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.
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.