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You Can’t Manage What You Can’t Measure

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Strategic Finance – by Jason Peterson

You Can’t Manage What You Can’t Measure

Access to actionable, current data enables companies to make more effective decisions related to people, resources, and areas of focus.

Many of us have probably heard some version of the expression, “You can’t manage what you can’t measure.” This focus on measurement is usually combined with target setting, and then regular reviews are established to ensure each business unit is making its numbers. This often takes the form of quarterly, monthly, or even weekly reviews, with substantial time spent preparing for and attending formal in-person meetings.

Unfortunately, rather than providing a meaningful opportunity to discuss legitimate business challenges, these meetings often invoke fear: Missing revenue, profitability, or expense targets requires explanation and often results in some form of corrective action and, at a minimum, shaming. If targets aren’t met over several measurement periods, executive leadership steps in to direct next steps and help business unit management get back on track.

Introducing fear into a business review process doesn’t result in changed behavior or solutions to business challenges. In fact, it often inhibits positive change. Fear-based leadership can reduce innovation and initiative and often create self-doubt, which isn’t ideal when your team is facing adversity. Under these circumstances, employees are less likely to self-identify challenges or problems and take responsibility for any mistakes. Once fear is present in a review process, employees often just provide guarded and paralyzed responses.

An alternative approach creates superior results: Expectations should be clearly communicated, and teams must be enabled with data and encouraged to make decisions quickly, bringing about momentum to execute. The goal is to enable people to think creatively. Pressuring people into making quotas and meeting deadlines inhibits creativity and does little to overcome business problems.

If a company isn’t careful, so much time can go into preparing to present to executive leadership that management has little time left to work on actual issues. The book American Icon: Alan Mulally and the Fight to Save Ford Motor Company by Bryce G. Hoffman describes a transition from ruling with fear to managing via honesty. The book is the story of Ford Motor Company’s turnaround under the leadership of CEO Alan Mulally. After joining Ford, Mulally started doing reviews every Saturday, leading to every business unit attempting to present their results as favorably as possible.

Finally, one business unit head conceded that he wouldn’t make his numbers. While many of his peers thought that this business unit head was doomed, Mulally responded by saying, “Good. Now what can we do to fix that?” Honesty is beneficial because leaders need to be informed early when teams are facing challenges. Failing to acknowledge issues prevents an organization from addressing them. To fix a problem or a shortcoming, you first need to admit that it exists and own up to it. Companies should encourage the openness and candor championed in Hoffman’s book.

Setting Business Goals

Let’s next discuss the business target-setting process to make clear how unfair it can be to penalize business management teams that aren’t making their numbers. Many financial leaders recognize the difficulties associated with setting challenging but fair targets for revenue growth, profitability, and other operating metrics. Some business leaders believe in extreme “stretch goals” for revenue growth or market share improvement: They think they should go big and give targets that are nearly unachievable to one or more business units, while other business units get targets that are far less challenging. When businesses with nearly impossible targets almost achieve them, they’re deemed as having failed, while businesses with easier targets are celebrated if they barely meet their much-more-achievable goals. Difficult targets include drastic changes in business strategy or focusing on achieving a specific amount of revenue over a given time frame, while easier targets can include increasing employee productivity or improving work practices.

Even if targets are well constructed, some business units get lucky when an unexpected client opportunity drops into their laps or when unforeseen demand for their product is discovered by accident, resulting in greater than anticipated revenues. Others might experience competition from an unpredicted market entrant or reduced demand due to a natural disaster in a key geographic market negatively impacting revenue. Individual targets are often not updated during the year in response to these changing circumstances, leaving one business with a near- impossible challenge and the other with a much easier road to travel. Moreover, people need to understand how their individual contributions drive the company’s success.

We spend a lot of our lives at work. In fact, the average person will spend one-third of their life working—don’t forget to tack on an hour spent getting to and from work each day for those coming into the office. With all this time spent, we want our contributions to matter. We want to know that our efforts to deliver goods and services to our customers help create a more successful business. People understand when they aren’t achieving their targets and don’t always need to be reminded that they’re missing the targets. Companies will get results that far exceed expectations if they set reasonable goals, encourage overachievement where possible, and allow people to interact with their peers to discuss approaches that have produced success in other parts of the business and let them freely apply their own creativity.

Broad Access to Data

Yet these practices need support from measurements, or data. The more traditional approach where companies conduct formal periodic reviews with only a few senior decision makers present no longer works. Why not make the data broadly available and update results daily or even more frequently, if possible? That way, you get broad employee engagement. With all oars pulling in the same direction, a company can make rapid changes in response to evolving circumstances.

Financial leaders can support such an environment by providing the broader company with data, ideally converted into consumable information. Employees should know when their business is underperforming, and, when supplied with actionable insights, they will be more able to identify specific drivers of shortcomings and work to correct them. Similarly, executive leadership must also be comfortable working closely with data and should be able to use data to critically evaluate changes in business results and the operating environment to adjust to evolving circumstances and make decisions quickly.

This approach sets targets as part of an annual plan. Companies then should frequently revisit these targets and update forecasts and expectations in response to changing markets. Optimally, they should then measure, report, and create dashboards using new data streams to support the ever-changing business. This information is broadly disseminated, and data is usually refreshed or updated daily in near-real time. 

Where possible, businesses need to prioritize data organization from the beginning, as it will be much easier to maintain and organize that data over time. For example, an organization can develop digital business platforms, collect data, and continue to maintain and enhance these platforms and the organization of data. The business will then have a significant data pool on both employees and customers, or any other business asset the company wishes to measure and better understand. This isn’t to say that a company that hasn’t meticulously gathered and categorized data from day one is doomed. While some extra effort may be required, a business can achieve greater efficiencies by striving to improve the immediacy of its information. Data is best utilized and analyzed when current or “fresh.”

To stay competitive, companies need to have the capability to refresh data frequently so that their finance teams and businesses can quickly determine what decisions to make before the situation changes and the data is no longer useful. Nevertheless, obtaining fresh data to make better business decisions is perhaps the greatest challenge faced by CFOs and financial managers. It can be a significant challenge for any business, regardless of size. Sometimes, it’s helpful to find an experienced partner to help establish and build the necessary infrastructure and systems.  

Data and Its Use in Decision Making

The COVID-19 pandemic and recent geopolitical events have impacted companies globally. At EPAM Systems, we were able to track employee productivity during the COVID-19 pandemic even after all employees began working from home. The company was also able to see rapid changes in specific customer demand (remember that daily sales pipeline report previously mentioned) and adjust staffing as necessary. It transferred workers who were allocated to projects that were ramping down to other customer projects where there was still demand.

By not hiring for new projects and instead deploying existing underutilized staff, EPAM prevented overstaffing during periods of too few billable hours. Once demand improved, hiring accelerated. EPAM was able to reduce the impact on employees, manage profitability to acceptable levels, and then reaccelerate revenue growth as it came out of the initial crisis. EPAM did this by updating reports and analyses daily and meeting as a leadership team (also daily) to do a quick informal review of changes, make decisions, and set new objectives.

For companies operating in Ukraine, the Russian invasion of that country created a need for up-to-date information on employees to maintain business operations and, more importantly, to ensure their safety. At EPAM, we needed to know where employees were located and how they were doing and then needed to track their progress as we worked to move them, and their families, to safety. Much like the pandemic, when we examined analytics to see what was happening to the customer pipeline and how it matched up with supply, the same concept was used to prioritize the safety of employees. This data allowed EPAM to support employees and their families and empowered the company to meet customer delivery goals despite challenges. The availability of near-real-time data helps the company support its employees while enabling it to meet customer commitments and maintain the business.

You Can’t Manage What You Measure Ineffectively

Some companies are able to measure results with frequent data collection and analysis and make rapid decisions in response to changing circumstances. However, this probably doesn’t apply to the majority. Many companies haven’t organized their data or created data-capture systems that allow near-real-time measurement. Actionable, current information enables companies to make more effective decisions related to people, resources, and areas of focus, and is key in responding to change.

For organizations to drive better business outcomes, they should also critically evaluate their business review and target-setting processes. In many cases, these processes could likely be less rigid and formal. Leaders should make performance expectations clear and give people room to collaborate and deliver outcomes.

Lastly, companies need to accept that they can’t control all the unexpected changes in their operating environment. The world is an increasingly unpredictable place. Leaders can, however, make frequent adjustments in their targets and goals in response to changing conditions and then work hard to achieve these goals. If companies change their approach to results measurement, they will be happy with the results.

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