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.

The Case Against Goals

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For years, Western management has embraced the notion that setting goals and holding people accountable to achieving them is a vital component of effective leadership. According to a BusinessWeek article published last July, goal-setting is especially important during tough economic times like we're experiencing today.

In the midst of a decade in which the world of business is undergoing significant transformation, however, I wonder why leaders still hold tightly to the traditional goal-setting process, even though it continually causes more harm than good.

Among the problems caused by assigning goals to people and tying rewards to success (and punishments to failure), include the following:

1. Goals set for individuals often conflict with one another. As a result, goals are not consistent throughout the organization. Even though many of these goals may be met, there is little, if any, improvement in performance of the organization;
   
   
2. Holding people accountable or tying bonuses to the achievement of goals results in "safe" goal-setting and mediocre results. People will resist committing to stretch goals if it means they could lose their jobs or bonuses if they fail. People will accept aggressive goals enthusiastically if they know their job or bonus does not depend on meeting them;
   
   
3. When money is involved, people will pretty much do whatever it takes to meet goals set for them. Whether or not their actions are in the best interests of the company is secondary;
   
   
4. Tying the achievement of a goal to a bonus can turn the best of team players into dictators or Lone Rangers. If you really want to transform someone into a micromanager, set a goal with a strict deadline and tie the result to a fairly large bonus.

Real World Examples

A plant manager for a small valve manufacturer was held accountable for the shipping budget and given a 10% bonus each quarter the budget was met. The budget was met every quarter during the year, but was accompanied by increases in returns, customer complaints, overtime costs, and employee turnover - all resulting from the increased pressure to ship products at the end of each quarter.

A procurement manager was given the goal of reducing the annual costs of rental equipment (the equipment was mostly used to support new gas production facilities). The operations managers, on the other hand, were given uptime goals for the facilities they managed and felt that they needed to keep the rented equipment for long periods of time after startup to handle any problems that occurred early in the process. The conflicting goals resulted in a breakdown of the teamwork between procurement and production because the achievement of the goal by one could only come at the expense of the other. Further, neither could afford to care about the other's ability to meet their goal.

A product manager was given a goal to grow the business for a certain material in Asia and South America, and was given a bonus when certain targets were hit. He met all targets during the year by lowering the price of the material, when necessary, to get orders. One of the new customers for the material was an Asian company that purchased the material at a significant discount. The VP of Procurement for a large European customer (a sister division of the Asian company) found out about the lower price and pulled the business from the supplier. As a result, the product manager got his bonus but at the expense of the European business unit's performance and the company's gross margin.

Enough Already

There are countless other examples with similar results as the above. The key is to get the entire team to focus on improvement objectives that benefit the company as a whole. In line with this, objectives should be set system wide (facility, division, company) rather than at the individual level. Also, specific targets really do not accomplish more than mediocrity when the real goal is to improve as much as possible.

Remember that it is the performance of the company - rather than the individual - that matters. Attempting to manage the company by breaking it down into components rather than focusing on the whole creates a host of problems and oversimplifies the role of a leader.

As Douglas Adams once wrote, "If you try and take a cat apart to see how it works, the first thing you have on your hands is a non-working cat." The same philosophy applies to organizations.

How Happy Are You?

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How happy are you? If you are an American, chances are you are not - or at least not as happy as you were 30 years ago. You're also not as happy as people in many other countries. There are actually several studies regarding happiness published around the world and most agree that Americans are generally not happy people. How can this be? After all, the term American Dream was coined to characterize the U.S. as a nation with limitless potential for a richer and better life than anywhere in the world.

We have the largest GDP of any country in the world; the dollar is generally accepted as the standard global currency (at least for now); we own 2.2 cars and 2.4 televisions sets per household; and we get pizza delivered to our door. Shouldn't all of this make us happy? Apparently not . . .

The surveys and studies on the subject attribute the lack of happiness in the U.S. to a variety of factors; many of them rooted in the workplace. According to the International Labour Organization, Americans work more hours per week and have less vacation time than those in many other industrialized nations. researchers at Siena University in Italy have surmised that this extra work time negatively impacts our social relationships - an important component of happiness. Working overtime and/or spending significant time in traffic commuting to and from work leaves little time for friends and family. In other words, our drive to succeed and stay on top has resulted in a lack of balance in our lives. People are social by nature, and a lack of interaction can lead to unhappiness and depression.

The Fear of Layoffs

Another factor contributing to the lack of happiness is increased stress in the workplace. The fear of layoffs is always present in American business (even during good economic times), which adds pressure from a lack of job security. Add to this a weak system of social programs for the unemployed and an extremely expensive healthcare system, and the result is a feeling that losing one's wealth is a very real possibility.

Workers in Europe are much more protected than American workers. Layoffs in continental Western Europe occur much less often than in the U.S. and when they do happen, require a fairly significant severance to be paid. In the U.S., these types of laws do not exist, and when severance is paid to fired workers, it is often very temporary and fairly insignificant (laws obviously differ from state to state).

To make matters worse, the current downturn has put additional pressure on those who were not laid off to demonstrate increased value in the workplace, leading to more hours and even less time for social relationships.

Remembering Maslow

Virtually every business school around the world includes a something about Maslow's hierarchy of needs in management classes. In general, Maslow theorized that people need to achieve their basic needs (physiological and safety/security) before moving up to the more satisfying needs (love/belonging, self-esteem, self-actualization). he referred to the basic needs as deficiency needs, because not achieving then can result in negative feelings (stress, depression, etc.), while satisfying them does not necessarily create positive feelings. In other words, as long as we are worried about losing our job or financial security, we will never be happy. This situation will also prevent us from striving for the higher level needs, which can lead to increased happiness.

Since we have all been educated on Maslow's theory, I can only assume that many American leaders either do not believe in it or do not see the value in having happy employees. If they did, they would stop the practices that keep people worrying about their jobs and financial security. I have actually worked a CEO who believed that the fear of losing one's job was an effective motivator. This CEO also told me that he was working to cut back on the vacation time the company offered to employees.

It's a Question of Balance

I don't feel we will ever be happy unless our culture undergoes a fundamental shift toward a better work-life balance. I also feel that unless we start valuing and focusing on increasing the level of happiness, U.S. businesses will continue to decline, eroding our standard of living in pure economic terms (leading to a further decline in happiness).

The cost of labor puts U.S. businesses at a distinct disadvantage when competing with companies that have overseas operations. We have seen hundreds of thousands of jobs move offshore for this very reason. How we can compete, however, is by continually improving the products and services we offer, and by finding more efficient methods with which to produce and deliver them. This requires a high level of innovation and motivation throughout our workforce because to succeed, everyone has to contribute ideas for improvement. People will not be creative or motivated to contribute ideas, however, when they are stressed overworked, and worried about their jobs.

Is GDP a Complete Indicator?

There has been a debate among economists regarding whether or not GDP is a sufficient indicator of a nation's success because it does not include a quality of life component. In terms of pure numbers from the IMF for 2008, the U.S. ranks number one in the world, accounting for roughly 24% of the world's GDP, and is almost triple that of Japan, which is ranked second on the list.

We have to ask ourselves, though, if being number one really means anything if we are not happy. Are we better off than The Netherlands, for example, which is ranked 16th in GDP but much higher in the happiness index than the U.S.?

I truly believe that if we don't improve our happiness in this country, it will eventually sink us. We have got to change our lifestyles, which includes improving the workplace, to enable us to become a happier nation.

Improving our level of happiness will be a long process, but we have got to start making it a priority before the situation deteriorates to the point of severely impacting our prosperity and our lives. The components of a plan to increase happiness must include, among other things, improving job security, making the workplace more enjoyable, and improving the work-life balance. We may never totally self-destruct economically because of the sheer size of the U.S. market, but that is no reason to ignore the situation.

I had a conversation with a Swedish citizen recently who, based on what he's witnessed in the news media, characterized Americans as "grumpy people." I have to admit that it was difficult to argue with him.

The Declaration of Independence states that the pursuit of happiness is an unalienable right. This does not mean, however, that it is guaranteed. That part is left up to us.