Over the past 30+ years, I've had the opportunity to work with many organizations around the world. During this time, I’ve been able to observe and reflect on the things that I've seen and experienced particularly in terms of organizational behavior. These include how established organizations with deeply embedded cultures respond to and manage change; how they evolve and deploy strategies, develop goals and objectives and how well, or not, they execute those strategies.
Underestimating Organizational Misalignment
One of the most consistent weaknesses I've found is how poorly organizations, including successful organizations, align their strategies, goals, objectives, resources, tools and execution processes. In fact, Organizational Misalignment (OM) with its insidious consequences, is an all too common, but often not easily recognizable, phenomenon in many companies. A particularly dramatic instance of OM is the establishment of conflicting goals and objectives which often leads to confusion and an inability to execute effectively.
In today's world many companies have been able to expand their global reach by migrating their service offerings to the cloud. Such migrations often necessitate changes in an organization’s business model(s). Yet, companies often proceed with a wholesale adoption of new technologies and associated business models without a complete appreciation for the implications of the new models.
The Case of Company X
Take the case of company X. Like most other companies, Company X wants to grow its revenue as well as its market share. Following its migration to the cloud, it has taken the decision to move from a more traditional revenue model to a SaaS model, and has therefore changed the way it measures its business’ success. It has redefined its key performance indicators (KPIs) and has decided that its single most important KPI will be growth in MRR (monthly recurring revenue) even though revenue growth of its core product is not optimally positioned to be measured on a monthly basis.
At the same time, Company X uses a more traditional measure of the financial health of the organization by focusing on improving EBITDA. Because of the nature of its sales cycle, revenue growth is slower than expected and the desire to improve EBITDA has led to the decision to cut expenses. Expenses in areas of those critical to growing sales were the first functional areas to be cut and, as expected, sales growth has suffered significantly.
Negative Implications
In a true SaaS model, at least in the very early stages of implementation, investment is the key to growth. Therefore, the focus on EBITDA, to a great extent, can be construed as a constraint on revenue growth. This conflict in and misalignment of strategy, goals, objectives, measures and processes inevitably led to organizational confusion and dysfunction and directly impeded the ability of the organization to execute effectively. It also resulted in the Company X’s failure to realize its goals and objectives and distorted the underlying issues associated with underperforming areas of the organization. Furthermore, the crisis in confidence in the organization’s leadership ignited distrust across the organization which resulted in significant turnover and even greater organizational instability and pressure on remaining personnel.
The Takeaway
For Company X, the desire to simultaneously increase MRR while reducing EBITDA is a classic example of the old cliché which says, “you can't have your cake and eat it too.” Most importantly, the case of Company X demonstrates the inherent conflict between old and new business models and the pitfalls associated with transforming to a new model without alignment between strategy, objectives, KPIs, product and processes and a failure to truly understand the requirements and outcomes of the new business model itself. The effects of organizational misalignment are far more extensive and debilitating than this single example. OM can be avoided through careful consideration and alignment of the drivers that move a company from where they are to where they want or need to be. In subsequent editions of The Observation Deck we will examine the full gamut of organizational dynamics leading to organizational misalignment at each step in the process.