When John S. Varley became the CEO of Barclays Bank, in 2004, he inherited an enviable legacy: Barclays had dispelled the reputation it had acquired, at the end of the 1990s, of being a financial underperformer and a possible takeover target. Indeed, from 2000 to 2003 the bank's economic profit grew by 56 percent, its cost-to-income ratio fell by nine percentage points, and its shareholder returns were in the global top quartile. Barclays had become a high performer.

Yet all was not well. Varley was acutely conscious that Barclays still had much work to do to ensure that its strong financial performance would be sustainable. What he calls the company's "franchise health" had to be strengthened and, in some places, transformed. As he told us in an interview:

"Employee engagement and customer satisfaction are the proxies for future growth and profitability. In some parts of our business, the engagement and motivation of our employees, our service for customers and clients, and our track record of innovation are first class. But there are other parts of Barclays where we would not consistently be held up as exemplary. For several years, the focus on initiatives to improve financial performance dramatically crowded out attention on franchise health, leaving us with a set of issues, in some businesses, that needed urgent attention. We are addressing those issues."

It's about performance . . .

Financial performance is vital, of course, and organizations measure it by looking at profit and loss, net income, returns on investment, cash flows, economic value added (EVA), and so on. Organizations that don't probably should, and they know it. But financials alone are not enough to measure either performance or health. "I see soft-side strategies as the foundation stones of hard-side-strategy success," explains Varley. "They are additive, not alternative."

The first step is to think about performance more broadly. Most companies, it is true, look beyond the financials in order to measure operational performance—the proportion of phone calls answered within three rings at a call center, for example, or the number of drug approvals at a pharmaceutical company. But other important dimensions are examined sporadically, if at all. One of these is organizational performance, which can have no less an effect on both health and performance than operational issues do. Low retention rates and poor succession planning, for example, are as worrisome as poor maintenance. In the case of Barclays, behavior generated concern as well. "Few doubted the quality of our brains," Varley told us. "What they doubted was the quality of our soul."

Another aspect of performance is marketplace performance. What, however, does an exhortation like "the customer is king" actually mean? For Barclays, it can be measured by the proportion of satisfied customers, by the proportion that would recommend Barclays to friends, and by the level of customer attrition. "In some of our big businesses—UK business banking, investment banking, and investment management, for example—an exemplary client focus has powered our growth by helping us retain existing clients, attract new ones, and do more business with them," said Varley. "The challenge is to extend that performance to all divisions of the bank."

. . . and about health

But a broader view of performance, by itself, isn't enough to address a company's health. Managing an organization, in either the private or the public sector, isn't just about delivering results today. Stakeholders do have a clear interest in current performance, of course, but they also expect management to maintain and improve on it, much as a football coach is expected to win games and titles in the present while building a squad with depth and strength for future seasons, developing new tactics, and ensuring that the team attracts supporters.

The arrival of a new CEO at Barclays brought fresh perspectives and allowed John Varley to push his franchise-health agenda, notably employee engagement and customer satisfaction, which he regards as proxies for future growth and profitability. In some areas, he realized, Barclays could boast engaged and motivated employees as well as first-class service and a strong record of innovation—but not in others.

A good place to start diagnosing the health of an organization is its metrics, though defining the best ones, whether for health or performance, is difficult. The ability to find them depends on the culture and strategy of an organization as much as on the industry in which it competes.

Varley and his team defined metrics for each of Barclays three "franchises": customers, colleagues, and communities (or marketplace, organization, and network, respectively). These metrics helped the board as well as the broader organization to understand the nature and scale of the problem—an excessive focus on short-term performance—and to track the progress of initiatives designed to address it. The metrics have also served Barclays well by drawing the focus away from financial results. As Varley put it, "We created a simplified scorecard for each business, customized to its particular imperatives, enabling the board and me to see, throughout the portfolio, how we are doing in the areas of customers, colleagues, and communities, just as we look together, on a regular basis, at the areas of economic profit and performance versus the financial plan."

Defining a company's metrics makes it possible to take the kind of sober look at its health that Barclays did. Indeed, it was the metrics of franchise health that fueled the concern and the need for action at Barclays in the spring of 2004. The diagnosis revealed that Barclays had serious health problems in some areas of its portfolio: principally, its UK retail franchise.

Once problems are exposed, the next step is to understand why they emerged in the first place and to ensure that the company addresses their causes as well as their symptoms. In the case of Barclays, both were straightforward: after losses in the property market crash of the early 1990s, the bank underinvested in its core UK retail franchise and stressed short-term recovery strategies.

Broadening management's attention beyond immediate returns to shareholders was the root of the problem. Although the answer too was straightforward, considerable effort is required to persuade an organization that the approach it has followed successfully over four years has now become outdated. But the reason for the former excessive focus on financial performance was clear, and the metrics that revealed the problem are now, with some minor tweaking, used to track the organization's progress.

With the metrics defined, targets are set. Just as companies that develop performance metrics can choose from a variety of options—internal benchmarking among divisions or external benchmarking with competitors—they have many possible sources for health metric targets. The trick is to make them ambitious, but not so ambitious that managers can't deliver. Varley told us that "measuring more than financial performance raised awareness and set expectations."

Barclays accomplished this trick by basing its medium-term health targets on the performance of its top-quartile peers. This approach was certainly ambitious, but it also helped build "ownership" of the targets because they echoed the organization's strong financial performance: top-quartile growth in shareholder returns over the previous four years. As Varley said, "There was much to look back on of which we were proud. It was not easy pointing out that there was a 'but,' but there was."

The immediate health and performance targets were intentionally ambitious. But they also provided for early wins, thereby avoiding the endless delayed gratification of programs whose targets recede infinitely into the future.

Getting there

With the groundwork now prepared, Barclays had to get healthy. Embedding the concept of health into its performance-management system was vital; otherwise, employees would put their best efforts into things the organization actually did measure. But though embedding health in this way is the clearest signal of management's intent, it is rarely enough. Management, for example, must also make sure that the people holding key jobs maintain the right mind-set and behavior, and it must act to capture the next generation of customers.

At Barclays, Varley told us, the idea of health "has become the dominant theme in our cross-group communications; we have created a strong sense of ownership of the issues among our enterprise-wide leadership. We have taken our aspirations and boiled them down into end-of-2004 and end-of-2007 deliverables for each franchise area and for each customer and employee segment. Executive committee member by executive committee member, we have identified what steps need to be taken by whom and by when to achieve success. We have aligned the reward and recognition systems with these new imperatives by showing that the franchise-health metrics are just as significant in driving recognition and reward as the meeting of sales targets and the production of economic profit."

These are, of course, sensible steps—and it may well be that the primary role for a CEO who sets about improving an organization's health is to create such an environment by implementing them. But a company must also reinforce them with detailed business activities tailored to its culture, context, and strategy, so that they reinforce its existing organizational model. It shouldn't try to implement a partial set of incoherent ideas copied from a high-performing organization that follows a very different model.

Barclays has structured these steps by grouping them into themes. As Varley noted, "It felt to me, as I set off on my own transformation here at Barclays, that I needed to have some themes that were recognizable in all parts of the forest but that could then be customized to take account of the environment in a particular part of the forest. I have seven themes, and they overlap a bit. One is getting the basics right. The second is productivity, of course. The third is employee engagement. The fourth is 'customer-centricity.' The fifth is selfless leadership, and the sixth is top grading. The seventh, which I have derived from the previous six, is that we should be famous for two things with our stakeholders. The first is being in control. The second is brilliant customer service. And that's it."

If successful, the themes are mutually reinforcing. Employee engagement and customer-centricity, for example, complement each other, as Varley told us, by "causing people to ask themselves, 'Why am I doing what I am doing, and what does it mean for the experience that our customers are having?' That is where I am the noisiest, because I think the voice of the customer is not loud enough in Barclays."

These seven themes, then, fit together as a set of mutually reinforcing mechanisms that should help Barclays directly address the health problems it discovered in certain business areas. Ultimately, the themes will help sustain the financial performance that Barclays worked so hard to achieve. As Varley put it, "If you concentrate first on creating a high-performance, healthy organization that has everything your customers are looking for, your shareholders will be just fine over time."