Monday, April 22, 2013

Profit Beyond Measure



The greatest gains and losses cannot be measured but they must be managed. 

This is not a very well appreciated sentiment in business today.  The relationship between measurement and management, characterized by such expressions as “if you can’t measure it, you can’t manage it” are considered common sense adages in any business context today - including sustainability.  A few years ago, an article in The Economist magazine discussing the merits of sustainability's most famous business framework, Triple Bottom Line, stated  “Behind it lies the … fundamental principle: what you measure is what you get, because what you measure is what you are likely to pay attention to.”  Having three bottom lines – the thinking goes – means having three areas to measure, and thus to focus management attention.

Redefining management as measurement has been promoted and fostered over the years by such management trends as MBO (Management By Objective), which was a system for setting targets and goals for business managers with emphasis on results rather than methodology.  As the popularity of MBO faded, another even more prevalent tool for measuring management success emerged and continues to thrive.  The Balanced Scorecard reduces management performance to impacts in four areas: financial results, customers, operations, and employee development.  A particular manifestation of the Balanced Scorecard, according to The Economist, is Triple Bottom Line.

To understand why or whether we need to rethink Triple Bottom Line, we might begin by studying the fascinating history behind The Balanced Scorecard.  The Balanced Scorecard grew out of a book by Robert Kaplan and Tom Johnson published in 1987 under the title Relevance Lost: The Rise and Fall of Management Accounting.  In short, it dealt with the failure of American business to see beyond the numbers.  Financially oriented management, in their view, was ruining American competitiveness.  Because of the way costs were being allocated, companies were shutting down profitable product lines because they looked costly on paper.  This was making companies less profitable and more vulnerable.  Relevance Lost was a hugely successful business book, named by Harvard Business Review as one of the most influential of the last century. 

Kaplan and Johnson together enjoyed their success, but when it came to talking about solutions to the problem, the deeper they dug the more they realized how much they differed.  Kaplan felt that the problem described in Relevance Lost was about failing to pinpoint accurately where the costs really lie.  If the costs could be allocated properly, through Activity Based Costing (ABC) and The Balanced Scorecard, then accounting would become relevant once again, and American competitiveness would return.

Johnson questioned the very premise of making decisions from quantitative information, rather than from explicit, detailed knowledge of how a company conducts work. As Art Kleiner discussed in his article in strategy+business about the Kaplan/Johnson feud, Johnson saw a business obsession in ‘looking good’ by the numbers, that threatened “to damage the underlying system of relationships that sustain any human organization.”  Johnson went on to say that quantitative generalizations apply to mechanistic systems.  By definition a mechanism is nothing but a system of parts whose interactions can be defined entirely in quantitative terms.  Businesses are systems but not mechanisms since they are planned and managed by and for human beings.  Johnson was trying to show that reducing to a number creates “a mind-set that leads people to pay less attention to the day-to-day particulars of work.”  Kaplan’s balanced scorecard, on the other hand, reduced the essential business activities to those that could be represented in quantitative measures.


New Management Thinking

A new kind of management thinking is going to be required if over the next twenty to thirty years billions of people are to emerge from poverty into a global economy that works for all.  It is becoming essential for corporate managers to understand the interconnections and interdependencies between once disparate and disconnected systems.  (The GreenBiz VERGE conferences are a great example of this – showcasing convergence to solutions to 21st century problems.)  As once fragmented parts of the economy are becoming more connected, systems thinking is more critical.  And there is a tremendous financial benefit in managing from a systems perspective as Johnson articulates in his book Profit Beyond Measure.  If sustainability is to succeed as an organizing principle for all business everywhere, the message of Profit Beyond Measure must become ubiquitous, as Triple Bottom Line has been over the last 15 years.  Profit Beyond Measure conveys a future of prosperity that understands the importance yet the limits of measures, and the necessity of understanding the interrelationships and dynamics of systems.  The most powerful and sustainable systems on earth are natural systems, and they are characterized by three important principles (1) Self-organization, (2) Interdependence and (3) Diversity (SoID).  As opposed to Triple Bottom Line, these are the Triple Emergent Properties (3EP) of sustainable systems.  

 In Profit Beyond Measure we are introduced to one of the world’s largest manufacturers (The Toyota Motor Corporation) where the Triple Emergent Properties of SoID characterized the manufacturing process.  The result was one of the most sophisticated, highest quality, and lowest cost automobile plants in the world (located in Georgetown, Kentucky.)  Indeed, Toyota’s quality calamities over the last several years have been recognized by the corporation as directly attributable to the company’s shift in focus to reductionist targets for growth (which may have made those keeping the scorecard happy for a while), but ultimately disregarded the systems appreciation of SoID.and degraded Toyota’s long-built reputation for impeccable quality.

Sustainability will become a property of the global economy when thinking in accounting metaphors is supplanted by thinking in systems.  Some might see this as a new-age management gimmick, but actually it’s an age-old management skill.  Even accounting itself used to embody a systems approach to professional and business development.  Arthur Andersen had been an organization of the highest reputation in the accounting industry.  It took the greatest care in whom it hired, whom it took on as clients, how fast it expanded its business and how carefully it imbued the “Arthur Andersen Way” to its employees, its customers and all its stakeholders.  Andersen saw itself as a system, and its high profits and impeccable reputation were outcomes of a self-organized, interdependent and diverse system.  Over time the firm changed, driven by programs like MBO and The Balanced Scorecard, corporate silos developed fostering a culture of profits and growth as ends in themselves.  Stephen Duggan, a long-retired senior partner who once ran Andersen’s entire northern European operations out of Brussels, reflected on the organization's transformation.  As his erstwhile firm lay in ruins from scandal, lawsuit, and criminal indictment, Duggan was asked how could this happen to such a great company.  He paused for a long while, thinking very carefully about his answer, and then said “I tell you, it really started to change when we began measuring everything.”

The greatest gains and losses cannot be measured, but they must be managed.


No comments: