The Missing Link Connection Organization and Financial Performance

The Missing Link

Connecting Organizational and Financial Performance

February 2007 Confidential Working Paper  Copyright 2007 McKinsey & Company

Aaron De Smet Rodgers Palmer William Schaninger

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Contents

3 3 7 8 8 9 11 12 Introduction Strong organizations have better financial results Achieving top-quartile organizational performance Focus on a few practices Target distinctiveness in four to five practices Create your blend for success Structuring an improvement program A word about our data set, methodology, and analysis

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“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.” –William Thompson (Lord Kelvin), 1824-1907

degree to which organizational performance matters but also the particular management practices that companies can pursue to improve financial results.1 The proprietary survey, involving more than 115,000 individuals in 231 organizations, examined nine attributes, or “outcomes,” of organizational effectiveness, and the behaviors or practices that contribute to these outcomes. Our findings are compelling: A company that measures in the top rather than the bottom quartile of organizational performance is more than twice as likely to attain above-average margins for its industry. How can a company get to the top quartile? Our research has helped us uncover three important principles. First, at a minimum, companies should get to work on three universally beneficial practices. Second, companies should aim to be distinctive (i.e., in the top quartile) in four or five additional practices: Such out-performance is associated with better financial returns. Third, as they construct a program, the companies should look for complementary practices that, when combined, can often yield stronger results than simply improving one or two in isolation. Companies can...