company

by Ira Chaleff

Executive Excellence – September 2000

There is a disturbing trend in companies and government agencies. Increasingly, key statistics are manipulated and used to drive up the price of a company’s stock or the funding of government agency programs, instead of being used for their intended purpose.

Any operation needs to develop measurements. Measurements can’t substitute for the many observations and interactions good management makes, but they provide a shared sense of how things are going. The essential function of measurements is to help focus a company or program, monitor and analyze its successes or failures, and take actions that reinforce or remedy them as appropriate. This function has always been subject to distortion for the sake of image and rewards. Recently, this misuse of measurements appears to have worsened.

We have witnessed the consequences of placing excessive value on the literal act of “making the numbers.” In the corporate world, high-tech flyers distort accounting principles to make quarterly earnings look attractive to investors. Large fines have been levied for deceptive practices (e.g., counting promotional items as capital expenditures). The market has severely punished other deceptive practices once they are discovered, such as counting verbal agreements as hard revenue.

A CEO can put enormous pressure on divisional executives to make their numbers. Out of sheer fear, subordinates “game” the numbers to make them appear to have been met when they have not. This was a key factor in the dramatic demise of “Chainsaw” Al Dunlop at Sunbeam.

The phenomenon manifests itself perhaps even more destructively in the public sector. In the last year we have witnessed the scandal of teachers providing students with answers to standardized tests so their schools will rank favorably. Worse, we have seen police departments unwilling to take reports of crimes in their jurisdiction as these would jeopardize downtrending crime statistics! Behind these unethical acts are excessive pressure to “make the numbers” and reap the rewards that go with doing so.

It is now common practice for large accounting firms to be both the auditors of, and consultants to, their clients. This practice further weakens the restraints on playing fast and loose with numbers. It threatens the integrity of information on which investors rely. Either the accounting firms will reform themselves, or regulators will do it for them.

But a deeper management issue is at play here. The old saw “You get what you measure” has a lot of power. Management must always be thoughtful about what it measures and how such measurements reflect the underlying values and mission of the organization.

It is less appreciated that management must pay equally close attention to the quality of the reports it uses to track these measurements. Just as “the map is not the territory”, measurements are not the same thing as the actual products, relationships or events they measure. They can just as easily misrepresent, as represent, the actual conditions they are supposed to be alerting management to.

If management values “customer renewals” as a prime measurement, it needs to be very concerned if these trend downward, and equally curious about sudden upturns. In either case, intelligent management will explore the causes, and the resources for remedying or reinforcing them. Only then will it reward or correct those responsible for the underlying actions which contributed to the success or failure.

By contrast, poor management will simply reward or punish those associated with the numbers themselves. This has the dangerous effect of encouraging those responsible for the numbers to “make them” any way they can, regardless if they are fudged or fabricated. Because management obviously doesn’t care, as long as it can flash the numbers it wants to investors, the legislature or city hall.

Of course, the chickens eventually come home to roost and careers are broken, investments squandered, constituents betrayed and left more cynical than ever.

All of this presents a need for senior management to rethink what they reward and how they do so. They cannot expect to parachute in, hand out fat bonuses for “the highest ever quarterly sales figures,” and airlift back out. If this is all management does, it will generate padded figures. People become endlessly inventive about how to pad the figures when they have enough incentive to do so.

The steps management can embrace to make valid and constructive use of measurements include:

Values: Clarify them, talk them, walk them. At staff retreats, explore performance situations which would test adherence to these values. Flush out contradictions and mixed messages.
Constellations of measurements: Require several measurements for each key function which balance quantity with quality, short-term with long-term results, shareholder with stakeholder value. Tracking only one measurement or giving it undue weight, often introduces a distortion into the system.
Rewards: Avoid linking excessive rewards (or penalties) directly to measurements. Link rewards to excellence in creating the underlying conditions that contribute to a measurable improvement.
Head out of the sand: Good managers know intuitively when things don’t add up. If the reported numbers “smell,” don’t ignore or avoid them. Dig around and find why there is an inconsistency between the numbers and other indicators.
Systems answers: If numbers prove to be fudged, you may need to make an example of the offender to show you value honesty above “performance.” But don’t stop there. Examine the system, including your own style and policies, to determine how it may pressure individuals to game it.
Accountability: If your people fudge numbers to look good, accept accountability whether you condoned the specific deceptive practice or not. Leaders set the ethical tone and cannot duck responsibility for doing so.
Industrious enquiry: When important measurements are declining, don’t harangue others to improve the numbers. Use appropriate analytic tools to discover the root causes. Then you can push all out for effective responses to those causes.

To use measurements well, you need to value your reputation for integrity above your reputation for performance. No one likes to perform poorly but you can live through and learn from performance failures. It is not so easy to recover your good name once it is tarnished. Make sure yours isn’t tarnished in the effort to “drive up the numbers.”

© Ira Chaleff 2004

by Ira Chaleff

If your organization is missing a high-spiritedness or is rife with discord and anxiety and you want to turn this around, read on. In working with organizations of many types and sizes I have observed seven common factors in an organization losing its vitality:

Loss of faith in leadership

Leaders get insulated from staff, even in moderate sized organizations. Staff cease to see what a leader is doing and believe the leader is ignorant about what the organization should be doing. The leader needs to spnd more time being visible to the staff. One of the most important ways of doing this is to delegate authority that has needlessly been retained. This empowers leadership at lower levels which is often full of pent up creative energy and it frees the leader to spend more time connecting with those who will make the organization succeed or fail. Delegating real authority to lower level managers and teams is much more important than the endless organization chart restructuring to which organizations often resort.

Lack of successes

Organizations exist to achieve specific results. Morale cannot be sustained in the absence of results. Winning teams need successes to feel like and behave like winners. Identify achievable results, make them happen and draw attention to them even if they are small. The losses that do occur are not as important as the attitude of the team towards those losses. A leader must convey optimism and hope in the face of losses. This is not to say that the leader denies the losses. It means that the leader is responsible for maintaining faith in the capacity of himself and the team to prevail.

Intramural warfare

Bitter fingerpointing and distrust between two interdependent departments is debilitating. Enormous amounts of productive energy are wasted by the friction in each interaction. The problem seems to be personality based and therefore unsolvable. It is, however, often soluble through energetic leadership. The solution requires zero tolerance of the dysfunctional status quo. It must be clear that the leader is emotionally prepared to let one or both parties go for the good of the organization. When this willingness is unmistakably genuine, the parties tend to rise above their entrenched positions and work to understand and meet each others= legitimate needs..

Loss of founding purpose

Organizations are usually founded with a crystal clear mission and vision. As the organization succeeds, the vision often fades into the background and the processes and activities associated with its success become what the organization most values and preserves. This works for a time but eventually is insufficient. The organization loses its internal guidance system and implicitly or explicitly makes the very largest decisions based on expediency rather than a coherent value system. Discontent begins to pervade the organization because, at the deepest level, human beings demand their lives have meaning, and meaning requires coherency. An organization at this juncture must create the forums in which fundamental conversations can occur about the organization=s identity and unique role.

End of business life-cycle

Organizations which have built their success around a service or product that once met a societal need which has now changed often go through protracted deaths. Leading and working in this environment is highly stressful. Expectations are based on historical achievements not future potential. Layers of systems are in place to keep the organization going so it hangs on in a sadly diminished capacity. There are only two alternatives for organizations in this stage – on orderly wind-down or a complete reinvention in which the business idea itself – the unique match of capabilities and needs which generates wealth – is fundamentally restated. The sooner this reality is accepted, the greater the options that remain open in either direction.

Lack of decency

Decency is about how people treat each other as they go about their lives and work. Whether an organization behaves decently is determined by the culture instilled by the founding team and the values and behaviors of the current team. Organizations which are successful can thrive despite a lack of decency because they have the resources to pay staff enough to put up with a demeaning environment. Organizations struggling to survive don=t have this luxury. Leaders seeking to revitalize a struggling organization must be very thoughtful about their staffs= feelings and perceptions and take great pains to communicate what they are doing and why. How they implement tough decisions is as important as making the decision. It sends a strong message as to whether people are valued or expendable. Staff will act accordingly.

Lack of re-investment in organization

Morale slowly drains in organizations which do not continue to invest in their own development. Old equipment, outdated software, junky furniture or office space, inadequate staffing and training all fly in the face of management=s exhortations for excellence. There are many reasons organizations are denied the investment they need. Regardless, revitalization requires finding creative solutions for renewing the organization=s infrastructure. While plant investment will do no good if organization purpose and design are deeply flawed, it must be factored into a revitalization effort. And while solutions are being sought, staff must be kept fully informed and invited to participate by contributing their ideas for renewal.

There is a bonus factor in all this. Anyone working to revitalize an organization is paying a steep personal price as the demands are often heroic. If they are to take good care of the organization over the long run, they must also take good care of themselves. They require opportunities for reflection and renewal, harbors in the storm to refresh and collect themselves. If you are one of these, organize your life so you have the time, space and support for this reflection. It will serve your organization well.