Do you think it would be valuable to know if your organization was headed for a fall? That’s what I thought; of course it would be valuable to be able to predict your risk of future challenges. The good news is that Jim Collins and his team have done the research for you and have determined the 6 leading indicators of organizational decline as follows from “How the Mighty Fall”:

1. Deteriorating margins
2. Declining current ratio
3. Increasing debt to equity ratio
4. Decline in customer loyalty
5. Decline in employee engagement
6. Decline in the proportion of right people in key seats in the organization

I would like to break this analysis into two categories. The first three are pretty basic and common business ratios. So what is the magic here? Well, it is twofold. First, you need to discern the difference between a fluctuation and a trend. Second, you have to take the trend seriously and take action to stem the tide of the negative trend.

First things first, what is the difference between a fluctuation and a trend. Any one of the first three ratios might vary some from month to month. So when do you start to take action–after the first month of decline, the second? One excellent tool to determine if a true trend is shaping is to perform a trailing 12-month analysis. This ensures that you have really established a true long-term trend vs. a mere short-term fluctuation. 

Here is a link to Kraig Kramers’ web site where you can purchase a TTM (Trailing Twelve Month) Excel template: http://www.ceotools.com/software/4760319.pdf

The second part of the magic of the analysis is to actually take action in the face of a true negative trend. You would think this would be self-evident and automatic, but don’t bet on it.  Jim Collins found no lack of knowledge of negative trends in declining companies. The problem was what he refers to as a culture of denial. He indicates they found little evidence of significant management concern and certainly not the productive paranoia they should have had about these trends. 

Jim provides a great analysis on pages 77 and 78 of the book of Leadership-Team Dynamics of companies that are on their way up versus companies in decline. It boils down to the difference between having a culture of denial or a culture of facing reality.

Now, let’s focus on the last three of the metrics. Every organization ought to have a close handle on all three of these, but in my experience few actually do. So, this is a different problem than with the first three measurements. We have to actually create the last three measurement tools in the first place before we can submit them to a trailing twelve-month analysis to determine if a negative trend is being established.
So, why don’t we measure numbers 4, 5 & 6? Well, let’s take 6 first. Here, the Board or CEO just needs to be honest with themselves and ask this question on a monthly basis. The question is two fold. First, how many key seats do you have? Second, how many of these seats are filled with the right people. Generally, you have a pretty good idea; you just need to start keeping a database. To the extent that you are not sure if you have the right people for the right seats, we can help you with selecting the appropriate competency and 360-degree review assessment tools to assist you in answering the question confidently.

Lastly, what is the problem with items 4 and 5 from the list above–customer loyalty and employee engagement? The push back to measurement here is generally cost. My thought is that regardless of cost, if these two measurements together are one-third of the critical leading indicators of organizational decline, you best just do it! That said there are many options and alternatives in these areas of measurement. We can help you choose a methodology that is appropriate for any budget and will be much better than doing nothing at all.

Please tell us your leading indicators of organization decline.

We would love to hear from you!