You Can’t Manage What You Can’t Measure – More From the C-Level Consultants Discussion on Linked In

Incorporating Management Measurements into Managed Work Flow

Let’s take the point of view of an innovative manager. I have a bunch of software in place in my organization that manages workflow. That is, for transaction-based events that must be handled inside the organization, we developed piece of software which routes activities from person-to-person based on the contents of the previous event. Data or documents flow along this this workflow as appropriate. Scheduling events allow individuals to assign pieces of work to either the next available person in a role, or to specific individuals. Decision events route the work down one sub path or another. Essentially this is a managed workflow. With some thought and care it can be implemented in a variety of ERP or other packages.

Now let’s add a measurement component.First, let’s lay out some some basic principles or values on which we want to base our measurements.

1. Not every occurrence of an event in the workflow will take the same time. Some will take longer than others on both the actual time put in any calendar elapsed basis. This will be a function of both the content of each actual occurrence of the event, and on outside events (e.g. vacations).

2. Individuals who do a particular event in the workflow are the best judge of how long a particular occurrence should take based on the knowledge they bring to the doing of the event.

3. The point is to provide feedback which helps them complete the task, as well as aggregated measures which help management decide if intervention of some kind is necessary either with an individual(e.g. coaching) or with the structure of the work flow itself.

So how would you do that? Remember you can’t manage what you can’t measure. What do you can measure here? And how would you do that in a way that is not obnoxious and over rigid, but still respects the capability of the individuals doing the work during the particular events in the workflow.

Here is how I would do it.

1. Add a component to the software which measures the elapsed calendar time between the initiation of an event in the completion of that event. That’s reasonably easy to do.

2. Store this information in a database.3. Provide periodic reports to the individuals who complete events in the workflow which show:

a. Their distribution of completion times,

b. as compared to the average distribution of completion times for all of the people who do this event,

c. as compared to the normal curve.

Why provide these three levels of feedback in this way?

1. It respects the fact that many things can affect the completion of a particular instance of the event – some of which may be beyond the control of the person completing it.

2. It provides individual with feedback that compares their distribution of completion times against the average distribution of completion times. It provides them with direct information about their level of performance, not subjective judgments by others.

3. It provides a norm, a normal distribution, which says that management expects variation in completion times. We are not just providing you with this feedback to try to drive you into completing events in the shortest time possible.

So, if we implement this we have a very sophisticated measure and manage system which is really not beyond the capacity of much of the software we have today.

The point I’m making here is that it’s not just about what we can measure and not measure, but also about the values we bring into the process of implementing measures in a management context.

I built primitive versions of feedback mechanisms like this and have been deeply impressed by the willingness of the people handling the events in the workflow to take this feedback and find ways to improve the quality of what they do.

The Great Pension Scandal: A Moral Fable

The Great Pension Scandal: A Moral Fable

Let’s listen into the dialogue between an employer (E) and a new employee (N) somewhere in North America, sometime after the Second World War.

E: Great, you will be starting work with us on Monday.
N: Yes, I’m looking forward to it.
E: OK. We’ve got your benefits out of the way but now we have to think about your pension. Here is the deal. You put in 5% of your salary. We will match it. Because we know that people are too busy to do a very good job of managing their pension investments, we will put these funds into the company pension plan for you and we will manage it. That way you can be sure that what you need will be there for you when you retire.
N: Let me see if I understand this correctly. Instead of giving me 10% more in salary, you are going to hold it back. In effect, you’re paying me 10% less than you would have. Instead, you’ll invest this in a pension plan program for me, so that I’ll have a clearly defined set of pension benefits when I retire.
E: You’ve got it. Although we don’t think of it as deferred income. Instead, we think of it as the company putting company funds into your pension plan. We know that we are really better at managing long-term investment plans than individuals. Therefore, we just think of this as another company asset that we are managing for you in the long run.
N: OK. If that’s what it takes to get the job, I’ll go along.

Shared “Myths” and “Social Contract” Behind Pensions

This dialogue sets out the pension component of the employment contract that generations of employees have entered into since the Second World War. Broadly accepted by employers, employees, and politicians, these employment contracts really became a “social contract” that shaped the lives of millions of individuals and families. When it worked, it provided financial stability in the later years. When it didn’t, it created hardship for individuals and families.

The word “scandal” reflects the fact that this social contract is logically based on the idea of “personal income”. No matter how you try to make this situation “nice” or “legal”, the reality is that pension plan contributions are income that was paid to employees. The whole legal debate about who owes the “surplus” in pension plans that occurred in the 1990’s completely missed this fact. Pension plans contributions were and are listed as “deductions” from individual income in most organizations. The legalities of the various pension plan contracts crafted by organizations cannot escape this fundamental fact. Legal niceties have often hidden such fundamental moral realities in the endless arguments framed by careful and thoughtful lawyers who are paid to favor one side over another.

Unfortunately, these employment contracts, and the resulting social contract that evolved from them, are based on a number of commonly accepted beliefs that have not held up over time.

1. Individuals were taking “life long” jobs. Careers progressed within the boundaries of a single-employer. People would retire from the first (or at least, an early) employer they joined in their careers. In many cases, they did. This employment pattern started to break down in the last decades of the 20th century.
2. Organizations last a “long time” – over 50 years. Unfortunately, as research has shown, most public and private corporations simply do not have life spans that last this long.Many of the largest corporations in the Fortune 2000 simply disappear as visible entities. In fact, the only employer with some guarantee of this kind of life span tends to to be the government.
3. Organizations are led by individuals who have a sense of responsibility for the welfare of their employees.This “paternalistic” mindset became less and less common as the decades since the Second Work War progressed. It was associated with a form of “male”: and “employee” chauvinism that has been undermined by the social movements of unionism, feminism, and anti-racism.
4. Most individuals are not capable of managing their financial affairs in a way that ensures that they will save for the “later years”. The complexities of investment and the stock market require special expertise and ability. An organization’s leaders are more capable of identifying this kind of expertise than the average individual. Therefore, it made sense for the organization to “own” the pension assets, and manage investments for employees.
5. Defined benefit plans made long-term sense. Shortfalls from investments will always be made up by the future contributions of future employees. Somehow, their numbers would always be large enough, and the investment wisdom of pension plan managers would always be great enough, to support defined benefit pension plans 10, 20, 30, 40, and 50 years into the future.

Unrealistic Beliefs

Today, we know that these beliefs were really a form of social elitism. This social elitism still exists today, even in the face of events that have shown its shortcomings. The upper cadre in organizations still believes that they were more capable than the majority of their employees to make long-term decisions. Specialized “pension managers” still believe that they are more capable of investing pension income and ensuring that adequate amounts would be available to pay out defined benefit pensions to individuals 10, 20, 30, 40, and 50 years into the future.

Throughout the second half of the 20th Century, the political elite, closely connected to the organizational elite, shared these beliefs. They created legal frameworks governing pensions that treated pension funds as assets of organizations. Deferred income belonging to employees became regarded as an asset on an organization’s balance sheet.

During the later decades of the 20th century, as government started to realize that there was a “pension” problem, and used tax-based incentives to encourage individuals to “save” additional funds through RRSPs (Canada) and 401K plans (US), these beliefs shaped the legislation which regulated private pension plan industry as well.

When organizations face financial difficulties, pension assets, just like any other asset on the balance sheet, are used to “deal” with the claims of the organization’s creditors. Pensioners are the creditors of last resort. All other creditors have a prior claim to the organization’s assets. Somehow, the fact that pension funds were really deferred income that logically belonged to the employees got lost in the social elite’s paternalistic approach to pension plan management. Corporations set up to manage “additional” savings (e.g. RRSP or 401K) savings are treated in the same way. Other creditors come first when they run into financial difficulty.

Government-based pension plans were created as a pension of “last resort” to cover these gaps. Unfortunately, the managers of these government plans also believed in their ability to predict long-term financial trends. Time has made abundantly clear that all pension managers’ – corporate and government – belief in their own abilities substantially over-estimate their actual long-term financial and investment management performance. Government pension plans, both for government employees and for other members of society, are also facing a severe underfunding crisis.

The beliefs of the social and political elite that underlie pension plan management were and are unrealistic. They reflect an “over optimistic” view of “themselves” shared by the organizational and political elite in society. Pension benefits for current and former employees / contributors have disappeared, and will continue to disappear, within a pension regulatory regime based on these beliefs.

An Impending Pension Disaster

At the end of the first decade of the 21st century, dialogue about an impending pension plan disaster fueled both political debate and pundit commentary. However, very little of this commentary looks back to the social conditions which created the crisis. Few of the reforms proposed address the underlying moral scandal that led to crisis. This scandal, and the proposed attempts to mitigate it, continues to refuse to recognize a number of simple fundamental truths.

1. Pension assets do not belong to the organizations that manage them, whether they are private corporations or specialty organizations created to manage these funds. They belong to the individuals whose deferred income or chosen contributions fund them. This deferred income and chosen contributions, and the return, good or bad on the investment of these funds, make up the assets of all pension funds. Pension fund managers are stewards of others’ assets. They have no “right” to these assets.

2. Pension assets belong to individuals as individuals, not to the the collective group who, at any point in time, might be entitled to benefits from a pension plan. Organizations which offer pension plan saving services today recognize this. Individuals can choose to place some part of their income in such plans. Logically, such individual choices are no different from the implicit choice individuals make to place some part of their income into a pension plan on accepting an offer of employment.

3. Pension plan managers, whether working for an organization that employs individuals or for an organization offering a pension plan management service to individuals, are stewards of others’ assets. As a result, they cannot claim any right of confidentiality with respect to their activities as they steward those assets. Freedom of information about their activities – all of their activities – is simply a right which goes with the fact that individuals own the assets in a pension plan. The idea that such stewardship groups or organizations are somehow like private corporations, and entitled to privacy about their internal activities, simply does not hold.

4. Management teams make decisions that balance between the very short and the foreseeable future. Generally, this means that they make decisions which choose between immediate benefits (this year and next) and benefits attainable in the foreseeable future (3 to 5 years).

Pension plans require that individuals look 10, 20, 30, 40, and 50 years ahead. That is almost impossible, given the nature of human ability. Very few people can accurately see what will happen in our global society 50 years ahead. Those that do tend to focus on broad trends, e.g. the environment. They do not often make judgments about specific investment choices that need to generate a return adequate to fund pension obligations 10, 20, 30, 40 and 50 years into the future. Consequently, pension managers need to be responsive to a form of governance which is very different from that applied to either profit or not-for-profit corporations.

Corrective Responsibilities and Actions

Today, we as a society have to deal with the results of our past actions. We cannot escape the fact that our shared beliefs, and the natural collusion between organizational and political elites, created a current problem. We can also not avoid moral components of our current pension dilemma. The corrective action must go back to basics. Saving for pensions is done out of the income of individuals. Consequently, they own the those savings, and the results that come about from the management of those savings, no matter who does this.

Fixing the current pension problem will not be easy. It will take careful thought and open dialogue at all levels of our society. It will will need to go beyond the ideas that follow. However, we must start. Tinkering with the existing pension plan system will not work. We must address some of the fundamental underlying beliefs that created this crisis in the first place.

1. Politicians must immediately pass legislation that recognizes that pensions belong to individuals not to organizations, whether they are employers or pension savings service management corporations offering to manage pension related savings.

Consequences:

 Pensions become “creditor” of first resort, not last resort when these organizations fail financially.

 The pension savings management industry will develop ways to facilitate the “movement” of individuals’ pensions as they compete for this service business.

 Organizations doing business with pension savings management companies, recognizing that they will be “creditors” of last resort, will rapidly “sharpen” their evaluation of these firms and only do business with the ones most likely to last and survive.

 Financial corporations (e.g. banks and insurance companies) offering “pension savings management” services will need to take steps to “isolate” this part of their business from the other “financial risks” that apply to their balance sheets.

 Employing organizations that manage “company pension plans” will take steps to “isolate” these assets from the other parts of their business.

 All of the internal information created by these pension management service firms will be “publicly” available, since the companies doing this service are “stewards”, not owners of anything. This will “speed” up the spread of best practices in the industry, and reward the “best stewards”.

 Over time, individuals will be able to migrate their pension savings to the “best performing” pension savings management organizations.

2. Politicians must create a regulatory scheme for pension savings management organizations that focuses on “adequacy” to meet future obligations, not past’s year’s return on investment.

Consequences:

 Pension management service groups, even if they exist within the framework of employing organizations, must be structured as “not-for-profit” organizations that are accountable to the individuals who ultimately own the funds which fuel them. That does not mean that pension plan managers cannot earn “individual incomes” based on their activity. It does mean that such managers cannot use the “structure” of private or public corporations, or the laws relating to them, to reduce their fundamental need to be accountable to the owners of these funds. It also means that they cannot use existing corporate law to reduce their need to be totally transparent in their activities to such owners.

 Pension savings management firms will need to develop complex predictive models that relate their funds under management to the “payouts” they expect to make to their funders 10, 20, 30, 40 and 50 years in the future. These models will need to take into account the “age distribution” of their funders, as well as their understanding of the likely investment performance of their funds under management. The year-over-year success or failure of their predictions will become the basis of their “competition” for contributors’ funds, not backward looking past investment histories. This has two profound implications. First, long-term investment strategists will be attracted to such firms. Second, over time, better and better prediction models will be developed, which will help regulate this industry in its true time frame (10, 20, 30, 40, and 50 years into the future).

 The government regulatory agency, which oversees this industry, will have to develop “extraordinary skill” at this kind of predictive modeling. It will be able to do so, based on the fact, that the internal details of these models will be publicly available.

3. Politicians must pass legislation that requires individuals who earn above a certain income level annually (say 50% of the national average) to contribute a minimum part of their income (say 10%) to a pension savings management organization.

Consequences:

 Working out the details of how to do this, and how to move the funds from employers to these organizations, will require careful thought. Surely, a society capable of the electronic banking and fund management we have today can find ways of doing this effectively.

 Individuals can always save more if they chose to do so.

4. No pension income that is less that the average annual income in a society should be subject to income tax.

People made their income-based contribution to society during their earning years. Once they are living off “pension” income, whether they receive it from the government, or a pension income management organization, a certain portion of it should be sheltered from income tax.

Consequences:

 People living on “minimum” pensions today would receive an immediate boast in “income”.

 When combined with other social support mechanisms, e.g. income supplement for the “poorest” seniors, society will deal responsibly with the problems created by the “myths” underlying pension management in the past.

Being Part of a Society is Making Moral Choices

Pension savings dynamics and schemes are part of the social framework that makes up modern society. Like all the components of such frameworks, they are not “true” or “factual” in the same way as facts about the material world. They are part of the way that we build “ways” of being together in “society”. As such, they have moral and ethical components which cannot escape logical argument and reasoned debate. They need constant review in the light of changing social dynamics. They also need open dialogue through which each person in a democratic society has the right to make themselves heard.

“A Measure What You Manage” System that Works

Sandy Pentland’s book “Honest Signals” ( http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=11532 ) makes it clear how much our evolved internal psycho-dynamics are still functioning as if we were living in tribal and other “survival” situations.

I personally think that management has to “consciously” work with and “against” our evolved interpersonal judgment mechanisms. I believe that this has deep application in recruiting and in performance management.

Our evolved psycho-dynamics precondition us to “rapid judgment of others” and to “action”. That made sense in a tribal, hunter-gatherer world, where meeting a new person required “instant” assessments and “flight / fight” reactions. It does not in modern society, and certainly not in modern management.

Performance management in organization must move us beyond the inappropriate use of our evolved human “natural” abilities. Our performance management processes must meet the requirement of managing complex organizations and technologies that populate our world. (The subject of my last blog.)

But we can move even further down this path. I once worked for a CEO who said three things.

“1. I need to get the folks who work for me thinking about the same things that I am. I need a way to convey that to them without having to tell them in talk all the time.

2. What counts is not the past. Explanations about the past don’t help me any. What counts is commitment on the part of the folks working for me  to doing something which changes non-positive trends – trends starting in the past that will continue to happen if my people don’t do something to keep these trends from continuing to happen.

3. The numbers which are important to me today are not the numbers which may be important to me 6 months from now. Sure, some numbers are perpetually important, but I need others as I and my folks do things to manage and to change the business and make it better.”

He said these things to an innovative systems chap who happened to be a physicist working for his organization as a lead business application designer. That chap said:

“I don’t understand management. It is like a big cloud bubble chamber experiment in particle physics to me. You get all kinds of data and the best that you can do is look for patterns which you think explains some things.”

This systems chap worked with the CEO to implement a “measurement system” that was based on the following ideas and principles.

1. Each person can only get as many numbers from the “system” as will fit on one 8/2 by 11 inch page.

2. You can only get numbers that already exist in one of the transaction processing business systems that are already used to run the business. If you want new numbers, you can only get them through the process of improving the functioning of these systems.

3. All the numbers that are available are listed in a data catalog which the system made available to each individual executive. (Getting this data catalog up and maintaining was a real “roll up your shelves and catalog” effort in meta-data management.

4. Librarians and public relations people provided input on how to “structure” the presentation of this data catalog to executives so that they would find it “user friendly”, and could navigate through it in ways that made sense to them, not systems analysts.

5. Each executive could pick the numbers they wanted to see. They would get a personalized report of their numbers every day, even though not all the numbers changed every day. Changed numbers were highlighted. Individuals could request supporting graphs showing the historical patterns of any of the numbers on their personalized report. These “supporting” graphs also showed the trend lines that were being used to predict the “at year end” projections of these numbers. (See point 8 below.)

6. An individual’s immediate reports would get a copy of that executive’s personalized report at the same time that the individual got the report. Usually, they were delivered to all of these folks in-boxes at the same time. That meant that people in the top three or four ranks of this company got the following each day.

• A copy of their boss’s personalized report.
• Their own personalized report.
• Any support “graphs” of any numbers on their personalized report they had requested. Everything was always printed out on 8½ by 11 inch paper.

7. Executives did not have to explain their choice of numbers to their bosses.

The physicist-systems chap trained in physics believed that management was a process that depended a great deal on individual intuition and experience. He did not understand management. He believed that many executives did not either. He thought that executives often acted on “intuitions” that were beyond rational explanation before the fact. He did feel that he should in any way interfere with their personalized approaches to the “bubble chamber” experiment called management.

The CEO thought his job was to get his folks to produce results, not do this in ways that reflected his own approach to problems.

This combination of beliefs was extremely important in setting up this system. I believe that it was also key to its success.

8. Once an executive asked for a number in the data catalog, that person would get the following versions of that number:

• Actual to date
• Budgeted ( if available),

and

• Projected to year end.

These projections were based on estimating systems that the physicist developed for each of the entries in the data catalogue. The physicist and his system team developed statistical processes which they used to project these numbers. These process were based on “curve fitting” technologies, as well as dialogue with folks responsible for operating the source transaction processing systems about the nature of each of these numbers.

This team regularly reviewed the success of their projection routine by comparing their projections against actual numbers as they became available. As they learned to from these regular comparisons, they updated these prediction- to-year-end mechanisms.

Regular updates to the data catalog communicated the results of this assessment and updating process. This also quelled the inevitable debate about “how to predict” among the executives.

9. Each number in the data catalog was classified as either an output number the result of effort put in) or an input number (some kind of effort put in to produce some output). The data catalog preparation team based this on dialogue with the individuals responsible for the source transaction processing business applications.

Although there was a little bit of flurry among the executives about this classification in the beginning, it rapidly settled down, once the daily reports started going out.

It took the best part of a year for this “measure what we manage” system or application to settle in. The CEO’s sponsorship of it was extremely important in its initial “acceptance”, even if this acceptance was less than enthusiastic on the part of some of the executive team.

The system really took off when the CEO insisted that his report consist entirely of ratios – of outputs over inputs. He explained his reasoning for his choice for this in his personalized report. The first part of it simply reflected long term ratios that he considered important to his understanding of the up and the downs of the business They were stable.

The second part of his personal report he regarded as “experimental”. He chose ratios for it that reflected his current attempt to delve deeper into the dynamics in the business that he thought could be improved or were changing. They were his way of gaining insight into some of the dynamics of the business about which he had preliminary, unconfirmed hunches.

Others in the executive group started to experiment with similar approaches on their personalized reports. Again, they never had to explain their choices to anyone other than their direct reports. Before long, the personalized reports of the top 1 or 2 ranks of the executive group consisted almost entirely or ratios.

Again and again, the CEO in this organization emphasized what he wanted to hear from folks when things were considered less than positive. He asked them to tell him what they were going to do to attempt to change that, not provide explanations about the past. He considered simple focus on understanding the past as a form of “analysis paralysis”. He wanted such “insight” linked to actions they were taking to change the projected trends in raw numbers being taken from the transaction processing systems used to run the business.

As the CEO changed the some of the ratios that made up his personalized report, this reports able to follow the things he was concerned about in the business. Often, these changes were based on intuitions or hunches or curiosities he had. They did not always make sense. They did not always provide “useful” information after a couple of days or weeks. He simply dropped them when he die not find them helpful to him, and replaced them with other things which intrigued him. As his direct reports followed these changes, they “started to read his mind more accurately’, based on following the patterns of his changes in his personalized report.

The projections-to-year end focused people lower down in the executive ranks, who often did not interact with the CEO on a day-to-day, basis on doing things rather than explaining things. The culture became less concerned about blame and more focused on doing. Over time, the executive ranks “got” that not doing something about a “downward productivity” trend was the real thing for which they got into trouble with their bosses.

In some cases, an individual executive’s dis-satisfaction with the quality of some of the ratios on a personalized reports led to that executive taking an interest in the source transaction processing business application and requesting upgrades to it. Over a number of years, there was a commonly noticed improvement in the quality of both operational and customer facing transaction processing applications.

This system became known as the “management daily”. The CEO attributed a year-over-year annual 10% increase in the operational productivity and profitability of his organization for the period that he was CEO directly to the “management daily”. He claimed that it created an “cascading alignment of thinking and concern” in the executive ranks of the organization – a pulling towards constant productive improvement that he had never experienced before.

To me, this is a “you can’t manage what you don’t measure” system which makes sense for an organization.

1. It respects the fact that individual executives have different insights and intuitions about what is important in management.

2. It encourages dialogue between an executive and his or her immediate reports. At the same time, it allows these immediate reports to shape a different kind of dialogue with their own immediate reports.

3. It insists that the numbers – the measures – come from the transaction processing systems used operate the organization.

4. It builds feedback loops from the management team back to these transaction processing systems.

No additional measurement effort, other than the collation and reporting system itself, is required to generate numbers. The transaction processing systems can be used to handle internal operational activities or be used to manage customer centric ones.

5. It follows change over time, as the management team makes change to improve the organization.

6. It focuses management dialogue on the future, and on acting to change the future, not explaining the past.

7. It focuses management dialogue on productivity, on outputs over input, where it should be, and on trends in productivity, not point in time measures.

This point in time focus is one of the weaknesses of many external investment analysts who focus on quarter by quarter results. Their time frame is simply too limited to truly “get” what is happening inside an organization.

Some of the features of this “management daily system” have found their way the balance scorecard systems. Unfortunately, I believe that in many cases balance scorecard implementations have lost two of the great strengths of this management daily system.

• First, balanced scorecards are often static – reflecting one individual’s point of view about what counts, or a consensus of individuals ‘view about what’s important at a certain point in time. Balanced scorecards may include ratios, but they often lack the “experimental component” of the management daily. They are not “personalized” to each executive like the management daily

• Second, balanced scorecard systems seldom implement the projection element of the management daily system. The lack the “learning element” – comparing projections against actuals – which the physicist-systems chap implemented in the management daily. As a result, balanced scorecards often become systems which focus executives on explaining the past rather than achieving value results in the future.

Link such a “management daily “measure what you manage” system to appropriate performance management incentive schemes. Let the incentives consist of a thoughtful mixture of individual, business area team and organization wide incentives. Get this linkage right, and you create the environment needed to focus people on creating extraordinary organizational excellence.

I have implemented “management daily or weekly” approaches in each organization unit that I have managed since my exposure to this organization. It has been relatively straight forward to set up the necessary data extract and numbers processing systems, given the advances in business intelligence and business analytic software.

In each case, I have been deeply impressed by the change in thinking that resulted in my direct reports. They became future action oriented, rather than past explanation bound. We achieved significantly enhanced performance results as a team, and as individuals. This is a form of “measure what you manage” that works.

You Cannot Manage What You Cannot Measure

The C-Level Consultants Network on Linked In led by Frank Feather has been having a very powerful discussion on “You Can’t Measure What You Cannot Measure”. (see http://linkd.in/gt57Ox if you are on Linked In and have the ability to follow this group.)

The discussion got me going on one of my core beliefs: performance contracting and appraisal, particularly at the senior level, are a waste of time without two factor metrics. So I posted this comment in this group.

This continuous debate about “You Can’s Manage What You Don’t Measure” has been around since Alfred Sloan. To some extent, we forget what the core of his message. “You cannot manage managers unless you have clear insight into the measures that you are going to use to measure their performance.”

As an individual who has managed managers and consulted to them at all levels, including the C level, I know how true Sloan’s prescription is. At the same time, as a work place psychologist, I know how counter intuitive measures are to our evolved “individual-relationship-family-tribal” internal psycho-dynamics. We did not evolve to measure. We evolved to act.

But management is not day-to-day life. Although it is strongly impacted by the evolution of the tribal component of our internal psycho-dynamics, and our need to act, we can also use the rational parts of our mind to provide structure to management action.

In my own career, I developed the following approach to managing managers through performance contracting and appraisal.

One:

Focus on metrics that are relevant to what they are expected to produce.

Two:

Use only output / measures – what I call two factors measures – something that manager are expected to produce over something they are expected to use to produce it. Revenue per employee and lines of software code / developer hours are two examples that I have used.

Three:

Never have more than 3 to 7 of these – remembering that short term memory really only holds only about 5 things in its view and with two factor measures we are already dealing with complex things.

Four:

Focus on the trend over time, not the absolute measure at any point in time.

Five:

Focus on the pattern of results in the trends over the whole set of measures, not any particular one.

Over the years, I have received lots of comment about how this too complicated – takes too much energy etc., often from very senior executives.

That always sounds like an excuse for me from people who prefer to drop back to our evolved “individual – relationship – family – tribal” ways of doing things rather than actually managing thoughtfully. Often, they invoke the “ASS” principle as their justification.

Who ever said that management was simple. Take Fukushima for instance, and many of the other things we do in our world today. They are not simple. “ASS” simply does not apply to such things.

It constantly amazes me how experienced managers and executive search professionals persist in their belief that somehow a desire to act before thinking is the sign of a “good manager”.

It constantly amazes me how many times I get a vague answer to the question – “how do you intend to measure this person’s success in this new job: in the first three months, in the first year, in the next year” – during the lead up interviews to search and recruitment at the senior level.

And finally, I have come to accept that the consistent resistance to two factor metric based performance contracting and appraisal that characterizes our executive and management culture is based in our evolutionary history. We evolved as tribal creatures whose internal psycho-dynamics lags behind the needs of management in today’s world. We like to think that acting is more important that thoughtful action. In management, thoughtful and successful, action requires at least two things:

◦ knowing what to measure,
◦ and actually measuring it over time.

Crucial Myths About Talent in Our Society

I believe that talent is everything in achieving organizational excellence. Single or simple-minded talent approaches will not work in the competitive world of the 21st Century. The world is a more inter-related place. The global integration of the world’s marketplaces has brought new opportunities, and new challenges and threats. The impact of technology has shortened time cycles and decreased the impact of distance. A society’s ability to nurture and effectively align talent with appropriate opportunity is its ultimate and only source of competitive advantage.

Unfortunately, many of the social myths about talent that were developed and proved effective in the 20th century world, and earlier, still hamper our ability to do this. Some of these myths cripple our ability to provide a sustainable standard of living for all. They need to be replaced with new ones. Five of the key ones follow.

1. Psychological “employment” contract

Old

The psychological contract between employer and employee works best if it includes the idea of long-time employment and employer responsibility for such things as benefits and pensions. A part of an employee’s wage must be held back by the employer to provide such “employment” benefits.

New

Adults, if educated and provided with appropriately structured and regulated service providers, can take responsibility for their short and long-term benefits and long-term pensions. Employees (full time and contract) should receive all of the payment achieved through their use of talent.

Note:

Employers must focus on the short-term (this year) and long-term (over the next 5 to 50 years) social and economic survival of their enterprises. They do not have the energy to also “provide” for the life-long benefit needs of their employees (permanent or contract).

Governments need to provide “enabling legislation” which facilitates and regulates the specialized service providers who do so as part of the social contract, just as employers used to do this as part of the employment contract.

2. Capital and its management

Old

The individuals in society who have access to,and who manage, capital do so because of some innate or acquired superiority of talent. They, therefore, have the right to expect a substantial premium payment for their use of capital

New

In the 21st Century, the lottery of birth and the market place has as much to do with access to capital as individual talent. All individuals have the right to be reasonably compensated for their productive use of talent, in whatever way they use it.

Notes:

Although the market place must recognize the contribution of capital (resulting from the past deployment of human talent), capital does not have some inherent right to be compensated at rates markedly higher than talent. Society can and must set these limits in ways, which reflect the underlying fact that talent is the source of all value in human society.

Financial capital cannot exist without society. It requires the common acceptance of financial exchange and social contract mechanisms (money, credit, contract law, and contract enforcement. Even slavery is ultimately a form of social contract). Without these, the only form in which capital can exist is in the products which an individual or cooperating group of individuals can produce or utilize by their use of their own talent, (largely personal tools, personally-harvested land and nurtured livestock), or through what they can “take = steal or inherit” from others.

3. Talent and its compensation

Old

Some forms of talent are inherently more valuable than others. The market place is a “fair adjudicator” of these differences. Therefore, some forms of talent desire to be compensated at rates that exceed others in large multiples (in the hundreds and thousands).

New

The market value of talent reflects “current” and “local” conditions, as well as social myths and stereotypes, not the innate nature of talent itself.

Note

Just like many other things in the market are “regulated” for the greater good, the range of compensation of talent can also be regulated for the greater good. This regulation will never be perfect, and must be subject to continual social dialogue about its nature and form.

4. Some talent is innately exceptional

Old

Some individuals have exceptional talents compared to the rest of us. They deserve to be compensated for their use of this talent at rates that far exceed the rest of us.

New

The exceptional value assigned to some levels of talent reflects social myths, trends, and stereotypes, not anything in the inherent nature of the talent itself.

Note

The folks with “exceptional” talent reflect what a society values at some point in time. They are not innately “worth more” than people who have their talents at average or less than average levels. (I hope that all college-educated individuals will have been exposed to the idea of the normal distribution by now, even if they reject it.) Some people have exceptional levels of talent in some areas that do not receive exceptional compensation, simply because “society” does not value their talent at that point in time.

5. An adult’s talent

Old

Some people simply do not have talent they need to be socially productive.

New

Every person who is capable of functioning on an adult basis on a day-to-day level in a society possesses the talent needed to contribute in some way to that society. The fact that some are not “valued” reflects the limitations of the society, not of the individual.

Note

It is clear to all of us that some people who are physically adults (i.e. they are older than 16 ,or 18, or 21 or whatever age is defined as the age of the onset of adulthood by the society in question) are not capable of functioning as adults in that society. They should be treated and cared for as if they were children.

Adults who function on a day-to-day basis in a society deserve to be treated as adults. Some societies are still strongly impacted by pre-21st century myths about talent. In such societies, people treat the inability of some of these adults to “use their talent” to earn sufficient compensation to support themselves as something for which to blame the individual.

Other societies (well, maybe only in the world of “Star Trek”) recognize that the choices that we make collectively through our political and enterprise processes have a great deal to do with the differential valuing of human talent. These societies provide appropriate social safety nets, which provide the basic dignity of survival (food, clothing, shelter, and health care) for all adults. Whether or not to do so is a choice we make through our social and political dialogue, not a “natural fact”. Such societies also recognize that all human adults have the capacity to make a useful contribution in some way.

People will argue that the existence of “criminals” invalidates this. However, it is both historically and sociologically clear that most forms of crime are socially defined. Most criminals only exist as a reflection of the current status of what they do in their society. (The best example that I can think of in this area is the lottery. In the 1920’s, the numbers game was criminal in North America. By the end of the 20th century, when in the hands of the government, this form of crime has become “non-crime”.)

Interpersonal violence may be the result of the fact that a person with the physical form of an adult cannot function as an adult. A society needs to cope with these folks in some humane, restraining way. We generally treat such folks as if they were violent criminals. Sometimes, individuals functioning as adults lose control and behave violently towards others in ways that we do not accept as “reasonable” in society. All societies set such limits and create social mechanisms to deal with it. But none of this invalidates the fact that all individuals functioning as adults have the potential to contribute to society in some way.

Concluding Note:

A social myth serves an important function in our society.I labeled it a myth because it is not about the physical or material world, and therefore cannot be true or false. You can observe and count and make statistical statements about a social myth’s adherence and relevance. These are facts – “x percent of the people in group y say they believe this myth”. You can evaluate whether or not this statistical fact about the social myth is true or false. But, you cannot state that the myth itself is true or false. You may believe it to be, treat it as an important value, but in doing so you are implying that social myths are the same category of thing as a fact. They are not.

I label them social because they serves an intensely important integrating function in society. People believe these myths. These beliefs impact the way that they structure their own lives and interact with others. Durkheim, the French sociologist, termed such integrating themes as being part of the “collective social consciousness”. I prefer to think of them as high integrative social myths or stories that shape our society.

Its all Ups and Downs in Start Up Land

Its is all ups and downs as I work through the various things that I need to work through in this start up. Little things send me up  – not so little – won a Blackberry Bold at a conference / networking event this week  – it is a neat tool and left me joking that I only need an app to shrink my thumbs to a smaller size when I use it.

Normal things send me crashing. Wrote a proposal for a potential client who seemed to be in a hurry. Now it is just wait, wait -  she does not have time to get to it.

Unlike executive work, or consulting gigs, I don’t have the momentum of day to day external events to keep me focused. It all starts and stops within me.

So I find that I am much more dependent on my own will, rather than the pressure of external events, to keep me energized and moving forward. In executive or senior consulting roles, I could always rely on external events to get me through the “low” days. The pressure of events, the constant need to contact and keep others in the loop, the inevitable administrative deadlines that needed to be met, all were a source of energy when I felt down about what I was trying to do. Now I can only rely on myself, and my internal belief that what I am doing makes sense. Big change.

What a way to start the New Year

Friend of mine sent me this article this morning: http://www.dailywealth.com/1573/How-America-Became-a-Communist-Nation

Here is my response.

The authors of the above commentary has got it both right and wrong. It is not communism that is the problem. That is just their red herring.

I think the following trends have got us into our troubles.

1. State- ism:
the idea that the state is ethically, morally and intellectually superior to individuals. Senior civil servants and the politicians have become the new political elite, replacing the aristocracy and if you look back far enough tribal leaders who have exploited the other members of societies for their own ends.

2. Combined with utilitarianism – the idea that progress occurs when wealth is shared more equitably across a nation’s citizens. It did when it created a consuming educated middle class which drove the technological progress of the last 150 years.  But now it has become the idea that we can all live off our neighbors by appealing to the state to finance us, either as private citizens through welfare and tax grants / advantages / breaks or as corporations through transferring some part of our legitimate costs to the state (e.g. education, disaster recovery, start up and innovation incentive grants and tax breaks etc).

3. Combined with annual general ledger accounting - the idea that everything can be reckoned up and managed with on 2 sided profit and loss ledgers based on a calendar year,at both the state and commercial level.
This has allowed both governments and organizations to substantially discount future cost – e.g. climate warming, destruction of ecological assets, education of needed workers …. At the same time, it focused our civil and commercial  investment thinking into short term profit and loss instead of long term sustainability and generation over generation quality of living increases.

4. Combined with deficit spending for democratic governments funded by current and future income taxes -
the idea that current spending can be financed by future taxes; really escalated to the point where we are now spending the next generations’ (who don’t have a vote) income.

If all current government income was current value tax based, the average person would be paying a sales tax of 65 to 70% on every dollar they spend to finance current government. That level of current value tax would not even begin to address accumulated government debt.  This level of taxation would provoke a psychological revolt that would quickly undermine existing democratic parties.

5. Combined with party politics in democracies: the idea that locally elected individuals – who should represent those who elected them – should be disciplined to the party line – the line set out by the party leaders. This has essentially replacing electoral democracy with tribal psychology based party politics.

Raising the red flag of communism is a kind of ideological Ludditism, which really does not help anything other than the previous commentator business. They are obviously trying to appeal to folks who response to that red flag label for his wealth management business.

However, as I keep telling myself – “give me solutions, don’t just define problems”. I believe that some of the solutions to mess we are in are relatively easy to state,  but very hard to implement, given the current state of our world.

1. Make government deficit financing illegal - legislate that governments must always balance their books within the period for which they are elected. That will eliminate their current practice of looking good today at some future governments’, and tax payers’, expense.

2. Eliminate income taxes - go to a value added transaction tax on all personal and commercial current transactions that occur in a society. That way people will really feel the current cost of the governments they elect. It also reflects the real role of government – create a sustainable, understandable, safe social framework within which both private and commercial citizens can contract and conduct business, live their lives.

3. Combine this with income support for the most poor 20% of society to eliminate poverty and want.  That allows those who will not / cannot support themselves the opportunity to survive while discouraging the kind of gross exploitation of the very poor that has characterized so much of our history once we moved from tribes to societies.

4. Move from annual commercial profit and loss accounting to something that reflects commercial reality more realistically – say 3 to 5 year profit and loss accounting. It is not a perfect solution but creates a better balance between the needs of short term / long term pressures that all commercial corporations need to address.

4. Allow individual vote, not party based votes, in the elected houses of government, on all issues in democratic governments at all levels. That encourages consensus seeking not party based control in government. It creates a much more complex dynamic for political leaders. But dealing with and successfully managing that dynamics is really their role.

5. Move to not-for-profit service delivery corporations for services that benefit the common good – e.g. transportation, health, education – without eliminating the need of such corporations to buy innovative products and processes from the “for profit” marketplace.- That will attract good service oriented quality talent to their leadership ranks. Make sure that they need to compete based a variety of unit-cost-over-time reduction and “service quality survey” metrics over the same 3 to 5 year time frame as commercial corporations are evaluated on their ability to generate profit.

6. Keep the “state” from delivering any service what so ever except for defense. Its job is to look ahead, plan, provide legal frameworks, coordinate, regulate – not do – in every area except for defense. Turn all existing government services – including law enforcement – over to competing non-profit corporation. Use the metrics laid out above to evaluate them. Have them responsible to boards that include representatives from government, the public at large and the “audiences served” (e.g. students, patients, parents, workers in these service corporations, suppliers, people impacted) and publish every decision they make, the minutes of every meeting they have, the views of every members of their board on the Internet.   Broadcast every meeting these Boards have on the Internet. Simply make high transparency a simple fact of their ability to govern these service corporations.

These would be my New Years resolutions, “if I were king of the forest”.

But since I am not, I will focus on an ever more important one for me in 2011. “Get on with turning my business round.”

Best to you all for your 2011.

Ben Horowitz on CEO succession in Enterpreneurial Orgs and Startups

It is not often that I find myself disagreeing in some way with Ben Horowitz. I have found his blogs insightful and useful, and recommend his writing regularly. But this morning, his latest blog distracted me from the events of my day. Lets deal with it and then get on with the day.

See http://bhorowitz.com/2010/12/16/ones-and-twos/ for what Ben Horowitz has to say on CEO succession.

I think he misses one factor and makes one mistake.

His mistake.
He applies Jim Collins’ Good to Great findings from large established corporations with significant multi-year histories to start ups and entrepreneurial organizations. Although at first sight, this makes sense, my own experience and the insights of others, make it clear that these are very different organizational worlds. The factor of inside knowledge is hugely important in big corporations with a long track record, partly because part of this knowledge consists of established internal and external relationships. These are crucial to the success of the large organization.
(As a side note, Collins also talks about 5 factor leadership, and his succession perspective for this corporations needs to be placed in this context.)

The missing factor
Start ups often need to build dramatically new external relationships, rather than having a long history of effective ones. An new outside CEO can often bring these to a start up and ensure that its moves through its stage of the growth cycle by establishing / negotiating these relationships. The CEO’s part history in these relationships is often the very reason these outside individuals even consider the possibility of a relationship with the start up.. An insider might not have these connections or the personal trust which fuels the dialogue that establishes these required B to B connections.

CEO succession is a hard issue. Careful thought and risk taking is always a part of it, whether the people make the choice are members of the board of an established corporation, or investors in / advisors to an entrepreneurial start up.

Both Ben Horowitz and Jim Collins have something to contribute to the dialogue that must occur when this choice must be faced. But generalizing findings from one sample – large established corporations – to another – entrepreneurial start ups – does not help clarify this difficult issue. Ben’s Ones / Twos distinction is grist of the mill of these dialogues, but only part of the needed grist.

December is re-evaluation time

We started to get serious about our start up in August. Finished the long / summary bus plan in Sept / started to move things forward in Sept and have been trying to get things going since then

Little forward movement despite what seems like endless effort, networking, marketing etc

So yesterday was deep discouragement day.
Finally kicked it by watching a 1933 John Wayne movie (Hurricane Express) last night.
But December is re-evaluation and re-orientation month for me.
Am into serious thought / dialogue about what we are up to and whether or not it will work.
Too early too tell where it will come out. But the process feels right, even as we persist on our current path at the same time.
Back to the sales calls … …

Focus, Focus, Focus

1) One of the distinguishing characteristics of effective people is their ability to ruthlessly focus. Find that I cannot do that. I simply have and enjoy two many interests that detract me from the ruthless pursuit of my start up success. Have to learn how to balance the two drives in a better fashion. So many hours each day spent in ruthless pursuit has to be the foundation of time spent on other interests.

2) Took a booth at a networking event last night. Turned out it was more like in an-house party for the folks in a building than a business networking event. They all more or less knew each other, and spend time connecting with each other and engaging in “fun” chat. Some of the other folks who paid for a booth shared my first frustration.

Then on the drive home realized that I had learned something. Because of the dynamics of this group, this was a tough audience. Our booth material did not cut it. It completely failed with this audience. We could not attract them away from their social interests. That tells me that the message we are using is not cutting it in general. Need to par it down. Need to increase its punch. Need to be more “provoking”. Finally, really need to focus on those folks who are our “buying” audience.

Always something positive in every experience if you chose to make it so.