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August Aquila
August Aquila
Coral Rice
Coral Rice

Grow the Compensation Pie

The 7S method shows you how.

January 5, 2012
by August Aquila and Coral Rice

No matter how noble or powerful your organizational mission (why your firm exists), that mission (and your long-term vision) cannot be achieved unless you understand the ecosystem that supports it. To achieve your desired results, you must be clear not only about who you are, who you serve and why but also how you do so. You must create organizational alignment.

Organizational alignment is linking strategy, systems and processes, people and culture, to best accomplish the mission, vision and desired business results of an organization. Alignment occurs when the above elements are mutually supportive and focused on effective and efficient
delivery of results.

The first step is an understanding of why organizations get the good results they get and why they get the not-so-good results they get — and it’s not based on their compensation criteria or methodology.

The 7S Model

While employed as a client partner and business developer at Franklin Covey Co., Coral received her first exposure to the company’s performance cycle, later to be called the Organizational Effectiveness Cycle (OEC). She came to understand it as an iteration of McKinsey’s “7S” Model, which illustrates the seven key components of an organization, which is charted in Exhibit 3-1, “The 7S Model.” The 7S-Model was developed by Tom Peters, Robert Waterman and Julien R. Phillips, consultants at McKinsey & Co. They first published the 7S Model in their 1980 article, “Structure Is Not Organization.” The model maintains that an organization is not just its structure, but it consists of seven distinct elements, three of which are dubbed “hard” and four of which are dubbed “soft.”

The three hard S elements — strategy, structure and systems — are tangible and easy to identify. They can be found in a firm’s strategy statements, business plans organizational charts and other documentation. The four soft S elements — skills, staff, shared values and style — are intangible. They are difficult to describe since capabilities, values and elements of your firm’s culture are continuously developing and changing.

The soft elements are highly determined by the people who work in the organization. Therefore, it is much more difficult to plan or to influence the characteristics of the soft elements. Although the soft factors are intangible, they have a significant impact on the hard strategy, structure and systems of the organization.

Peters, Waterman and Phillips describe the Seven S’s as follows (Tom Peters, Robert Waterman and Julien R. Phillips, In Search of Excellence: Lessons from America’s Best Run Companies (New York: Warner Books, 1982), p. 9-11.):

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As in nature, all organizations have their own ecosystems in which each element has its place yet is dependent on the other elements for long-term survival. Effective organizations maintain a fine balance between and among the seven Ss.

Applying the 7S Elements to Accounting Firms

Let’s take a look at how this might work in an accounting firm. Following is a description of the seven Ss in a public accounting firm.

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If one of the seven elements changes, each of the other elements is affected. For example, a change in human resource systems such as internal career plans and management training, will have an impact on organizational culture (management style) and thus will affect structures,
processes and finally characteristic competences of the organization.

According to Dagmar Recklies, when firms try to make changes, they usually focus their efforts on the hard Ss — strategy, structure and systems — believing these are easier to change. “If we change our strategy,” says one managing owner, “won’t we get different results?”

Traditionally, this has been the approach public accounting firms have taken when starting a change process. Unfortunately, however, it is the wrong place to start.

Most companies and public accounting firms care less for the soft Ss — skills, staff, style and shared values. Peters and Waterman in In Search of Excellence observed that most successful companies work hard at these soft Ss (Peters, Waterman and Phillips, p. 9-11.). Few companies, including public accounting firms, have taken their advice to heart. We know that soft factors can make or break a change process, since new structures and strategies are difficult to build when the culture is dysfunctional or values are not shared. The dissatisfying results of most mergers, whether small or spectacular mega-mergers, are often based on a clash of completely different cultures, values and styles, which makes it difficult to establish effective, common systems and structures.

The Organizational Effectiveness Cycle (OEC)

Like the 7S Model, the OEC helps us see our organizations in a holistic fashion and if properly employed, it can be a powerful instrument to help leaders increase performance and achieve sustainable results. The OEC reorganizes the elements of the 7S Model and serves as two leadership tools:

  • A graphic model, which illustrates the relationships among all key components of an organization and defines the path for leading change in a firm, department or functional area.
  • A methodology, which enables leaders to diagnose root causes and to design root solutions systematically and effectively — and answer the question, “How can we develop a more highly effective firm?”

The Organizational Effectiveness Cycle As a Graphic Model

To illustrate the relationships among all key components of an organization, we must first know the components. They are:

  • Customer and other stakeholder needs (other stakeholders may be internal or external and may include employees and their family members, vendors and suppliers, community members and shareholders, among others).
  • Mission (why we exist), vision (where we are going) and values (how we will treat each other along the way).
  • Strategy (how we accomplish the goals of the organization).
  • Systems and processes (how work flows and is accomplished on a day-to-day basis). Examples may include accounts payable and accounts receivable processes, training/systems, performance management, compensation systems and the way a tax return is processed.
  • Organizational culture (the collective behaviors of an organization’s members).
  • Results we are trying to accomplish for internal and/or external stakeholders.

This article has been excerpted from Compensation As a Strategic Asset: The New Paradigm. You can find more information about the publication on CPA2Biz.

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August Aquila has been recognized as one of the “Top 100 Most Influential People in the Accounting Profession” and works with firms the US, Canada and abroad. He specializes in compensation plan design, succession planning and mergers for CPA firms. Coral Rice, a senior consultant in FranklinCovey’s 4 Disciplines of Execution Practice, is noted for her solutions to the accounting profession. Her no-nonsense, yet practical and fun style make her a frequently-requested consultant.