By The Numbers

The economic system has a considerable influence on the way business is conducted since it encourages enterprises operating within it to align with its material growth maximization maxim.  Consequently, economic enterprises are expected not only to seek but to maximize (their) material gain.  Accordingly, those with administrative authority over the enterprise pursue material growth, monetizing all aspects of the company in the process.  That which can’t be quantified is not material and is thus ignored—becoming immaterial in the management of the enterprise. [It is interesting to note that the term immaterial has come to mean irrelevant when in fact it is simply anything that is not material.]  In fact, the effectiveness of a manager is most often determined by the numbers, by his/her P&L statement.

Not only is most everything translated into monetary terms it is accepted management practice to reduce the evaluation of both individual and organizational performance—very complex issues—to a simple either/or dichotomy.  That is, evaluation is reduced to a good versus bad judgment relative to what is expected.  The common practice is to assess and evaluate performance with the aid of a variance report, which does for management what numbers does for painting: Making it simple and formulaic with no need for understanding and critical insight.  [Correspondingly, the MBA—the ticket to be punched on the way to the corner office—is a highly quantitative curriculum designed to prepare future captains of industry for the numerical navigation of business.]

Quite predictably there will be a difference between the current figure and what is expected; or between the current value and the value of the same metric in a previous month, quarter or year.   In practice a slight deviation from expectation is acceptable, but not very much of one.  How much is not very much?  It is common that a variance of say within 10% of expectation would not require an explanation.  However, anything beyond this certainly would! To many this arbitrary limit seems reasonable—yet it begs the question why not 8% or 15%?  When faced with an unacceptable variance in need of an explanation, one can’t just do nothing!  After all when presented an exception isn’t it better to act than not?

Inciting Action

Generally, when those in authority ask questions everyone to whom the question is directed will work to provide an answer—even if they know no reasonable one exists. How do you explain that your signature is never the same from one time to the next?  You really can’t!  Such management by exception unavoidably stimulates considerable effort by others.  The good news is that management has incited others to act: the bad news is that it is likely they are acting in response to a false alarm.

Having an understanding of the theory of variation would guide us to act differently in the face of variation.  We would seek an understanding of the pattern in the variation, choosing to create knowledge using all data not just reacting to the relative position of two points.  This understanding will shed light on whether we have a situation wherein the system itself is the cause or whether there is a strong likelihood that an assignable cause can be uncovered.  If the situation is the former—which is most often the case—then think of the time wasted seeking an assignable cause when there is a high probability that there is none. So what we have is unnecessary effort expended.  More specifically, what we have in the traditional variance report is a mechanism that actually increases the cost of doing business—the very thing those in management seeks to minimize.  It is quite ironic that those so focused on the numbers have little to no understanding of how to translate the outcome variation of a process into knowledge toward improvement.  So why do managers continue using this approach?  Does it appear that this misguided practice is a system problem or an individual manager problem?

Could it be that this approach aligns with a focus on short-term growth; the very things that the economic system requires them to do?  In other words, when we concern ourselves with material growth we focus on the magnitude of things in the present—such as profit, shareholder value, etc—in relation to the past.  Of course numerical goals need to be set, but their attainment is generally for the near horizon—the next month, the next quarter, or the next year.  This causes a focus on the present versus the past.  With eyes squarely in the rearview mirror there is little to no regard for the future and the options we can provide ourselves by the decisions we make.

Alternatively, a better focus would be on progress. While it includes not only improvement relative to the past, it also encompasses the enhancement of the probability for a better future.  Pursuing progress we don’t grow ourselves into an untenable situation.

23 thoughts on “By The Numbers

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