Corporate history is littered with examples of companies that suffered, or even failed, because they drifted away from their original principles and purpose, whether that’s Apple of the 1980s and ’90s struggling to decide who it’s market was (back when Michael Dell was suggesting the best thing to do with Apple was to close it), Progressive Insurance surrendering it’s guideline that any new area of business represented 5% or less of total revenues (which led to a loss of $84m in the mid-1980s) or the thousands of start-ups that struggle with growing up into a medium-sized company and balancing their earlier freedom with the new requirements for governance and organisation.
I can comprehend how these things happen, but what I really don’t get is how or why companies sometimes seem to forget that they do anything beyond simply existing; “management” or “HQ” becomes more important than the companies’ “do-ers” – the designers, manufacturers, salespeople, customer services etc. The “central functions” begin to determine the organisation’s approach, while those who understand the business’ function best of all are gradually cut out of the loop.
I’ve written about how metrics can drive inappropriate behaviour, but that’s only part of the story. The Tesco and, more recently, Toshiba misreporting scandals show how inappropriate metrics can combine with “centralisation” (by which I mean the movement of power and influence to the administrative centre of an organisation) to lead to terrible results.
It doesn’t have to be like that. But we have to think about organisations differently to most to avoid it. Firstly, we’ll look at what goes wrong, before exploring how we can put core purpose back in its rightful place – at the forefront of any organisation.
As an organisation’s focus shifts towards its headquarters, it loses it’s strength in serving the customer (including its shareholders – who are served by achieving the maximum possible genuine/legitimate return – alongside those who it sells its products too).
One simple reason this happens is due to a knowledge imbalance. In a medium or large organisation those doing the work can’t know everything else that the business is involved in, yet those in “corporate” functions can see the overall position. This can leave operational areas feeling disempowered and therefore they feel a reliance on those functions, while central areas have the ability to translate the information they receive from operational areas into whatever story they’d like to tell.
It also happens because the organisation starts to measure success differently (which I covered in some detail in the post I mentioned earlier, so will keep it brief here). When for-profit businesses start they tend to have a simple overall objective; make more money than you spend. There are all sorts of interim goals, which can sometimes appear to conflict with that (e.g. gaining market share through investment in products, marketing, selling at low price points), but ultimately they lead towards that objective.
That tends to change, however, as organisations expand, particularly as they become focused on those who might buy a slice, or the whole, of the company – the objective becomes more like “make the business appear as valuable as possible”. Clearly making a genuine, increasing level of profit, while maintaining a healthy balance sheet is one way to do this, but that can be much harder to do than finding tricks with numbers, like bringing income into earlier accounting periods (as Tesco did) or putting hugely unrealistic figures onto the balance sheet for new ventures (as Toshiba did).
There is also a problem with self-justification. In general, people at the centre of an organisation feel important (they see across the organisation, they work with high ranking people etc), so they feel like they should be doing “important” things. Simply playing back office to operations doesn’t seem important enough, so other tasks start to be created. You gradually notice more and more “strategists”, who talk in very conceptual terms (often including lengthy management-speak), and often don’t talk to the do-ers very often. Layers and layers of “planners” creep into existence, but it’s impossible to differentiate one from another.
Unfortunately, these organisational units also tend to spend a lot of time with those at the top of an organisation. Therefore those at management board can easily level hear far more from them than those really doing the organisation’s work. And suddenly you have a vicious circle, as senior people listen to the ever-expanding central functions and the organisation’s focus shifts further and further from where it started; delivering a service/product that customers wanted to purchase.
One of these is the creation of additional friction within the organisational system. Now that an organisation is focused on the centre, those involved in serving customers are required to provide an ever increasing amount of information. This can shift a significant amount of resource away from core business.
Inserting layers and an extra breadth of new roles also removes clarity from communications. The information going to the management board gets distorted en route, while their objectives are warped on the way to operational staff.
Further, roles in these central functions tend to be less well defined than elsewhere, often leading to significant overlap (in areas considered valuable or interesting) with gaps elsewhere (in the less glamorous topics). As multiple people perform separate analyses of the same topics, they come to conflicting conclusions, but nobody notices until you reach the point in the organisation where they collide.
Decision-making power can also drift away from operational areas to the centre as excessive governance is created. This does not only put decision making power in the wrong hands, but means those decisions are made more slowly and creates a cultural divide between the doers and the central decision makers (I’m sure you’ve heard descriptions of people from HQ being in their “ivory towers”…).
Losing Practical Ambition
It also becomes inevitable that you lose ambition within your core business. If you can make something appear good more easily than you can actually make it good, then why waste the effort? If you are one of the doers and you’ve lost your decision making ability, then what power do you have to innovate? If extra layers make it harder to pass on an idea or a message, then you can only change fewer and fewer things.
There may still be great drive for new products and attention grabbing offerings, but the ambition is not relating to providing the best possible thing for the customer – it’s to provide the best possible story for the market. Releasing a product that isn’t ready is an even surer way to reduce people’s morale than not releasing one at all (imagine you knew you had a great idea and it would take a couple of years to get ready for market, but it’s seized from you after one year, released to market, is a disaster – as you knew it would be – and you see you’re idea killed before it had been given a chance…) – have a look into RJR Nabisco’s release of Premier for an example.
Introducing extra layers also intrinsically reduces an organisation’s likelihood of trying new things that might really make a difference – if an idea has to get approval from more people and each person has non-identical criteria for acceptance then there is, by definition, more chance of it being rejected. If people have exactly the same criteria then going through multiple people for approval is pointless.
Some might say this isn’t that big a deal, but I think a reduction in transparency due to distortion of organisational purpose is damaging to both a specific business and wider corporate culture.
Where a business’ aims differ from its apparent purpose it becomes really difficult for someone outside the organisation to understand what is actually happening within it. Therefore people can’t really make informed decisions about investing in an organisation, while this opacity also drives the need for masses of regulation.
This is emphasized by a wider corporate culture of trying to inflate share price as much as possible. Compounded, it means that investors have to factor the risk of the numbers not telling the true story into their investment decisions, which means all businesses have to try to max out their figures or they’ll be undervalued and their low share/purchase price will lead to investors believing something’s wrong, driving value down again (because investors will still be making the adjustment for over-the-top valuations).
Sticking to core purpose breeds simplicity, which improves organisational focus, drives efficiency and innovation, and creates clarity. So how do we put the “front-line” of the organisation at the forefront of its thinking?
Clarity of Responsibilities (and Feedback)
Central, management-type functions are often a great example of “mission creep”; as described above they start to take on a role beyond their intended station. An organisation should be run for the doers, rather than central administrators.
Therefore it’s absolutely essential that each areas’ responsibilities are carefully and clearly defined. More importantly it’s about drawing limits to those responsibilities; without limits people will always start to drift into new areas (which is something you want in some situations – e.g. product development – but not when you’re looking for a function that exists to enable other functions). Peter Drucker’s five tasks for managers is a good place to start:
- Set objectives (the metrics being measured need to be agreed with the front-line, but no area can consistently set its own targets)
- Organise (work and people)
- Motivate and communicate (or “integrate”)
- Develop people
Once you’ve decided what it is your central functions need to do, then the more challenging step is ensuring that you enforce those limits.
When one of your keen, bright people comes to you saying they’ve found a “paper” adjustment that will boost share price, the company’s ability to raise capital and/or increase your own pay packet, then you have a decision to make – go with it and set that standard or resist and continue to focus on your core business.
Peter Lewis, the long term CEO of Progressive Insurance, encountered this problem in the 1990s (as outlined in Great By Choice, again!). The share price was fluctuating wildly, jumping by 18% on one day in October 1998, before falling by 19% in a single day in January 1999. This was partly due to Lewis’ refusal to “advise” analysts about forthcoming earnings figures (unlike most businesses), meaning the market struggled to predict how Progressive was performing before figures were officially announced. The other reason was Lewis’ refusal to flatten out earnings between quarters. Lewis stood by his beliefs (that Wall Street shouldn’t have insider information and that information should reflect the reality of a business), despite the implications. He found a way around this problem – publishing monthly financial statements – despite the difficulties this posed to his business.
Reducing To Bare Necessities
As Franz Kafka said, ‘idleness is the beginning of all vice’. If the centre of an organisation has only enough resource to deliver its essential functions, then it can’t take on activities beyond those core elements.
Organisations can strip out the central excess, as well as stop building it up in the first place. Whitbread – the owner of Costa Coffee, Premier Inn, Beefeater among others – employs over 45,000 people across multiple businesses. Yet it only has a strategic management team of 60. They’ve recently stripped out much of middle management and reduced that team down because of changes in the business; specifically the introduction of technology that enables data to be transmitted instantaneously. By keeping it as lean as possible, Whitbread are a great example of maintaining focus on delivery.
Forced to Connect
Sometimes the connection between the front-line and central functions can be lost – the centre becomes too occupied in its own responsibilities to remember the business’ true purpose.
To remedy this, organisations should encourage people to spend time with the front-line, seeing the business in action. This helps generate direct visibility of what the business does, while also ensuring the central management team has some view of what people on the front-line are thinking. Bill Marriott, CEO of Marriott International between 1972 and 2012, is famous for his visits to hotels and his efforts to talk with as many people as possible – even past 80 he is still making visits and keeping a blog up to date, so there’s no reason we can’t do that too.
Joel Spolsky, CEO of Stack Exchange, is one of the strongest proponents of putting the front-line experts at the heart of the business, with the “management” function simply acting as lubrication to help the business work. Spolsky’s view is that ‘The “management team” isn’t the “decision making” team. It’s a support function. You may want to call them administration instead of management, which will keep them from getting too big for their britches’.
While I’m only taking a brief aside from his article, I think the nomenclature is something worth considering; as you’ve seen through this post, we typically refer to these functions as “central”, “headquarters” or “management”, which suggests they are in charge. Here we’re talking about turning that around in practice – so front-line experts are the decision makers, with everyone else enabling good decision making – so we should try to turn around how we conceptualize and describe the organisation too.
Why do you think that we place those administrative functions on a pedestal? Is it straightforward supply and demand? Or do we, for some reason, actually have more talented decision makers in those roles at the moment? And what do you think works to get those with the right knowledge involved in making the big decisions?