By BRIAN BABCOCK
First published in The Globe and Mail Friday, Sept. 26, 2003
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If a coach focuses
exclusively on winning each game but ignores player development, fan
support and long-term strategy, at best he risks the humdrum of ordinary
performance. At worst, he could ruin the team and lose his job.
So why is it acceptable
for a business manager to focus on short-term gains at the expense of
long-term planning for sustainable growth? Why not create multiple winning
measurement in business -- making a profit -- has become the goal: Shareholders
and chief executive officers zero in on quarterly growth; first-line
managers focus exclusively on monthly budgetary gains; supervisors watch
weekly productivity measures and service people keep an eye on hourly
This over attention
to the bottom line can result in stripping a company's human capital
-- ignoring, or at least playing down, the fundamentals of a great business:
leadership development; market analysis and the identification of customers'
needs; innovative solutions to customer problems; and listening to feedback
about issues critical to the enterprise's success, to name just a few.
Instead of the bottom
line growing from long-term strategy and planned earnings improvement
in a sustainable fashion, it becomes the whole focus of the game.
Why does this happen?
Because on the surface, the bottom line is easy to understand -- numbers
are exact.For many of us, our brains are wired in a way that "hard"
statistical data of accounting systems -- a third-quarter profit or
loss, for example -- drive out "soft" conceptual notions of
To avoid this dilemma,
you first have to recognize that accounting systems are just one of
the many tools needed to run a successful business. As management accounting
expert Robert Anthony wrote: An accounting system "is of no use
to management unless it results in action by human beings. . . . It
may be worse than useless because management overemphasizes the importance
of the figures and therefore takes unwise actions."
Second, you need
to integrate your financial planning tools into the fundamentals of
a great business. What does that mean?
There are elegant
financial planning tools linking product expansion with appropriate
debt levels. The sustainable growth equation identifies a "zone"
of earnings growth that will prevail with time. It's a crucially important
concept. Ambitious managers could save heartache for their customers,
employees and shareholders if they would focus on the "zone"
of sustainable growth to control expansion and debt.
But even here Gordon
Donaldson, in Strategic Goals and Financial Consequences, signals a
warning: "Unless managers make certain that all primary goals are
consistent with each other . . . [the] sustainable growth equation will
not serve as an effective discipline."
In the language
of the street, that means: Leadership development matters; market analysis
and the identification of customer needs is crucial; effective delivery
of product through people is a basic imperative, and listening for feedback
central to your company's critical successes should be your fanatical
Consider a third
thought on your path to making a profit based on great fundamentals:
All costs are variable in the long run. In other words, even fixed costs
are less fixed than you imagine them to be.
For example, the
fixed cost of vehicle amortization was dramatically reduced at our Ontario-based
school bus company. How did that happen? All employees shared the goal
of understanding customer needs, an important one being the safe delivery
of kids. Employees were rewarded for specific and measurable safety
achievements. They earned significant bonuses and, in turn, their extra
caution reduced insurance costs, fuel costs, maintenance costs and,
surprisingly, asset costs. As a result, vehicles had longer life spans.
The mutual gain
for drivers and shareholders was that both improved their financial
well being. Of course, the important and most significant gain was that
the kids' risk of injury was reduced.
If you are creative,
innovative, interactive and communicative with your people, similar
cost reductions can be achieved in your business.
To meld "soft"
concepts with "hard" measures, you have to use the hard measures
of accounting results wisely, use the mathematical model of sustainable
growth equations liberally and embrace the notion that even fixed costs
are variable in the long run.
But through it all,
never lose sight of the idea that strong fundamentals create the situation
where earnings follow from those business basics. As a result, shareholder
satisfaction rises over time.In an attempt to merge the hard and the
soft concepts in your business, ask yourself:
Does the scorecard
become the game at your company, or is the goal of the game to develop
great business fundamentals and make wise use of a scorecard?
Is your accounting
information "worse than useless" because you overemphasize
its importance? Remember, it's of no use unless it results in action
by human beings.
Can you refocus
stakeholder attention through sustainable growth models that support
more visionary goals?Can you de-emphasize quarterly results?
Do you understand
the concept of the variability of all costs? After all, it's a matter
Can you reduce
even your fixed costs through employee actions? Do they understand
the mutual gains of being rewarded for superior effort and the enhancement
of shareholder value?
With these questions
in hand, you can guide your company to self-sustaining, long-term superior
results. An impressive looking scorecard will be the result.
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