How to avoid being misled: Measure the drivers, before results.

Oct 9, 2019 | Management, Small business

 

The old cliché that you get what you measure, is right. You want more of something, make it a KPI, measure for it, and the chances you will get it are dramatically improved. The corollary is that you need to ensure that what it is that you are measuring is really what you want.

This obvious cause and effect is sometimes called The Lucas Critique, after the economist Robert Lucas, who in a 1976 paper, articulated the obvious fact that economic policy when implemented, drives changes in the  outcomes that were inconsistent with the assumptions made when the policy models were developed. This is because the assumptions remain fixed, insensitive to the changes in the behaviour the policy drove.

It put a mathematical framework around the better known Goodhart’s law, which simply stated is: ‘When a measure becomes a target, it ceases to be a good measure’ 

Therefore, choosing measures is a task of vital importance. You have to adopt measures that calibrate the drivers of outcomes, not the outcomes themselves, or you risk getting a lot of something you do not want, or need.

As a young product manager, I worked for a business that had sales volumes as the driving KPI for the sales force. Not unusual, and pretty well balanced, as the marketing function set the prices and therefore had nominal control over gross margin. However, sales personnel had control over promotional expenditure, which was budgeted as a percentage of sales.

Towards the end of the financial year when volumes were behind budget, an additional incentive was put in place. If sales budgets were achieved, the annual sales and marketing conference would be moved from the usual haunt just down the road in a dingy hotel, to a resort in the Whitsundays, and partners were to be invited.

The sales force went all out, and in the last 2 months of the year significantly over-achieved the sales budget, and we all went to a terrific location and had a holiday. However, the holiday came to a shuddering halt as the sales for the first few months of the following year came in. The sales force had achieved volume targets by stacking the retailers warehouses with product in the last two months of the previous year, boosting booked sales revenue, but delaying the timing of promotional expenditure to the new year. There was never a chance of catching up and achieving either the volume or net profit budgets in the following year. However, we did have a great time at the ‘conference’ .

You will get what you measure, just make sure it is what you want.

 

The often fatal flaw of the Family business

Oct 3, 2019 | Governance, Management, Small business

Family businesses have many advantages over publicly owned entities, largely around the pressures that apply to investment decisions.  They can, and often are, made with timeframes that would be unacceptable to a publicly listed company.

They also often contain the seeds of their own destruction.

On top of all the usual human pressures that exist in every enterprise, ambition, envy, personal gain, and all the rest, you also have the dynamics of family, and often multiple families, overlaid on the more usual pressures.

The mixture can be toxic.

It takes considerable leadership skill to address these added pressures, usually driven by the sense of entitlement that comes from: ‘it is our business, therefore we can do what we like’.  

There is no easy fix I have ever seen, but recognising a problem, catching it early and creating an environment where merit, and not bloodlines is rewarded, is a good first step.

This statement assumes two things: that there is a performance management system that is unbiased towards anything other than merit, and that there is a cultural understanding that bloodlines come second to performance.

A very unusual combination in my experience that requires rare leadership qualities, and extended self -awareness.

I have trouble thinking of a more challenging situation than having to fire your child, for whom you have built and nurtured an enterprise, because they are not the right person for the role they covet. The downside is if you do not, the non family members who are the backbone of the place will leave very quickly, or at best, tread water while it suits them, adding little real value in the meantime.  

Often an antidote is to have an outside advisory board of some sort that acts as a sounding board, advisor, performance manager, and sometimes executioner.

 

Header photo credit: Amar Chauhan via Flikr.

3 words summarising the challenges of maximising productivity

Sep 25, 2019 | Leadership, Management

 

‘Rhythm’, ‘Flow’ and ‘Balance’.

These three simple words reflect the ideal state for a process, big or small, in any enterprise. That state where the process is optimised for both efficiency and productivity, which are very different beasts. I have seen highly optimised processes that are still way short of being  productive, simply because there has been too little time spent considering the most productive use of the range of resources consumed by the process.  For example, US car companies used to  be highly efficient at driving the assembly of a car through a production process, but the cars they produced were terrible.

Rhythm.

Everything happens in an orderly and predictable manner, the ebbs and flows of volume have a cadence to them that enables the appropriate level of resource to be planned and allocated. No surprises!

Flow

The product being produced, or the process being followed proceeds in an uninterrupted manner, without obstacles, and complications. Achieving ‘Flow’  should be a core objective of anyone charged with the responsibility of managing a complete process, or participating in any part of a process, which is all of us. In most cases creating flow is like fitting a 1,000 piece jigsaw puzzle together. Complex at the beginning, but when completed, the picture is obvious, with no irregularities.

Balance

There are always forces acting against both rhythm and flow, forces that tend to distort the process. Seeking to balance all these forces is a job of leadership, and when efficient processes are optimised, all these forces are kept in ‘Balance. It is a  bit like trying to balance a top heavy piece of wood on the palm of your hand, you have to keep all the forces acting on the wood in balance in order to keep it vertical.

When you need some assistance in herding all the cats involved in this crucial but often easily pushed aside exercise, let the experience I have gathered over 40 years help you.

 

The cost of preventing errors

The cost of preventing errors

Sep 18, 2019 | Change, Lean, Management

 

Prevention of waste is a core tenet of lean thinking, and has been systematically used to optimise processes of all types.

However, it is not universally useful.

Prevention of errors in an existing process is one thing, you have the process established, and can map the manner in which the process is applied, and the outcomes achieved. However, when dealing with a new product, or process, things are a little different.

There is no known path towards an outcome, you are in effect telling the future, and that is an occupation with a high failure rate.

In order to tell the future with anything approaching an acceptable level of certainty, you need to experiment, try things, see what works, ask customers, deploy the ‘Lean start-up’ type mentality to the development of the process.

This means there will be many false starts, errors, failures, or more accurately, opportunities to learn.

Established businesses often do not accept errors. Promotion, salary reviews, and all the other trappings of corporate success are usually based on not making mistakes, so guess what, nobody tries anything new that just might not work, just in case.

An effort to remove these errors will end up costing more, as the implication is that the product or process will be developed until it is seen as ‘Completed’ before launching. As we know, not all new products work, so the losses involved in such an exercise can be huge

Remember ‘New Coke,’ the new improved taste of new coke that nearly destroyed the brand? With the benefit of hindsight, it was obviously a dumb idea, but at the time, I am sure Coke management had market research coming out their ears that confirmed this was a great idea. Pity they did  not pick a small test area, and put the change into the market, similar to a Minimum Viable Product, (MVP) to see what Coke consumers in real life rather than is some contrived market research environment said. Such a ‘waste’ would have saved them many millions of dollars, and being head of the queue in the greatest marketing blunder of all time list.

The lesson here is to encourage experimentation, each being an opportunity to learn, and improve your fortune telling skills, substituting small errors that do not compromise the business, for the big blunders that will.

 

 

 

Not all data is created equal

Not all data is created equal

Aug 16, 2019 | Governance, Management

We seem to believe, sometimes accurately, that the lack of data points is indicative of a less than a reliable outcome.

We also think that the more data points the better, but then we  tend to ignore the outliers, while privately acknowledging that is where change, and key insights, first emerge.

At other times, we are paralysed by the lack of data, or have so much of it we use misleading analyses to make our lives easier. The use of averages is a prime example, often resulting in absolutely misleading conclusions.

There was plenty of information about the distribution of icebergs in the North Atlantic in April 1912. However, the only data point that really counted, was that of the lookout on the foredeck of the Titanic.

Captain Smith was motivated by the race to set a new record for the Trans-Atlantic crossing time, and reassured by the information that there were ‘probably’ no icebergs so far south, he piled on the speed.

Whoops, missed the one really important data point.

The lesson: Not all data is born equal, and it is the insights that come from the analysis that really counts.

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How do you crete a documented ‘Flow’ in your processes?

How do you crete a documented ‘Flow’ in your processes?

Aug 5, 2019 | Management, Operations

 

‘Flow’ evolves as a completed task is handed over to the next stage, or person, automatically, with no error, in an entirely predictable manner.

When seeking to build flow into a system, there needs to  be a lot of detailed and logical thought put into the individual actions that need to take place in order to complete the activity, stage, and whole job.

There needs to be a list of the individual actions that are required, that are checked off.

Nothing too adventurous here.

If you boarded a plane and saw that the pilot was running through his preflight checks from memory, rather than a clipboard held by the copilot, you would be justified to feel nervous. In the case of a light plane, the pilot will use a clipboard himself, and physically check items off the list.  This post will have been edited several times, but it is only the use of the ‘speak’ tool that will root out the small inevitable errors of grammar, syntax, and spelling that I make. Even then, some sneak through.

We all miss things, our mind sees what it wants to see because it makes assumptions about what should be there, and just ‘sees’ it.

The easiest way to write out a sequence of actions in sufficient detail for it to be a contributor to the creation of ‘Flow’,  is to assume you are writing them for  your grandmother who has advancing Alzheimer’s, and for whom  every action has to be articulated in detail and in sequence. This should deliver a simple, logical flow, that is easily communicated and used.

A caution: Never assume because a process has been articulated in this way, and seems to work well, that there is no room for further revision and improvement.

Improvement can only occur in a stable environment, and documenting the flow is a key step in the ongoing challenge of improvement.