When we think of establishing a sustainable competitive advantage, it brings to mind what Katsuaki Watanabe, the former President of Toyota, said about excellence: "There is no genius in our company. We just do whatever we believe is right, trying every day to improve every little bit and piece. But when 70 years of very small improvements accumulate, they become a revolution."

In the realm of business, a Center of Excellence (CoE), sometimes referred to as a competency or capability center, is a strategic approach to developing and nurturing internal competencies or capabilities to maintain a revolutionary edge. McKinsey points out that an effective CoE, when correctly built and run, can lead to a 10-15% improvement in efficiency and effectiveness.

A CoE centralizes expertise and knowledge for a specific area—be it talent management, digital transformation, analytics target=_blank>data analytics, or risk management—and spreads it across the organization. A CoE aims not only to foster Innovation and Learning among its team members but also to spread that knowledge and best practices throughout the company.

The detailed study by PwC on CoE reveals that top-performing organizations have leveraged the CoE framework. It emphasizes that 77% of finance leaders report a moderate to a high level of centralization in their processes, achieved by establishing a financial CoE.

Given the potential benefits, many C-level executives might consider setting up a CoE. Here, we highlight key principles for creating a successful CoE:

• Clear Objective and Scope: Be it promoting Innovation, ensuring Compliance, or improving Operational Efficiency, the CoE's objective should be clearly outlined and widely understood. Considering the CoE's scope can help firms prevent functional overlap or duplication of efforts and roles.
• Competence Building: As the name suggests, a CoE should house experts in the field. Recruit and nurture talent with bespoke skills or invest in training and professional development.
• Supportive Leadership: The leadership team's commitment is crucial for the CoE to achieve its objectives and gain traction across the organization.

Just establishing a CoE doesn't guarantee success. Leaders must also continually assess the CoE's effectiveness. Metrics should be tailored to the specific business unit or function—for instance, in a Procurement CoE, you'd be looking at cost reduction or contract compliance rates.

Metrics to analyze a CoE effectiveness are typically a mix of quantitative and qualitative measures. Quantitative metrics include key performance indicators (KPIs), performance against targets, and return on investment (ROI). Qualitative evaluation could involve assessing customer satisfaction or staff engagement levels.

While CoEs are traditionally tied to operational functions, a new trend is emerging with the rise of Digital Transformation. Organizations are building CoEs focused on changing their business mode and operations. An example is the ‘growth CoE’, which focuses on driving sales and market share. In a recent survey by Gartner, it was found that over 50% of digital businesses have or plan to set up a digital CoE.

As transformations become increasingly complex, the role of CoEs is becoming more strategic. They are no longer about just sticking to best practices—they're about innovating, driving change, shaping company culture and future-proofing the business. If properly managed, a successful CoE can indeed be revolutionary, living up to Watanabe's words. As executives, it is our job to ensure that our Centers of Excellence are more than just a name—they should be a force for continuous improvement and sustainable growth.