Look Beyond the Spreadsheet!

November 22, 2011

In my last post, The Ultimate Productivity Metric, I stated that while revenue per employee is an excellent gauge for understanding how much you are generating from your people, it is an incomplete measure of how well the business as a whole is operating. Costs, for one, are not taken into account.

The implication is that you can be doing very well in terms of revenue generated per employee compared to your competition, but you may be losing money in the process. When it comes to controlling costs, the big trick is to find that sweet spot where you are producing more income for each dollar spent while avoiding cutting so deep in an effort to save money that you cut away activities that generate your income.

A balance should exist between being a “responsible,” conservative business and a speculative, growth-oriented enterprise seeking to provide new products or services. The word responsible is in quotes because often times we think of being responsible as being conservative and not taking risks. When it comes to business, not taking any risks is irresponsible because the world is constantly changing and businesses must adapt to keep up.

Over-emphasizing cost-cutting now in order to squeeze out a profit today can effectively be squeezing the company out of business tomorrow. An excellent real-world example of over-zealous cost-cutting was provided in the book, What They Don't Teach You At Harvard Business School by Mark McCormack. In it, Mark tells how the Ford Motor Company almost cut themselves into oblivion at one point in their history:
Many years ago the Ford Motor Company went through a period in which the numbers people literally took over the company and were closing plants left and right in order to cut costs. They had already succeeded in shutting down plants in Massachusetts and Texas and seemed to be relishing their newfound power.

Robert McNamara, who was president of Ford at the time, called a meeting of his top executives to discuss a recommendation he had received for the closing of yet another plant. Everyone was against it, but the predictions from the accountants were so glum that no one was willing to speak up.

Finally, a salty Ford veteran by the name of Charlie Beacham said, “Why don’t we close down all the plants and then we’ll really start to save money?” Everyone cracked up. The decision was made to postpone any more closings for a while, and the bean counters went back to working for the company rather than running it.
It’s easy to cross this line; the term financial controls is often used in business to ensure legal compliance with laws and regulations and to prevent fraud. If you get too rigorous in applying financial controls and running everything by a spreadsheet, you can end up in the situation that Ford found itself in.

Outside of meeting regulatory requirements and fraud prevention—moving towards the operational side of business—financials should be viewed as constraints on the system, not controls. A business leader must make decisions on how much investment he or she is going to make in certain areas like new product development. This places a constraint on how much capital a business will make available to creating new products relative to what it allocates towards the rest of the business that is designed to sell and support existing products.

Viewing financials as constraints allows people the room to work, provided that they stay within the boundaries of those constraints. This may demand new ways of working, including how organizations go about developing new products.

Ideally, you want to try as many small ideas out as you can and avoid making one big bet that depletes your resources if that bet doesn’t work out. I wrote about how you can achieve this in How to Fire a Business Bullet, among other posts. (Check out Put Your Product Assumptions to the Test! and my book reviews on The Lean Startup and Great by Choice for additional information.)

Viewing finances as controls and extending those controls to the rest of the organization as controls is an attempt to drive greater predictability—and not everything in business is as predictable as we would like. We need to lead and manage through the sea of unpredictability, and to do that we must look beyond the spreadsheet. Financials should inform management, not run the company.