Dysfunction by the numbers

For years the BIG/GAS theory has held sway in America.

BIG/GAS, which stands for “Business Is Great/Government and Academics are Stupid,” lionizes the wisdom of the marketplace, disparages the theoretical as irrelevant, extols the virtues of trusting one’s gut, and demonizes any and all governmental action or oversight as inefficient, intrusive, and pointless.

The truth of which explains how it is that when the economy started to crumble a few weeks ago, business leaders from around the nation gathered to provide economic leadership and a strong course of action while the federal government milled around ineffectually on the sidelines.

Oh, wait … that isn’t how it happened, is it?

The fact of the matter is that Keynes was right and Friedman and Greenspan were wrong. Markets aren’t automatically self-correcting and do need external oversight … something anyone with even a basic grasp of audit principles can recognize without the need for extensive macroeconomic modeling.

Understand, this is not an indictment of business leaders for failing to provide leadership during this crisis. It wasn’t their job.

This is an indictment of business propagandists who have, for decades, worked hard to convince us that an unfettered marketplace provides prosperity and stability with no undesirable side-effects.

Something for nothing is, sadly, a persuasive sales argument.

Among the root causes of our economic meltdown (surely you don’t think there’s just one) is this, hidden in plain sight: Bad metrics.

Yes, bad metrics, and understanding the nature of the problem can help you help your organization avoid a landmine or two as it adapts to the downturn.

As Chapter 3 of my soon-to-be-published Keep the Joint Running: A manifesto for 21st century IT points out, systems of measures are subject to four potential fallacies: (1) Measuring the right things wrong, yielding the wrong results; (2) measuring the wrong things, right or wrong, yielding the wrong results; (3) failing to measure something important — anything you don’t measure you don’t get; and (4) drilling down measures to individual employees, ensuring bad data, yielding Fallacy #1.

To avoid these measurement fallacies, valid systems of measures have six characteristics. They are connected, consistent, calibrated, complete, communicated, and current.

You’ll have to read Chapter 3 to get the whole story. As applied to the meltdown, and your economic-disaster recovery plan, the relevant fallacy is “anything you don’t measure you don’t get.” In terms of the metrics prescription, the operative word is “complete.” (I’ll hold off exploring how Fallacy #4 applies to CEO assessment and compensation for less urgent times.)

It’s like this: CEOs and the companies they lead are measured by a wide variety of metrics, such as: EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), ROE (Return on Equity), Debt to Equity ratio, EPS (Earnings per Share) and so on.

They are not measured on their contribution to the health of the marketplace in which they operate, nor are they measured on their contribution to the health of the national economies in which they operate.

Anything you don’t measure you don’t get.

Here’s how this applies to you and the company you help lead: Often, when the time comes for deep reductions in operating costs, companies ignore the metrics they use to assess their executives and managers. They’re a distraction, to be fixed later.

The predictable result is organizational dysfunction, as each cost center manager plays games to protect his or her personal fiefdom. This is not because they are uncooperative people or “bad corporate citizens.” It’s because they are doing exactly what the system of metrics tells them to do.

If the CEO wants each executive to act as a good corporate citizen, the solution is simple in principle, although difficult in detail: When establishing responsibilities and goals for each, eliminate any pretense that a clear division of responsibilities can turn the enterprise into a well-oiled machine, where each part connects to all of the other parts to create an efficient mechanism.

Machine parts are metal and plastic, not self-interested actors. It’s a key difference. Executives will act as good corporate citizens if and only if each has clearly defined goals and responsibilities that are only achieved by their acting as good corporate citizens … and a way to tell if they’re achieving those goals.

The one-word synonym for “way to tell if something is happening as planned” is “metric.”

If the CEOs of America had to help ensure the health of the overall economic system and were measured in part by their contribution to its health, you can be sure our situation today would be very different.

At a different scale of scrutiny, the same logic applies to every executive and manager in your company.