Forming a Goal Tree: Planning Lesson for Goal-Oriented Companies
Company employees should share responsibility for the final financial result with their management, as a really efficient business does not involve people who “simply perform important functions”, but a team of result-oriented professionals, with each of them understanding quite well what they do and why they do it.
The goal tree method represents a good instrument for subordination of employees’ objectives to the general goals of the company. This method enables the company management to structure and visualise the strategy for achieving their general goal.
The major objectives of the method are as follows:
• to develop a plan for achieving the company’s general goal by implementing a number of imbedded goals of a lower level;
• to distribute responsibility and competences among subdivisions and employees, to achieve the company’s general goal;
• to form the employees’ understanding of their contribution to the achievement of the general goal;
• to assess efficiency of the company’s organisational structure;
• to determine the key performance indicators of the business that the personnel motivation system will be based on.
The structure of a goal tree is based on the company’s current organisational structure. In case of Corum Group, the goal tree has three levels: the Group’s CEO and two management levels. The first of them is represented by the subdivisions of the Corporate Centre; the second one is represented by the production divisions and the trading companies. The decomposition is made according to the organisational structure, with the branches of the goal tree divided into sub-goals. Each organisational unit of the Group receives a clear definition of its operational goal; information is provided as soon as it becomes updated. In actual practice, it looks like this: the subdivisions prepare and submit their own budgets for approval (goals always come “from below” at Corum); on their basis, the annual business plan is compiled, and after that, each subdivision is given their objectives for the future period. The major methods for achieving the objectives are described, too. For example, “in 2015, it is planned to increase the division’s sales by 40% due to the increase in production volumes in physical terms, the conclusion of new contracts, the price growth in line with the market situation”.
When the division’s goal is defined clearly, this helps efficiently distribute areas of responsibility and competences. It also increases employees’ motivation due to their feeling of being a part of the larger unified whole and a more large-scaled result. Besides, a correctly formed goal tree may identify gaps or needless links in the current organisational structure.
Indicators of success: KPI
To assess the level of goal achievements on a regular basis, the tree depicts key performance indicators (KPIs). Each goal has a number of indicators (not exceeding seven), which characterise the degree of advancement of organisational units in achieving the goal during the certain period. To define these indicators is as difficult and responsible as to build the goal tree itself. The key indicators should provide exhaustive, but not excessive information and be defined according to “the less the better” principle. The correctly selected key indicators facilitate in assessing the degree of achievement of the general goal and the degree of each subdivision’s involvement in this process. Besides, they help trace whether the company is moving in the right direction and due to what factors it is.
The KPIs included in the goal tree should contain the final result that we want the employees of a certain business subdivision to reach. It should not be just a profile and a part of the result, but the final product, which in the end will enable the company to earn more money.
Examples of KPIs
For the CEO:
• Free Cash Flow (FCF)
• Company’s EBITDA
• Company’s Net Promoter Score (NPS) with regard to assessment of key customers
• Labour efficiency per one company’s employee
• Index of loyalty to the shareholder in the areas of the business presence
For a product division director:
• Division’s FCF
• Division’s EBITDA
• Share of overdue orders
• Coefficient of production accident severity
• Division’s NPS with regard to assessment of key customers
For the Financial Director:
• Timeliness and correctness of issuing managerial, accounting and IFRS reports
• Cost of the credit portfolio
• Compliance with the established covenants
• Company’s current capital turnover ratio
• Bank transactions expenses
• Economic effect of investment projects in the company’s portfolio
• NPS of the financial management function with regard to assessment of internal customers
Focus on result
It is not easy to form a goal tree for a large machine-building holding with a complicated matrix financial structure. At Corum, different subdivisions are in charge of the same financial indicator, and their goals and KPI should be defined without duplication. We managed to build the optimal scheme by introducing the matrix responsibility principle and by switching to the process management model. The mechanism of matrix responsibility can be illustrated as follows: each trading company of Corum Group is in charge of selling the entire product portfolio in their market; at the same time, the goal of a division is to sell its own products in all markets. Consequently, there is a crossing of responsibility areas. Basically, there is cross responsibility for the common result.
Within the functional management system, each organisational unit was in charge of their own part of the work, but there was no synergy: the balance of incomplete production and accounts receivable used to be accumulated. All this used to worsen liquidity and to make current capital management rather complicated. We understood that the functional model would not enable the Group to develop at the moment of economic peaks and to operate steadily during the crisis. So, we started moving towards the process management model, a model focused on the result. We began introducing changes even earlier than could understand the whole theory; the interactions between the major processes and the algorithm of cooperation between the subdivisions were described post factum.
We have been systematically working on delegating powers from the centre to business areas and trading companies for several years, since 2012. In the end, the Corporate Centre has concentrated strategic (objective setting, method defining) and control (monitoring of the Group’s major KPIs) functions, while the operational work is performed by the second management level, the production divisions and the trading companies.
As the process model is focused on achievement of the general goal, the Group’s volume of income and the cash flow have risen to the fore instead of the sales volume. Therefore, now all heads of Corum’s departments easily use such terms as margin, operational cash flow, fixed costs, EBIDTA. They compare the current figures and strive to achieve planned indicators. To some part, they compete with each other and conduct internal benchmarking. For instance, the correlation between the fixed costs and the sales proceeds is calculated for the trading companies. In such a way, we assess the cost of their services per product unit sold. The directors of the trading companies compete with regard to this indicator: those who fall behind strain after the leaders, contributing to the increase in the common result.
As we could see, the goal tree method and the matrix responsibility system, as well as the process management model, are the business practices that help direct the efforts of hundreds and thousands of employees to reach the shared goal, i.e. the financial success of the Group, like the labour of the entire beehive turns into the shared pot of honey. In such a hive, every bee understands its goal – not only murmur, create sounds, but to make honey, the end product.