant will be weaned out of the process as the council team becomes more comfortable in its role within the organization.

The culture council is sponsored by the leadership team, but actively seeks out culture issues within the organization to bring forth and work on. They meet once a month where they bring up issues to work on, review projects (both successes and failures), set goals and work to move the organization forward. What companies find when they successfully implement and support a culture council is an active voice of the workplace. The team becomes a valuable resource for continually feeding information up from the ground floor and becomes a great first step for a bottom up/top down organization.

Competitive Edge

Finally, the process of changing culture does not happen overnight. The companies that are successful understand it is an on-going process that requires time. Leaders may look at it as adding one more "thing" to their plate. But, if done right, it often takes things off the plate. If the research shows that culture is correlated with financial performance as it does above and in many other studies, then culture becomes a controllable factor -- a factor that can give you a competitive edge.

Jay Richards and James Skochelak are partners with PerformancePLUS www.P2LLC.org, a provider of organizational culture and leadership development solutions.

TAGS: Talent
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