“Better before Worse” – are you dropping off the cliff?

Posted on July 31, 2014

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(image: realestatebrowser.wordpress.com)

Most change initiatives fail.  Statistics from MIT research suggest that for leaders managing change the ‘capability trap’ is the single major failure mode.  So, what is this trap, how is it set up and, more importantly, how to avoid it?

As a quick disclaimer, the charts and examples are schematic and simple to get my point across.  This is a blog, not a textbook.

Under pressure

New leaders get appointed to solve a business problem such as improving poor results of sorts.  So from the start the new guy or gal is under pressure to perform and succeed.  In politics the common public expectations are to see result or bold actions within the first 100 days – and business is not known for being less demanding.

Tough Choice

So, soon enough the new leader faces a tough decision. Which choice do you favor?

  1. “Worse before better” means doing “the right thing.” However, this approach may not deliver sustainable results fast and is a hard sell to impatient or less reasonable superiors.
  2. “Better before worse” is a less stellar route to reap short-term benefits and lessen the immediate pressure but it comes at a price:  knowing that the this choice is not sustainable and will cost more later down the road.
By the way, this is really not rocket-science but straight-forward logic yet many executives still get seduced by the low hanging fruit, namely “better before worse”… so stay with me for a moment to see what happens next.

“Better before Worse” 

It starts out easy: you cut cost all over the place and look like a hero immediately.  For example, you could reduce machine maintenance or cut the employee training budget.  Schematically it looks somewhat like this:

Cutting costs equals savings

Cutting costs equals savings

What happens is that not only your balance sheet looks better quickly, you also increase productivity short-term.  The machines keep running and people keep on working, so in the short-term you produce the same output with less input.

After short-term gains, productivity plummets

After short-term gains, productivity plummets

Productivity and the Capability Inertia

The problems arrive with a delay when ‘capability inertia’ starts kicking in.  So here is what happens:  You didn’t maintain the machines yet the machines keep working – for while. Then, they break really bad and it takes a lot more money to get them fixed than having them maintained.  It’s like not putting oil in your car’s engine and driving on – somewhere down the road the engine will die on you.  You will have to spend money to fix it and live with the downtime while fixing the machines.

With a delay, the organization's capabilities suffer and are very costly to regain later

With a delay, the organization’s capabilities suffer and regaining them later proves very costly

At that time you find yourself in deep water and all your previous savings go up in smoke together with what else you didn’t budget for.

On the people side with employee training, for example, the effect is quite similar but often less obvious: You save the money for keeping them up-to-date with new technology, skilled, etc. and saved short-term.  The real problem is your staff losing its professional capabilities to continue to perform on a high level in the face of competition or adapting to changing markets and environments.  External focus comes with a cost of doing business – that you just eliminated, thereby fostering group-think and internal focus.  Getting the crew back in shape later on takes effort and is expensive: not only will you have to train them but also they are unproductive during the training period.

Furthermore, shortsighted cost-cutting inhibits seizing business growth opportunities such as ‘small elephant’ projects (see also How to grow innovation elephants in large organizations), which can jeopardize the business foundation for the future.

With it comes the ‘leaky pipeline’ effect where valuable talent leaves.  It is the best people who leave first (see How to retain talent under the new workplace paradigm?) if they see sweeping cost savings affecting critical investments in the company’s future capabilities and not surgically cuts.  Talent does not wait it out on a sinking ship.  If you are unfamiliar with the horrendous costs of turnover, check with your Human Resources person to get a sense for your burn-rate!

Despite all of this, many managers still embrace “better before worse” as the scenario of choice and believe they are “doing it the right way”.

Rewards for all the Wrong Reasons?

Unfortunately, performance and compensation frameworks in mature organizations usually support this easier approach.  ‘Success’ is typically measured quarterly or yearly as a basis for bonuses, raises or promotions.  The typical incentive systems don’t take long-term sustainability into account enough (other than stock options for publicly traded companies, for example) to change behavior.

Instead, rewards keep getting handed out on a short-term basis of evaluation.  Research showed many times over that this approach simply doesn’t work for more challenging jobs of the 21st century.  Don’t believe it? – Check out Dan Pink’s famous 18 minute TED talk “The Puzzle of Motivation” relating to the candle problem and motivation research.

As a bottom line, if don’t plan to hang around to ride out the consequences of your choice (or even have a golden parachute ready), “better before worse” appears an attractive shortcut to short-term success.  Deep down, however, you know it was not the right thing to do.  Your staff, your successor, and sometimes the entire company will suffer and face the consequence when you are gone. – So what could you do instead?

“Worse before Better” 

There is an alternative choice: the stony road of “worse before better” by doing what is right.  For leaders accepting responsibility this may be the only choice.

Right from the starts is gets tough: you increase cost to invest where things need to change most, be it people or technology. For example, invest in getting the best people to do the job and train them as well as you can for the challenges to come and step out of their way.  Establish or overhaul technology, processes and managerial framework needed to deliver results reliably.

Invest in future capabilities

Invest in future capabilities first

This takes time and money, so as you would expect, productivity suffers at first but then, if the change is executed well, recovers and quickly exceeds the additional costs by far while you deliver outstanding results reliably.
It is important here not to address all problems at one time but to prioritize and tackle change in smaller steps.  Mind that change is a development process that doesn’t lend itself to shortcuts.
With a delay, productivity recovers sustainably

After dipping down at first, productivity grows sustainably

While this is clearly the more sustainable strategy the tough part is getting your stakeholders and superiors to buy in (especially if they are looking for short-term “better before worse” results) by setting realistic expectations.  After all, “worse before better” is a sustainable basis for a business model where “better before worse” is not.
You may also have to accept not receiving the short-term performance incentives for doing the right thing if your incentive system does not reward building capabilities.  However, there are other kinds of meaningful rewards to consider.  They range from feeling good about withstanding the temptation, doing good for the company and its employees, as well as possibly getting attention from more forward-thinking parties who may want to hire you in the future as a leader with guts and brains.