Zone Management: Mind Your Metrics—Hard and Soft

The rationale for zone management is simple. Established enterprises undertake diverse sets of responsibilities, each of which needs to be managed in its own way. When organized properly, this results in four distinctly different zones of activity, each with its own mission and metrics. The four zones are as follows:

Performance Zone

• Mission: Be the agent of the enterprise in the world, and deliver the financial returns needed to fund operations and reward stakeholders.
• Hard metrics: Revenues, gross margins, bookings
• Soft metrics: Customer satisfaction, quality, regulatory compliance

This is the zone that executes the core business. Its metrics are externally verifiable and are used by investment analysts and other external constituencies to evaluate the enterprise’s competitive position and execution capability.

Productivity Zone

• Mission: Help the Performance Zone be more efficient and effective while managing the financial and operational systems to comply with regulations.
• Hard metrics: Expenses, net margins, compliance audits
• Soft metrics: Service-level agreements, employee satisfaction, safety

This is the zone that enables the core business. Its metrics are internally directed, the focus of operating reviews that evaluate cost management, productivity, and regulatory compliance.

Incubation Zone

• Mission: Develop next-generation business opportunities based on disruptive innovations.
• Hard metrics: Venture-funding milestones (prototype, first customer, first replicable use case, segment domination, transition to scale)
• Soft metrics: Product reviews, technology awards, patents, PR buzz

This zone is responsible for keeping abreast of emerging technologies and bringing those that are relevant to market as rapidly as possible.

Transformation Zone

• Mission: Drive a next-generation business to scale while maintaining stakeholder confidence in the core enterprise despite significant financial losses in the near term.
• Hard metrics: Growth trajectory in the next-gen business to exceed 10% of total enterprise revenue within 36 months, with gross margins superior to those of core business
• Soft metrics: Ecosystem partners committing to the next-gen business, investors engaging at a higher market valuation

This zone is responsible for guiding the enterprise from one era to the next, maintaining its customer base and ecosystem of partners, while transitioning to new infrastructure models, operating models, and business models.

In sum, each zone represents a distinctly different playbook. The hard and soft metrics that govern each playbook apply to that one zone and no other. They should not be used to manage or evaluate the performance of any of the other three zones. Unfortunately, they often are, particularly when the enterprise is under stress and everyone is challenged to up their game. The problem is that people tend to critique everyone else’s performance using the metrics they apply to themselves. Here are some of problems that can lead to: 

1. The Performance Zone extracting resources from the Incubation Zone because the latter has a horrible budget profile: miniscule revenue, subscale bookings, and exorbitant expenses. But all venture-backed enterprises have this profile, and the real question is, are they meeting their funding milestones or not? Even when they are not, the money should go back into innovations that are making their milestones and not be diverted into the Performance Zone’s coffers. 
2. The Productivity Zone insisting on reviewing the investment decisions taken by the Performance Zone because the latter is making high-risk decisions based on incomplete data. But that is the Performance Zone’s job. Market competitions happen in real time and often do not lend themselves to a process of careful study and planning. They are more like a series of bets, and the Performance Zone team is the one empowered to make them. There is no process that guarantees success. Risk mitigation, such as it is, comes from a compensation system based on the Performance Zone team meeting its hard metrics.
3. The Performance Zone imposing hard metrics on Productivity Zone programs and systems because the latter are not meeting the service levels it expects. This happens when Sales is unhappy with the lead generation efforts of Field Marketing, when Sales is unhappy with the sales enablement materials from Product Marketing, and when Product Management is unhappy with the market data it can get from Corporate Marketing. (Marketing folks: as an ex-marketing guy, I feel your pain!) The problem here is that these are not execution problems that can be solved by more disciplined transactional supervision. They are strategic alignment problems that need to be resolved through dialog and innovation.

The underlying principle at work here is that each zone should be held accountable, but to its own metrics, not to those of another zone. Lack of accountability results in failure to learn, sustained underperformance, and organizational cynicism. But holding zones accountable to the wrong metrics can be equally destructive, fostering passive aggressive behaviors that help no one. So, first, understand and honor the metrics of the zone you are engaging with, and second, hold that zone accountable to those standards.

That’s what I think. What do you think?

Follow Geoff on LinkedIn | Geoffrey Moore Mailing List

______________________________________________________________________

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