Blind to mistakes
Columns / 21 October 2011
Just because 'you've always done it like that' doesn't mean you should be blind to potential mistakes
Some bright ideas may spell trouble for your organisation, and you can’t just use the excuse that “it worked last time,” says Tim Phillips
Elizabeth Monrad, the former CFO of General Re Corp who was sentenced to 18 months imprisonment in 2008 for her role in manipulating financial statements of AIG, wasn’t just speaking about the credit default swap disaster when she said that “these deals are a little bit like morphine. It’s very hard to come off them”. We’ve all been exposed to a business (and probably worked for one) where a bright idea or quick fix became standard practice, almost imperceptibly.
One day we wake up and it’s the only way we do business, or the source of all of our profit, or it becomes the Plan A for which there is no Plan B, or the only sales pitch for a generation of salespeople. Or, worst of all, it becomes a giant gaping hole in the balance sheet, which cannot be filled and must not be revealed to the outside world.
The same mistakes
The problem with the idea that “it worked last time” is that it creates a monoculture. The recent history of business failure is littered with the corpses of companies that had built a magic machine, which was driven faster and faster until it exploded. Quarterly reporting provides not just a regular measure of the effectiveness of the magic, but also a reason why it has to be driven faster. The machine doesn’t have to be complicated: it might mean simply booking sales in the current quarter before they exist (which happened at companies like Enron, AOL and WorldCom, for example).
The recent history of business failure is littered with the corpses of companies that had built a magic machine, which was driven faster and faster until it exploded.
Tim Phillips
The culture of extravagantly incentivised salespeople and executives is the final piece in the puzzle of why companies run themselves into the ground in this way. There’s a personal reward for flogging the magic machine, both reputational – you are the genius who made it – and financial.
At the highest level, few will question whether outperforming the competition is the right thing to do. Investors don’t want you to stop, even if they don’t understand exactly what you’re doing. Inside the organisation, those who promote and approve these ideas become influential and attract acolytes. It takes rare insight to spot this early, and courage to dismantle the machine (or restrict its influence).
Read this article in a couple of years and several of our brightest business stars may have collapsed in ignominy, and we’ll have convinced ourselves that we could see that their business model had become shaky. But we don’t see it now. One of the reasons is that we’re fans of success and there are few better examples than football culture.
It’s ridiculous to hold up the management of football clubs as examples of good practice in almost any regard: a business where the regulator and the employees make a small fortune, while the companies involved usually make a loss, is self-evidently bananas.
But for a short time in the late 1990s Leeds United was seen as a model business. Careful financial engineering had created a squad of players that could challenge the best in Europe, and the club was primed to become one of the powers in a rapidly expanding business.
Too good to be true
But it didn’t last. From 2001, the business started to collapse. A string of poor results on the field started a chain reaction and eventually, in 2007, the club was in administration and relegated to the third league. It had staked everything on achieving success because the fans (and the board, who were fans too) demanded it. Spending small had got it to the brink of success. To get further, it had to spend big. It had worked last time.
Leeds is a particularly visible example of the need for Eeyores in a business – people who are prepared to be unpopular by questioning success and the route taken to get there. It’s a role commonly attributed to non-executive directors, but recent history suggests that an “outside” director becomes much more of an insider much quicker than we like to believe. It doesn’t help that many of the magic machines are so complex or obscure that few people understand them. Like morphine, we don’t know exactly what it does to take away the pain, but we know if feels very, very good when it does.