Having worked with several Fortune 500 organizations and many fast-growing mid-market companies, I am alarmed by how inefficient and ineffective many have become. Often, the leaders were unaware of their inefficiencies and ineffectiveness; they acted like the large institutional companies they swore they would never become.
Consider this, the CEOs and leadership team rarely recognize they have a problem. They may feel that something may not be right, but it is usually worse than they imagined. Despite facts to the contrary, CEOs will indicate pride in their leadership teams and the organizations. Influenced by external circumstances, leaders justify their approach to decisions, overcomplicated processes, and bloated organizations. Meanwhile:
I will never forget a discussion I had with a $5 Billion CEO. Growth rates were lackluster, and profits were dismal. They were considered a leader in their industry, yet performance did not support the hype. Others in their industry grew far faster and had much higher profit margins. When I talked with the CEO, I identified two moves that would double their profits, eliminate four layers of management, and eliminate several contracts that represented 10% of their revenue. These moves were worth $200 million in net profit, could likely double or triple the stock price, and would remove a lot of bureaucracy. The CEO decided against it and was replaced 18 months later after the company failed to break through lackluster performance.
Are You Efficient but Ineffective?
Today’s world is full of rapid, unpredictable changes and complex inter-dependencies. Traditional organizational models built on efficiency and optimizing predictable systems are no longer suited for these challenges. In “Team of Teams,” General Stanley McChrystal presents a new way of thinking and leading that allows organizations to adapt and innovate nimbly in a complex world.
Team of Teams is about the General’s process of restructuring the Joint Special Operations Command and making it more adaptable. The military was efficient at fighting traditional wars but not effective against Al-Qaeda in Iraq. General McChrystal began questioning whether a rigid structure inhibited their ability to respond quickly to threats and meet mission requirements and objectives.
Modern military management originated with Frederick Winslow Taylor’s work at the 1900 World’s Fair. He believed that there is a right way to do anything, and he built reductionist processes to streamline how production employees work. In these schemes, employees focus only on their role and don’t have to communicate with other employees or ask their managers about the bigger picture.
Taylor’s ideas revolutionized the way people work. His ideas were implemented in soldiers’ lives through rigorous routines, uniforms and equipment, and a lack of communication and involvement with decision-making processes. This excessive compartmentalization between intelligence operators and analysts in Iraq contributed to the failure to prevent the 9/11 terrorist attacks on U.S. soil.
General McChrystal describes how he built his team of teams, inspired by the Navy SEAL training and Brigham and Women’s Hospital. His core principles to create an efficient and effective team were awareness, empowerment, and a common purpose in an unpredictable environment, where hands-on command management styles are rewarded.
The general taught us that an efficient system is not necessarily effective. For example, if the output of a system doesn’t meet the needs of its users or it’s not using available resources effectively, it’s considered inefficient. To make an ineffective system more effective, you can sometimes reduce its efficiency by adding new features that improve performance and usability. To be more effective, we must create the right vision and empower people to make decisions at the front lines. We need to stop the need to run decision-making up the ladder to execute change, maximizing flexibility and agility.
Many organizations use the wrong measures for determining how to manage human assets. Labor rates, turnover, and other commonly used measures only take you so far. In Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential, Greg Crabtree and Beverly Harzog introduce the Labor Efficiency Ratio™ (LER). LER is used to determine how well your company manages its human assets.
I like LER because it gets more to the heart of the matter. LER expresses labor as a multiplier, not a fraction. In simple terms, it helps quantify how many dollars in gross profit is returned to you for every dollar you spend on labor. When you begin to learn how to look at LER, you may start calculating how to increase your multiplier instead of looking at labor as a cost of sales. When you look at labor as a cost of sales, you can observe each person in a role, see varying returns, and understand why that return varies. It helps you get comfortable paying one person twice as much as another in the same role—you can see that you receive a more substantial return from one person than the other. LER is also a crucial tool in forecasting and planning scenarios and makes profitability analysis much more straightforward than other methods. LER is the ultimate measure for helping management determine whether they are optimizing labor properly or not.
Commonly, we view high performers as outliers and remove them from our calculations to determine the right Labor Efficiency Ratio™ for a position. My challenge to leaders is to gain an in-depth understanding of why the outliers perform as they do. Usually, these people do not have exceptional talents, do not appear to work harder, and are not smarter than the rest of their team members, but they are doing something different. If you can identify that difference and disseminate it as a best practice, you will increase LER for a function or role.
There are three general categories of labor efficiency: direct labor, sales labor, and management labor. Many leaders make the mistake of trying to use one overall LER calculation, which can be very misleading. One of my clients was trying to use the one-size-fits-all method. After breaking down the calculation into the three categories, they learned that they were overinvested in the management-labor area, masking that they were understaffed in indirect labor to handle growth. Had they not realized this, they would have instituted a hiring freeze and missed a big last-quarter surge in sales. Additionally, we find in the many organizations whose sales teams are not performing that instead of addressing the issue, they start cutting labor costs in areas such as customer service and product quality, unintentionally causing severe problems for those functions.
Emotions were running high in the last quarter of 2008, with the banking debacle, stock market meltdown, the soaring foreclosure rate, job losses, poor earnings reports, and dismal projections. Finally, the government, which had long denied the obvious, admitted that we were experiencing an economic recession.
Nobody wanted to use the word “depression” about the economy, but that’s the word best describing the country’s mood. The result: Businesses and Consumers put on the brakes. Most everyone started operating in a “playing not to lose” mindset. They stopped trying to win and completely went on the defensive. However, an opportunity had just knocked for a small group of well-informed individuals. They took advantage of the inexpensive real estate market, stole market share, acquired quality talent, and bought stocks and other investment products at bargain-basement prices. In the process, they ended up making millions of dollars. It reminds me of that famous Kaizen principle –
Great leaders and strong businesses recognize opportunities and proceed accordingly. Their desire to win is so strong it overcomes their fear of losing. They do it through sheer will and the right balance of a positive attitude. I am hopeful your business does not find itself in the dire situation we experienced in 2008. Still, the absence of dire circumstances doesn’t mean attitude and desire shouldn’t remain like the small group of opportunistic individuals who took advantage of the situation. A “scared to lose” mentality can be costly for your career or business.
The mind does funny things when faced with adversity. Negative events result when people fail to look at their businesses and careers in an informed and critical manner. When you aim to preserve the status quo, it is not unusual to draw ill-advised conclusions. Below are five common bad decisions that are often enabled by a protectionist mindset:
These practices can be very harmful. It may not be today, tomorrow, or even a month from now. But you will eventually feel their impacts and fall short of your potential.
I challenge you to determine how you allow negative people and your environment to prevent you from maximizing your potential. If everyone was playing to win within your value system every minute of every day, what would or could they be doing differently? What are the top one or two things you could be doing right now to make a difference for your company? Are you spending most of your time focusing on that? If not, can you say you are playing to win? Michael Jordan said, “I play to win, whether during practice or a real game. And I will not let anything get in the way of me and my competitive enthusiasm to win.” The same could be true for you and your business. You have to play to win. Its value is almost immeasurable. Creating a strong business plan and strategy, and finding the right balance between efficiency and effectiveness will help you maximize Growth and Profits. Maintaining an opportunistic attitude and even remaining open to assessing and taking a risk will help you win and maximize your potential.
Be self-aware and provide yourself with honest answers. Are you efficient but ineffective? Are you playing to win or not lose? Are you using the wrong measures for determining how to manage human assets? More importantly, are you asking the right questions to help your organization reach its full potential?
Most companies have a lot more growth and profit potential staring them right in the face. I have found that most executives are great at solving problems but are bad about asking the right questions. And, when they ask the right questions, they are not good at answering them honestly. This is where outside facilitation can help. They focus you on the right questions by providing the tools and processes to help you make better, more informed decisions, leading to more Growth and Profits.
Howard M. Shore, Founder and CEO of Activate Group Inc., is a bestselling author and serial entrepreneur. A business coach specializing in liberating leadership teams from the barriers holding them back personally and professionally. Howard has helped create over $1 Billion of value and authored two best-selling books, The Leader Launchpad and Your Business is a Leaky Bucket.