Chapter Three: The Performance Zone

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Chapter Three: The Performance Zone

The Performance Zone generates virtually all the revenue and more than one hundred percent of the profits of the enterprise. It consists of a portfolio of lines of business, each with an established installed base. Revenue growth overall is typically cyclical, normally oscillating around three to four percent in mature categories, significantly higher in fast-growing ones. Within any given sector, market shares are relatively stable, distributed among a cohort of competitors, all more or less contemporaries, and while there is always the potential threat of disruption, these categories at present are characterized by evolution not revolution. Think gasoline-powered automobiles, fast food restaurants, management consulting, hospitals and clinics, and insurance.

In short, we are on Main Street – no early market experiments, no chasms to cross, perhaps some niche market development programs to capitalize on the granularity of growth, but no tornadoes driving massive secular shifts in spend. Main Street is home to the bulk of the world’s business, the preponderance of its jobs, the foundations of its tax revenues. Its health is our health, and the watchword is Steady as she goes. Management’s goal here is to maximize yields while not screwing things up. Play hard, play fair, and root out all forms of corruption aggressively. Optimize for the present, but invest enough to maintain the franchise.

Strategies on Main Street are relatively easy to frame, typically prioritizing either operational excellence or customer intimacy with product leadership being a distant third. It is a world where for many good enough is good enough, so you had better either delight your customer or show up with the best price. In either case the main challenge is execution, and that is where the performance matrix comes in.

A performance matrix is an organizational model optimized for managing a portfolio of established franchises across a single shared go-to-market fabric. It segments the field of execution into rows and columns, the rows representing a set of business lines each of which operates at scale, the columns a set of go-to-market channels through which their offers are sold, again at scale. Scale here means greater than ten percent of total enterprise revenue, a threshold of materiality designed to make the overall matrix manageable. Applying this standard, a typical performance matrix consists of somewhere between three to six rows intersecting with three to six columns.

Here’s a typical illustration from a B2B enterprise that sells direct to other businesses.

In this model each row and column has a unique owner who is accountable for the business results from every cell in that row or column. Cell-level results are measured in terms of bookings, revenues, and contribution margins, with additional attention paid to churn, growth, market share, customer satisfaction, and the like. Cell-level programs are focused on delivering the product/service roadmap on time, on spec, and on budget and developing and processing a pipeline of sales opportunities at an appropriate rate and volume. In short the performance matrix is a data driven affair: it all about performance metrics.

In terms of governance, setting aside the bottom-most row and right-hand column (the ones labeled TOTALS), every cell in the performance matrix has two owners, each of whom is held jointly accountable with the other for achieving that cell’s metrics. This accountability is established during an annual planning process where both owners must sign off on a single set of metrics which must then be approved by the CFO, the CEO, and the Board of Directors. The resulting plan is then spread across four quarters, providing the context for weekly commits, monthly status updates, and quarterly business reviews, the last of which become reflected in quarterly financial statements.

As mentioned above, the matrix does not include all products or all sales channels—just those that currently operate at scale. In 2014, in a company like Salesforce, its rows would include the Sales Cloud, Service Cloud, Marketing Cloud, and Platform, and the columns would split between their Commercial Business Unit and Enterprise Business Unit, each being subdivided into the Americas, EMEA, Asia Pacific, and Japan. Meanwhile over at Microsoft the rows would include Windows, Office, Cloud, and Devices, and the columns would include Enterprise (including a specialized channel focused on public sector), Small and Medium Business, OEM, and Consumer. In a smaller enterprise like Akamai, a specialist in content delivery over the Internet, the rows include Media Delivery and Performance & Security, and the columns are the Americas, EMEA, and Asia Pacific. At Cisco, the leader in networking, the rows include Enterprise Networks, Data Centers & Virtualization, Video & Collaboration, and Cisco Services, and the columns Global Enterprises, Service Providers, the Americas, EMEA and Russia, and Asia Pacific with specific focus on China and Japan.

A couple of side notes:

• To underscore the importance of maintaining scale in a performance matrix, ten years ago, Cisco consolidated its global sales into emerging markets—over 120 countries, all very much subscale—into a single column, put it under a single executive, Paul Mountford, and got amazing traction through this aggregation, north of forty percent at a time when the rest of the company was straining to hit double digits.
• In its January 2015 earnings announcement, Apple did not report out its iPod revenues but instead lumped it into the “other” category of sales. Even though these revenues are estimated to be well in excess of $1 billion, they are simply not material to a $160+ billion enterprise. Thus the product that gave Apple a whole new lease of life is now being retired.

The point is, the performance matrix is a meat-and-potatoes sort of thing that wants to be served up in hearty portions. It is designed to manage the heavy lifting of meeting multi-billion dollar bookings and revenue commitments on a quarterly basis. There is nothing novel, controversial or complex about it—Plan your work, work your plan. But under the pressure of disruptive change, many established enterprises discover they’ve developed bad habits which are now come back to haunt them. Here are some of the most common mistakes they make along with how best to correct for them.

Faults and Fixes

• Failure to secure interlock at the cell level. The most common mistake in implementing a performance matrix is to hold sales channels accountable to the total number for their column but not for each of the specific cells that make up that column. This seems reasonable enough—money is money, after all—until you realize it leaves the product/service row owners completely in the lurch. They have no mechanism by which to hold the field accountable to their particular offer set. In times of disruption when every business unit is under pressure to deliver, this is simply unacceptable. It is absolutely mandatory to enforce cell level accountability across all sales channels, not only during the annual planning process but also in the quarterly business reviews and monthly status updates. As a bonus, the resulting matrix makes a great Red-Yellow-Green dashboard that lets everyone know every month how every part of the business is doing.
• Driving cell level interlock responsibility too low in the sales organization. This is the opposite mistake from the previous one. Here you have enforced accountability at too granular a level. Some territories and some account teams simply are not set up to sell certain offers. Managers in the middle of the sales organization must have the discretion to modify accountability at the local level while at the same time maintaining it at the aggregate level. Make sure your CRM system gives them this flexibility, not to mention their compensation program.
• Failing to maintain a disciplined execution cadence. The performance matrix requires constant supervision. Best practice is to conduct weekly commits at the departmental level with monthly status updates and quarterly business reviews at the division level. The goal is jump on any cell that has turned yellow or red and “get it to green.” Shortfalls in performance normally manifest themselves first as slipped schedule commitments, and the only realistic chances at remediation depend on early detection and immediate response.
• Allowing subscale rows or columns into the matrix. It is fruitless to negotiate an interlock with a subscale partner. If you achieve the number, it won’t move the needle, and if you fail, no one will take an interest in remedying the situation. All you will have done is suck up a lot of people’s time while weakening the power of the matrix as a whole. Once any row or column in the matrix escapes accountability, the whole mechanism loses its force.

To correct this fault, first remove from the performance matrix any businesses that are in the Incubation Zone. They simply do not belong in the Performance Zone because their high cost of sales, long sales cycles, and relatively small initial deal sizes all mitigate against making the number. Instead they are going to get a completely separate go-to-market treatment outboard of the performance matrix. For the remaining businesses, ones that are mature but subscale, insist that they either aggregate with each other or integrate with other product or service lines in order to get to scale. Every entity in the matrix, be it a row-based offer or a column-based sales channel, must subtotal to ten percent or more of total revenue. Scale is sacrosanct.

• Assigning row-level responsibility to product line managers instead of general managers. This often goes hand in hand with allowing sub-scale rows into the matrix. In addition to creating a matrix of unmanageable size and complexity, it assigns execution responsibility to a role that is too junior to wield the authority necessary to hold the rest of the enterprise accountable to a given row or cell’s success. It is not only sales executives who must be held accountable for sales commits; success also depends on holding program leaders in shared services like marketing, engineering, and the supply chain to their enabling commitments as well. It really does take a village to make a number in a performance matrix cell, and only a senior executive operating with the authority of a general manager has the clout to orchestrate this effort properly.
• Managing professional services on a pure performance matrix basis. For companies that earn the preponderance of their revenues via a product or licensed service model, professional services create considerably more value spearheading next-generation offers for competitive advantage than they do delivering financial performance via their own operations. When you put them into the performance matrix, you risk driving the row owner in the latter direction. Not only does this represent a suboptimal return internally, but the greater the revenues, the more your company alienates the ecosystem of third party service providers so necessary to enhancing your sales productivity and expanding your licensed offers into new accounts. Realistically, this function can grow to be well more than 10% of total corporate revenue, and so it must be managed out of the performance matrix, but the primary focus should be on increasing the power of the Performance Zone to win next-generation deals as opposed to just supplementing its financial performance.
• Allocating corporate overhead to rows and columns in the performance matrix. The matrix is not a P&L – it is an operational construct. In that context, it is completely appropriate to hold row and column owners accountable for their controllable indirect expenses. These consist of shared services consumed directly in the pursuit of their financial objectives, such as marketing programs, subsidized professional services, or outsourced development, testing, or integration. All this is fair game to allocate to the matrix.

By contrast, holding matrix leaders accountable for expenses over which they have no discretionary say is a mistake. It just drives them crazy and causes ceaseless arguments over seemingly arbitrary allocations that are highly material to their objectives and compensation. Moreover, it is a cop out on the part of the Productivity Zone leaders themselves, including the CFO, who need to either “sell” these services to the matrix in some form of a controllable indirect expense or take direct cost-center responsibility for them as necessary overhead. Shuffling this burden off onto others is simply bad form.

Absorbing Disruption in the Performance Zone

The focus of the Zone Offense is on becoming a disrupter yourself, catching a next-generation technology wave, and riding it to add a new earnings engine to your enterprise portfolio. That is the big payoff for successfully navigating the Transformation Zone. But what do you do when you are not the disrupter but instead the disruptee? How, in other words, does one play Zone Defense?

The first principle of Zone Defense is that you must never attempt to disrupt yourself. Your number one asset as an established enterprise is the inertial momentum of your installed customer base. Your number two asset is an ecosystem of partners that makes its living adding value to your established offerings. These are amazing assets, the very things that the disrupter covets for itself, and you must never abandon them, never break faith with either constituency. So when consultants tell you that you have to disrupt yourself, tell them to get lost. Successful disrupters disrupt other companies, no their own.

The second principle of Zone Defense is to focus your innovation on neutralization, not differentiation. This is the opposite of the disrupters’ strategy. They have to differentiate—it’s the only way they can win your customers away from you. You, on the other hand, do not. You are the incumbent, the default choice, with inertia on your side. What you do have to do, however, is respond to the disruption in a timely manner. You cannot bury your head in the sand or go into denial.

Specifically, you have to co-opt some portion of the disruptive innovation and integrate it into your established offering. The result does not have to be best in class. It has to be good enough. That is, it has to allow customers and partners to get enough benefit from your combination of old and new to make their overall deal better than one they would get from the disrupter. That’s the basis of your defense. You are investing in a roadmap to the future while maintaining their existing asset base.

The third and final principle of Zone Defense is to appropriate whatever Innovation Zone assets you have in the works that pertain to the new technology and put them directly in service to the established business under attack. This entails abandoning any thought of pursuing the original Zone Offense play—the external disrupter beat you to the punch. Instead, focus on integrating this technology into your mature offering so as to give the latter a mid-life kicker, expanded capability available to your customers and partners that is compatible with their current infrastructure. This is not a perfect solution, to be sure. The technology gap between old and new is likely to be severe, and the integration solution is likely to be considerably less than elegant. This means you are undertaking a substantial technology debt, one you must pay down over time going forward. But it blunts the disrupter’s progress at the point of attack just at the time when it matters most, so strategically, it gets high marks.

A good case study for this was Microsoft’s response to Netscape Navigator, the Web browser that dramatically disrupted its Windows franchise back in the mid 1990’s. The company did not abandon Windows. Instead it quickly cobbled together a browser of its own, Internet Explorer 1.0, which was, truth be told, a pretty bad product. But they were back in the game, and by the time it came to release 3.0, it was a very good product. More importantly, it came integrated into Windows at no extra charge.   The strategy worked, Internet Explorer became the default browser for Windows, and Netscape’s disruption was beaten back.

Subsequently, however, Microsoft neglected to sustain its innovation investment in IE in the decade following, allowing first Mozilla’s Firefox and then Google’s Chrome browsers to pass it by. Thus today, its position is dangerously eroded at a time when Windows on devices is becoming less consequential and HTML5 browsing more so. This was an unforced error—it need never have happened—and we should all learn from it.

Concluding Remarks

In sum, when operating in undisrupted markets, enterprises can make any number of mistakes and still perform well financially. This is testimony to the power of inertia. It works so much to the incumbents’ advantage that discipline can be lax without jeopardizing success. Sure all the numbers could be a little better, but the customers aren’t going anywhere, and we can get that money next quarter. Chill out.

The reckoning, of course, comes with the advent of a disruptive innovation. Now the enterprise finds itself painfully out of position, with its performance matrix leaders lacking the skills, the discipline, and often the courage to take on the new challenge. Making changes in personnel at this point is risky and dangerous, but not making them is usually fatal. You simply must not let your enterprise drift into this state. Even if you are not under a current threat of disruption, you need to assume you will be soon and use the intervening period to get yourself into fighting shape.

To do so, reassert a set of disciplines that, truth be told, are simply best practices at any time:

1. Base the annual operating plan for the Performance Zone on financial metrics optimized for maximizing returns in the current fiscal year, what we have been calling Horizon 1.
2. Organize operations around the rows and columns of the performance matrix, assigning a unique owner to each row and column, empowering that owner to be a single point of accountability for both making and meeting the plan.
3. Aggregate operational units such that no row or column represents less than ten percent of the revenues of the overall operating plan.
4. Secure explicit interlock commitments for each of the performance metrics in every cell from the row owner and column owner directly involved, to be ratified by the CFO and the CEO, who will then review it with the Board of Directors.
5. Conduct quarterly business reviews in which all row and column owners must be present to speak to the current state of their businesses. These are command performances and should not be rescheduled to accommodate other pressing demands.
6. Install a cadence of weekly commits and monthly status updates to drive both a data-driven and date-driven approach to making the number.

These are the key principles. As you can see, they are neither novel nor radical. They simply require a firm commitment to discipline. And that, after all, is what the Performance Zone is all about.

Read the next chapter in this series

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Geoffrey Moore | Zone to Win Book | Geoffrey Moore Twitter | Geoffrey Moore YouTube