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.