Imagine Pacioli took a different tack.
You remember Pacioli. Italian guy. A friar. Invented modern accounting five centuries ago, give or take a few years. Ring a bell?
We still keep the books the Pacioli way. It’s why, when you buy a computer, you credit cash and debit tangible assets but when you train an employee you credit cash and debit training expenses.
Computers appear on the balance sheet. Employees don’t. Their skills, knowledge, judgment, loyalty and drive don’t appear as balance sheet assets.
Imagine they did — that on the departure of an experienced employee the balance sheet would worsen. Think businesses might behave differently?
Without a doubt, employee skills have real value. Without a doubt, accounting systems don’t record or report it. That means, beyond any shadow of a doubt, accounting systems are guilty of Metrics Fallacy #3: Anything you don’t measure you don’t get.
This is, by the way, one reason companies institute a “balanced scorecard” — they recognize the limitations of purely financial measurement, this being one of the more egregious examples.
It’s also one reason among many that “managing by the numbers” (widely understood to mean managing by the financials, by the way, not using metrics of all kinds) doesn’t work.
(Tidbit: Search Amazon.com for this phrase and you’ll find Managing by the Numbers: Absentee Owners and the Decline of American Industry. The authors are Meek, Woodworth and Dyer, the book was published in 1988, and the book’s dust jacket includes these words: “Today’s executive is more of a money manager than a leader of people; today’s companies are more concerned with manipulating assets … than with making quality products and creating new American jobs.” And these “This historical shift toward an absentee ownership structure and a highly trained, professional management is usually hailed as progress. In fact … these developments are the real culprit behind the appalling decline in America’s competitive position.” It appears my complaint isn’t new.)
Here’s another, even more serious limitation, not only of accounting systems, but of all metrics, balanced scorecards included: No matter how well you design and construct them, they won’t reveal the cause-and-effect relationships that connect what the company does to its success or failure.
The point is obvious once stated, not that you’d know this from our if-you-can’t-measure-you-can’t-manage obsession with metrics of all forms and financial measures more than any other.
And by the way … did you notice Drucker used the negative construction — if you can’t, you can’t? He didn’t say if you can measure you can manage. Measurement, according to Drucker, is a necessary condition for management, not a sufficient one.
So with all due deference to Dr. Drucker, let me propose an alternative aphorism (and please feel free to turn it, through endless repetition, into an annoying cliché): If you can’t predict, you can’t manage.
Even better, the positive version works too: If you can predict you can manage: To the extent you can describe your organization in terms of cause-and-effect relationships that connect actions to outcomes, you can make rational decisions about what to do and not do.
This is easier for those who run internal departments than it is for those who run competitive businesses, because of the nature of competition.
Running IT, for example, if you know each sysadmin can support 25 servers, you know what projects are coming up, and have decent estimates of their impact on processing load, you can predict how many additional servers and sysadmins you’ll need once they complete.
Running a business, on the other hand, you won’t know what your fiercest competitors will do to outcompete you until they do it. Or so they hope. The better you know them, the better you’re able to anticipate their next move, and the better you’ll be at surprising them.
It’s business as (groan!) sports. There isn’t a manager in professional athletics who thinks he or she can win by looking at the scoreboard. Scoreboards, like accounting systems, tell managers whether or not they’re winning, but not how to win. Whether their batter should bunt, try for a sacrifice fly, or swing away; whether the runner at first should sit tight or try to steal second; who to put in as a relief pitcher and when …
To make these judgments, managers need to know the game, their players, the opposing players, and how their opposite number thinks.
To the extent they can predict, they can manage.
Not only doesn’t “managing by the numbers” get you there. It doesn’t even get you close.
Bob:
As usual, your point is well taken.
But, you missed another reason why IT guys can’t manage by the numbers: they don’t know accounting.
When you spend money, you credit cash. Sorry, your debits and credits are backwards. A common mistake made by many, many IT pros because is doesn’t fit the logic of term they think of as “credit”.
With experience and forethought one can “triage” decisions into fairly easy to predict, predict within some reasonable limits and predict in very wide limits.
The more difficult decisions are the ones dependent on the requirements or decision made by others but we can still do fairly well in guessing the range of possible decisions they will make. In that case we be have an idea as to budget, man power, resources etc and prepare accordingly. However we are sometimes taken by surprise and really have to stop and reassess – sometimes even to the point of starting all over or canceling the project. Most of the time a bit of negotiations will result in an acceptable middle ground.
Knowing what one “owns” and what others “own” is important, allowing one to know when we can make decisions and when we must respect anothers province.
“Running IT, for example, if you know each sysadmin can support 25 servers, you know what projects are coming up, and have decent estimates of their impact on processing load, you can predict how many additional servers and sysadmins you’ll need once they complete.”
I have been in shops where the CYA has lead to a situation where the PC Group stated in writing that each tech could only install 4 PCs a day! Before it got “organized and professional” one tech would install 25 in half a day. Numbers such as these are untenable. Not only are they costly to implement the scheduling is ridiculous.
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Um Bob, am I about the 800th person to tell you that your accounting is backward? I actually prefer it, as I would LOVE to acquire a computer and debit (i.e., increase) cash.
The inherent weakness of any competitive business is what its competitors do. If it’s competitors cheat, then it has to cheat as well to survive. This Gresham’s dynamic is an inherent weakness of unfettered capitalism. If this dynamic is at play, it’s a race to the bottom. If this dynamic is not at play due to standards or government regulations, then it’s a race to survive. Ideally, you want to be first (market leader), but often it’s sufficient to be 2nd or third. You definitely do not want to be last. This is an outrun the bankruptcy bear scenario. Since humans aren’t that great at prediction or assessing real risks, I’m not sure how much weight prediction and risk assessment contribute to business strategy. Gates got the GUI from Jobs who got it from Xerox PARC. They saw the value of the technology when Xerox did not and executed it. Xerox was first to develop, but not first to market. Apple was first, but lost their market lead to Microsoft. Now Apple is a market leader and Microsoft is struggling, but both are winners compared to Sun Microsystems who lost to the bear.
Great article and valid points about asset recognition under current GAAP. However, your debits and credits are reversed. (Expenses increase with a debit and assets decrease with a credit.).
One of the many reasons I’ve never tried a career in accounting …
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“Not only doesn’t “managing by the numbers” get you there. It doesn’t even get you close.”
So what Bob. It’s obvious to me that the vast majority of business is run “by the numbers”. So what? What effect will this revelation have on anyone?
Bob, I’m only interested in how to change it. I enjoy your column, I read it religiously, but I’m stuck in business hell along with most of my colleagues.
Bob, unless you hang your ass out in the breeze and put forth how to change it, your just another columnist with an opinion.
I don’t expect you to change the world but surely with your knowledge and experience you can identify the source of this mind set.
I think the source is the complete failure of our business education. These are clever but myopic institutions that pride themselves on vision and leadership. Yet I see a systemic lack of vision and leadership.
The sad part, the one that really hurts, is the damage to the american worker. To the current business leadership they are but collateral damage.
Nero Fiddled while Rome burned!
Enough, I have to run to another meaningless meeting to discuss a trivial issue of no consequence. But I will have done my job.
It’s a good question. The answer is (I hope) that everyone reading the column will ask themselves how well they can predict the behavior of the organizations they manage. The best way to lead is by example.
So every time a manager in any department is able to predict the outcomes of whatever it is that drives their organization, it does more than just make them a better manager.
It also illustrates the point to the executives to whom they report.
“groan” – I completely agree.
I love the column, as usual, I suggest a slight tweak to your aphorism:
If you cannot model, you cannot manage.
Predict sounds too much like a guess or a gut decision.
Think of it this way: the bank credits your account, but it’s a debit on your books.
Taking the accounting lesson beyond debits and credits, there’s a reason employees are not valued on the balance sheet. Accountants call this conservatism. The main one is that you can’t predict their behavior. The employee you just trained may: find a new job outside the organization, get transferred to a different function, or might have not gotten any benefit out of the training. Since you’re not sure of the value, then you can’t assign one – estimates don’t work here. Remember George Michaels? He got mad at Sony and never recorded anything for them. Waited until it expired to record for another label. Unpredictable. The contact had no value.
Anyway, despite being an accountant, I got the point. There are things beyond just numbers.
Very interesting.
Best,
Chris D.
Hi Bob, Another great article! I agree with your basic premise and I like the catch phrase, but as a baseball fan I feel compelled to point out that there is a LOT of managing by the numbers in baseball. It’s not about looking at the scoreboard. It’s about looking through the giant binder that is stuffed with statistics, like how well David Ortiz hits against left handers during day games that follow night games. Search the web on “sabermetrics” to see what I mean. -Mike
As I thought I’d made clear, “managing by the numbers” is well-understood to mean managing by the financials. I couldn’t agree more that baseball managers make use of reams of statistics … which they use to construct models (of varying degrees of formality) that help them predict what will and won’t work.
Sorry I wasn’t more clear on this point.
The issue really isn’t managing by the numbers it’s the death of the Personnel dept and the rise of the Human Resources Dept that focused on employees as assets to be depreciated and eliminated not about increasing sales and jobs but hitting short term profits so the C level could get their bonus. Managing by the numbers gives them cover for their action and lack of skills.
I remember this opening quoute from my Mangerial Accounting professor. “90% of financial accounting is lying to the IRS.” So financial accounting is for a specific purpose and is not the whole picture.
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