Hewitt Quarterly - Vol. 5 Iss. 3 - The Rewards of Transformation

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Hewitt Asia Pacific

Hewitt Quarterly Asia Pacific
is made possible through the combined skills and experience of Hewitt consultants from across the Asia-Pacific region.

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editor-hqap@hewitt.com

Increasingly, many successful companies are passing over geographic orientation in favor of the "three horizons" approach to managing organizational growth across the regions

Within global organizations, many problems that are attributed to communication issues or a clash of cultures can easily be explained in terms of a poor horizon fit

Just how can companies go about linking total rewards to the particular phase of growth of a business?

Taking a time horizon approach to managing global business could well be the secret to achieving sustained growth. But it is only when total rewards enter the equation that organizations are poised for business transformation and renewal.

Businesses that set out to be global success stories invariably focus on two key goals - growing their profits, and winning over international markets. But establishing businesses across different national boundaries is one thing; managing their operations to achieve sustained growth is another.

One of the most formidable challenges confronting managers of global businesses is how to come up with a consistent approach to managing operations and growth across varied geographical regions. Related to this is the question of how best to adapt these centrally developed strategies to suit local conditions without diluting their impact.

Geography has its limits
Very often, organizations adopt the practice of managing global businesses along geographic or regional lines, with countries that are near each other on the map adopting similar modifications to management strategies emanating from the corporate headquarters.

But just how useful, or accurate, are these assumptions as applied to neighboring countries? How similar, really, are the business climates and talent environments of countries such as Japan and China, or Australia and Indonesia, or, for that matter, Singapore and Vietnam?

Increasingly, many successful companies are passing over the purely geographic orientation in favor of incorporating the "three horizons" approach to managing organizational growth across the regions. Developed by McKinsey & Co, the three horizons model is based on the premise that successful companies build a pipeline of businesses that pay off over different time horizons.

Horizon one encompasses businesses that are at the heart of an organization. These are the company's core businesses that customers and stock analysts most readily identify with the company name. Often, these mature businesses account for the lion's share of the organization's cash flow and profit and their success is critical to near term performance.

Horizon two businesses include the rising stars of the company: the fast moving, entrepreneurial ventures that will, over time, become new core businesses. These new businesses focus on achieving explosive revenue growth and often require heavy capital commitments.

Horizon three contains the seeds for tomorrow's businesses. These are nascent business ideas and opportunities that could blossom into future growth engines. These businesses typically involve research projects, test-market pilots and memoranda of understanding that mark the first steps towards actual businesses.

Common horizon, common priorities
Most companies that operate across a vast and diverse region like Asia Pacific have businesses that fall into all three of these horizons. So rather than grouping these businesses by geography, dividing them up into three groupings based on the horizon model allows for effective management that responds to the needs of these companies in their current growth phase.

Richard Kantor, Head of the Asia Pacific Compensation Consulting practice, Hewitt Associates, brings to the discussion his experience of helping clients in over 60 countries to improve business performance through the effective design and delivery of rewards and other talent programs.

Kantor explains, "In essence, what the three horizons model offers is a template for managing global businesses and ensuring their continued growth. Regardless of where they are located, businesses in the same horizon tend to have similar needs in terms of management challenges, types of leaders and talent approach.

"For example, a company may have located its mature core businesses, or what the model refers to as horizon one entities, in Germany and in China. As far as management is concerned, the key challenge for its German and Chinese operations is one and the same - to make sure that they absolutely hit their profit targets."

As companies move away from the geography-driven approach in managing their international operations, the three horizons model offers a practical, yet structured, basis for managing international operations.

Says Kantor, "At best, MNCs think of Asia as a collection of 15 to 20 countries. If you start with 20, then you have to figure out how to manage each of these 20 countries, how to localize your operations and still grow your business and achieve your targets.

"With the three horizons model, you have a template that offers perhaps 80 to 90 per cent of the solution to managing a global business. The other 10 to 20 per cent can then be tailored to local market conditions."

The advantage of dividing up businesses according to these three groupings is that some of the seemingly intractable problems or potential sources of tension associated with running offshore businesses may be dealt with quite painlessly and objectively.

Kantor speaks from experience when he observes, "Within global organizations, many problems that are attributed to communication issues or a clash of cultures can easily be explained in terms of a poor horizon fit. Take, for example, an American multinational that is having problems managing its staff in a newly established product development center in India. The heart of the problem may have absolutely nothing to do with communication or culture. Rather, any tension could simply be the result of a poor fit between the target-oriented horizon one priorities of the head office in the U.S. and the ideas-driven horizon three approach of the Indian start-up."

Rewards that deliver
Beyond improving the management of global businesses, adopting the three horizons model forces management to take a fresh look at various aspects of the business such as talent and leadership requirements, training and compensation. Based on its extensive experience of working with global businesses, Hewitt Associates has found that linking total rewards to horizons often speeds up the process of business transformation and renewal.

Says Kantor, "Certainly, from a total rewards perspective, the three horizons model starts you thinking very differently. The different nature of businesses in each of the three horizons calls for different approaches to total rewards. Now more than ever before, companies across Asia-Pacific are becoming aware that the way they reward talent impacts directly on how their businesses grow and renew themselves."

For a start, companies would do well to match total rewards to the particular talent profile they need to recruit for each horizon. Total rewards have to resonate strongly with the type of talents needed by a business at its current phase of growth; only then can the business achieve its management goals.

Take, for example, the core businesses of an organization or what the model refers to as horizon one businesses. Management focus in these established, mature businesses is on extending and defending today's profit generators by putting in place leaders who are strong operating managers willing to do what it takes to hit their targets. To recruit and retain leaders who fit this profile, horizon one businesses would do well to incorporate a target incentive concept into the total rewards package. Such an incentive concept would include increased rewards for achieving forecasted targets and, on the downside, a steep fall in income for failing to meet targets.

Another key consideration that global organizations would do well to ponder is the fact that a mismatch between the total rewards offered and the talent suited to a particular horizon can have far reaching implications in the long term.

Says Richard Kantor, "If you have horizon two ventures or strong up-and-coming businesses that are ready to explode with growth, and you apply horizon one rewards which are basically designed to help employees meet their targets, you may be damaging the business. More than that, you may end up discouraging the very people that you need to transform these businesses into the rising stars of your organization."

And that, Kantor explains, is because horizon two talents are typically business builders who think like entrepreneurs. For these risk takers, target-based incentives are unnecessarily limiting because they don't want to be constrained in terms of "how high is up". What will work for these aggressive go-getters are rewards that offer significant opportunities to create personal wealth, with considerable upside for over-achieving.

Summary of the "three horizons model"

	Horizon 1	Horizon 2	Horizon 3
Definition	Those core businesses that customers and stock analysts most readily identify with the corporate name, profits and cash flow.	Businesses on the rise - fast-moving, entrepreneurial ventures in which a concept is taking root or growth is accelerating.	The seeds of tomorrow's businesses - options on future opportunities. Research projects, test-market pilots, alliances, minority stakes, etc.
Role of the Business	Critical to near-term performance. The cash they generate and the skills they nurture help future growth.	Could transform the company but require considerable investment. Substantial profits are 4-5 years away.	Can generate sustained performance over the long term.
Management Attention	Extend and defend today's profit generators - focus on execution.	Build emerging businesses -develop new streams of revenue.	Create viable options - secure long-term growth.
Management Challenge	Shore up competitive positions. Capture remaining potential of core business.	Single-minded drive to increase revenue and market share.	Nurture promising options but cut out those with diminishing potential.
Operating the Business	Emphasis on product extensions, marketing changes, restructuring, productivity enhancement, cost reduction.	Continue investment for expansion. Success depends on speed and effectiveness of revenue stream building.	Develop good ideas into business opportunities. Seed many and retain options without committing too much capital, etc.
Key Outputs	Annual operating plan, tactical plan, resourcing decisions, budgets.	Business-building strategies, investment budget, detailed business plans for new ventures.	Exploration, initial project plans, project milestones.
Key Measures	Near-term, bottom-line results and cash flow.	Top-line growth and capital productivity.	Size of payoff and probability of success.
Other Measures	Profit, return on capital, costs, productivity, efficiency.	Revenue growth, market share, customer acquisition, profit, capital investment efficiency, likely net present value (NPV).	Project-based milestones, option valuation of the business, rate of conversion from ideas to launch, number of initiatives.
Type of Leaders	Strong operating managers who will do what it takes to hit their targets.	Risk takers who think like owners or investors; focused on top-line (often with marketing or sales background).	Visionaries who understand that futures must be imagined, investigated, and elaborated.
Type of People	Operators. Deep functional and/or industry expertise. Strong drive to hit targets and meet plan consistently. Disciplined.	Builders. Entrepreneurial desire to create. Comfortable with ambiguity and change. Top-line focused. Sharp decision makers. Willing to make sacrifices today for gains tomorrow. Independent. Self-motivated.	Visionaries. Champions. Unconventional thinkers. People who want to look beyond conventional wisdom to explore new ideas and opportunities. Don't mind being a lone ranger.
Talent Approach	Create consequences (career and compensation) for near-term performance, including penalties for under performance. Impose "no excuses" management style.	Provide autonomy, freedom to act, and mandate to create and build. Opportunity to leave a legacy. Provide alternate career paths to employees who head risky ventures - if their business folds, another challenge awaits.	Provide psychological rewards, recognition of ideas, freedom to experiment and explore. Provide clear career advantages, opportunity to satisfy intellectual curiosity, option to become horizon 2 business builder.

By the same token, Kantor explains that horizon three businesses that typically generate ideas rather than profits need a total reward package that acknowledges their role as the hothouse of tomorrow's business. Says Kantor, "If you apply the rewards of horizon one or established businesses to horizon three or embryonic companies, all you will be doing is cutting costs and starving the business. So with horizon three businesses, you have to move away from profits and hitting financial targets and think in terms of rewarding talent for achieving key milestones."

What is clear from the discussion is that managing global operations to achieve sustained growth goes well beyond attracting the right talent mix and rewarding these talents handsomely. The challenge for global businesses is to design a customized package of total rewards that matches the talent profile vital to the success of a business at its current phase of growth.

Forward thinking organizations have started to apply this conceptual framework to their rewards programs globally. By redesigning their incentive programs and other rewards to engage and motivate their people, many companies find that they are creating the correct momentum necessary for sustained growth at every phase in their business lifecycle, across all geographies.

The author can be reached at: richard.kantor@hewitt.com

Horizon 1 reward strategies are typically managed over many years (5+) and offer the greatest window for predictability in terms of measuring against internal company or market competitor norms. In this horizon there is already a rich resource of market data. Traditional grading or broad grades with a fixed points system is likely to be the most appropriate tool. Horizon 1 reward system requirements are also easier to forecast, as they can be tied to explicit and well-publicized performance goals - sometimes declared years in advance. Flexibility is also required, however, for rewarding short-term and market opportunity- related goals.

Horizon 2 reward systems typically require 3-5 years of planning, but offer less predictability. Manager discretion and flexibility is required here. These projects are focused less on performance programs to extract extra value from mature businesses and more on creating new value. Awards are closely tied to the growth and speed with which ideas are developed into revenue streams. These systems require a significant upside for overachieving (a publicly stated cap on performance payments may not be appropriate) but equally they require a significant downside for falling short of projections. 'Pool' approaches on payments are a possible strategy, with additional discretionary awards for high-performing individuals.

Horizon 3 reward strategies have the lowest level of predictability and are focused on responding to fast-moving conditions in emerging sectors. Planning times are typically 1-2 years. They are competency-based, with emphasis on competing in the market for the best 'ideas people'. Peer group and industry recognition may be nearly as important to this talent base as pure financial reward. These are often highly motivated individuals with an existing strong track record who are motivated by the thrill of the chase and respond better to bonus structures than incentive payments.