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|In: Career Management|Last Updated:

Call it governance. Call it “managing the project portfolio.” Call it whatever dull, uninspired, bureaucracy-invoking name you prefer.

Just don’t ignore it, because it’s one of the most important subjects in any business, one that victimizes … sorry, that profoundly affects … every IT organization in the world.

And it has a deep dependence on the same basic physical principle that governs billiards: The angle of incidence equals the angle of reflection. (They both also depend on a second physical principle that isn’t the subject this week: Spin matters.)

The angle of incidence is the perspective through which the company’s decision-makers view the enterprise. The angle of reflection is the set of investments they decide to make in the business … the outcome, that is, of their governance processes, which turns into the project portfolio.

Too few executives are competitors. Their angle? The marketplace is a playing field and their company is a contestant. (Some, more bloodthirsty, see the marketplace as more of a coliseum and their company as a gladiator).

Many other executives are mechanics. Mechanics think of the business as a machine — that’s their angle of incidence.

Then there are those who see themselves as referees. It’s an all-too-common perspective. When viewed from this direction the organization is the playing field, on which the company’s executives and managers are contestants who play against each other.

There’s another category, which started to emerge with the rise of the leveraged buyout, and whose influence has been expanding with the rise of private equity investment firms and the increasing dominance of the financial sector in our economy. It’s the economist … executives who think of the business solely as an asset, and view their job to be maximizing the value of that asset in an entirely different marketplace … the marketplace of companies that can be bought and sold through mergers and acquisitions.

This isn’t just an abstract set of distinctions. Which of these perspectives a company’s executives take (and this isn’t an exhaustive list) has a profound impact on just about every aspect of how a company is run, including which investments the company makes in itself.

Take the competitors. They’ll assess how other companies are trying to gain mindshare and marketshare at their expense, and plan countermoves so they win more mindshare and marketshare instead. They invest in what’s needed to win in the marketplace.

Mechanics will take a different approach. The gears, cogs, pulleys and levers of their business machines are the company’s processes and practices. What are they most likely to invest in? Projects that make those processes and practices more effective, whether through iterative improvement or fork-lift replacement.

How about referees? They don’t lead organizations. They preside over a collection of independent actors, each with a different opinion of what matters (their organizational silo and, to a lesser extent, the silos their silo depends on) and what doesn’t (everything else).

It isn’t that referees don’t understand the principle that in order to optimize the whole you have to sub-optimize the parts (unlike you, they haven’t read Chapter 1 of the KJR Manifesto). It’s that they’re incapable of understanding it. That being the case, they oversee investment decisions based on a combination of what makes sense in the context of individual organizational silos and whose turn it is to receive CapEx largesse, combined with a generous helping of trying to do everything at once, because after all, they’re all good ideas, so why should we make painful decisions when instead we can share staff among all the projects?

Competitors lead success. Mechanics build companies designed to succeed. Even referees make sure something gets better from time to time. How about the economists?

When the company is an asset, and you’re trying to maximize its value in the M&A marketplace, your focus will be on the balance sheet and share price. Invest in operational improvements, products that are more competitive, or improving the odds that customers will be more likely to come back and bring their friends?

Why do that when we can use our capital to buy back stock or acquire an undervalued company with an attractive balance sheet of its own? Especially when project costs hit our books right now but the returns won’t show up for a year or two.

All of these perspectives are equally valid. The challenge isn’t choosing which one is “right.”

What matters to you is what those responsible for running the company are trying to accomplish. It matters to you because referees and economists are less likely to invest in why IT exists in the first place: Helping every part of the business run better, and helping the company win in the marketplace.

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|In: Industry Commentary|Last Updated:

Flackery ain’t what it used to be.

I promised to publish Deloitte’s response to last week’s critique of its Center for the Edge’s Shift Index.

Once upon a time, public relations professionals made sure no potential image challenge went unaddressed. And yet, even though I contacted Deloitte, no response has been forthcoming.

From Deloitte, that is. Steve Denning, author of Forbes’ excellent Radical Management blog, posted a critique of my critique (and others as well; he addresses points I didn’t and wouldn’t have made).

(Endorsement: While Steve and I don’t completely agree on this particular topic, his thoughts on business leadership and management are innovative and interesting … well worth your time and attention.)

Denning’s defends the use of declining ROA as an indicator of economic decline, and points out that in Deloitte’s 2010 report it considered alternative metrics, like return on equity and return on invested capital. They all reported equivalent trends.

But that three metrics report similar trends simply means they’re correlated — unsurprising given how computationally similar they are.

It’s how Deloitte misused them that matters to you, because understanding this misuse can help you as you sort through your own information overload, trying to make sense of things.

Misuse #1 — starting with the metric: This is a fundamental fallacy that’s distressingly common in the world of business. When someone starts by asking, “What metrics should we use?” nothing good will come of it.

The better question is, “What are we trying to accomplish?” It very well might be that as a matter of macroeconomic policy, the United States should be trying to maximize the return on aggregate business investment across all industries (ROA, ROE and ROIC all measure return on overall investment).

If that’s the question, say so. Deloitte does not. It simply takes a commonly reported financial ratio that some but not all professional investors consider to be a gauge of management performance, and that all professional investors understand should not be compared across industries, and aggregates it across all industries.

My guess: Deloitte chose its metrics based on what data were readily available that had some association with business performance.

Misuse #2 — working backward from a pre-determined conclusion. Deloitte’s Center for the Edge is committed to its Big Shift view of the world. That’s a problem.

To summarize and oversimplify, the Big Shift is increased competitive intensity, knowledge flow mattering more than knowledge assets, and failure to redefine business practices in response to these two changes.

Imagine ROA is a perfect measure of business management performance. Its 47-year decline might mean what Deloitte says it means … that the caliber of management throughout the U.S. economy has deteriorated in some way, in particular by failing to adapt to the “Big Shift.”

Or, it might mean something completely different. As I pointed out last week, the U.S. shift in industry emphasis … from manufacturing to finance, services and entertainment … also accounts for the ROA decline.

In private correspondence, Denning made the point that my explanation doesn’t change anything, because even if this is the case, it still points to increasing economic weakness.

But it does matter, because there’s a huge difference between mismanaging the economy and mismanaging the individual corporations that comprise the economy.

Just because someone finds data that supports their preferred interpretation doesn’t mean they’re right. And if they get the root cause wrong, they’ll only improve the situation by accident.

Root cause analysis is a scientific practice, not a search for ammunition. What Deloitte failed to do was to clearly formulate the different hypotheses that might explain the decline in ROA, identify the evidence that would disprove each of them, and then collect that evidence.

As it happens, I agree that Deloitte’s “Big Shift” trends matter. It’s a truism that the Internet has made agility more important than size, increasing competition. As for “knowledge flow,” I’m pretty sure it’s important as well, although I prefer a more prosaic formulation … that a business’s success is tied to how well employees collaborate, both with each other and with employees in its network of suppliers, partners, and customers.

These trends matter to you, because IT lives in the middle of both of them. If you agree, ask yourself what you’re doing to help your company exploit them.

And, ask what evidence you have that supports your opinion. It might not be very good, but that’s okay. In business, you don’t always have conclusive evidence in time to support the decisions you have to make.

Often, evidence arrives just too late to do any good. All I ask is that you don’t have more confidence in your conclusions than the evidence allows.

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