Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today (10 page)

I
t sure is. In fact, that sound you hear is the collective groan of hordes of people, just like you, who have watched this dysfunctional dynamic play out in their own organizations. And we’re not just talking about IT getting buried where it shouldn’t and neglected until a crisis strikes—although that’s bad enough. We’re talking about the bigger and more onerous problem your letter suggests—the Rasputin-like dominance of the chief financial officer in too many companies.

OK, maybe invoking Rasputin is a bit extreme. But it’s not going too far to say that the CFO can, and very often does, wield too much influence. And if not the CFO, it’s the so-called chief administrative officer who gets this type of excessive power, overseeing finance itself, HR, and any number of other staff departments. Now, sometimes the chief administrative officer is the former CFO. Sometimes he or she is the former general counsel. Regardless, this extra management layer spawns bureaucracy at its worst. The person holding the CFO or chief administrative officer title inevitably becomes the company’s go-to guy—the bodyguard through whom every question and decision must pass before finally making it to the CEO—or not. The job becomes a catchall bin for projects, people, or whole departments that the “overburdened” CEO, with just too many direct reports, is said to be too busy to deal with.

It’s just wrong.

So, why does it happen?

With IT, the explanation is easy: it’s a historical hangover. Initially, IT was mainly seen as good for lowering the costs and increasing the efficiency of payroll operations. In those days, decades ago, there was some logic to having IT report to the CFO. Most good companies, however, took IT out of finance when its broad strategic utility became obvious. But some, apparently including your company, have not.

As for HR reporting to a chief administrative officer, there actually can be no good explanation! With its critical role in hiring, appraising, and developing people, HR is so central to the success of a company, it’s practically criminal if it doesn’t report directly to the CEO. When it doesn’t, you can only assume it’s because the CEO doesn’t get the people thing, or someone else is actually running the place, or both.

Which brings us to the consequences of this whole dynamic. The first is that frontline IT and HR managers, who usually have among the most relevant ideas and information in the company, do not get heard high enough up in a timely way. Any insights they might have get filtered before making it to the CEO or the board, sometimes by the cost-sensitive CFO, of all people!

Second, companies where the CFO or chief administrative officer reigns supreme have a much harder time attracting good people to top HR and IT jobs. The best and brightest in these fields will always choose to work where they have a seat at the table
equal
to the CFO. Why shouldn’t they? The best companies recognize their value and reward them with pay and prestige.

So, to your question then—absolutely, IT shouldn’t be reporting to the CFO.

Nor, for that matter, should any key function report to a bureaucratic layer. Your painfully common problem is case in point.

S
ometimes companies have no choice but layoffs. They miss a technology cycle or the economy in general is tanking. But the awful truth is that too many companies use tough times to do something they should be doing all along—cleaning house. That negligence—especially while numbly chanting the “people are our most valuable asset” mantra—certainly makes sudden layoffs hypocritical, as you suggest.

But more than that, it makes them unfair and cruel.

Look, it’s not always easy to be a manager, but once you agree to be one, you have a responsibility to your employees, and that is to always let them know where they stand. No company should be without a rigorous appraisal system, and no manager should be too weak-kneed to implement it. Rewards should be closely linked to an employee’s evaluation, with the most money and praise going to the best, and nothing at all going to the worst.

This kind of system has a swift and amazing effect on underperformers. You rarely have to fire them. They usually leave on their own. And in fact, many of them go on to find work that better fits their skills, at places where they can finally be appreciated. It’s a perfect ending for them, the company they’ve left, and the one they’ve joined.

The problem is that many managers claim they are too “kind” or too “nice” to tell people exactly where they stand—in particular, the real losers.

That’s why so many companies run into the situation you describe. The pattern usually goes like this. Faced with poor results, the top team decides costs must be reduced fast. Managers throughout the company see layoffs as the most immediate course of action, so the manager of, say, division Q, decides to fire two people. Now, all along, this terribly nice person has been telling his employees how great they are, rewarding them about equally at bonus time and even sending many of them off for training. But when the boom falls, he knows
exactly
who should go: Joe and Mary, who haven’t carried their weight for years.

He calls each of them in for a meeting to give the news.

“Why me?” both ask.

“Well, because you weren’t very good” is the mumbled answer.

“But I’ve been told I was doing just fine for thirty years! What’s going on?”

Good question.

If this manager had been doing his personnel job the right way all along, being fired wouldn’t have come as such a shock to poor Joe and Mary. Knowing their status, they would have left the company long before. Instead, they find themselves forced to look for new work, often during the very recession that made their layoffs necessary.

So much for “kind” management.

Now, we’re not saying that companies can always avoid the shock and pain of layoffs by consistently using a system of appraisals and housecleaning. There will always be unfortunate events outside an organization’s control that require fast cost-cutting, and nothing does that like job cuts.

But a rigorous evaluation system combined with clear communication about how the company is faring go a long way toward preventing the kind of widespread cynicism about layoffs that you exemplify—and rightly so.

S
enseless? Not really—counterproductive is more like it.

Look, some form of financial planning is obviously necessary; companies have to keep track of the numbers. But your thinking is on the right track. The budgeting process—as it currently stands at most companies—does exactly what you’d never want. It hides growth opportunities. It promotes bad behaviors, in particular when market conditions change midstream and people
still
try to “make the number.” And it has an uncanny way of sucking the energy and fun out of an organization.

Why? Because most budgeting is, simply put, disconnected from reality. It’s a process that draws its authority from the mere fact that it’s institutionalized, as in: “Well, that’s just the way it’s always been done.”

It just doesn’t have to be!

But before we go there—that is, a better way to budget—think about what’s wrong with the standard approach.

The process usually begins in the early fall. That’s when the people in the field start the long slog of constructing the next year’s bottom-up, highly detailed financial plans to make their case to the company bigwigs in a few weeks’ time. The goal of the people in the field, of course, is unstated, but it’s laserlike. They want to come up with targets that they absolutely, positively think they can hit; after all, that’s how they’re rewarded. So, they construct plans with layer upon layer of conservatism.

Meanwhile, back at headquarters, executives are also preparing for the budget review, but with the exact opposite agenda. They’re rewarded for big increases in sales and earnings, so they want targets that push the limits.

You know what happens next. The two sides meet in a windowless room for a daylong wrestling match. The field will make the case that competition is brutal and the economy is tough, and, therefore, earnings can increase, say, just 6 percent. Headquarters will look surprised and perhaps a bit irate; their view of the world calls for the team to deliver 14 percent.

Fast-forward to late in the day. Despite the requisite groaning and grumbling along the way, the budget number will be settled right down the middle—10 percent. And soon after, the meeting will end with pleasantries and handshakes. It will only be later, when both sides are alone, that they will crow among themselves about how they managed to get the other guys to
exactly
the targets they wanted.

What’s wrong with this picture? First, what you see: an orchestrated compromise. But more important, what you don’t: a rich, expansive conversation about growth opportunities, especially the high-risk ones.

That conversation is usually missing because of the wrongheaded reward system we mentioned above. People in the field are literally paid to hit their targets. They get a stick in the eye (or worse) for missing them. So, why in the world would they ever dream big?

They won’t—unless a new reward system is put in place. One in which bonuses are based
not
on an internally negotiated number but on real-world measures: how the business performed compared to the previous year and how it did compared to the competition.

With those kinds of metrics, watch out. Suddenly, budgeting can change from a mind-numbing ritual to a wide-ranging, anything-goes dialogue between the field and headquarters about gutsy, what-if market opportunities. And from those conversations will spring growth scenarios that cannot really be called budgets at all. They’re
operating plans
, filled with mutually agreed-upon strategies and tactics to expand sales and earnings, not all of them sure bets.

Of course, operating plans are not all wishing and fluff, lacking any financial framework. They should always contain an upside number—the best-case scenario—and a number below which the business is not expected to go. The main point is, though, that this range will be the result of a dialogue about market realities.

And because they’re part of a dialogue, operating plans can be flexible, changing during the year with market conditions if need be.

In fact, the only rigid thing about this form of budgeting is the core value it requires of an organization—and that is trust. People in the field have to believe they won’t be punished for not reaching their stretch targets, and executives have to honor that confidence. Executives, meanwhile, have to believe that people in the field are giving their all to achieve those big goals, and people in the field have to uphold that good faith with their efforts.

With that “contract” in place, the budget dynamic takes on a whole new life.

So, don’t give up on budgeting at your company yet. You’re right to be frustrated by it now, but given how much is to be gained, maybe it’s time to start a conversation about changing the process. Are you ready?

F
or someone at a company of only two thousand people, you sure sound as if you have one of the most common symptoms of big company-itis: the not invented here syndrome, or NIH.

You know NIH. It’s when managers become very comfortable with the notion that their company is performing at its peak—so comfortable, in fact, that they create an atmosphere where there is little interest in using ideas from outside sources to improve how things are done. NIH managers believe the company has everything figured out. After all, it’s been around for a while and had its share of successes. “This is the way we do it here,” they like to say. And should someone suggest a new practice, they typically come back with the refrain, “We’ve tried that before.”

Now, big company-itis in general is awful. Along with NIH’s complacency, its other symptoms include inertia, bureaucracy, and risk aversion. But NIH trumps them all. It wrecks organizations, draining competitiveness right from the veins.

So, let’s talk about cures.

In fact, let’s look at your situation. You indicate that you have costs so under control that they can go no lower, even with outsourcing. You also seem to believe you have the best technology available, further obviating the need to seek alternatives outside the company. Overall, you seem genuinely stymied by your problem.

But perhaps you see no way out because you’re too inwardly focused. To us, your problem seems pretty straightforward. A competitor appears to have built a better, cheaper “mousetrap” than you and gotten it to market faster. The solution feels straightforward too: why not let go of the notion that you’ve tried everything and try
more
of everything?

Innovation, basically, is what we’re talking about. Your company has to become fixated on finding a new process, product, or service that creates a value proposition the market desperately wants to buy. Maybe a new practice is what you need—a different way of purchasing, or a new way of communicating with customers. Maybe a new technology will move you forward—something you can develop or get from another company through a license, merger, or acquisition. With an open mind you’ll find the world of improvement possibilities is huge. In fact, keep pushing on the outsourcing front. Despite your excellent machines and low depreciation, there has to be a company in a country out there that can make your product’s components or the finished product itself for less.

Your greatest advantage at this time, ironically, may be your size. Your company is too small to have big company-itis! With two thousand people you should be able to move quickly to develop and push a new technology through testing, or buy another company with a great add-on service, or change management to bring in fresh faces who can break the technical paradigm. The biggest thing standing in the way is your attitude—an insular big-company condition you can’t afford to have.