Image source @ Visual China
Text | Mu Sheng
In the article "Middle Office Construction: Not Just IT Tools, But Also Organizational Layout", I mentioned that the main positioning of the business middle office is to provide "ammunition" to support front-office operations.
However, simply changing the traditional functional departments (such as R&D, production, procurement, etc.) to the business middle office and emphasizing the above positioning will not make any changes to the traditional pyramid organization. In order to let the business middle office play a corresponding role, efforts should be made in the assessment, and only through the assessment can their position and mode of action be changed.
This begs the question – "How should the middle office of the business be evaluated?" Looking further, this question can be expanded to "how should the middle and back office functional departments that do not directly hit grain be assessed?" ”
01 The middle and back office does not assess the efficiency is to play hooliganism
In general perception, departments that do not directly fight grain are collectively referred to as functional departments. Among them, the cost center of supply chain, production, procurement department and so on is generally regarded as the middle office, while the cost center of human resources, finance, legal affairs and so on is generally regarded as the background. Since functional departments do not fight for grain, how to assess it has become a difficult problem for eternity.
In the minds of all bosses, the ideal state is definitely to be able to assess the operating value of the middle and back office departments, to put it bluntly, that is, to assess how much these departments contribute to the fight for grain. Some companies even push the middle and back office departments to the front desk to fight for this purpose, but this is obviously unreasonable. As a result, companies can only find an alternative indicator, splitting business objectives into strategic objectives and sinking strategic objectives into each middle and back office department.
However, this has formed the effect of "each managing a section", resulting in a great decline in the support of the middle and back office departments for the front office department, and even leading to the formation of a bureaucratization of "keeping an eye on KPIs and managing one size fits all" in the middle and back office departments. Moreover, no matter how scientific the decomposition of strategic objectives, the KPIs that do not hang up the business results in the foreground are really unconvincing, and are more like the self-talk of these departments.
Therefore, we can determine that the first principle that should be followed in order to assess the middle and back office relatively accurately:
Principle 1 – There should be a clear mathematical linkage relationship with the front-end business results, rather than a logical linkage relationship (traditional strategic decomposition method).
The two major functions of the business middle office and even the back office are "landing rules" and "transportation of resources", and the two blend with each other to become the "ammunition" to support front-end operations. The traditional middle and back office likes to emphasize that its main function is the "landing rule", because this positioning is not easy to assess, and the free space is huge.
In order to make the middle and back office really provide "ammunition", the assessment should be reversed, from the main assessment of the "landing rules" to the main assessment of the effect of "transporting resources". Only in this way will the business middle office department that holds the power take the management resources as the premise and consider how to flexibly adapt to the rules instead of using a rigid policy "one size fits all" to find business space for the front desk.
Therefore, we can determine that the second principle that should be followed in order to assess the middle and back office relatively accurately:
Principle 2 – The results of the department's "delivery of resources" should be focused on, rather than the results of the "landing rules".
Principle 1 means that the contribution of the middle and back office should be split from the front office business performance mathematically, and principle 2 means that the resource operation mode of the middle and back office department should be clarified and quantified. The combination of the two is not difficult to find that the assessment of the middle and back office departments should have only one theme - Efficiency (that is, efficiency). This is the middle and back office outcome metric, while the other metrics are process metrics. There are no outcome indicators, and the process indicators are castles in the air and meaningless.
02 Two perspectives of performance assessment in the middle and back office
In the past, there was a misunderstanding in the middle and back office of the assessment. For example, Kazuo Inamori's "Amoeba Operation" and Haier's "Market Chain" implemented in 1999, this model allows enterprises to conduct upstream and downstream transactions, and strives to transmit market pressure with the logic of "the next process is the user". However, due to the fact that there is only one role in the upstream and downstream, there is no substitute for the transaction, and the price is not clear at all. Moreover, this assessment method will inevitably lead to each department "managing a section" and unable to collaborate "market-centric" or "user-centric".
Later, another misunderstanding appeared, that is, to make this kind of middle and back office department smaller, so that more people in the middle and back office departments entered the front desk. In this way, the front desk has become a lot of small business units, but the company has lost the support of "heavy firepower" because of the "hollowing out" of the middle and back office, and can only play a little "small guerrilla warfare". In addition, this extreme authorization to the front desk will also lead to management out of control.
The former way goes astray, and the latter way tries to "bypass" the assessment in the middle and back office. Either way, it does not solve the problem of quantifying the value of middle and back office operations. If we follow the previous two principles, it should not be difficult to find that assessment efficiency is the best choice. Consider the following logic:
Resource input efficiency = effective resources obtained at the front desk
On the one hand, these resources enter the terminal product as "ammunition", which is naturally highly correlated with the results of front-end operations and is in line with "Principle 1". On the other hand, efficiency clearly determines the outcome of "transporting resources", in line with "principle 2".
The front desk can assess business performance, but it is also necessary to assess efficiency, so as to avoid the front desk department from exchanging "big resources" for "small performance", which is beautiful on the surface but does not perform well. There is no explicit business performance in the middle and back office, only the efficiency can be assessed, to put it bluntly, their positioning is to transport resources to the front desk as much as possible without loss. In two enterprises with no obvious difference in the order of magnitude of resources, which enterprise has higher efficiency in the middle and back office, the front office will be able to hit the grain more. Here, the fight is organizational ability, and the reason why I emphasize that "effectiveness is the best endorsement of organizational ability" is this truth.
Any business is an investment of resources to pursue results, which can be measured by efficiency. And all the resource investment of the enterprise can be measured by two large calibers - human efficiency and financial efficiency. To improve human efficiency, it is necessary to follow the human resources operation (human efficiency) value chain of "selecting and retaining functional teams (organizations + talents)"; and to improve financial efficiency, it is necessary to follow the business operation (financial efficiency) value chain of "business function business track financial efficiency". What is more interesting is that there is obvious synergy between the two value chains, and the improvement of human efficiency can leverage financial efficiency, and financial efficiency also has a feedback effect on human efficiency.
Figure: Value chains for human and financial efficiency
Source: Mu Sheng Consulting
In fact, human effectiveness and financial efficiency are like the two veins of the business, through the two, a business can suddenly open up. Because of this, we also advocate that the heads of middle and back office departments think about the work of the department from these two perspectives and become "small bosses" who do business. If they agree with this view, the indicator system formed by the overlap of the two value chains of human and financial efficiency can lead them in the right direction and quantify the operating value of these sectors.
For example, if we imagine the R&D department in the middle and back office as a "R&D outsourcing company", then the assessment of its effectiveness should be two: one is human effectiveness, that is, how much R&D and surrounding personnel are invested, or how much corresponding labor costs are invested, and how much income is generated (workload, revenue, profit, etc.); the second is financial efficiency, that is, investing various types of R&D resources, how much income is generated. The two overlap, which should form several typical performance indicators, and simply quantify the effect of the R&D department 'delivering resources'. Of course, in order to achieve the quantification of this direction in a more three-dimensional way, enterprises can extend the assessment to the driving indicators on the two value chains, forming an indicator system similar to the "scorecard".
03 Application of the middle and back office performance dashboard
If we agree that the middle and back office departments should assess efficiency, how to put the efficiency assessment into practice?
The first step is to find the key performance indicators.
There is a linkage relationship between the indicators in the performance indicator group: from a macro point of view, the human efficiency indicator has a clear driving effect on the financial efficiency indicator. According to a 2020 study by Musheng Consulting, in enterprises with Internet attributes, for every unit of change in human efficiency, 4.33 units of financial efficiency change in the same direction. From a micro perspective, there is also a clear linkage relationship within the human efficiency indicators or within the financial efficiency indicators. In short, we can form a causal chain between the performance indicators, and find the most critical performance indicators as the main assessment indicators.
In fact, this step is to deconstruct each middle and back office department as a company. It's amazing here that if you think of a middle and back office department as a "company", you will find many laws in their operations, and it is possible to find key efficiency indicators to support front-office operations.
The second step is to find the MID (Most Important Drivers) of key performance indicators and explore the causal chain.
This step treats each middle and back office as a company, and begins to delve into the details of the business, not just stay at the business level. Only intervention based on business logic can improve efficiency, or efficiency is only a result, and only in the value chain that considers efficiency in business scenarios can we reverse the source and find MID.
According to the experience of Musheng Consulting, the efficiency of each middle and back office department has a huge room for improvement. As long as you invest in the right people, invest in the right resources (money), and aim at the main performance output goals, high efficiency is inevitable. In other words, any adjustment in the "style of play" can bring about the benefit of efficiency improvement.
For example, the supply chain department may adjust the team building idea and send business partners to several front-end BU, resulting in more accurate front-line demand and more accurate first-line delivery, thereby improving the efficiency of supply chain support.
For another example, the R&D department may adjust the R&D schedule and give priority to investing in a "cost-effective" R&D project, which makes the support for the front-end BU greater. Of course, they may also choose to prioritize a long-term R&D project to capture the value blowout in the later stage, and they can also support the front-end BU more strongly. Here, it is an investment from a business perspective, and if the head of the R&D department achieves this level, he is a "small boss".
Of course, the general level of the middle and back office departments have various restrictions in the existing organizational model, and it is not easy to make these adjustments, so I will insist that the middle and back office departments have room for efficiency improvement.
In the third step, put the "performance indicator + driver" into the efficiency dashboard and set the baseline.
When we find the causal chain of performance improvement, we can grab each indicator on the causal chain, and then assign weights and measurement methods to form a performance dashboard. Of course, for an indicator to be applied, there must be a Baseline. With Baseline, you can judge how much the indicator is called "high" and how much is called "low", and the score of the indicator can be measured. Here, we first want to clarify the principles set by Baseline.
The first is the business retrograde method. Baseline is set up to ensure that this causal chain with performance as the end can function properly. Therefore, the baseline of each indicator should mainly be the delivery of the following link as the standard. For example, in order to achieve the company's operating performance, what kind of financial efficiency standards need to be achieved by the production department, which forms a financial efficiency baseline. For another example, in order to achieve the financial efficiency baseline of the production department, what human efficiency standards need to be achieved, which forms a human effect baseline. Then, each driver can also be derived from the Baseline.
The second is the trend extrapolation method. On the basis of the inverse of the causal chain, the actual situation of the department should also be considered, and some departments have a low level of existing levels and cannot achieve the baseline set according to the business objectives. At this point, it is necessary to change the thinking.
The third is the benchmarking method. Considering that the company is in a competitive environment, based on the performance of the business objectives of the reverse performance of the baseline, you may also consider the benchmarking. This is a difficult problem in itself, if it cannot be broken, it may lead to the base line not being accurate, which will be described later in this article.
In the fourth step, apply the results of the performance dashboard and perform the incentive of the middle and back office departments.
The last step is the most error-prone and must be reminded. Once the effectiveness of the middle and back office departments is measured, we must not roughly allocate bonuses and then simply distribute them according to the level of efficiency.
First, the prize pool in the middle and back office is not allocated from the budget, but from the company's profit (in the strategic loss period and the profit is not good, you can consider the stock/equity appreciation income, strategic profit and loss and other measurement calibers).
As an important part of the salary, the source of the bonus should still come from the grain hit by the front office business unit. And the way to form the middle and back office bonus pool is either mapping, nesting, or cutting... There are several technical approaches here. In short, the middle and back office must be consistent with the front desk goal, the front desk has not made money, the middle and back office performance is useless, and everyone cannot be encouraged to "not be in the same boat". This point may be questioned by many middle and backstage friends, but if you are the boss's perspective, there will be no controversy at all.
Second, the distribution of bonuses between middle and back office departments should not be rigid and applied to the results of performance assessment.
Due to the different performance indicators of each middle and back office department, the contributions cannot be ranked according to the pattern of the tournament, and the prize money is issued in turn. As for how to measure contribution, the performance result is certainly an important factor, but not all factors, and the use of the performance result should be processed with technical data.
04 Three dead knots in the middle and back office performance assessment
In reality, although most people will agree with the idea of assessing performance for the middle and back office, it is difficult for them to push the concept of performance dashboard into practice. There are three reasons for this:
First, the performance of the front desk is vague.
For the middle and back office, the assessment of effectiveness is an assessment, but motivation is far more complicated than the assessment. As mentioned earlier, for the allocation of the prize pool, it must be from the front desk to hit the grain. Not only that, but if we can't quantify the performance of the front office, it's hard to calculate how many resources they're using. Therefore, the efficiency accounting of the middle and back office must be based on the accounting of the business performance of the front desk, otherwise this kind of "transportation of resources" assessment will become self-talk again.
In the methodology of Musheng Consulting, all businesses are divided into profit pools and growth engines, the former is a profitable business with realistic operating value, and the latter is the hope for the future and has long-term strategic value. The profit pool is also divided into one, two, and three levels, and as for the growth engine, it is even more complicated. The performance of the front office, which includes both operating profit and loss, and strategic profit and loss, is a comprehensive result.
The reality is that almost all companies are vague in their measurement of front-end performance, and it is the norm to use profit assessment as a one-size-fits-all. Essentially, it stems from a lack of strategic clarity, where the boss doesn't think clearly about what he wants. Failure to measure performance on a strategy basis results in a confused account. The performance of the front desk is not clear, and the assessment of the middle and back office naturally cannot form a closed loop of verification.
The second is the non-standardization of business processes in the middle and back office.
If the business processes in the middle and back office are non-standardized, it is difficult to measure their output, and naturally they cannot calculate their effectiveness.
When I teach, I almost always encounter the same question - "How to evaluate the effectiveness of the R&D department?" "So far, I've heard this question dozens of times, and my answers to this question and the feedback from students also illustrate the difficulty."
My answer was: "R&D is a process, and every node should be a gate." Formal R & D management requires the time of the gate, and after the gate, the product also has a rating, for example, before the gate is A level, after the gate, it may become S level. Then, based on the two elements of 'time' and 'grading', we can simulate the value points of research and development. On this basis, based on the investment of two types of resources in research and development, their effectiveness can be derived. ”
Hearing my reply, almost all the students replied: "Our R&D process is not so rigorous, it is the R&D personnel themselves who are doing things." ”
So the question is, is this chaotic state of research and development reasonable? At least in my vision, the best companies have their own rigorous R&D processes, and some companies, at each gate, not only evaluate the product level, but also evaluate the "expected ROI "ratio of production". Is this complicated or not? It's too complicated. But that's where people's competitiveness lies.
The fact that a large number of enterprises do not have rigorous business processes does not mean that this is wrong or impossible to achieve, but that leaders in this field are reluctant to standardize business processes. As for why they are unwilling, one possibility is that they do not have enough vision, are used to relying on the feel, afraid of trouble; another possibility is that they are afraid that standardization will lead to the compression of their power space. As a result, they will find all sorts of reasons to oppose standardization, and what "the process is too rigid" and "the actual situation is too complicated" are their words.
Third, after the efficiency of the assessment indicators, there is a lack of baseline, and the indicators cannot be used.
The importance of the indicator baseline was mentioned earlier, and the most difficult way to determine the baseline is the benchmarking method. But this step cannot be bypassed, because the operating performance advantage that is not based on the performance advantage is just a bubble. How to solve it?
First of all, it may require going to the market to find benchmark companies. It is not that a main business is a benchmarking enterprise, everyone has different business models, different strategic playing methods, and different stages... For example, Ali and JD.com are both doing e-commerce, but one of them is a platform model and the other is a self-operated model, can they be compared together? This selection requires technology.
Secondly, even if the appropriate number or type of benchmarking companies are selected, their data must be cleaned to ensure that they are compared with the same caliber. For example, if one company achieves light operation through "outsourcing" and another company still stands on its own, then the human efficiency data of the two companies cannot be directly compared. If you want to compare, you must also "restore" the personnel contracted out by the outsourcing enterprise with an algorithm, or "eliminate" this part of the personnel of the enterprise that stands to the end with the algorithm. This cleaning naturally requires technology.
Finally, as a baseline number, it is highly likely that it is not from a benchmark company, but a composite index or dynamic baseline. Think about it, is it possible to find five benchmark companies and simply take an average of their performance data as a baseline? Technology is still needed.
If you want the middle and back office functions to create business value, you must solve their assessment problems, and you must stick to the data. The courage of self-exploration is commendable, but it is really too difficult to get out of a healthy road in this unknown field. It doesn't matter if it's difficult, it doesn't matter if it's slow, the key is to have the empowerment of professionals, step by step, don't go astray.