Managing to the numbers

The problem with managing to the numbers is that it doesn’t work. Far too many of those who think having an equity stake in a business qualifies them to run it, is that they think it does.

They are, in a word, naïfs, and in another word, arrogant. Bad combination.

Understanding that the plural of anecdote isn’t data, here nonetheless is an example, provided by a subscriber who understandably needs the details obscured:

About five years ago I worked at a manufacturing company that had just been taken over by Wall Street bankers.

My plant had been the profit leader of a four-plant corporation. The bankers’ new strategy involved low-margin sales, concentrating production in the corporation’s lowest-cost plant, and with partners who had decidedly shady reputations.

As the plant manager of a de-emphasized operation, I might have been somewhat biased against sending work to our lowest-cost plant, but bias or not my clients were suddenly subject to six week lead times (up from three weeks), along with inconsistent quality and packaging.

I had previously done this work in house or sent it to a reliable and competent “friendly competitor.” I’d tried working with the lowest-cost plant … for 18 months … to help them “get it right,” but was finally told that I was measuring the wrong things. Charting and graphing types of errors, delays, quality issues, and customer complaints was seen as nitpicking.

Several customers left because the lowest-cost plant couldn’t get their orders right. Lower-margin sales displaced long-time customers. Five years later, my plant still inspected and repacked everything the other plant sent … an unrecorded cost. And still, all the work the lowest-cost plant could do was sent there.

Except for work sent to our new sales partner.

I was vocal against this company, but was told to base my argument in fact rather than innuendo (reputation was considered innuendo rather than fact).

And so, the new sales partnership collapsed when we caught our partner substituting a competitor’s product for ours, even to the point of copying our labels and trade names.

In less than five years, the company closed. The owners tried to sell my plant (yes, I still think of it as mine) as a stand-alone operation, but in the end, only its machinery was sold, to a competitor.

A central paradox of business is that focusing on profits is the second-best way to ensure you don’t get any (the best, of course, is to focus on “shareholder value”). Here’s how it plays out:

In the end, business value has three components: Revenue, cost, and risk. They’re the top level of what business executives pay attention to. Any effort that doesn’t result in improvements to at least one of them is wasted.

Other than through funny accounting, though, nobody can directly improve any of these. Their influence is always indirect, through actions that optimize how the business operates. You can, that is, decide for each process and practice what you mean by “improve” (ranking fixed cost, incremental cost, cycle time, throughput, quality and excellence in order of importance) and then, through strong leadership and effective management, improve them.

This is the bottom level of what business executives pay attention to — how effectively the on-the-ground work of the enterprise gets done.

What remains is the challenge of connecting the work of the enterprise to its revenue, cost and risk. This is the layer in the middle. Call it the business model — how a company converts its internal actions to revenue, cost and risk.

This middle layer is where the uncertainties lie, because few business models are even remotely provable. For example, imagine you’re a retailer and your business model is, “If we take care of our customers, they’ll come back and bring their friends.”

It’s a great business model. It works in a wide variety of circumstances.

Retailers take care of their customers through such processes and practices as merchandising, sales, fulfillment, and customer service.

So you improve fulfillment (improved quality) and customer service (reduced cycle time). Revenue increases. Try proving your improvements were the cause.

You can’t. You can’t even measure customer satisfaction accurately, let alone demonstrate its relationship to increased revenue.

Which is why those who “run a company by the numbers” so often rely on mindless cost-cutting: They can easily prove the connection to this-year bottom-line improvements, while those who complain about the long-term consequential damage have no proof — only their knowledge of and confidence in the business model.

While choosing provable benefit now in exchange for unprovable future damage might not be smart, it is understandable.

Especially among those who consider knowing how the business works to be Someone Else’s Problem.