Return On Management (ROM) is a
business ratio that can ensure strategic success

How high is your ROM?

Robert Simons
Antonio Dávila

Based on an article by Robert Simons and Antonio Dávila in the Harvard Business Review, January-February 1998.

Every manager can remember a brilliant strategy that 'got away'. Everyone supported the strategy, but somehow it was never properly implemented. The result was frustration, confusion, lost opportunities, and occasionally crisis. Why do so many reasonable, analysis-driven and implementable strategies fail to make it from concept to reality?

The answer lies with how managers direct their energy. Managerial energy is an organization's most important and scarcest resource, especially today, when boundless new business opportunities are clamouring for managers' time and attention.

If managerial energy is misdirected, or spread too thin, even the best of strategies is at risk. It is absolutely essential to ensure that managers channel their energies into the right things. Yet in today's hyper-charged environment it is very hard to maintain a sharp focus on the strategy.

The answer is to use a new business ratio: Return on Management, or ROM.

productive organizational energy released

ROM =

management time and attention invested

Like return on assets (ROA), ROM measures the return on the investment of a scarce resource-managers' time and attention. It indicates how well managers have deployed this resource among alternative courses of action. ROM answers the question: Are you getting maximum payback from every hour you invest in pursuing your business's strategy?

ROM is maximized when the numerator is large and the denominator is small, but it is a qualitative and approximate measure, not a quantitative one. Managers need to estimate these magnitudes, but executives who understand ROM have a powerful tool for change.


Case study:
Automated Consulting Services (ACS)

ACS (1) started with a clear strategy of growth through supplying state-of-the-art industrial technology. It grew quickly, based on its expertise, but within seven years it was in severe crisis. One office was cross-charging clients to meet budget targets. In another, managers had failed to notice a significant decline in business generated by three of the company's key clients. An ad hoc project to automate a client's library caused losses and embarrassment, as ACS discovered it did not possess the appropriate expertise.

ROM measures the payback from the investment of a
company's scarcest resource - managers' time and attention

The company had come undone. Managers were spreading their energy over too many projects, clients and goals, with no sense of priorities. The original strategy focus had been lost. As a result, the amount of productive organizational energy released was very low, while the management time invested was very high. ACS's ROM was dismal.


Case Study:
Automatic Data Processing (ADP)

In ADP (2) ­a large database processing company­ managers understand the value of focusing their energy on projects that directly serve the company's strategy. By rigorously assessing whether projects are consistent with the strategy, and by communicating its priorities clearly, ADP has achieved a matchless 143 consecutive quarters of double-figure earnings-per-share growth. ADP's ROM is sky-high.

ROM has a way of plunging fast when managers let themselves or their
staff engage in activities that fall outside the company's strategic boundaries

Both companies know the world is teeming with business opportunities, but ADP's managerial energy is fixed on specific, crystal-clear strategic priorities, and its managers are conscious that their time and energy are precious. Like all high-ROM managers, they have realized that organizations thrive when their leaders ­and their employees­ are disciplined about how they spend their time. Unlike ACS, they make hard choices about where they will commit their energy and ­more importantly­ where they won't. This clarity of purpose transforms all energy into productive energy, and propels strategy from the boardroom to the marketplace.


The enemies and allies of high ROM

Why don't all managers intuitively work to maximize ROM? The answer lies in natural organizational forces. On the one hand, numerous market opportunities beckon; on the other, managers naturally attend to whatever crisis, project or client is most pressing at the moment. Organizational structures designed to maintain the focus on strategy implementation can grow bureaucratic and ponderous. Finally, using ROM is difficult: it requires constant vigilance for the signs of organizational confusion and strategic drift.

Thus ROM-reducing behaviours invariably creep in ­unless managers recognize and prevent them. Five 'acid tests' can show managers when enemies of high ROM are present, and also suggest how high ROM can be achieved.


Acid Test 1.
Does your organization know what opportunities are out of bounds?

In most companies, strategy begins with a broad mission statement, such as: "Our mission is to apply our talents, knowledge and skills to making ABC Corporation the leader in all the markets we serve. We will strive to deliver innovative products at a fair price, ensuring that we are the preferred provider for our customers".

Senior managers have the job of translating this into short and long-term plans, budgets, etc., but often the organization receives only a vague idea of how to spend its energy. High-ROM managers take a different approach. They explain about the vision, but they also spell out what opportunities are off limits, and how their people cannot spend their time. High-ROM managers are explicit about what types of customer will not be accepted, what types of products or initiatives will not be funded, and what types of deals people should not do. These hard choices establish strategic boundaries that lie at the core of successful strategic implementation.

At ADP, managers use a five-point checklist to assess business opportunities against strategy.
· Financial: must be able to generate $50 million annual revenue.
· Growth: must be able to generate at least 15% continuing growth.
· Competitive position: ADP must be able to be first or second in this market.
· New products: products must be mass produced and sold to a mass market; and must offer superior direct-client service and performance.
· Sustained market position: products or services must have a very distinctive position, must add a significant number of new clients, and must offer a high payback for clients.

Bill Gates is unequivocal about Microsoft's strategic boundaries: "...we are not going to own any telecommunications networks; phone companies, things like that. We're not going to do system integration or consulting for corporate information systems. We love to write software, but... you won't see us doing applications like small business accounting. That's... not for us. Computer-aided design and engineering? We won't be doing that".

ACS never made clear what was out of bounds, so lower-level managers chased every mildly promising contingency. They spent untold hours on a project ­the library­ where ACS had no competitive advantage or expertise. Distracted by this, managers failed to notice three core clients slipping away, or the serious ethical problem of double billing.

Most managers understand how to control risks to the company's assets or reputation. Few understand the importance of protecting their most valuable resource ­the energy and focus needed to implement a strategy.

Strategic boundaries are useless unless policed. Naturally, some opportunities can look like ripe fruit ready for picking, but a high-ROM manager must be prepared to say no.

In low-ROM companies, no-one is certain which performance
variables are being measured, and why

A retail bank refocused its strategy on customers capable of generating at least $5,000 in net annual revenue. It instructed employees not to bring in new business below that level, but employees resisted: "What if someone walks in and wants to do a lucrative one-time foreign exchange transaction? Should we send them away?". Managers replied with an unequivocal "Yes!". They were determined to avoid distractions, even of the most seductive kind.

High-ROM managers see every activity from a strategic perspective. They will ask: "Does this meeting move our strategic agenda forward? Does this problem deserve the time and energy we are giving it?". By resisting temptations and distractions, they can keep the whole organization working towards the same goals. All energy becomes productive.


Acid Test 2.
Are your company's critical performance measures driven by a healthy fear of failure?

Many companies link strategy to performance measures; for example, where strategy centres on customer service, companies evaluate their employees' ability to anticipate and respond to customers' needs.

This is a robust approach that supports high ROM, provided the performance factors studied are those that really matter. 'Critical performance variables' may include all kinds of factors that are nice, or even useful, to know, without clearly identifying the factors that are truly critical for success. It may be wonderful to have a high level of IT productivity, or of employee retention, but these may contribute little to long-term success. When people don't know exactly where to focus their energies, ROM suffers.

A financial services company hired consultants to help design performance scorecards. They identified more than a dozen critical performance variables and analyzed how these contributed value to the business. The resulting diagrams were truly impressive. Unfortunately, they gave employees no clue as to which variables were mission-critical.

High-ROM managers would use this exercise to decide what should not be on the list of critical performance measures. This means imagining the worst: that in five years time the strategy has failed. What could have gone wrong? What competitor or market trend did they miss? How did they fail to execute the strategy? This often painful exercise can tell managers which performance variables really make the difference between failure and success. Long lists of performance measures often reflect a desire not to offend divisions or groups within the company. High-ROM managers will gladly sacrifice 'political correctness' for the sake of organizational focus and strategy implementation.


Acid Test 3.
Can managers recall their key diagnostic measures?

Low-ROM companies often inflict too many diagnostic measures on their managers. Only some of these performance measures really matter to success, and their number should be limited to what managers can retain in their heads ­around seven. This number may vary for different individuals, different parts of the company, and different stages in the company's life cycle.

One electronics company used between four and seven diagnostic measures to communicate its strategy to employees at various times. At the beginning, these clustered around improving cash flow. Later, performance and quality standards became critical.

More recently, these managers have refocused diagnostic measures on product development, manufacturing quality and service. Keeping the number of measures small avoids confusion about goals. As the company president said, his people are "... accountable for just a small number of measures. Everyone can tell you what these measures are, and why they're important to our success".


Acid Test 4.
Is your organization safe from drowning in a sea of paperwork and processes?

The new CEO of a $3 billion turnover high-tech company summarily killed off the strategy management process. The process ran on a nine-month cycle, involving vast amounts of management energy, and producing thousands of pages of multiply-layered analyses, plans, risk assessments and budgets. Useful in theory, the scale of the process was diverting managers' attention from profitable activities; the new CEO saw this as a low-ROM investment.

Among the worst enemies of ROM
are paperwork and processes that weigh managers down and prevent them
from spending time and energy on competitive challenges that matter

Many much-heralded management processes have backfired. What became of management by objectives, zero-based budgeting, strategic planning and TQM? Ultimately, they made such demands on time and energy that managers rebelled against them.

Take Florida Power & Light, a company than won the Deming award and ran its own TQM consultancy. A new CEO shut down the TQM program because it was pulling managers away from work that really mattered, and both customers and the bottom line were suffering.

In high-ROM companies, planning, budgeting and control systems are exception-based, and operate as negative feedback systems. Management attention is only required when exceptions or anomalies occur. Managers set annual goals, receive periodic exception reports, and get on with the business of strategy implementation. If your organization is submerged in paperwork, that is an enemy of ROM.


Acid Test 5.
Does everyone watch what the boss watches?

When Robert Galvin was CEO of Motorola, he was so fixated on making the company the world leader in quality that he would walk out of meetings when quality was not the topic. The message was clear: the boss's goal was product perfection. John Sculley (3) recalls a similar approach when Don Kendall was CEO of Pepsi-Cola. "The Nielsen ratings defined the ground rules of competition for everyone... top managers would carry little charts in their wallets with the latest key Nielsen figures. They became such an important part of my life that I could quote them on any product in the market. We would pore over the data to search for Coke's vulnerable points...". Sculley adds that it was the man at the top who made it this way. The challenge for the person at the top is to make sure everyone knows what he or she is watching. Then they can direct all the company's energy towards the same goals.

To test ROM, ask random employees a few simple questions:
What does the boss watch? Are you watching it too?

High-ROM managers use actions, rather than words, to show what matters to them. They invariably fixate on one or two control systems, and use them to generate heated discussion and debate in the organization. Such interactive systems are unique in focusing energy on the key areas of uncertainty in the implementation of strategy. This is how the Nielsen data were used at Pepsi-Cola: within an hour of receiving the data, 60 or 70 people would be examining them and asking questions like: What assumptions could affect our plans? What are our competitors doing? Is new technology affecting how we create value and differentiate our product?

Such interactive systems used by high-ROM managers are simple to understand, useful for managers at many levels, and credible, because they cascade from the top downwards. They generate information which relates to strategic uncertainties in the business, and which can be used to revise action plans. In other words, these systems can spark meaningful strategic change.

There is a corollary to Acid Test 5. High-ROM managers must ensure that once employees have been shown 'what matters to the boss', they must become the boss's eyes and ears at the front line of the business. Those employees closest to customers, technology and markets must constantly inform top-level managers about changes that might affect the business.

Consider Intel Corporation. In 1983 primarily a manufacturer of DRAM chips, today it is the undisputed leader in higher value-added microprocessors. This change emerged from its middle management and operations people rather than from the top.

Senior managers were very clear in communicating their strategy for success in the semiconductor market: efficient use of scarce production capacity. The key measure was contribution margin per silicon wafer. Employees at all levels knew that senior managers frequently looked at this measure ­and everyone watched what the boss watched. Not surprisingly, operational decisions started to favor microprocessors, which made a higher contribution per wafer. This drove the strategic change that made Intel the world leader in semiconductors.

One way to test ROM is to put a few simple questions to random members of the organization: What does the boss watch? Are you watching it too? If you saw something that challenged our performance, whom would you tell? If everyone answers these questions quickly, consistently and accurately, managers need not fear for their ROM. If not, it's probably time for changes.


High ROM: Focus and communication

High ROM is a function of managerial focus and communication. The energy of an organization's employees becomes most productive when they have a crystal-clear understanding of their organization's strategy. It is the responsibility of managers to communicate this understanding, specifying what people should ­and should not­ do. Persistent and insidious forces often work against high ROM, but these can and must be counteracted. This is the most important work that managers can do.

Perhaps it is unrealistic to imagine a business in which all energy is productive, in which people spend their time only on initiatives that align with strategic priorities. But it is not unrealistic to suggest that most companies could significantly increase their ROM if they applied the five Acid Tests. A manager's time would not become less scarce, but it would be more wisely spent. And maybe, some day, managers will tell fewer stories about 'strategies that got away'.

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© IESE 1998