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How Do Organizational Diagnostics Help Grow Your Business?

What is operational excellence?

 “When GAAP standards are adhered to, financial reporting provides an accurate measurement of business past performance” - Andrea Sotgiu, Managing Director, Lavan Financial Group

If we think of a business as an engine, the output being operational performance measured by financial results - a key financial measurement is profit with sales, expense and. cashflow #s delivering essential insight- Thanks to GAAP and a regulated industry of accountants we can rely on the financial reporting of the business for historical performance. 

Besides some rolling numbers, financials report what was achieved - lagging data. Reliable (if GAAP standards are adhered to) but those financials do not tell us about the dependability of future performance. To understand how well the business is running to drive outcomes that matter, we need to look under the hood at the operational business engine; the business drivers, system, primary and support activities that combine to produce futures results.

Operational excellence is a high standard of operating throughout the broad activities that combine to drive reliable, and dependable future performance - It is generally understood as the foundation of a valuable business. 

Naturally, a measurement of both financial performance and operational excellence provides an invaluable view - An evidence-based picture of a company’s operational status quo, pointing to strengths, weaknesses, and the capabilities to deliver future profitability is the basis of organizational diagnostics. Where does the business stand across all activities, how healthy is it and capable of sustainably driving results that matter? Every service we provide is underpinned by this premise. Data can be collected for all drivers, activities and disciplines including human capital, typically the highest business cost. When talent is harnessed through organizational health and aligned to strategy the results become predictably reliable.

Organizational diagnostics are at the heart of performance systems informing business health through performance indicators and outcomes that matter. Well informed a a business is armed to make better more insightful decisions - as can partners and associates of the business -to steer a winning path and more resilient path.

Due Diligence - An Example

Bank’s do not lend based on financial reports alone, they require some further level of due diligence, and view filtered through underwriting criteria to determine risks of repayment default. Similarly, historical financials and quality of earnings reports are not adequate insight into risks for most buyers. Certainly not astute buyers, institutional buyers like PE firms will conduct thorough due diligence to determine more reliable measures of operating quality. They will examine the metrics that drive future profitability, tangibles, intangibles, and risks that impact enterprise (equity) value, revenue continuity, upside and operational strength. Can the business operate without the exiting owner’s presence, how diverse are the clients, the proven process to obtain new business, client retention, customer satisfaction, segmentation, margin trends, brand recognition, concentration risk, recurring revenue, quality of earnings the list goes on.

  
Robust due diligence reveals operational strengths and weaknesses, and a measurement of efficacy to drive future profitability. To optimize value a business must strive for operational excellence.  

Business Drivers of Operational Excellence

The primary and support activities (captured in M Porters' value chain) that take place within a company represent the gears and belts of a business engine. 

Categorized into 18 drivers, each is integral to value creation and overall output. When optimized, and working well together they produce operational performance.

Measuring the status and performance of each driver through a diagnostic assessment, provides a basis to understand performance dependability, help determine a reliable enterprise value, and if we wish, to apply resources to solve any operational weaknesses and optimize growth and value.

Research Shows 18 Factors Drive Operational Effectiveness:

Market Drivers

  1. Growth
  2. Large Potential Market
  3. Market Share
  4. Recurring Revenue
  5. Barriers to Entry
  6. Product Differentiation
  7. Brand
  8. Margin Advantage
  9. Customer Diversification

Operational Drivers

  1. Company Overview
  2. Financial
  3. Sales & Marketing
  4. Operations
  5. Customer Satisfaction
  6. Senior Management - Talent Optimization
  7. Human Resources - Talent Optimization
  8. Legal
  9. Innovation

To be of value, and help make systematic improvement possible we need to observe what’s relevant, and matters across all business drivers. We require a “barometer” of standards at which highest performing companies achieve statistically proven best in class results.

Operational Standards - Best in Class Practices

Observing and documenting activities across the business drivers of peak performing companies provides an understanding and basis of private business standards, best practices and a metric for operational excellence.  Capturing qualified information, quantifying, comparing and benchmarking against industry best practices enables identification of value gaps - We can then define how to close those gaps, prioritize and choose to act to drive desired outcomes - improve revenue growth, increase enterprise value and strengthen operationally.

Diagnostics Measure Operational Excellence - Methodology

We use a patented methodology to gauge performance against a set of private business standards first developed at MIT, designed to measure operational strength and quantify company value as an operating asset. Reporting includes the present strengths of the business and offers suggestions for improvements to enhance overall growth, profitability and operational strength, categorized by most critical issues with highest ROI impact.

Report Sections

  1. Executive Summary: a brief overview of our findings
  2. Red Flags: important issues that can diminish the operational strength of your business; operational strength is key to unlocking growth
  3. Key Actions: a list of key actions you and your senior team can take to strengthen your business and drive revenue growth, and or enterprise value
  4. Driver Detail Reports: a complete analysis of your company’s 18 Value Drivers
  5. Q&A Bank: a summary of all assessment questions and your responses, a calculated Business Rating, and a listing of the contribution of each response to your Value Gap

Clients can choose to take project task goal recommendations and move ahead independently. 

Alternatively, following phase(s) options are available and discussions on next steps occur;  audit or evaluation of existing strategy, and or strategy formation, and implementation choices. 

We use a quadrant graph to help determine planning priorities and objectives

Growth Quadrant Graph


Once objectives are confirmed we develop a scope of project plan. 

Scope of Project

With objectives determined and prioritized we collaborate to develop a Scope of Project (SOP) as a working draft of a potential engagement. We define output, success metrics, tangible/intangible benefits, roles, responsibilities, conditions, timelines, and a collective understanding of overall ROI.

Engagement Agreement

The SOP is rationalized by a series of discussions and becomes both a de facto roadmap for the project and the basis of an engagement agreement. Our agreements are both project-related targeting specific initiatives and or retainer-based.

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