A Tacticware Resource Group, LLC White Paper.
This white paper is available for free download on Tacticware.com
At Tacticware, we discuss challenging and meaningful subjects for today’s business leaders. On its whole, we suggest that organizational culture, leadership, and brand perception set the boundaries of financial capacity. They are also contributors to risk management.
Cultural challenges and leadership have no Silver Bullet. Every customer transaction is impacted by the culture of the organization and its employees. The impact of culture directly influences financial capacity and predictability.
But keep in mind our dialogue is not about basic business mechanics; it’s about corporate governance, communication, and the quality of company vision, mission, and core values.
White Paper Introduction
In this white paper, we discuss “Financial Capacity: The Impact of Company Culture on the Financial Statement.” The paper includes why and how culture management sets the boundaries and limitations of company financials. We will focus on the following topics:
- Innovation – R&D Expense
- Customer Satisfaction And Retention – Revenue
- Management Effectiveness – Revenue – Strategy And Performance
- Employee Productivity And Retention – Wages And Benefits
- Working Environment – Wages And Benefits
- Risk Management – Insurance Expense
Whether your business is B2B or B2C, effective cultural management shapes profitability and shareholder value.
Five-Star Performance: Greater Expectations
Today, companies must set greater expectations if they expect to succeed. We suggest businesses consider the Five Star Standard. It is a simple rating system that applies to both customers and employees.
We encourage clients to move their thinking beyond “average.” Average in traditional rating scales is a C. With the Five Star Rating System, think of each Star with a value of 20%. If we are to gain competitive advantage, the least acceptable rating is a four-star rating. After all, if we do not stretch to improve, we erode.
The Star Rating System is a model of simplicity. It benchmarks both customer and employee perception of the company.
To sum up the Star Ratings:
- Five Star performance means consistently superior customer and employee satisfaction and retention. Five Star relationships generally result in a greater pool of strategic customer relationships. Five Star performance generally results in greater employee retention and productivity. Strong cultures are generally proactive to risk management.
The result is superior financial capacity.
- Four Star performance means satisfactory. There may be some restrained and/or inconsistent satisfaction or trust from customers and employees.
The result is moderate financial capacity.
- Three Stars or less performance generally means inconsistent, unpredictable, and sometimes incompatible customer and employee satisfaction. Competitors are probably winning both customers and employees.
The result is limited financial capacity.
Rating Organizational Culture
“Organizational Culture is a system of shared values, beliefs, and business practices.” – Investopedia
As we have discussed in previous Tacticware white papers, a Cultural Management System governs how people and teams behave, communicate, plan, engage, and perform within the organization. It measures and benchmarks organizational perception from all employees through a Star Rating process. Company vision, mission, and core values all work together to establish cultural expectations.
A Cultural Management System also governs how management and employees communicate quality, innovation, value, service, and relationships to external customers. It measures and benchmarks customer satisfaction through a Star Rating process.
Every employee is a cultural ambassador. With every customer transaction, the Star Rating is in play. If the company expects to maximize its financial capacity, a Five Star Rating is necessary.
Please consider the following:
- What is the customer attrition rate?
- What is the employee attrition rate?
- What significant financial resources have been expended to restore customer confidence due to quality, supply chain, distribution, or relationship challenges?
- What financial resources have been expended to correct strategy, management, or human resource challenges?
Pivot Your Thinking
Continuous improvement is necessary to achieve our financial goals. Culture management moves culture from a subjective ideal, to a managed discipline. Look at your toughest competitor and determine how these topics influence your financial status.
Company culture plays an important role in innovation. Successful companies invest significant resources into R&D. Some investments are an extension of existing products. For others, it may be leap beyond its core competencies.
Innovation accomplishes three objectives. First, it provides new income streams. Second, it creates the opportunity to collaborate and innovate with existing customers. Third, innovation provides the opportunity to discover new customers.
Five Star customer relationships encourage and support greater investment in innovation. They are the first customers to approach with innovation.
Sometimes strategic customers don’t share the same love. We have found with some clients, their best and most strategic customers rated the company as a 2-3 Star Rated supplier. Company leaders are sometimes surprised with this dose of reality.
The truth is innovation often struggles with existing customers. Customers with 1-2-3 Star ratings sometimes choose not to purchase innovation from the company. Why invest with suppliers that are providing limited value?
New customers are generally willing to risk very little from unknown suppliers. New customers don’t know you. Nor do they trust you. How frequently do new customers purchase from your company? Statistically, sales closure rates on new customers purchasing innovation are very low for most industries.
Companies with 4-5 Star cultures generally have a firm handle on strategic customer relationships. They are generally the most successful innovators. They achieve the greatest return on the R&D investment.
Remember, every employee is a company ambassador. Company ambassadors are viral communicators of culture.
Please consider the following:
- How successful has the distribution of company innovation been with regard to strategic customers?
- What has been the Return on Investment regarding innovation?
- How many company customers are both Five Star rated and strategic?
#2: Customer Satisfaction and Retention
Revenue and earnings erode quickly with the loss of a strategic customer. Customers often leave because of company business practices, not price. Price is just an easy excuse.
Business practices are a function of culture. More often than not, price is a muted response to a bad experience from an employee or business practice. Customers reach their limit of bad experiences, opening the door for competitors to “win over” the customer.
Profitability and earnings erode slowly with the loss of a smaller customers. The company is forced to not only replace customer attrition, but to increase growth as well.
Growth and revenue profits are impacted by culture. Hypothetically, if the company:
- Experiences 10% customer attrition
- And expect +8% sales plan growth
- It requires +18% in real growth to meet plan
Generally, +18% growth is a real challenge for most companies. The fact is with excessive customer attrition, most companies never achieve plan goals through organic growth.
Hence, acquisition becomes the growth model. Financial risk increases through greater leverage of company indebtedness.
The takeaway here is when companies improve company culture, customer satisfaction and retention improve. Company revenue increases as does new opportunities.
Please consider the following:
- What is the Star Rating of your top strategic customers?
- If the Star Rating is low, what is the real truth? Call the customer personally and determine the facts.
#3: Management Effectiveness
Leadership and management are two distinctly different skill sets.
- Leadership is consistently engaged with its customers, management, employees, and operational environment to increase company value.
- Management is consistently engaged in processes and systems to increase company value.
The Five Star Rating System performs as a benchmark of culture management. The Five Star System identifies and measures five areas of customer satisfaction. It also identifies ten (10) areas of employee perception and satisfaction. This allows for a way to use facts and evidence as a way to effectively understand and manage culture.
The real sign of a Five Star culture is when leaders and managers cease being “firefighters” and actually have the time to lead and manage. The “fires” of dysfunction, lackluster performance, and poor communication dim.
When leadership and management are better able to focus on strategic decisions, financial capacity improves. Priorities align with meaningful results.
Company leadership is better able to collaborate with strategic customers and facilitate the growth of its team. Perception and culture improvements diminish risk.
Please consider the following:
- When did leadership last spend significant time with strategic customers?
- Does company leadership maintain consistent customer relationships?
#4: Employee Productivity & Retention
Employee attrition has tremendous financial liability. Employee wages and benefits, training, and customer relationships all have a price. Employee attrition also influences management, productivity, risk, and company culture.
Superior cultures have a defined employee selection process. This process identifies the right person for the right job.
We hear from some managers they don’t have sufficient time to manage a selection process, as they enjoy another day of “fighting fires.” But the real fact is that selecting quality employees is key to culture management.
Recruiting and selecting productive employees begins with an accurate job description. Identifying primary objectives and activities allow the company to target specific skill sets.
Highly effective Candidate Assessments allow management to compare specific candidate skills, knowledge, and behaviors to a comprehensive job description. This style of assessment is very helpful in selecting the right candidates for the right job.
Other less effective Candidate Assessments identify basic personality traits and compare them to a broad job description. We ask you to consider the real expense of a toxic hire when considering using Candidate Assessments.
Companies promoting from within their own ranks should understand a great individual performer may not make a great manager. Skill sets do not always transfer, nor the ability to facilitate the success of subordinates.
“On-boarding” is not training. Effective on-boarding contributes to employee retention. Leadership is responsible for effective on-boarding to explain the company’s vision, mission, and core values.
The reason is accountability. Leadership is responsible for communicating company values and expectations so that every employee ambassador has the correct facts regarding company culture. Often times core values and expectations are lost in translation.
Effective job training provides knowledge, skills, and expectations. We recommend every training session also provide cultural reinforcement. The facts are employees value and expect effective training. They fear failure and stagnation.
Companies providing expert job training, apprentice programs, certification programs, and educational resources retain more employees. They attract new employees with greater skill sets and talent.
#5: Working Environment
Cultural Environment: Incubator of Employee Productivity
Five Star cultures deliver greater employee productivity. Part of the reason is superior communication, training, and accountability.
Fair accountability means all employees are held to equal expectations. There is mutual respect and trust among team members and management.
Believe it or not, fair and equal accountability are among the greatest complaints we have discovered in employee assessments in companies of all sizes. Fair and equal accountability supports the notion of team, rather than employee gangs.
People are fragile. Despite all the rhetoric about people and job expectations, not much has really changed over time. Quality people expect team, job security, and fair compensation and benefits. Exactly in that order.
Most companies are a mixture of generations. Some generations communicate differently. Some have a differing sense of time management. Five Star cultures treat everyone with realistic expectations and equal accountability.
Poor employee perception is an incubator of toxic employees. They either leave or infect the organization. If companies are to retain quality employees, the cultural environment must be positive.
#6: Company Risk Management
Risk is everywhere. Risk concerns exist throughout every organization. Financially, safety violations, data hacking, excessive insurance premiums, supply chain losses, and loss of revenue are sometimes indicators of a Star Rating of 1-2-3.
4-5 Star Rated companies better manage departmental risk. It’s a priority for management and employees who are more accountable. Most importantly, management and employees are more proactive to overcome challenges and adversity.
In our experience within various industries, we have observed that companies with a 4-5 Star Rating consistently operate with fewer employee accidents. In those organizations, Safety First training and accountability has been a first priority of leadership, management, and employees.
Effective communication, respect, and accountability are key components of a strong culture. Strong cultures have engaged employees who seek to be the best and perform the safest course of action.
Intellectual Property Risk
All companies are vulnerable to computer hacking or compromised systems. Our observation is 4-5 Star Rated Companies are more proactive and diligent in assessing technology and intellectual property risks.
Leadership and management have more time to develop effective policies and procedures. They are also able to create an evolving process which learns from the last experience. Lower Star Rated companies repeat the same lesson time and again.
4-5 Star Rated companies generally tend to have fewer technology challenges. For many, there is a plan and process for education, updates, and best practices.
Financial Predictability – Managed Growth
Financial predictability influences banking and financial relationships. From a lender’s perspective, cash intensive companies and inventory credit lines are influenced by predictable revenue. The source of predictable revenue is culture management.
For investors, well managed growth generally indicates predictable results. Wide swings in revenue, liabilities, and earnings are sometimes an indicator of challenges. Why invest in a leadership and management team that is off course?
4-5 Star Rated companies generally have developed a larger pool of strategic customers. They are better able to predict and manage their financial status. EBITDA (earnings before interest, taxes, depreciation, and amortization) values are generally more significant and stable.
3 Star Rated companies are sometimes more inconsistent. Customers and employees recognize the inconsistency. Inconsistency is expensive and dysfunctional to customers. Quality employees view inconsistency as a lack of leadership. When a better opportunity arrives, quality customers and employees move up and out. So does revenue and productivity.
1-2 Star Rated companies sometimes reside in chaos and mayhem. The business environment is uncomfortable and unpredictable. Oftentimes leadership and management are caught in an endless loop. Financial predictability varies from day to day.
Please consider the following:
- Where does your company exist financially in the Five Star Rating System?
- What are your financial limitations from a lender’s perspective?
White Paper Conclusion
Throughout this white paper we have discussed the relationship of culture management and financial capacity.
We encouraged clients to move their thinking beyond “average.” Average in traditional rating scales is a C. With the Five Star Rating System, think of each Star with a value of 20%. If we are to gain competitive advantage, the least acceptable rating is a four-star rating.
We identified these contributors to financial capacity. We also provided tips and questions to identify challenges and opportunities in culture management.
#1: Innovation- Return of Investment
#2: Customer Satisfaction and Retention- Revenue Growth
#3: Management Effectiveness- Revenue Growth
#4: Employee Productivity & Retention- Wages and Benefits
#5: Working Environment- Productivity, Wages, and Benefits
#6: Company Risk Management- Liabilities
We suggest the best takeaway is when the company culture is measured with a Star Rating of 4-5, it allows leaders and employees to operate the business proactively.
Companies avoid dysfunction, stress, and actualize financial success. Without a 4-5 Star Rating, shareholder value eventually erodes and attrition invades.
Objectively speaking, it can be helpful to employ an unbiased observer to help your organization when considering cultural analysis and improvement. Oftentimes an outside, objective ally can assist in determining all sides and pieces of the puzzle, giving a honest view of culture with no play of politics.
White Paper Author
Paul Fournier is President of Tacticware Resource Group. Tacticware is a organizational change management consultancy firm offering cultural management systems, strategic planning, upSkill management/sales training, and 360 Cultural Assessments. We assist clients nationally. Learn more about transforming your business by contacting us.
Quality people do not have a color, gender, or age. We are committed to diversity and equal opportunity. We do not discriminate against racial, ethnic, and/or religious groups, older workers, women, veterans, and people with disabilities. As a matter of policy, we remain apolitical, religion neutral, and respectful of local customs.
Tacticware Resource Group, LLC