The Effect of Culture on Performance – Part 2

The development and maturity of cultures in professional services
by Dave Hofferberth and Jeanne Urich, SPI Research

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In Part 1 of this two-part series, we introduced the concept of organizational culture and defined the four dominant types found in professional service organizations (collaborative, creative, competitive and controlled). Part 2 shows how these organizations fared in our 2012 Professional Services Maturity Benchmark published in February.

Professional services (PS) firms want to know which type of culture produces the best results. The following sections highlight each cultural type and the results based on the survey of 216 PS organizations conducted in November, 2011.

Collaborative (57 percent of survey respondents)

In this year’s benchmark, organizations stating they have a collaborative culture were in the majority. Collaborative organizations grew faster than those that defined themselves as creative, competitive or controlled. Based on their ability to successfully market and sell services, their key performance measurements were solid, but not the best in the client relationships pillar. For instance, organizations with a collaborative culture had the second-highest win to bid ratio, pipeline to bookings and percentage of referenceable clients.

Organizations with a collaborative culture had the second-highest billable utilization and on-time project delivery, yet they displayed the highest revenue per billable employee. They didn’t achieve the highest project margins or the highest levels of profitability. Those accomplishments came from organizations with a creative culture.

The dominant culture based on responses from 216 PS Maturity Benchmark participants is collaborative. In general, it yields good, but not great, levels of financial performance.

Creative (19 percent)

The creative culture, the second most prevalent, showed impressive results in the following areas:

  • Second-highest year-over-year revenue growth.
  • Highest win-to-bid ratios.
  • Highest percentage of referenceable clients.
  • Delivered the most projects on-time.
  • Highest net profit.

With the exception of billable utilization, there were no key performance areas in which organizations with a creative culture did not excel.

So how can you develop a more creative culture? The primary impediment is hierarchical management and control. Managing an organization with a creative culture is sometimes like herding cats, meaning it is difficult to plan, schedule and execute when working with creative types. Many PS executives are comfortable with creative people in marketing or user interface design. But, not so much when it comes to management controls, rigorous business processes and compliance with standards that require consistently delivering client results.

Many organizations fear the term creative because it sounds unstructured and lacking in discipline. SPI Research believes that with the right infrastructure — processes, standards and measurements — organizations with creative cultures can thrive while still fostering personal and organizational innovation.

Competitive (13 percent)

One-eighth of the respondents reported competitive as their predominant culture. Given the competitive cultural stereotype as primarily sales oriented and aggressive, it was somewhat surprising to see a lack of performance in client relationship metrics. Competitive was the second lowest in bid-to-win ratios with 4.6 bids won for every 10 submitted.

The competitive culture fared well in pipeline development and billable utilization. However, this culture produced only 12 percent in net profit, placing their average net profit third out of the four cultures.

Controlled (10 percent)

The one culture that displayed the worst metrics in the 2012 benchmark (and for every year this question was asked in the survey) was controlled. These organizations grew the least in year over year revenue, and had the lowest key performance metrics in all service performance pillars with the exception of revenue per billable employee.

By virtue of its name, one might think that this type of environment does not encourage individuals to think out-of-the-box, to do what it takes to succeed or take risks. This cultural stereotype tends to be more structured than the others where individuals must adhere to more strict or rigorous standards.

The negative connotation of controlled cultures – the antithesis of team-oriented professional service organizations — is hierarchical, top-down decision-making. Effective PS organizations require self-organizing teams who are able to come together quickly to solve specific client business problems. There’s simply no time on the PS battlefield for decisions to come from on high.

Which culture works best?

As the survey results show for each culture, no one culture is superior. Each has strengths and weaknesses. Overall, it appears that creative, competitive and collaborative cultures work well for professional services. The only cultural type that consistently produced the poorest results was controlled. It makes sense when the elements of control come from hierarchy, bureaucracy, red tape or excessive micro-management.

By nature, PS organizations are creative and collaborative based on the fluid creation of high-performance work teams who rapidly come together to solve customer problems. If the predominant cultural style of the organization is competitive or controlled, the PS leadership team needs to ensure employees are free to make decisions and empowered to quickly solve problems.

Table 1 and Table 2 highlight the most critical key performance indicators (KPIs), and how each culture fared.

Table 1 Organizational Culture KPIs – Client Relationships    

 

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Source: Service Performance Insight, April 2012

Table 2 Organizational Culture KPIs – Service Execution and Finance and Operations

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Source: Service Performance Insight, April 2012

Creating cultural balance is key

The take-away from the PS Benchmark is that it’s important to discuss culture to ensure the cultural dynamics of organization structure, power, decision-making and rewards best support the goals of the organization.

Larger firms with multiple functions and complex organization structures may have many cultures, and these sub-cultures might overlap and contradict each other. For example, corporate finance and accounting is a naturally controlling function focused primarily on clear goals and metrics, whereas professional service tends to be more creative and customer support is more collaborative.

The key to cultural effectiveness is to make sure that whatever the dominant style, the culture is flexible enough to accept and assimilate different ideas, personality types and views to best adapt to changing market dynamics.

The maturation of an organizational culture

Every PS organization has its own unique culture, typically reflecting executive leadership style and values. As the organization matures, employees take on aspects of the culture and accept it as the standard. Effective leaders model the values and behavior they expect from their employees. They work with their cross-functional counterparts to develop a shared vision of the future and the role the service organization will play in achieving that vision.

Then, they create clear goals and measurements that drive alignment and empower employees to act and make decisions. Finally, they provide clear and open communication to encourage employees to become part of the solution rather than the problem. Effective leaders create an environment of continual learning and celebrate both individual and team success. They empower their workforce by encouraging subjective and objective decisions.

Most professional service organizations do not overtly define their culture, but it lies below the surface. This goes back to the question of whether organizational culture predetermines performance. The answer is most likely no, but with a caveat. Leaders should consider culture as they build the organization, and foster an environment where different personality types can flourish as long as they respect the organization’s intrinsic values.

No organization consists of individuals who are carbon copies of each other, and this approach would not be healthy anyway. To succeed in professional services, organizations need people with a variety of skills and approaches to successfully sell and execute work. A defined organizational culture can help everyone understand why they need to follow policies and procedures, and how it affects decision-making and power.

It’s unlikely you’ll find a written description of your corporate culture. Instead, you’ll find some level of platitudes and values. It is helpful to understand the real rules of the game and what behaviors will and won’t be accepted. If this survey were to show which culture drove the highest overall performance, it would probably be the creative culture. Those representing the fastest growing organizations said they operated within a creative culture, which represented 20 percent of the organizations surveyed.

The evolution of culture in young organizations

It just so happens that the cloud service providers represented the hottest and fastest growing sector within our 2012 Professional Services Maturity Benchmark. Most are up and comers experiencing tremendous growth. One-third of the cloud service organizations described their cultures as creative. Because they’re young in their organizational lives, they tend to be creative as they’re rewriting IT and business application rules.

At this stage, they need and attract creative leaders and employees who can solve first-of-their-kind problems on the fly. However, as all organizations and markets mature, over time they may find they need to give way to the “98 percent” who characterize themselves as collaborative.