Describing the dysfunctional management culture of Ford Motor Company during the later years of Henry Ford, Peter Drucker observed that a Ford foundry manager was not allowed to know the cost per ton of the coal being used in his furnaces. This was a function of the secretive and very controlling personality that Mr Ford had developed by this time, aided and abetted by his thuggish sidekick, Harry Bennett.
I was reminded of Drucker’s story by this item, which asserts that the budgets of most Chief Information Officers are not charged for the electrical power consumed by their data centers. Dean Nelson, senior director of data center services at eBay, suggests that these costs should be allocated to the IT budget, rather than lumped in with some general corporate overhead category: “When the CIO is paying the power bill, he really understands the impact of the decisions being made.” At eBay, he says, the power costs are indeed charged to the IT function, and as a result, the company has been very aggressive about cutting power consumption.
Well, duh! (The “duh” isn’t directed at Mr Nelson, but rather at those individuals and companies that haven’t figured this out yet.) Charge someone for something and he’s likely to be much more interested in using it efficiently than if he gets it free.
The failure to assign costs properly isn’t limited to the IT function. A couple of years ago, I was at a Borders store in south Florida. Although the day was very hot, the front door was propped open for a prolonged period of time, which didn’t make the task of the air conditioning system any easier. Somehow, I suspect that the general manager of the store wasn’t being charged for power in his budget…I think this practice is probably common in retail chains, and indeed thermostat settings are sometimes controlled centrally, which would not be necessary if the local people had the proper measurements and incentives.
Tradeoffs are best made by a person who is close to the situation and has the relevant knowledge. This requires that the incentive structure must assign costs (and revenues also, where appropriate) at the appropriate levels. Although most executives understand that socialism as a political system doesn’t work very well, too many of them fail to understand that market incentives work within a corporation as well as across an entire economy.
Fancy what a game of chess would be if all the chessman had passions and intellects, more or less small and cunning; if you were not only uncertain about your adversary’s men, but a little uncertain also about your own . . . You would be especially likely to be beaten if you depeneded arrogantly on your mathematical imagination, and regarded your passionate pieces with contempt. Yet this imaginary chess is easy compared with a game man has to play against his fellow-men with other fellow-men for instruments.
–George Eliot, in Felix Holt, the Radical (1866)
Effective leaders need to understand this insight and to learn to use the “passions and intellects” of their “chessmen” effectively. Proper allocation of costs, and the responsibility for controlling them, is one of the things that should follow from this understanding.
I can beat Drucker’s story.
Back in the early 90s Apple was under completely different management than now. Apple sold extended warranties. The VP of service came to do a communications meeting with the people who managed the warranties. Thinking they were warning the VP of a costly flaw in the system, they brought to her attention that the company was issuing warranties on machines five years old and older which was obviously a bad idea has they had entered the end of the hardware’s statistical operational lifetime. (This would be like issuing a full new car warranty on 10+ year old car with high milage.)
The VP just smiled and with no apparent consciousness of how delusional she sounded, said not to worry about it because all warranties were pure profit! After the obvious WTF response from the audience she delusionally explained that ALL the revenue, not just profits, from warranties booked to the service division whereas all the cost of warranties booked against the manufacturing division. Therefore, the all warranties were pure profit for service.
So Apple was losing money hand over fist on warranties not because a manager didn’t have enough information but because the system created a powerful incentives for the VP to make her own division look good by losing the company significant amounts of money.
Under the reign of Scully, Apple fractured into self-contained fiefdoms each concern solely with its own welfare at the expense of the overall company. It was truly bizarre. It was like a ship in which each water tight compartment was a different division and as the ship took on water the crew in the on compartment lowered their own water level not by pumping water outside the ship but instead into other compartments.
This dysfunction would have killed a company with a less strong brand and customer loyalty. Amilio tried valiantly to fix the problem but just didn’t have the moral authority. Jobs initiated a blood bath in upper and middle management when he came back and fixed the problem otherwise Apple would have long since been history.
I have long since begin to look at companies as programs and/or biological systems governed by feedback loops instead of reason. If you don’t design the proper negative feedback loop for wasting money, you get run away spending almost automatically.
I would say this example shows Scully as failing in three ways:
1)failed to set up proper cost allocation systems that would have created useful rather than destructive incentives
2)failure to create a corporate culture in which managers–while pursuing success by hitting their own objectives–understand that destructiveness to the company as a whole will not be tolerated
3)failure to dig deep frequently enough to warn people like this manager that she had better not do what she was doing, because he just might find out
See also my post stupidity, communist-style and capitalist-style
Shannon, thanks for a GREAT insight about the superior importantce of feedback loops. Usually more important than initial design, for instance.
Being open to feedback is also part of humility, and it is arrogance of the PC elite that has them closed to so much feedback.
David, fine note on the Incentives Matter theme, and Scully’s particular mistaken incentives at the time.