Understanding the COO Role
We've all heard the term "COO agenda," but its meaning is often ambiguous. Many COOs move into the role from related operations positions, making the transition seem less like a change. Before starting in a COO role, it's essential to answer two critical questions: Why do we have a COO? And why am I in this role? The scope and situation of the role vary by organization and industry. It could involve overall operations responsibility or business support functions. Understanding these factors is crucial for a COO to succeed.
For example, in a heavy industry like mining, the COO might be responsible for primary operations. In a financial institution, it could be business support functions. In other cases, the COO's role is similar to that of a president, overseeing business units. The situation, such as a business transformation or recovery, also drives what needs to happen in operations.
Seeing What Drives Value
The COO must be clear on what creates value for the company. It's not just about low cost; it's about understanding the strategy, how operations drives it, and which operational sensitivities determine outcomes. Connecting the cascade of drivers to strategic objectives is essential. For instance, a logistics company launched initiatives but found they had little impact on overall results. A mining company focused on individual site performance but missed the big picture. The COO is best positioned to fill these gaps and prioritize operations efforts.
Setting the COO Agenda
The COO agenda guides actions, tests investments, and helps focus on "COO-only" topics. Its core elements vary by company and context. These include vision, where only 22 percent of employees believe leaders have a clear direction. It also includes plan and execution, stakeholder engagement, organization and talent, and a personal operating model.
An effective operations vision articulates the plan for success and serves as a guide for employees. It must be unambiguous and communicated clearly. A robust plan intertwined with the vision is essential for moving forward. COOs should assess and act across five areas: operations, stakeholders, culture, team, and themselves.
Engaging Stakeholders
The COO plays a pivotal role in building relationships with stakeholders. Internal stakeholders like the CEO, C-suite, and board are crucial. For example, the COO must understand how to collaborate with the CEO, communicate the "full operational picture" to other C-suite executives, and engage with the board in focused meetings. External stakeholders such as regulators, suppliers, and customers also matter. The COO should have market-facing experience to collaborate effectively with the marketing function.
Building Organizational and Talent Excellence
About 70 percent of corporate transformations fail due to organizational issues. The COO is critical in ensuring the right infrastructure and talent are in place. This includes ensuring strong frontline leadership, being clear about intentions, and considering how to amplify success. COOs should assess their organization and talent, build capabilities, and manage behaviors.
For example, they should focus on developing managers as the "true center" of the organization. They should also use concepts like leader's intent to guide decisions in ambiguous situations. Additionally, COOs need to consider how to influence change through various techniques like role modeling, understanding and conviction, confidence and skill building, and reinforcement with formal mechanisms.
Establishing a Personal Operating Model
A COO's role is different from their previous one. They need to "lean into their left hand" and improve in areas outside their core expertise. Successful COOs find a balance between running the operation and delivering strategic outcomes. They need to be deliberate in establishing their personal operating model, clearly defining their role.
They should know their strengths and limitations and align talent accordingly. Creating an actionable plan and sticking to it is also important. COOs should be clear about what data and reports they need and how frequently. They should also lead to inspire talent and shape the culture.
Managing Time and Energy
Effective time management is a challenge for COOs. They should spend no more than a third of their time on running the operation and focus on COO-only topics. Stepping back and making data-based decisions instead of being reactive is crucial. Scheduling activities to prevent "energy troughs" and setting boundaries is also important.
Today's effective COOs have a defined agenda aligned with the business strategy. They drive collaboration with stakeholders, are inspirational leaders, and delegate well. By focusing on these aspects, they can deliver the highest impact for the organization.
Unlock the Secrets of Capital Management in Chemicals
Managing Capital in Chemicals
Chemical companies' capital deployment is closely tied to their overall value and financial well-being. When ROIC increases from 12.0 to 13.0 percent (an 8.3 percent improvement), EV surges by 22.0 percent. But as ROIC continues to rise, the impact on EV becomes less significant. CFOs face a complex landscape of challenges when trying to improve ROIC through better capital management, exacerbated by rising project costs, labor shortages, and macroeconomic headwinds. These challenges include highly technical projects with communication barriers, "gaming the system" due to trust deficits, information asymmetry within projects, deprioritized capital capabilities, and disruptions cascading through the portfolio. 2: The average project cost has increased by approximately 26 percent since 2020. This makes it crucial for companies to stay within budget to safeguard returns, especially in the face of margin declines. Optimizing capital deployment is now a pivotal task for CFOs as it directly affects a company's financial health and overall value.Optimizing Capital Management in Chemicals: Five Questions for CFOs
What is the best way to determine what and where to spend?In a balanced portfolio, trade-offs are inevitable. Active discussions across the C-suite are needed to determine which projects best support business priorities. CFOs have four cash allocation avenues. Sustaining and compliance capital expenditures typically make up about 1.5 to 2.0 percent of the asset base for top performers. Growth capital expenditures are based on quantified risk-adjusted return targets and historical ROIC estimates. Strategic initiatives involve plotting investments to achieve commitments like net-zero goals or M&A strategies. And other uses of cash require balancing "should spend" with returns to shareholders. 2: How should my return expectations be different in a rising-interest-rate environment?From 2022 to 2023, capital project costs increased by about 10 percent. For a hypothetical $100 million project with a 15 percent internal rate of return (IRR) in early 2022, it required an investment of $110 million in late 2023 and yielded only a 12 percent IRR with 3 percent margin compression. To achieve similar returns to 2022 highs, companies need to either reduce capital expenditures by 15 percent or improve gross margins by 10 percent. The most effective approach often involves both actions.How can I improve project outcomes or control risk across my portfolio and on large projects?CFOs have a significant influence across five key stages of the project life cycle. In the concept development phase, they can set strict criteria and evaluation processes to ensure consistency and quality in project business cases. Engaging actively at this stage helps control portfolio quality and manage risk. During the design stage, CFOs can challenge existing scopes and push for standardization to reduce costs and improve returns. Examples include guiding design teams to the minimal technical solution and ensuring appropriate use of standard industry specifications. 2: Before financial investment decision (FID), CFOs can lead an independent review team similar to those in private equity. Major projects often have average cost overruns of 79 percent above the initial budget and schedule overruns of 52 percent. These overruns can often be prevented by performing due diligence similar to M&A transactions. Independent reviews before FID bring in external data and perspectives to validate and challenge estimates, plans, and budgets. In the procurement and contracting phase, CFOs are crucial in evaluating joint ventures and partnerships and avoiding complacency. In the execution phase, they maintain controlled communication and ensure a financial mindset.How can I focus the technical project teams on financial outcomes?CFOs can take four actions to encourage technical project teams to adopt a financial perspective. Role modeling by approaching major projects as independent businesses and appointing project directors with a CFO mindset. Developing financial expertise within the team and facilitating team development with coaching and tools. Communicating the financial impact alongside technical information in a compelling story. Reinforcing the use of financial terms through approval decisions and project updates. 2: These efforts help cultivate a financial mindset throughout the organization, aligning technical teams with broader financial objectives.How can I drive transparency on major projects to better predict what’s coming?CFOs have three interdependent levers to enhance capital project transparency. Integrating new technical solutions allows them to drill down into data at a granular project level and address productivity issues early. Improving performance management processes involves structured meetings with up-to-date data and clear escalation paths. Nurturing project leaders with the right mindsets, capabilities, and behaviors is essential for effective project management. 2: Tools, systems, and people should work together to create transparency and results. Today, chemical CFOs must balance shareholder returns with escalating costs and implement solutions to address critical questions.Unlock Business Potential in a Geopolitical World
How a Proactive Approach to Geopolitics Can Generate Value
Many management teams and boards have aligned their corporate strategies with geopolitical realities. They have appointed chief geopolitical officers, set up intelligence units, and developed response plans. Some advanced leadership teams are taking it a step further by exploring ways to create value amid geopolitical disruption.
Accelerating growth is one area where businesses can thrive. By assessing growth scenarios and identifying opportunities, companies can attract new customers and capture more market share. For example, Caterpillar was well-positioned to increase sales in Australia and Chile due to free trade agreements. Shifts in trade corridors are already reshaping industries, and business leaders must monitor where foreign direct investment lands.
Portfolio rebalancing is another crucial aspect. Geopolitical shocks can cause stable business segments to falter, while overlooked ones may offer new potential. Companies need to continuously assess and reallocate capital to higher-growth, lower-risk segments. One private equity fund redirected portfolio companies to more stable geographies, and a global dairy organization sold off a business unit and reinvested in a growing region.
Optimizing Core Business Operations
Business leaders can enhance organizational resilience by assessing how geopolitical shifts affect their operations. Operating footprint decisions are crucial, as seen with Samsung and Apple. Supply chain disruptions have led many companies to source from multiple vendors and use advanced technologies.
One CPG company constructed a digital twin of its supply chain to understand the effects of geopolitical shifts. It reduced reliance on third-party manufacturing sites and improved various aspects of its operations. Other companies are leveraging industrial policies for domestic production and supply chain localization, like Tesla.
Geopolitical tensions also complicate talent management. Companies can review talent concentration patterns and localize important functions. Egis maintained operations in Ukraine during the conflict by pivoting to remote work. A global bank relocated employees to avoid visa and trade restrictions.
Multinational organizations' technology and data footprints are exposed to geopolitical risks. Global IT leaders need to assess and hedge against these risks. Google chose Finland for data centers, and Malaysia offers incentives for data centers.
The Capabilities and Strategies Required to Respond to Geopolitical Disruption
Business executives need to broaden their view of corporate strategy. They must monitor geopolitical risks and economic policies and incorporate them into their planning. Scenario planning and tabletop exercises help leaders make informed decisions and focus on controllable factors.
Future-proofing multinational organizations is essential. Companies need to anticipate the impact of potential laws and regulations. Some rely on structural segmentation, while others focus on resolution planning to ensure stable growth pathways.
Establishing a dedicated geopolitical functional group can help companies respond quickly. Led by a geopolitics officer, it provides regular opportunities for boards and senior leaders to discuss geopolitical risks and opportunities.
Finally, establishing a crisis response playbook is crucial. It provides a guide for working through volatility during geopolitical events. One semiconductor company delegated responsibilities during supply chain disruptions.
As our overview shows, a proactive approach to geopolitics is essential but challenging. Organizations need insight, foresight, oversight, and the right capabilities. The effort is worthwhile, as those who act on the shifting world order will be tomorrow's market leaders.