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|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.

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|In: Industry Commentary|Last Updated:

If you’re a CIO and aren’t tightening your organizational belt right about now, and I had to bet whether you work in (1) a growing, profitable company; or (2) a different solar system, I’d put my money on (2).

IT can’t tighten its belt in isolation. The enterprise needs an integrated plan. As CIO you participate in its creation, both because you should as part of the executive team, and because without IT representation the plan’s practicality will be limited.

In typical cost-cutting situations, a single company finds itself insufficiently profitable. The proper response is finding and fixing root causes, and the places to look are internal: Uncompetitive products, bad marketing, ineffective selling, too-costly manufacturing, a flabby supply chain, or any of a variety of other sins of ineffectiveness.

That, however, isn’t this. The root cause today is the entire economy.

Faced with any new, externally driven trend, I know of only four possible strategic responses: Ignore, exploit, ally, or defend.

Ignoring the financial crisis isn’t an option. I trust no further argument is required.

A few happy companies can exploit this mess, either by aggressively grabbing weaker competitors’ customers or aggressively buying the weaker competitors themselves. If that’s your situation, as CIO gear up to support due diligence work, and for integrating acquisitions.

Alliances might be a useful part of your overall game plan, but choose your opportunities carefully. Alliances entangle your company’s future with potentially unreliable partners, after all.

Strategic outsourcing is a long-term play. It rarely reduces cost in any significant way and certainly won’t in the short term. Meanwhile, it does create immediate reductions in effectiveness as everyone learns how to operate with the outsourcing partner.

And, it adds risk, because you dismantle your internal capabilities. If the outsource doesn’t work out you’ll have to rebuild them — an expensive proposition.

Tactical outsourcing, in contrast, might make sense — particularly for “commodity” business functions that are highly portable. For IT, managed hosting or co-location facilities are the most likely opportunities.

Most companies will choose defense as the most prudent response. Defense means becoming less dependent on debt, increasing cash reserves, and most of all downscaling capacity in response to ongoing industry-wide declines in demand. If that’s your game, here’s the enterprise-level program:

First, as mentioned last week, terminate negatively productive employees. Put this at the top of every manager’s to-do list, in every department in the company. It’s a pain-free cost-cutting step, and you don’t have many of these.

Second, identify “charity case” employees. Every company has them — perfectly nice people who everyone likes but whose contributions are limited. They are a luxury, and this, sadly, isn’t the time for luxuries.

Third — speaking of luxuries, don’t make the “AIG mistake.” The bash AIG threw for its top salespeople was a rounding error given its size. The tone choices like this set, though, rationalize a thousand more decisions to be lavish.

Lavish means: Four-star hotels instead of clean, three-star alternatives; apartment-sized offices instead of using space more productively; travel when a conference call will do … in a word, self-indulgence.

Dial everything back a notch. And be creative. For example, convert vendor-provided perks — junkets for the privileged few, for example — to productive business uses such as vendor-funded broad-based training.

Every luxury the company eliminates is pain it can avoid.

What’s left will hurt. Your choice is whether it’s the pain of surgery or injury. The difference lies in how well every part of the enterprise understands what drives costs.

Cost-centers fall into three major categories: Direct revenue generators, production, and shared services.

Direct revenue generators include Sales, Marketing/Advertising, and Customer Service (yes, Customer Service, which retains current customers, reducing the need to acquire replacements). The target for these areas is reducing the cost of sales.

Production departments (in manufacturing, Supply Chain, Manufacturing, and Distribution) deliver what the revenue-generating departments promise. Their target is, in the short-term, to shed capacity, and in the middle term to reconfigure, shifting overhead cost to unit cost so they can respond flexibly to uncertain, fluctuating demand.

Shared services departments … IT, HR, Accounting, Purchasing and so on … can’t effectively plan until the revenue-generating and production departments know what they have to do. That doesn’t mean IT gets to sit back and wait. It means IT has to do what it’s been doing all along:

Collaborate. Be part of every solution. And make sure assumptions about what IT can deliver are realistic.

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