Thoughts about the long term short term debate

Received wisdom says that leaders have become increasingly short term. In fact short termism is blamed for many ills. In addition the strategic entrepreneurship debate and the ambidexterity debate both argue that it is difficult for organisations to make current operations efficient while at the same time investing for future growth.

I have two challenges to this debate. First, how much evidence do we have that managers are short term biased? Second, most humans balance short term and long term issues every day. Most are quite good at getting the balance right. So, if managers are short termist what is the cause?

On the first issue of evidence for short termism, I think it is possible to argue that it does not really exist. Yes there are examples such as sub-prime mortgages and asset stripping and massaging reported numbers. But there are also examples of the opposite. I did research into corporate venturing units, and found that less than 5% achieved their objectives. This was not because of short termism, but because they were taking too much long term risk. I also know of plenty of companies investing in foolish growth initiatives in a desperate attempt to find new growth (less of this in the last three years admittedly). Also, the one recent period where long term thinking dominated – the dot com boom of the late 1990s – was not a period of much note. My own experience suggests that humans have a tendency to dream themselves into unrealistic views of the future. Hence long term thinking is dangerous. I am old enough to remember “long term planning”: an activity that proved to provide very little help to managers.

There is however solid scientific evidence for some mental biases in the human make up, such as risk aversion, loss avoidance and a preference for immediate gratification (the bane of our dieting ambitions). So I am not totally against the idea of short termism. I am just not convinced by the evidence.

On the second issue of capability, all of us have to deal with trade offs between the short term and the long term in our education, in our marriages, in our diets, in our daily work, and in our friendships. Most of us get pretty good at finding the right balance between things like staying up late with friends and performing well at work or between exercise and health. It is true that many make mistakes and some are pretty bad at making some of these trade offs. But, typically, managers who rise to leadership positions are those who are better at making these trade offs than others. So we might expect to find that our leaders are pretty good at trading off short term gains for long term outcomes. If we believe they are not, we would have to believe in one or all of the following explanations

1. The human brain is biased towards short termism and there is very little we can do about it
2. Our processes for selecting people for promotion cause us to select people who are biased towards short term outcomes
3. The incentives we give leaders causes them to take short term decisions even though they would prefer to take longer term decisions

My guess is that those who believe in short termism mainly believe the problem is one of incentives. This is something that can easily be researched. We could look at a sample of leaders with longer term incentives (like owners) and compare their performance with those with shorter term incentives (like bonuses). My experience suggests that we would not find much difference, although there is some evidence to suggest that family companies marginally outperform public companies. If there is short termism, it does not, I think, have a very big impact on anything – except, of course, in some specific situations – such as the incentives given to bankers to lend money to people who could not pay it back! These specific problems are probably not that hard to spot and correct. We may not need a campaign against short termism. We may just need some common sense about incentives.

Insights about ambidexterity

Ambidexterity is the ability to look after today and innovate for tomorrow. It is the holy grail of organization. The main recommendation is structural separation at the operating level and managerial integration at the next level up.

A recent discussion with a manager from Colfax made me wonder whether the solution might be process separation rather than structural separation.

Colfax has a dual budgeting process. There is a budget for the base activities and ‘policy deployment’ for projects that will make a significant change to the status quo. Policy deployment consists of 5 to 10 projects each of which will make a step change in some dimension of sales or costs. Each project is headed by a member of the executive team, so some may have more than one project. Each project is separately funded. Progress is reviewed monthly. The reviews happen the day after the budget reviews. Normally the same people are present, but the focus is on progress, speed, value for money and stretch rather than operating performance, variances and plans to get back on track.

Colfax also has a track record. Most senior managers have come from Danaher which has had above 20% earnings gains for 20 years or more. Both management teams frequently double margins and double organic growth in the companies they acquire, exactly the sort of ambidextrous performance that most companies are looking for.

So maybe we do not need to create structural ambidexterity. Maybe we can do it with ambidextrous processes.

I run courses on organisation design and operating model improvements at Ashridge business school

How do you draw organisation charts

How to draw organisation charts

The typical organisation chart does not tell you much about how the organisation is supposed to work.  Normally, charts are drawn in layers: all the people reporting in to a boss are on the same level and so on down the structure.  Because there are multiple layers, the chart often extends to multiple pages.

If an attempt is made to distinguish between people reporting in to the same boss, it is normally done using pay grades or titles.  So that those with an SVP title are higher up the chart than those with a VP title and so on.

This simple format is partly a result of the simplicity of the computer programs used to construct the charts.  But, it is also a result not knowing a better way.

A good organisation chart can achieve the following:

–       explain who reports to whom

–       communicate information about the business model of the organisation and

–       define the relationships that should exist between boxes in the chart.

The operating core

The first step in drawing an organization chart is to define the operating core; and to decide how this operating core is divided up.  There are three ways to divide up the operating core: by function, making each box a cost centre; or by business unit, such as product, market segment or geography, where each box is a profit centre; or by matrix, where profit reporting is made on more than one dimension.

The operating core of a single restaurant would be structured as functions: for example buying, cooking, serving and marketing functions.   The operating core of a chain of similar restaurants would be structured into business units, with each restaurant as a profit centre.  The operating core of a group of restaurant brands would also be structured into business units.  Each brand would be a separate business. The operating core, therefore, may be different at different levels in the structure.

If the operating core consists of functions the relationship between these functions is that of a “tight team”.  Profit can only be calculated once the activities of all the functions are combined.  Hence the functions need to work closely together to ensure their combined activities are achieving the objective. Monday morning meetings or something equivalent are needed to ensure regular coordination between the functions.  This also has implications for the role of the leader of these functions.  He or she will be “hands-on”: frequently involved in easing tensions, deciding priorities and guiding action.

If the operating core consists of business units, the relationship between the units will be much looser.  Coordination does not need to be as close: each can operate with a good degree of independence.  The relationships between business units can be quite distant.  Monthly or quarterly meetings may be sufficient to achieve needed coordination.   Also the leader of the collection of business units is likely to be “hands-off”.   Because he or she is not needed to ensure coordination on a daily or weekly basis, much more can be delegated to each business unit within the constraints of defined policies and strategies.

Above the operating core

Once you have clarity about the operating core at any level, the next challenge is to define any parts of the structure ‘above the operating core’, yet still at the same level.

Obviously the boss or leader sits above the operating core in the organization chart.   But it is also helpful to position some other activities ‘above the operating core’.

The way to do this visually is to have the operating core boxes all on the same level of the chart.  Then draw a horizontal connecting line just above the operating core boxes.  Then draw a vertical line, from the horizontal line, to the boss or leader.  Make this vertical line long enough to allow additional boxes to be added to left and right of this line .

So what boxes should hang off to the left or right of this vertical line?  Four kinds of support functions:

1. Policy functions: these are functions with policy roles, whose job is to set and monitor policies for the operating core.  Examples are accounting rules from finance, people management rules from human resources and IT rules.
2. Shared services: these are activities that could be carried out within each part of the operating core, but have been centralized for reasons of economy of scale or skill.  The relationship is a service one: the operating core is the customer and the shared service is the supplier.
3. Partner functions: these are also functions that could be embedded in each part of the operating core, but have been centralized for competence or control reasons.   The relationship is that of a partner rather than a supplier.  The representative from the function has a seat at the table of the relevant part of the operating core.  Examples are HR business partners, central research, IT business partners, finance business partners, etc.
4. Lobby functions:  these are units whose role is to influence the operating core to give more attention to some area of importance.  If the operating units all involve manufacturing, the lobby function might be lean manufacturing.  If the operating units are structured by product, the lobby function might be global accounts.  Often one of the roles of a lobby function is to facilitate coordination.  So, where a number of business units operate in one country but report in to their global divisions, there is often a country management structure whose job is to coordinate the business units in the country, but whose power is limited.  One of the features of the lobby function is that it has responsibility that is greater than its authority.   It is expected to influence, but does not have the power or resources to execute.

The final part of drawing the chart is to place the “bossy” functions on the left and the “service and influencing” functions on the right of the vertical line.  So that policy functions and partner functions go on the left and shared services and lobby units go on the right.

In practice, finance, HR and IT typically contain, within their empires, at least three or sometimes all four of these support functions.  This can make it difficult to decide which side of the line to place them.

There are two responses to this.  First, place them in which ever of the four roles is dominant.  Second, consider splitting the function into its separate roles.   For example, many companies are achieving significant improvements from separating shared services from policy functions.  The reason for the success is that the skills needed to manage these different support roles are very different.  The same is true for lobby functions.  They are often more successful with a separate reporting line to the overall leader.  There is, however, less evidence about the value of separating policy from partner roles, and these are often combined in functions where they both exist.

Content from Advanced Organisation Design course at Ashridge Business School

Thoughts about the balanced score card

I was stimulated today by a discussion group on LinkedIn on the balanced score card. 

One of the entries explained the the origins of the scorecard came from Analog Devices, whose approach to measurement was reproduced in the famous HBR article.   While appropriate for Analog Devices, it is probably not universally appropriate, which explained why I have always struggled with the four dimensions.

My work on measurement has led me to conclude that the stakeholder approach is the only theoretically sound way of tackling the measurement and targeting challenge.   

The reason why the stakeholder approach is superior is because the success of the organisation depends on winning and retaining the loyalty of a group of stakeholders, such as financiers, employees, customers and suppliers, or, in my case, business school leadership, member companies, course participants, fellow directors, fellow academics, clients, Harvard Business Review Readers, etc.  Hence measurement should start with the degree of loyalty or satisfaction of each important stakeholder group.

All other measures should be treated with caution unless we are certain that the measure correlates with success.  Take waiting time for medical treatment – topical in the UK right now.  If we place this on our balanced score card, it may or may not lead to greater success.  Or take market share.  In financial service markets half the market is often unprofitable – so a market share measure can lead to less success.

Of course our strategy should guide us to the measures that matter – but this assumes that our strategy is wise.  If we do not have some measures that are independent of the strategy, how will we know when the strategy is wrong or needs changing?

So, start by defining all the “active” stakeholders (those who can influence success).  Then look for measures of satisfaction for each stakeholder.   Some stakeholders will not be good at giving accurate feedback (think of subordinates with regard to a boss) – so you may need to find surrogates for “satisfaction” (such as employee engagement).  Then scrutinise the strategy and look for additional measures that will record the progress of the strategy.   Then stand back and consider a universal measure “productivity” or “resource untilisation efficiency”.  More success will always come from achieving more with fewer resources – so consider ways of measuring either the amount of value created for a given input of resources or the amount of resource used for a given output (e.g. cost per unit or profit per employee).

These steps will give you a “Comprehensive Scorecard”.  Measures of success;  measures of strategy implementation; and measures of resource utilisation efficiency.