Beating silos into shape
Silos - and how to eliminate them - present a perennial management problem. Below, Professor Sir Andrew Likierman explains how performance measurement can help get rid of these potential saboteurs.
Silos... most organisations seem to have them. Many of us moan about them and feel we should break them down. They are extremely resistant to our efforts. And no sooner have we had some small success than they infuriatingly reappear.
Yet it is not surprising that the problem of silos - those divisions inside organisations which inhibit the organisation as a whole from achieving its objectives - is so widespread. As soon as there is devolved responsibility through decentralisation, there will be a temptation for those running one part of the organisation to promote their own part, even when that might be at the expense of the organisation as a whole. And the temptation is even greater when backed up by financial incentives based on how much we achieve for our part of the organisation. Indeed, 'silo mentality' is a very rational response to certain kinds of incentive.
Performance measures seen as a main cause
Performance measures themselves are often seen as one of the main causes of silo mentality - only one because there are others linked to such age-old problems such as managing complexity through disaggregation and trading off specialisation and coordination. But when the focus of performance measurement is on subsidiaries, divisions or other decentralised units, rather than the whole organisation, the silo problem looks as if it is self inflicted. And finance is often implicated by being seen to have devised the wrong kinds of measures.
Problems of this kind are certainly not confined to the UK, or to certain industries, and can be identified with some of the best-managed organisations. In the US, the pharmaceutical giant Johnson & Johnson at one stage had no fewer than 13 of the group's own companies selling to hospitals. In Japan, Sanyo was not atypical in expressing concern that its divisions operated as separate fiefdoms that did not communicate.
The reaction to silo problems has usually been to focus on getting decision-taking back to the centre. But that brings complaints about bloated bureaucracies and slow decision-taking. After a while, it is often back to decentralisation... and those silos again. The last century's most extreme example of this seesaw was the former Soviet Union, where planners switched the economy from centralised to decentralised management and back over many decades in a vain, and ultimately fruitless, attempt to find a way to run the economy efficiently.
Are silos always bad? Let's be careful here. The word 'silo' is itself negative. 'Managers empowered through devolved responsibility' arguably describes the same set of circumstances. And 'breaking down silos' (another value-loaded term) can result in disempowered managers and imprecise goals. Internal transfer pricing directly promotes silos in the form of individual profit centres. Getting rid of these may well help on silos, but may also remove important elements of transparency and personal accountability. When GlaxoSmithKline split its research and development into a number of centres of excellence, it was to break down what was seen as a central bureaucracy, and to get the benefits of flexibility and team-building. The reorganisation acknowledged - indeed, welcomed - tensions created in competition between the units.
Four ways of grappling with silos
But that still leaves the majority of organisations grappling with silo problems. Set out in this article (and summarised in the box on page 7 'Taking action - a summary') are four ways to do so.
1. Improve the budgeting framework
Just as budgets can reinforce silos, so they can be framed to encourage cross-silo working. One approach is to align the budget to the customer rather than the services which supply the customer or administrative units.
Another way of using the budgets is to ensure that they fully reflect any cross-silo projects, events or processes.
On a more limited basis, the focus of budget responsibility can be contribution rather than profit. An example is using a single budget for functions such as finance or marketing which were previously treated as part of divisional budgets. Moving budgets such as finance and marketing into the centre turns divisions into contribution centres rather than profit centres. A budget based on contribution reinforces the role of the corporate centre and a company-wide, rather than divisional, perspective.
2. Incorporate appropriate measures
When responsibility is decentralised, measures are generally designed to accentuate the performance of the subsidiary, the division or the unit. Performance is not profitability but subsidiary profitability, not margin but divisional margin. To overcome the problem, measures need to reflect what is wanted as cross-silo behaviour.
The most straightforward way is to find cross-function measures. At GE, such a measure was used to make sure the interests of sales and marketing were aligned. The sales pool, to which both commit, was known as the 'the number' and was based on integrated metrics.
The GE example shows that improved measures do not need to involve organisational change. Tetra Pak uses measures that focus end-to-end on the customer. The company commented, "Our new scope of measurement is 'from order to performance' - meaning the time from when the customer places the order until it is installed and up and running according to guaranteed performance criteria that we sold them."
Procter & Gamble (P&G) moved to managing the ultimate result through focus on the supply chain to the customer. Indeed, they made the link to customer interests in a highly original way. As the company explained "We seek to reduce overall supply chain time by one third. What is unusual about this metric is that it is not an internal P&G measure of supply chain time but rather spans from our suppliers through to our retailers. In other words the reductions might not even occur within the walls of P&G."
A cross-silo scorecard can be used to bring together appropriate measures. At DuPont Engineering Polymers, the scorecard was constructed round five strategic themes that cut across units, regions and functions, highlighted corporate priorities and made it easier to understand why resources were allocated. The procurement team at Aetna, the US health and benefits provider used a scorecard to help counter silo effects in IT procurement by linking corporate and personal measures.
This is an extract from the Finance & Management Magazine, Issue 179, July/August 2010.
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