New Measures to Speed an Organizational Transformation

Lawrence A Bossidy was well known inside Allied Signal Corporation, the $12 billion diversified producer of equipment for the aerospace and automotive industries, as a CEO who was impatient with the traditionally slow pace of organizational change. Bossidy set as his personal goal an unusual measure of cycle time reduction: he wanted to bring about a complete transformation of the corporation’s culture, operations, and performance in 5 years, about half the time that had been required by comparable transformations at firms such as General Electric. Early in the transformation process, Bossidy became convinced of the power of measurement in bringing about change and implementing new strategies.

For example, Allied, like many organizations, initially placed most of the emphasis of its cost cutting effort on reducing labor costs. However, in its capital intensive operations, labor amounts to no more than about 25% of total costs, so focusing on it limited the success of the cost reduction efforts. Then Bossidy began tracking what he called ‘total cost productivity’. This was calculated as sales, discounted fro price increases that cannot be attributed to increases in value e.g., inflation, divided by all costs, including plant and equipment costs, materials, and labor. This measure encourages managers to look well beyond labor reduction as a source of productivity gains. Explains one manager affected by the new measure, ‘if I had to get 6% productivity growth from labor alone, there’d be nobody left in about 3 years. The real opportunities are in raising the value of what you sell and cutting materials costs.’

Another measure that Bossidy adopted has proven useful at a number of other firms: working capital turnover. This is the number of times working capital cycles through the business each year. Because working capital is affected by everything from purchasing supplies to billing for sold goods. It is difficult to generate improvements in one part of the business by hiding something elsewhere. For example, if a manager tries to cut corners in shipping and billing, this will show up later as errors that slow down collections and raise accounts receivables. Another advantage of working capital turnover is that it is easy to measure using conventional accounting data: add accounts receivables and inventory, subtract accounts payable, and divide the difference by sales. The Boston Consulting Group’s research has shown that firms with high working capital turnover also score high on productivity and cash generation, making this measure a possible substitute for managers who lack the data to calculate economic value added. For example, Allied Signal calculated that if it could increase the turnover of its working capital to five times a year instead of four, the corporation could generate another $500 million in cash, creating significant value for stockholders.