The case of the missing management model.

Instead of just latching onto the latest management fad and hoping it will improve your company's performance, shouldn't you start questioning what's really best? Join a group of Joe Fridays in search of the perfect management process.

This is the city. New York, New York. Home to some of the largest, most sophisticated corporations in the world - and the people who run them. It's here that a small group of senior financial officers - known as the Downtown Committee of Financial Executives Institute's New York City Chapter - meets in several sessions throughout 1995.

The charge: to examine numerous management tools that have come and gone over the last two decades. The purpose: to determine why many of these concepts have been ineffective and whether there's a common frame. work, or management model, in which they should be used to make them more useful going forward. The goal: to improve corporate performance by identifying a basic management model.

The main question? What's the missing link that can ensure a management tool's success?

The group goes to work.

JANUARY 11, 1995

The first meeting. The focus: the participants' views of - and experiences with - a wide variety of management tools. Stephen Grace, co-chairman of the group, questions whether senior management overlooks certain fundamentals when it employs such management tools as re-engineering, restructuring, bench-marking, zero-based budgeting and quality initiatives.

Using management information systems as an example, he points out that no system will work unless management performs certain critical steps: "Management can't just push a problem out to some systems analyst or consultant and claim the issue's been solved."

Grace opens the floor for a wide-ranging discussion on how and when management tools have been most efficiently used. John Haupert, also a group co-chairman, states that the Port Authority tried many of the tools they're considering here. Too often, the tool became the "end all and be all" of the process. "Generally, the tools weren't used within a framework of what was done before and what was best for the organization. Instead, the company viewed them as a panacea that should be tried because some management guru proposed them."

Haupert notes that when employees sense this deficiency, they just "play the game," seeing nothing in the effort for themselves or their company. They never get energized to make the tool succeed. "To be effective there must be a framework that makes sense for the entire organization - a total understanding and statement of the final goal," Haupert claims.

Next up is Joe Barkley. Barkley reviewed the serious difficulties Chase Manhattan Bank faced in the late 1980s. Total quality management was one of the tools the bank employed in its initial effort to regain profitability. Chase also brought in consultants who specialized in changing attitudes. But Chase's chairman and vice chairman drove the program, and their belief rippled down. The basic guideline: Either you're in the game, or you're gone.

Barkley notes that not everything in Chase's TQM program worked. But the basic objectives of customer focus, respect for each other, recognition of core values and the return to core businesses have all been successful. "I'm less of a cynic than I used to be," he says. His belief: Assess the tools and figure out what is and isn't useful to you.

Battery Park City Authority's Bob Serpico sees the tools as a system to "discipline" management. "They can keep everyone working in the same direction. And they can help get management back on track, particularly in companies having problems." Serpico further notes how some companies don't seem to need these tools - the disciplines and basics are inherent in the way they do business.

Grace asks, somewhat rhetorically, why this is true. What are these companies doing differently that others are failing to do?

AIG's Chuck Torielli takes the floor, discussing issues associated with re-engineering. "Often re-engineering efforts have created considerable tension," he says. "Instead of bringing people together, I've seen friction caused by the stress put on everyone to cut costs, particularly if it comes at a time when a company is successful, reporting record earnings and continuing growth."

Torielli recalls some areas within firms that eliminated reports or shifted work to other parties. This created situations that later came back to haunt them, such as when a company needed an eliminated report and a smaller staff had to reinstitute it. He makes another point: Getting close to your customer is nice to talk about, but what really counts on the street is a company's bottom line.

Chris Eklund states that Merrill Lynch has adopted added economic value as a key performance-measurement tool. The firm believes that shareholder value is best served by using the concept of economic profit, which measures cash returns on cash capital relative to the cost of capital, as opposed to using a GAAP accounting-based model. Eklund concedes that added economic value doesn't tell firms how to create wealth. But, he says, it's a good place to start, by examining those businesses that have performed truly well over time.

Torielli's view is that companies won't find such a model, because it's really the chief executive who determines the philosophy or the culture of a company. A strong CEO has considerable influence in determining such critical areas as the corporate attitude toward decision-making, growth and acquisitions. Most agree that a capable CEO, whatever his focus and objectives, builds on the fundamental strengths of his company and is also good at execution.

Mark Babij addresses American Express' evolution with TQM and other tools. Babij notes that many management tools are analogous to a carpenter trying to build a house. "You don't look at the tools on your belt to build the house. You look at the blueprint," he says. When management fails to have an accurate blueprint, it's out of synch with what's happening in the marketplace. Then the company's forced to catch up - fast.

That's what happened with American Express and the discount rate charged to merchants. In the early 1980s, American Express could maintain a fairly large discount premium over Visa and Mastercard and still deliver customers. Then, suddenly, some restaurants refused to take the American Express card. Babij says this was a real "wakeup call" that resulted in a series of service establishment initiatives, including some rate reductions. The rate reductions were, in effect, funded by aggressive re-engineering. "If we had recognized earlier that the rate differential wasn't sustainable, we could have had more time to ratchet down our costs," he notes.

Babij points out that American Express now has a blueprint in place that focuses on shareholders, employees and customers, with designated points of arrival for each of these three groups. The company drives its planning process around achieving these points and uses re-engineering to achieve the point-of-arrival cost levels. After that, it employs a continuous-improvement approach to stay there.

So far, the group's discussion indicates the "tools" are helpful when used within a defined framework. When you know where you want to go, a particular tool can help you get there. Michael Goldman concludes the day's meeting with the idea that it will be years before we see, first, whether the potential "instabilities" that certain tools create permanently impair the quality and loyalty of the workforce and, second, whether these efforts have had a positive financial impact. That's because the financial machinations undertaken in connection with many management tools distort financial reports. Companies can accrue extremely large costs in connection with management programs. This results in firms showing improved profits over the next several periods, even though these profits result from large writeoffs taken at the front end.

FEBRUARY 28, 1995

As the group reconvenes, there's general agreement that management tools are valuable in identifying how to do what needs to be done. But they offer no particular insights into what management needs to do. Neither do performance-measurement techniques - added economic value, return on equity, earnings per share and other non-financial measures.

Constructing a simple chart might be helpful in pinpointing the problems, so the group draws a three-column chart. The left-hand column, titled "How to Do What Needs To Be Done," contains a partial list of the management tools. The right-hand column, titled "How To Measure What Has Been Done," contains a partial list of performance-measurement techniques. The middle, blank column represents the missing ingredient - the illusive basic management model, or "What Needs to be Done."

To fill in the missing element, Grace wants to examine what investors, creditors and other business leaders say management should address. He thinks that both the implicit and explicit guidelines that investors like Warren E. Buffett and John M. Templeton follow may be factors to focus on.

For example, Buffet focuses strongly on industry characteristics, market positioning, the economic model of the firm, its capital structure, the strength of its management team and its management process. An examination of Templeton's activities suggests he holds similar views.

Their investment approach is further supported by the key questions creditors tend to raise in the case of troubled investments, as well as the guidelines creditors follow in assessing the viability of a business. Here, again, the focus is on industry characteristics, market position, economic models, capital structure, management and management processes.

A basic issue is how and when management determines if something needs to be done - and what that something is. The group agrees this should be an ongoing process demanding management's attention at all times - particularly during good times, since it's in "up" cycles that adverse conditions begin and go unnoticed. Babij notes how - despite record earnings - American Express Financial Advisors developed a team to anticipate what kind of firm would replace AEFA over the next decade. The objective: to become that firm before the competition does!

Despite this contrary example, most members of the group believe that management gets complacent during good times, voting against change and preferring instead to hold on to what it has. In more negative environments, it's easier to focus on corrective action because of the perceived need to do something - anything - to turn around a difficult situation.

There's a growing sense of frustration as the second meeting comes to a close. Good thoughts have been exchanged, but the discussions haven't led to a greater understanding of what management needs to focus on or how to clearly express what a management model should look like.

APRIL 12, 1995

At this meeting, the group decides to focus exclusively on what needs to be done to improve organizations. There's general agreement that without an understanding of the basic management model, the long list of available management tools won't be particularly useful.

Haupert discusses techniques broadening one's thinking. He points out that beliefs remain the same, behavior won't change no matter what tools or practices companies employ. Lang, Haupert and Barkley all stress the difficulties in getting the troops to sign on to the need for change before it becomes a survival issue. The group reaches no consensus on whether such an effort will be successful in the absence of a significant external force threatening an organization's very life.

Goldman notes that the enormous compensation packages at many firms may cause some senior managers to maintain the status quo. Large severance agreements also can take away management's incentive to change because managers can't lose financially, even if they're terminated for a dismal performance record. He wonders if using a "general partnership" organization structure might create a stronger incentive for continued oversight. Eklund agrees, pointing out that directors paid with stock will continue to reassess operations even when things are good, in the hopes of doing better.

So what's the proper role of the financial officer in the management oversight process? Barkley says the financial officer can simply report results - or point out potentially critical issues. He's in a unique position, removed from the inevitable competition that arises among different areas of a firm. Goldman says he isn't sure whether financial officers in public corporations can be objective, since they've gone online with projections to the marketplace. But Barkley's position is that financial officers are the "honest brokers" in both numbers and resource allocations.

As the meeting concludes, there's a feeling that progress is being made even though the group has yet to reach any definitive conclusions. Another meeting is scheduled.

MAY 23, 1995

Prior to the May meeting, the team of Haupert, Grace, Babij, Barkley, Serpico and Goldman work to consolidate material from the first three meetings. They develop a framework - called the performance improvement loop - in response to the call for a basic management model. They intend to use the PIL in a discussion that will drive toward an agreed-upon model framework.

At the meeting, Haupert and Grace explain how the PIL represents the integration of management concepts and tools with performance-measurement techniques and a fundamental management focus, all to help achieve continued performance improvement.

Focusing on "what needs to be done," the group contrasts the views of investors, creditors and leading business thinkers such as Peter Drucker and Allied Signal's Larry Bossidy. The positions of the parties are very close, and taken together, they form the basis for defining the fundamental management focus:

* Examining the industry, its characteristics and dynamics;

* Understanding and improving the business unit's position in the industry;

* Understanding and improving the business unit's economic model;

* Making modifications to improve the capital structure; and

* Identifying opportunities to improve the management team and management processes.

These are deemed the most important issues for senior management to focus on, leaving more direct operational matters to lower-level management.

With the fundamental management focus defined, the PIL can be amplified to show more clearly how the focus relates to management tools and measurement techniques. The initial step - understand where you are and visualize where you want to be - builds directly on the fundamental focus. Only when a firm thoroughly understands and defines where it is and where it wants to go can it progress to the next steps: Select the appropriate concepts and tools, and set the designated targets. Then it can measure results using the appropriate performance-measurement techniques, as determined by the firm. The process is displayed as a loop because it's dynamic and continuous. (See the chart on page 47.)

The group members were comfortable that the PIL is a good visual presentation of how management should behave if it's to continually re-invigorate, re-energize and strengthen its business. And there was this important realization: The reason management tools don't work in most instances is because they're not used as part of a well-thought-out program that all staff members buy into.

As the meeting draws to a close, the members muse at the time it has taken for a group of seasoned professionals to reach a fairly evident conclusion: that management tools must be used in the appropriate framework - one that's applied continuously - to succeed. While the conclusion is simple, it's not taken to heart by most firms. The more common approach is for management to apply one or more of the tools in a vacuum, without a well-thought-out program and without clearly defined goals as part of an overall management model.

OCTOBER 10, 1995

The epilogue. The discussions in the four-meeting series generated so much interest and enthusiasm among the participants that the interchange among the small group continued throughout the summer and into the fall. While all admitted the PIL represented the integrating framework, the group members had several ideas about how to graphically represent it and apply it to particular firms and situations.

There also was the important recognition that the findings appeared to contradict much of the current literature on management tools, which emphasizes the tools are an end in themselves. The group saw them instead as being effective only within the appropriate framework, as concluded earlier.

With that, the members of the group decided they had accomplished their mission, at least for now, possibly to reconvene at a later date ... on another topic.

RELATED ARTICLE: The Executive Sleuths

Here's a list of the main participants in the round-table discussions reported in this story.

MARK BABIJ, vice president of corporate analysis and planning, American Express

JOE BARKLEY, vice president and controller of the insurance products group, Chase Manhattan Bank, N.A.

CHRIS EKLUND, vice president of strategic business evaluation, Merrill Lynch

MICHAEL GOLDMAN, CFO, Frederick Goldman Inc.

STEPHEN GRACE, principal consultant, Zolfo, Cooper, L.L.C./H.S. Grace & Company Inc. Consulting Alliance

JOHN HAUPERT, treasurer, the Port Authority of New York and New Jersey 

THERESA LANG, senior vice president and treasurer, Merrill Lynch

BOB SEASS, senior vice president and group comptroller, Dean Witter, Discover & Co.

BOB SERPICO, vice president of finance and treasurer, Battery Park City Authority 

CHUCK TORIELLI, assistant comptroller, AIG Domestic Brokerage Group

RELATED ARTICLE: Enter the Performance Improvement Loop

Instructions: Start at #1. Continue around the loop - uninterrupted, forever.

1. UNDERSTAND WHERE YOU ARE AND VISUALIZE WHERE YOU WANT TO BE

Fundamental Management Focus

* Industry Picture - Choices

* Market Position - Modifications

* Economic Model - Improvements

* Capital Structure - Adjustments

* Management Team and Processes - Improvements

2. SELECT TOOLS AND PURSUE TARGETS

Concepts and Tools

* Re-engineer

* Restrategize

* Benchmark

* TQM

3. MEASURE RESULTS

Performance-Measurement Techniques

* EVA 

* MVA 

* ROE

* EPS 

* NFM(*)

* Non-financial measures

RELATED ARTICLE: What Do You Think About It?

Hearing about the sessions relived here, several executives expressed an interest in getting more information on the proper use of management tools and learning about other executives' experiences with a broad range of such tools. The result: Plans are being laid for a special one-day forum to be held in New York in mid-May. For further details, contact H. Stephen Grace at (212) 2135555 or Susan Koski-Grafer at Financial Executives Institute at [phone].