Chapter Seven:
Installing Zone Management

When it comes to installing anything new, as golf instructors tell their pupils everywhere, it is all in the setup. In this short chapter we will outline a series of steps to take during the annual planning process to get your enterprise zoned to win.

1. Zone your orgs. Every organization as well as every major initiative needs to be funded out of one—and only one—zone. That choice of zone defines the contract between the entity and the enterprise in terms of one of four paradigms—performance, productivity, incubation, or transformation. There must be no confusion as to which contract model is being applied. Choose one.
        That said, once an organization has been funded, its leader is free to deploy the funding received in whatever manner best serves. That is, leaders can create a four zones model inside their own domains as a way of setting up internal contracts with team members inside their function. For example, while most of the people on my team might be focused on delivering, say, a performance objective, I might choose to have some working to incubate a future option and others developing a productivity tool for the rest to use. All of that is my choice as manager of the function. What I do not have permission to do is expose this complexity to the rest of the enterprise. From its point of view, my organization operates within a single zone and according to the protocols of that zone.
2. Lock in the performance matrix. It is important to clarify and formalize the structure of the performance matrix right from the start. This is the foundation of every established enterprise. Each of its rows represents a major source of bookings and revenues greater than 10 percent of the total. Similarly, each of its columns represents a sales channel accountable for greater than 10 percent of that same total. Each row and column has a unique owner who is responsible for its subtotals. The sum of all the row subtotals rolls up to the head of product, the sum of all the column subtotals to the head of sales. The grand total is owned by the CEO and the CFO.
        The budget process begins with the CEO, the CFO, and the heads of product and sales. They publish a pro forma performance matrix with the grand total and all the various subtotals already set. The row and column owners then meet collectively to allocate these targets to each of the various cells in the matrix. From these targets matrix leaders determine the resources they will need to meet them, in terms of head count, direct operating expenses, and controllable indirect expenses in the form of supporting programs.
        At this point there will typically be considerable gaps between the “bid” for resources from the matrix leaders and the “ask” of the senior executives to constrain them. These gaps can be closed by adding more resources in the performance zone, funding more programs in the productivity zone, renegotiating financial targets, or finding more creative approaches to making the existing targets within the existing constraints. Needless to say, there is a lot of horse trading that goes on at this point, no different from any other annual planning process. But here is the difference when it comes to zone management: when the horse trading is done and the dust settles, the final commitments and allocations are directly reflected in the contents of each and every cell in the performance matrix, and they have been explicitly endorsed and cosponsored by the joint row and column owners responsible for each cell.
        The power of this outcome must not be underestimated. Not only have the direct accountabilities been established in the performance zone but the indirect programs needed to achieve those outcomes have also been explicitly identified and funded as controllable indirect expenses. The result is a simple chart that can serve as a red/yellow/green dashboard to guide each of the quarterly business reviews for the upcoming year, not to mention also serving as the basis for performance compensation systems. The more ambiguity you can drive out of the plan via this process, the tighter your ship will run.
3. Activate the productivity zone. All cost centers must continually fight the battle of the bulge, and the annual planning process is the place to start. This is where zero-based budgeting makes sense. The first order of business is to establish a set of organizational units such that all indirect spending rolls up to a manageable number of accountable executives. Within this construct each unit should identify the programs it intends to conduct on behalf of other organizations and negotiate the deliverables and funding required with the program sponsors in those organizations. In this way, the power of the purse for controllable indirect expenses is put in the hands of the program consumers while at the same time crediting the program-supplying organization with an expense offset.
        Once the program funding has been sorted out, everything else is corporate overhead. Some of this will go to compliance obligations, but the bulk will go to building and maintaining enterprise systems. Here again the bulge must be fought. It should be an annual goal to apply Six Sigma and Six Levers principles to reengineer corporate systems to make them both more efficient and more effective. This is the one time when productivity program dollars can actually be spent inside the productivity zone. The goal is to do more with less, by leveraging technology, experience, and innovation. Doing more with less is a readily achievable goal provided you explicitly charter programs to accomplish this outcome. It’s when you just cut budget and hope for the best that you get into trouble. Worse, when you simply declare a uniform percentage cut across all budgets regardless, you have abdicated your leadership role altogether.
4. Fence off the incubation zone. The annual planning process is not the time to get into the specifics of funding independent operating units within the incubation zone. That process follows a venture cadence based on milestones, not calendars. What should be established at this time, on the other hand, is the size of the incubation zone fund and the composition of the venture board that will have governance over it. Both decisions should be made by the CEO and CFO in consultation with the rest of the executive staff. Once these are set, all further incubation zone planning should happen offline.
5. Determine the status of the transformation zone and proceed accordingly. Annual planning processes are typically kicked off with a strategy discussion. Usually these focus on Horizon 3 and, frankly, are most often a waste of time. Horizon 3 is the purview of the venture board governing the incubation zone and not the executive staff at large. By contrast, discussions focused on Horizon 2 are incredibly germane, and the assembled executive team is precisely the group that needs to have them.
        The upshot of these discussions is to establish the status of the transformation zone for the coming year as either inactive (no disruption to be engaged with at present), proactive (playing offense to catch the next wave), or reactive (playing defense to prevent the next wave from catching you). Depending on which state is declared, the remainder of the planning process unfolds very differently. It is imperative, therefore, to declare one—and only one—of these states unequivocally.

Here’s how the process plays out from there:

• Inactive. If there is no transformation under way or to be undertaken, then simply iterate the performance zone and productivity zone processes to closure. Don’t let all the talk about returns from disruptive innovation fool you. Proceeding in an undisrupted state is by far the most productive way to generate attractive earnings.
• Proactive. To organize and play offense in the transformation zone effectively, the key steps are:
  • Add a new row to the performance matrix, representing a net new line of business to be scaled to material size, and promote the GM of that business to the status of row owner.
  • Set the pro forma numbers for each cell in the new row. These should be dictated top-down by the CEO.
  • Determine the head count, operating expenses, and controllable indirect program expenses needed for the new row to make its pro forma numbers.
  • Commit to this investment, and ring-fence it to hold it constant.
  • Iterate the rest of the performance matrix to closure.
  • In light of the above, iterate the productivity zone plan to closure.
  • Reduce the funding for the incubation zone to force one or more additional exits.
• Reactive. To play defense in the transformation zone effectively, the key steps to follow are:
  • Identify which row or rows in the performance matrix are being directly disrupted, and erase the numbers in their cells.
  • Determine the neutralization objectives for the targeted businesses and set an aggressive date for their initial market launch.
  • Resource the neutralization effort in terms of staffing, operating expenses, and controllable indirect support programs designed to accelerate time to market. Ring-fence these resources.
  • In light of the above, reset the performance metrics for the targeted row or rows.
  • Holding those metrics constant, iterate to closure first on the rest of the performance matrix, then on the productivity zone.
  • Reduce the funding for the incubation zone.

Concluding Remarks

The intent of this chapter has been to distill the playbook down to its most prescriptive form to produce a brutally clear plan. Such a plan is a precious thing in an ever-changing world, a way to align the many in service to a single goal as well as a way to keep tabs on progress toward that goal. We all need a plan, and frameworks like this one are intended to provide the foundations needed to make one.

To put the value of this kind of planning in perspective, and to bring this book to a close, let us now turn to look at how two great companies that have engaged with the four zones framework in recent years, Salesforce and Microsoft. The former is playing offense, the latter defense.