All Posts in Leadership

|In: Industry Commentary|Last Updated:

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.

Comments

|In: Leadership|Last Updated:

A brief history of finance:

In the beginning, all transactions were barter transactions. Then we invented money to act as a proxy for physical goods and services. Money simplified barter.

Next came credit, which smoothed out cash flows so businesses and consumers could buy goods and services with money they didn’t have at the moment, but expected to have.

Then, Wall Street securitized debt. The rest, as they say, is current events.

But while today’s crisis is a credit crunch, it’s a mere annoyance compared to the big risk — an employment crunch. If large enterprises start to lay off employees in large numbers we’ll be in trouble beyond anything we’ve seen thus far. Large unemployment numbers would leave consumer spending in tatters. And since consumer spending is what drives all other spending, layoffs could trigger a chain reaction.

What’s worse is that market forces take us in exactly the wrong direction, because they favor the wrong behavior: Any business that tries to be a “responsible public citizen” by retaining as many employees as it can will be punished by competitors who push costs to a minimum to gain a short-term advantage.

The only solutions I know of are: (1) Tax penalties on excessive layoffs, to encourage higher employment; (2) government spending programs that support private enterprises; or (3) government employment programs that pick up the slack.

Not that I claim expertise on this subject. The one I know something about is business spending — in particular IT spending and what you can do reduce it without excessively damaging the enterprise.

Last week’s column finished by dividing the enterprise into three categories of business responsibility: Revenue, Production, and Shared Service. It recommended you begin by defining the cost-drivers of each and setting goals for improving them: For Revenue departments, reduce the cost of sales; for Production, shift overhead cost into unit cost where possible to more flexibly add and shed capacity.

Shared Services … IT, HR, Purchasing and so on … can’t plan in detail until Revenue and Production know what they’re trying to accomplish. Revenue and Production will, after all, need new IT to accomplish their goals.

Still, there are some steps IT can take independent of any specific plans elsewhere in de company to trim de budget without destroying de organization. For example:

De-specialize: Typically, small entrepreneurships rely on generalists who do large chunks of work well enough, while large enterprises rely on specialists who do narrow pieces of work exceptionally well. It’s a case where good enough is literally the enemy of better, and vice versa.

In theory if there’s enough work to do, specialists and generalists cost the same. They just divide up the work differently. The specialists are enough more efficient at their respective tasks to cover the additional overhead needed to coordinate their efforts.

But over time, coordination can expand and specialties can turn into silos. When times are tight, reorganize work around generalists.

De-layer: How many layers of manager separate you from those who do real work? Second question: How many people report, on average, to those with supervisory or managerial responsibilities? Third question: How many managers have, as their sole responsibility, connecting people to each other? Get de picture?

Decommission: So you implemented a new system but left the old one in place because it generates a slew of reports nobody wants to take the time to inventory, let alone convert — is that what’s troubling you, bunky?

Turn it off. Connect end-users directly to the new one through your BI tool. If you don’t have a BI tool, write one dump-and-load-into-an-Excel-Pivot-Table program per workgroup instead of converting a dozen or more reports, and get rid of the dinosaur. It’s costing you staffing, maintenance fees, data center real estate, and watts.

Demolish: Last April, in Advice Line, I mentioned my old friend Fitz, who figured out back in the 1980s that instead of using chillers to cool the data center, in Minnesota a complex technology called OUTSIDE (OUtdoor Temperatures are Sub-zero In DEgrees) could do a very good job of it.

Fitz didn’t really demolish a wall. He just asked the maintenance crew to cut a hole in it and connected the ducts.

Viola! A bunch of watts saved. Interestingly enough, a few months after my Advice Line post, Intel gave the idea a try and discovered it could save hundreds of thousands of dollars a year with it.

Coincidence? Almost certainly. If it isn’t, I figure Intel owes Fitz a check.

Or a job offer.

Comments