CHAPTER TWO
A Scorecard for Management
“MANAGEMENT AUDITS” ARE HOTLY debated these days by business’ friends and by its critics, by regulatory agencies, in management seminars, and in management journals. The proponents usually argue for a searching inquiry into basic management qualities—a management’s morale and integrity, its creativity, its “social values,” its human empathy, and so on. “Nonsense,” snort the opponents. “The only thing that counts is performance, and that is measured by the bottom line.”
Both sides, it can be said unequivocally, are wrong. There is a need to appraise management. Indeed, it is quite likely that boards of directors within a fairly short time will have imposed on them a legal duty to appraise the management of publicly held companies. But it is equally true that only performance can be appraised. The things which a proponent of management audits talks about—integrity or creativity, for instance—are better left to a novelist.
Yet the “bottom line” is not even an appropriate measure of management performance. The bottom line measures business performance rather than management performance. And the performance of a business today is largely a result of the performance, or lack of it, of earlier managements in years past.
Today’s executives are, of course, a good deal more than passive custodians of the past. They can, and properly should, modify the decisions they inherit. Indeed to bail out these decisions when they go wrong, as all decisions in respect to the future are likely to do, is one of their most important and most difficult assignments. But today’s executives are also charged with the responsibility for making the future of the business—with lead times that are becoming increasingly longer and in some areas range up to ten years or so.
Performance of management, therefore, means in large measure doing a good job in preparing today’s business for the future. And this is an area in which measurement of management performance—or at least an appraisal of it—is needed the most.
Certainty regarding the performance of today’s management is possible only by hindsight, that is, in the future. But appraisal with a high probability is possible today. For the future of a business is largely made by management performance in four areas, in each of which the batting average of a management can be ascertained, and in each of which a management can work on improving its performance once it knows its past record of hits and misses.
1. Performance in Appropriating Capital
Almost every company has elaborate procedures for capital appropriations. Even in companies in which divisional managers have almost complete freedom, top management keeps a tight rein on capital appropriations and reserves for itself the final decision on even fairly small capital investments. And most managements spend an enormous amount of time on capital appropriations decisions. But amazingly few managements pay much attention to what happens after the capital investment has been approved. In many companies there is no way even of finding out. To be sure, if the new multimillion-dollar plant falls behind schedule or costs a great deal more than was originally planned, everybody knows about it. But once a plant is “on stream,” there is not too much attention paid to comparing its performance with the expectations that led to the investment. And smaller investments, though in their totality equally important, are barely ever looked at once the decision has been made.
Yet there are few better tests of the competence and performance of a management than its performance in appropriating capital, that is, the actual experience of capital investments measured against expectations. General Motors has known this for about sixty years; indeed, its system for monitoring the performance of managerial capital investment decisions was first published in 1927.
Since then we have known that we need to measure both return on the investment itself against the return expected when the investment decision was made and the impact of the investment decision on the return and profitability of the entire business, again against the expectations at the time the decision was made. To organize this feedback from the results of capital appropriation decisions is a fairly simple matter. It does not, except in the biggest and most complex companies, require a computer run but can be done on an ordinary spread sheet, kept in the bottom drawer. What is needed, however, is a willingness to commit oneself to expectations when the decision is being made and then the intellectual honesty to face up to the actual results rather than try not to have to look at them.
2. Performance on People Decisions
Everyone agrees that the development and placement of managerial and other professional people is the ultimate control of any organization. Indeed, it is the only way to make sure that today’s decisions will bear fruit. By their very nature, decisions made with respect to the future—that is, managerial decisions which commit today’s economic resources to future uncertainty—will run into serious difficulty. And then it all depends on the ability of tomorrow’s people to bail out today’s managerial decisions. Yet, while admitted to be crucial, the area is usually considered to be intangible. But neither what is expected of a person’s performance when he is put into a job nor how the appointment works out is intangible. Perhaps they can’t be quantified, but surely they can be judged—and fairly easily.
One thing we can be sure of when an appointment does not turn out as well as expected is that the executive who made the decision and who selected and appointed the person made the wrong decision or—equally often—made the decision the wrong way. To blame the failed promotion on the promoted person—as is usually done—is no more rational than to blame a capital investment that has gone sour on the money that was put in. Indeed, executives who know how one makes people decisions and who work on them do not accept the much-invoked “Peter Principle” in respect to their appointees. Few, very few, of the men they pick for promotions turn out to be incompetent. They never believe that good people decisions are made by “good judges of people.” They know that they are made by executives who don’t know how to judge people but who work hard on making people decisions, and especially by executives who make sure that they check how their people decisions actually work out in practice.
It is indeed not possible—or at least not easily possible—to judge, let alone to test, the spirit of an organization and the development of the people in it. But it is quite easy to test the results of spirit and development—that is the performance of decisions on people compared to the expectations underlying them.
3. Innovation Performance
What is expected from a research effort, from a development effort, from a new business or a new product? And what then are the actual results—one year, two years, three years, five years later? Research results cannot be predicted or projected forward, we are being told all the time. But surely the research results can be measured, or at least appraised, and can then be projected backward to the promises and expectations at the time the research effort was started. The same thing is equally true in respect to development efforts, to a new business, to a new product, to a new market, and to innovation.
Even the most competent management probably bats, at best, around 0.300 in the innovation area. Innovation is chancy. But surely there is a reason, other than luck, why some managements, a Procter & Gamble or a 3-M, for instance, have done consistently so much better in product development and product introduction than most others. One reason is that all the businesses with a high batting average systematically appraise their innovation performance against expectations. Then one can improve. And then, above all, one can know what one is good at. Most businesses manage innovation by promise. The competent innovators manage by results.
4. Planning Performance
Finally, the performance of management can and should be measured in respect to its business planning. Again, the question is what the results are compared to the expectations. Did the things predicted in the plan happen? And were they the truly important things? Were the goals set the right goals, in light of actual development, both within the business and in the market, economy, and society? And have they been attained?
Planning, it cannot be said too often, is not an attempt to predict the future, let alone an attempt to control it. It is an attempt to make today’s decisions in contemplation of their futurity. Planning, therefore, whether done systematically or haphazardly, assumes expectations regarding the future. And whether these expectations are then borne out by actual events or contradicted by them is an acid test of management’s performance. Again, this requires that expectations be defined, spelled out—and that there be organized feedback from actual events on the expectations. As in the innovation area, the most capable firm does not have a particularly high batting average in its business planning, something less than 0.300 I would assume. But, to continue the baseball metaphor, these managements at least know when they strike out or make a hit and above all they know what they do well and what they need to improve on.
Because planning, no matter how organized, is the process that commits the resources of a business to the future, planning performance is crucial to the performance of management’s responsibility for making the future. Appraisal of planning performance, therefore, constitutes the last, though perhaps not the least, measurement of management’s performance.
Even the greatest skill in these four areas is unlikely to help much if the company is in the wrong business. It is unlikely to make a profitable business out of the proverbial buggy-whip manufacturer or a growth company out of an old business in a mature industry—say a bread bakery. But at least skill and performance in these areas will show soon that a company is in yesterday’s business or that it does not possess the economic characteristics that allow it to grow.
On the other hand, being in the right business and having the right objectives will not bring about performance unless management performs well—or at least adequately—in respect to capital investment decisions, people decisions, innovation, and planning. These four decision areas are not the essence of business management, but they are its test. And every management should subject itself to these tests.
(1976)