Managing What You Can't Measure

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"Not everything that counts can be counted, and not everything that can be counted, counts." - Albert Einstein

One of the most common beliefs in western business is the idea that, if it can't be measured, it can't be managed. This saying has been around for years and the philosophy behind it has guided decisions in actions in many organizations ever since.

I don't know who coined the phrase, but I'm guessing it has its roots in the mid-1940s when the Whiz Kids introduced the practice of management by numbers at Ford Motor Company. Although the Whiz Kids may have saved Ford from bankruptcy by increasing focus on numbers at the company, I believe the widespread number-obsession that resulted from their success is one of the practices leading American business into decline. We have far too many managers today who spend more time with spreadsheets than the people who are on their teams.

What Cannot Be Measured

It would be great if everything that is critical to a business could be accurately measured - it would make the job of managing so much easier. Unfortunately, organizations are too complex to assume they can be effectively led by implementing a handful of metrics.

There are numerous elements of an organization that must be managed and continually improved for a company to be successful. Very few, if any, of these elements can be accurately measured. Included in this group are the costs and benefits associated with:

• Employee morale
• Poor planning
• Fear in the workplace
• Teamwork
• Employee turnover
• Customer satisfaction
  
• Poor supplier relations

As an example, most would agree that there is a relationship between employee morale and financial performance. Although a company can implement an employee satisfaction survey and develop a measure based on its results, there is no way to measure how much (or even if) a five-point increase in morale would benefit the company. Any attempt to perform a cost-benefit analysis of an idea to improve morale would include too many assumptions and estimates to be valid.

Another example relates to the level of teamwork within an organization. Improved teamwork should lead to improved results, but how much improvement is anyone's guess.

A leader who believes in the if-it-can't be measured-it-can't-be-improved philosophy would have a tendency to ignore the above elements, although doing so would pretty much guarantee that he or she would not have to worry about leading the company for very long.

Numbers Have Their Place

I am not advocating the elimination of all key metrics for a company, because they do have their place. Besides the need to comply with legal obligations, numbers provide feedback on how the business is operating in terms of financial performance, budgeting, and cash flow. They are also very important in studying and improving the costs, quality, and cycle times of processes. It is critical, though, to understand how to gain knowledge from numbers and to realize that the numbers rarely, if ever, tell the whole story.

Organizations are highly complex, and believing that the most important aspects can be accurately measured oversimplifies and underestimates the role of a leader. If leadership consisted only of making decisions based on accurate measures, it would not be a very difficult to run a company.

Sales Goals Revisited

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A few weeks ago, I posted a column about the problems with goal-setting for individuals. Although I received comments from several people who agreed that the Western system of goal-setting and rewarding employees were destructive, I also received many responses from people who vehemently disagreed and felt that the process not only worked, but was necessary for success.

I'd like to revisit the subject and limit the discussion to goal-setting and reward systems for salespeople. The Stanford Graduate School of Business recently reported on a study conducted about the effectiveness of using sales quotas to motivate and reward salespeople (http://gsb.stanford.edu/news/research/Nair_sales.html). Based on an experiment at one Fortune 500 company, the researchers concluded that removing the sales quotas resulted in a 9% increase in overall revenues.

I'll agree that conducting an experiment at one company does not necessarily prove my point that setting goals is often destructive, but since the study involved salespeople - the largest group affected by goal-setting - the results merit further discussion.

When I posted the blog, I received several confidential comments from sales professionals who wrote that they disliked the system of quotas for a variety of reasons. They stated that quotas forced them to play games with the timing of orders in order to meet a target in a given period. They knew this was not in the best interests of the organization as a whole, but felt it was necessary to keep their jobs and/or achieve their bonuses.

I've never understood why we feel it is necessary to use money to motivate salespeople but don't use the same approach with accountants, receptionists, network engineers, and other positions within the company. Are salespeople lazy? Are they untrustworthy? Do we really feel that if we don't offer them carrots that they won't produce?

Gallery Furniture

Jim McIngvale is the founder of Gallery Furniture store in Houston, Texas. Many years ago, he called on W. Edwards Deming to help him improve his business. McIngvale often tells the story about Deming telling him to change his salespeople from commission-based pay to salary. After failing to convince Deming that it wouldn't work in the retail industry, he gave in and changed his pay practices and put his salespeople on salary. In The New Economics, Deming wrote about the results of the change. " . . . steady increase in sales. Older salesmen now help beginners. Salesmen no longer try to steal business from other salesmen. they now help each other . . . sales go up month by month. Moreover, profit per square foot of floor space advances even faster." McIngvale agrees.

Like so many elements in business, it goes back to effective leadership and hiring practices.

Unfortunately, I'm betting that the Stanford study will not lead to a wholesale change in Western business practices because if people don't feel there is a problem, they won't be looking for a solution or feel there is a need for change. My hope, however, is that more studies will be conducted on the subject and more examples of companies changing their practices will be publicized and, little by little, transformation will begin to occur.

The True Cost of a Layoff

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The world of business has become increasingly dependent on layoffs as a response to a downturn in business. There are layoff announcements virtually every day by companies, along with statements about the expected benefits of a reduced headcount.

Does a layoff really result in the savings to an organization that we think it does?

There are hidden costs that are often not considered (or are ignored) when making the decision to institute a reduction in force. These costs are difficult, if not impossible, to measure, but exist whether they are recognized or not.

Besides the severance and social charges associated with a layoff, the hidden costs show up in areas like productivity, customer service, and absenteeism. Since they are not measurable, however, they are easy to debate and not considered relevant in the number-obsessed world of business.

The hidden costs of layoffs include the following:

Increased Fear: Nothing can increase the level of fear within an organization like a layoff. Fear leads to a host of problems including reduced creativity, safe goal-setting, increased health problems/absenteeism, and a lack of willingness to take risks.

Loss of Teamwork: A layoff forces a person to worry more about his or her own situations than that of a co-worker. The atmosphere becomes more competitive as people do as much as possible to demonstrate their personal value to the company.

Loss of Customer Focus: When a layoff occurs, people turn their focus toward pleasing the boss instead of the customer. After all, it is the boss, not the customer, who makes the decisions regarding who will be released.

Drop in Morale: Layoffs make people feel expendable which, along with the loss of friends and coworkers in the organization, leads to a drop in morale. As a result, dedication is lost, and people will be less likely to contribute ideas for improvement or go the extra mile to help the company succeed.

Increased Employee Turnover: Because remaining employees will begin to worry about their own jobs, those who can find other work elsewhere will do so.

Loss of Trained/Experienced Employees: Losing employees means the loss of trained and experienced people to handle the increase in work when business returns. New employees lack experience with the process, systems and customers, and result in increased hiring and training costs (in addition to a higher incidence of quality problems).

What to Do Instead of Layoffs

Many business leaders have come to the conclusion that layoffs are necessary during a downturn in business. There are steps that companies can take to reduce the need for layoffs - even during a recession as deep as the one we've experienced over the last two years. These actions, which equate to cost management as compared to cost cutting, include the following:

1. Shorten the workweek and adjust pay accordingly;
2. Offer unpaid vacations/holidays;
3. Eliminate overtime;
4. Freeze all hiring;
5. Eliminate all bonuses and associated accruals;
6. Cut dividends;
   
7. Focus continual improvement activities on cost reductions.

In addition to the potential savings from the above actions, imagine the loyalty and dedication a company would earn from its employees if it manages to survive the recession without reducing headcount.

Sprinting Into a Death Spiral: Sprint Nextel Announces Layoffs

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Last week, Sprint Nextel announced plans to cut up to 2,500 jobs in an effort to - once again - reduce costs. This is the third round of layoffs since early-2008, when the company announced job cuts of 4,000 (they also eliminated 8,000 jobs in January, 2009). Employees who manage to survive this latest round of layoffs are probably thinking that it's only a matter of time before the next one occurs.

In 2008, Sprint lost 4.6 million subscribers. During the same period, AT&T and Verizon added 7 million and 5.8 million, respectively. Sprint also reported a $4.2 billion loss for the year. I'm thinking that addressing the problems at the company are going to require much more than cost cutting to resolve.

Remember that this is the company that, in 2007, made the much publicized decision to drop customers who make too many calls to customer service for help. Whether or not this decision made sense from a financial perspective, it did a lot of damage to the company's reputation for customer service.

According to their website, Sprint's mission statement is: To be No. 1 in providing a simple, instant, enriching and productive customer experience. Judging by the number of subscribers lost last year, I'm guessing that their customers do not think they are achieving their purpose.

The company needs to get back to the basics and focus on the customer instead of just costs. This means reflecting on its purpose and openly and honestly debating what it means to the company. Do they truly believe in it? Does the leadership team in place feel they can achieve it? If not, there is little chance of getting anyone else to believe in it either. Many companies, especially during the recession, have acted as if their purpose is to cut costs instead of provide value for their customers.

Once it is clear that the leadership team absolutely believes in the purpose and feels confident that it can be achieved, they need to identify the barriers that are preventing the company from being number one and start aggressively attacking them. This will require creating initiatives in critical areas like product & service offering, market development, process improvement, or people development. Chances are, there will be some pretty daunting barriers to overcome, but they need to be addressed for the company to become competitive again.

Ignoring the barriers is not an option - neither is continuing to focus on cost cutting. The company shrinks in size and the culture is damaged with each round of cuts and eventually there will be nothing left to cut without completely shutting down the company . . . which is definitely not the way to become number one.

Culture: The Critical M&A Element

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As we make our way to the other side of the economic downturn and confidence in the future increases, M&A activity will most likely return as a common fixture in the world of business. As this occurs, people involved in the process will make decisions like they always have, by evaluating deals in terms of market capitalization, cash flow, EBITDA, goodwill, etc. Unfortunately, many will ignore a critical element that can ultimately make or break the merger: culture.

Studies continue to show that a vast majority of mergers fail to ever achieve intended results. The intensity associated with the traditional due diligence process pretty well assures that the reason for failure does not lie in the financial analysis. Since culture is considered a subjective element, many people think it can't be effectively assessed. Whether assessed or not, though, cultural issues will appear after the deal is done, often resulting in excessive costs and stress that can greatly lengthen the time it takes for the merger to produce results - if not kill it altogether.

In my experience, I have found the cultural elements that interfere with a successful merger consist of the following:

• Misaligned values between the acquirer and acquiree;
• Misunderstood purpose of the new/larger enterprise;
• Poor communication with team members of the acquired company;
• Fear throughout the organization.
  

As a consultant, I spend a lot of time with companies helping to sort out problems encountered after an acquisition occurs. Too often, investors discover well after the merger takes place that there is ab enormous mismatch in culture between the acquiring company and the acquired company. And the longer these problems are allowed to continue, the more damage that is done to the organization as a whole.

What to Do

An organization, by definition, is a group of people who work together for a shared purpose in a continuing way. Along this line, a due diligence process is not diligent if it does not include a cultural assessment. Although there will never be a perfect match, an upfront cultural assessment will at least provide a picture of the issues to be faced after the merger takes place.

A cultural assessment consists of observation and a series of interviews with people at all levels of the organization to address the following topics:

• Values: Determine the values that exist within the target company (or whether a consistent set of values actually does exist). The objective is to understand how aligned the values are with the acquiring company and where problems may occur;
  
  
• Fear: Assess the level and causes of fear within the company. Fear will obviously exist in any organization that is being acquired, but the key is to discover whether it is a fundamental part of the organization's culture;
  
  
• Leadership Style: Ascertain whether the target company's leaders use a command and control or participative style of management. This will be important after the acquisition to give an idea of how much work will need to be done at the supervisor and management level;
  
  
• Teamwork: Understand the level of teamwork between people, departments, and facilities. If there are problems, it is important to understand what is interfering with people working together. Teamwork needs to be assessed at all levels within the organization;

As part of the cultural assessment process, it is also important to develop a plan to address the issues as quickly as possible after the acquisition. Cultural problems tend to grow exponentially - especially after a merger - and the longer the issues are allowed to continue, the greater the chance they will interfere with the performance of the new organization.

If a cultural assessment had not been performed before the merger, it is important to do one as quickly as possible afterward. Acquisitions generally consume an enormous amount of time and money, and the quicker the new organization begins performing as expected, the better for everyone involved. Unless the cultural issues are understood and corrected, however, the merger has no chance of living up to its potential.