In recent years, a number of Nordic companies have tried to capture synergies by centralizing functions, only to find that in optimizing those individual functional efficiencies they've compromised their overall advantage. The good thing is that there are ways to avoid these kinds of traps - read about them in our white paper on the subject

1. SILOS OR SYNERGIES?
August Whitepaper on Performance Management
June 2017

2. JUNE 2017 WHITE PAPER BY AUGUST 2/11
“Capturing synergies
is especially critical in
our increasingly digital
business world, where
companies are finding
it more and more
difficult, or even impos-
sible, to stay competi-
tive if they are not fully
aligned with customer
expectations.”

3. JUNE 2017 WHITE PAPER BY AUGUST 3/11
SILOS OR SYNERGIES?
In the digital era, cross-organizational alignment
is essential for success.
The fundamental idea of any firm is to create something greater
thanthesumofitsparts.Organizeyourresourcesmoreefficiently
or pursue a better strategy than your competitors and you win.
But as with a lot of business, only the theory is simple. When
they try to capture new synergies, companies often stumble.
Capturing synergies is especially
critical in our increasingly digital busi-
ness world, where companies are
finding it more and more difficult, or
even impossible, to stay competitive
if they are not fully aligned with cus-
tomer expectations. Keeping up with
customers requires integrated oper-
ations that enable the company to
fulfill their needs better while lowering
unit costs – a challenge that cannot
be met if the business is a collection
of functional silos.
Unfortunately, in recent years, a number of Nordic companies
have accidentally headed in the opposite direction. Consider,
for instance, the many companies that have tried to centralize
important functions such as sourcing and the supply chain, only
to find that in optimizing those individual functional efficiencies
they’ve compromised their overall advantage.
“In recent years, a
number of Nordic
companies have
tried to capture
synergies by cen-
tralizing functions,
only to find that in
optimizing those
individual functional
efficiencies they’ve
compromised their
overall advantage.”

4. JUNE 2017 WHITE PAPER BY AUGUST 4/11
On paper, centralizing these functions should have created
some very profitable economies of scale, and it did. Yet these
gains have often been offset by expensive inefficiencies created
by lack of coordination between functions or clumsy collabora-
tion between the functions and the business units.
The biggest problem has tended to be that the mechanics of
performance management have not kept up with the strategy
and revised organizational structure. Functional centers and
business units are designed and their managers incentivized to
maximize their internal efficiency. Without guidance or the right
incentive to maximize the company’s overall good, individual
units and offices fight for their own interests.
We often see examples of this kind of shortsightedness. For
instance, a Nordic industrial leader wanted to embed a con-
sistent way of working across its multi-country, multi-location
operations, and created a centralized functional organization to
implement this set of processes. However, although the com-
pany centralized its functions, it still measured performance on
the local level, creating incentives for local units to focus on
optimizing their own performance instead of looking for syner-
gies within the new organization. In the end, executives told us,
they had accidently built a company that had all the costs but
few of the benefits of a highly-centralized enterprise.

5. JUNE 2017 WHITE PAPER BY AUGUST 5/11
RETHINKING PERFORMANCE
MANAGEMENT
How do you avoid these kinds of traps? In our experience,
companies can only overcome this kind of structural sub-opti-
mization by improving their performance management.
Performance management of company-wide functions consists
(or should consist) of the same high-level processes – target set-
ting, planning and forecasting, and follow-up – as “traditional”
performance management. Centralized functions typically have
all these processes but make no serious attempt to synchronize
them with any other parts of the business.
Fortunately, we find that three practices can correct many of
these problems (see figure below):
1
32
Synergies
realized
Align targets
and plans
across the
business
Act like
one company
Tailor KPIs to
align with the
function’s P&L
contribution
Figure – Three performance management practices to avoid sub-optimization
and enable realization of synergies in centralized functions

6. JUNE 2017 WHITE PAPER BY AUGUST 6/11
“Top-down targets are an
efficient way to improve
plan alignment from the
beginning. Such targeting
helps ensure that the focus
of the planning stays on
topics that are most crucial
to the health of the busi-
ness, rather than the pet
projects of particular func-
tions or business units.”

7. JUNE 2017 WHITE PAPER BY AUGUST 7/11
1
ALIGN TARGETS AND
PLANS ACROSS
THE BUSINESS.
Challenge: Functions often
prepare their plans without
proper alignment with each
other. They may lack a common
language, common metrics, or
note only monetary accounts.
This limits their opportunity to
discuss concrete measures and
actions and achieve alignment. Functional plans can be hard to
synchronize. One common example is working out forecasts
between sales and production planners. For many companies,
this ends up being a chicken-and-egg problem: production
costs depend on volume, but volume depends on production
cost and sales price. Not aligning the plans properly can result
in increased inventory levels, poor availability and delivery accu-
racy, excessive fixed costs, and a general lack of operational
flexibility. When in spite of those obstacles, unit planners finally
learn about the other functions’ plans, they spend a lot of time
adjusting their plans in light of this new information.
Solution: Top-down targets are an efficient way to improve plan
alignment from the beginning. Setting top-targets requires some
effort by the C-suite, but makes it easier to align functions. Such tar-
geting helps ensure that the focus of the planning stays on topics that
are most crucial to the health of the business, rather than the pet pro-
jects of particular functions or business units.
“Functions often prepare
their plans without proper
alignment with each
other. They may lack
a common language,
common metrics, or note
only monetary accounts.”

8. JUNE 2017 WHITE PAPER BY AUGUST 8/11
2
TAILOR KPIS TO ALIGN
WITH THE FUNCTION’S
P&L CONTRIBUTION
Challenge: Key Performance
Indicators (KPIs) are a typical
point of failure in functions’ perfor-
mance management. Functions’
KPIs often focus only on the func-
tion itself, with no clear linkage to
the P&L. This can create situations
where functions and their sub-
units focus only on their own unit’s
performance, not on the whole company’s, leading to a high
level of sub-optimization from financial perspective. Customers
also suffer collateral damage of sub-optimization, as the com-
pany is not aligned to meet their expectations. With no incentive
to optimize the whole and with no common language, functions
will often lack a true understanding of how sub-optimal they are
and what they need to do to improve. Linking functions’ KPIs to
the P&L is critical to align efforts and break the silos.
Pursuing the unit’s goals at the expense of the greater good can
lead to absurd results. Imagine, for instance, this situation: a pro-
curement officer sits down to negotiate with a supplier. He wants
a lower price on a familiar SKU. The supplier wants a higher one.
Eventually, without the procurement officer quite realizing what’s
happened, the supplier accepts the lower price on that SKU but
then turns around and persuades the procurement officer to
take more of his newer, higher-margin products. On paper, it’s a
win-win for buyer and seller. The only loser is the company.
“Key Performance
Indicators (KPIs) are a
typical point of failure in
functions’ performance
management. Functions’
KPIs often focus only on
the function itself, with no
clear linkage to the P&L.”

9. JUNE 2017 WHITE PAPER BY AUGUST 9/11
We’ve seen this on a larger scale too.
IntheFinnishbasicmaterialsindustry,
many steel and paper mills lost con-
trol of their own P&Ls to become cost
centers of a larger company-wide
supply chain. Organizers believed
this would make it easier to optimize
what was produced and where and
to adjust the overall volume to actual
market demand. Instead of fighting
for local profits, the mills were asked
to chase KPIs that focused on safety,
volume and productivity.
Changing the role of the mills did improve the company’s
supply chain optimization. However, the new prescription had a
nasty side effect: the mills began to overlook costs and profits.
Executives found it difficult to introduce new KPIs that would
properly replace the P&L and keep the focus on the things that
mattered most to their shareholders.
Solution: Each function should clearly understand its contribu-
tion to the P&L of the whole firm as well as the profitability of
its own business unit. For example, sourcing should feel accountable
for overall external spending, not just unit costs. Production should
analyze its performance and set ambitious targets for unit costs and
report the difference between target and actual production expenses.
Tailoring KPIs to align with the function’s P&L contribution is a practical
means to achieve this. Of course, business units and functions should
still have other KPIs that ensure customer orientation, as well as their
own special KPIs, but the big picture should always come first.
“Each function should
clearly understand
its contribution to
the P&L of the whole
firm as well as the
profitability of its
own business unit.
Tailoring KPIs to align
with the function’s
P&L contribution is
a practical means to
achieve this.”

10. JUNE 2017 WHITE PAPER BY AUGUST 10/11
3
ACT LIKE
ONE COMPANY
Challenge: Lack of sufficient
collaborationandcoordination
between business units and func-
tions makes it difficult for them to
operate in a coherent way. When
line managers do not understand
the big picture, they generally cannot act for the benefit of the
whole. At a very pragmatic level this can mean, for example,
that many key stakeholders are not involved in critical meetings
and decisions are made in silos without understanding all the
relevant angles. Supply chain people, for example, might be
left out of R&D development meetings, even though the officers
have important insights on production costs, quality issues,
component availability, and make-or-buy opportunities.
Solution: When a company acts like one company, working
together to achieve a single goal, great things can happen. In
a successful Sales and Operations Planning (S&OP) process, for
example, collaboration between functions and business units is wired
to optimize the whole. Done right, S&OP ensures that the right func-
tional and business unit decision makers have the right information
to strike an optimal balance of supply and demand. This kind of prag-
matic implementation aligns their functional efforts and focuses the
units on fulfilling a single goal. Such a well-embedded process instills
a common culture that prizes the company’s larger interest, which in
turn encourages more collaboration.
“When a company
acts like one company,
working together to
achieve a single goal,
great things can happen.”

11. JUNE 2017 WHITE PAPER BY AUGUST 11/11
FROM PLAYERS TO TEAM
A great product, a strong organization, a lucrative target market
– many companies have everything they need to succeed but
throw their opportunity away by making two common but pre-
ventable errors: lack of coordination and communication. To
make the sum greater than the parts requires rethinking per-
formance management: better alignment of targets and plans
throughout the business; smarter KPIs that aren’t working at
cross-purposes with the business’s larger goals; and ongoing
dialogue among the business units, functions, and the C-suite.
As in team sports, great players may score goals, but only teams
win games.