AlastairThomson.com

“Garbage in, garbage out”, or GIGO, was something we were all warned about as young accountants. Sure complex data systems had their uses, but if the quality of the stuff being loaded into them was poor, there was no point using their outputs to drive business decision-making.

One of the reasons people sometimes find me challenging is because, when they present numbers to me, my starting point is never “what do these numbers tell us?”. It’s always “how do we know the data underlying these numbers is correct?”

This is partly from experience. I can’t tell you the number of times I’ve found that the numbers being presented to me are…at the most charitable interpretation possible…only a partial version of the truth. Often what they don’t say is more important than what they do say.

So I spend a lot of my time in meetings wondering what I’m not being told.

It’s not that the numbers are wrong. They are inevitably mathematically accurate, based on the data someone fed into a spreadsheet.

But if the underlying data is suspect, or presents an incomplete view of the problem, it’s easy to end up taking entirely the wrong decision just because the numbers you are presented with would suggest that’s the best course of action.

A quick example

A relatively common example of what I’m talking about comes from salespeople.

Now, sales is the hardest job in any business, and I’ve worked with some great salespeople over the years.

But some salespeople, even quite senior ones, forget that it’s not the company’s objective to make a sale. The company’s objective is to make a profit.

And while you can’t make a profit without a sale, it’s equally quite possible to make lots of sales without ever making a profit.

Years ago, I worked with a salesperson who was seen as very successful, but that’s only because, every time his customers asked for a price reduction, he always gave it to them. The customer showed their appreciation for this by giving him more of their business.

Over time, as his main (very large) client switched more and more of their purchasing to him, his sales numbers skyrocketed.

The only issue here was that all the work we did for this client lost us money. And every time this sales rep increased sales to his mega-client, not only did we lose more money, we also took up space on our production line which could have been used to produce profitable work instead.

Before I got there, all the board presentations by the sales director had been encouraging the business to ride this incredible growth from a large, prestigious client because the fact we were growing so fast with them meant “we had to be doing something right”.

However, nobody had worked out the real costs of servicing this client, they’d just done a superficial calculation or two and pressed ahead. So, sadly, the only thing we were “doing right” with this client was learning how to lose money by servicing them.

Why the company was losing money was a mystery to everyone involved because, until I got there and asked a few awkward questions, they only had some of the information they needed to make good business decisions.

They thought they were making good decisions, but this was really an example of “garbage in, garbage out”. Bad…or, perhaps more fairly, incomplete…information at the front end meant that the decisions they made, based on that data, were inevitably flawed.

Another quick example

Another time I went to work for a business with a number of financial difficulties (yup, I love a challenge…!)

This business had mixed up two important – but entirely separate – financial concepts…the profitability of an individual job or project, and the overall profitability of the business.

Now, these sound like the same thing, but sometimes they’re not.

This particular organisation had a high fixed cost base, but beyond a threshold we could produce two or three times the sales volume with only a tiny increase in cost. Past the threshold, each incremental sale produced about 99% gross margin.

However, supposedly in the name of “rigorous financial control”, this organisation had decided that if a project wasn’t going to achieve a margin of at least £X they weren’t going to do the project at all.

Not completely crazy, you might think. And sometimes you’d be right.

But in this case, most of the projects which came along were, within a small margin above and below, somewhere around £X.

And because £X was an arbitrary limit, if your project was achieving 95% of X, we didn’t take it on, whereas if it achieved 101% of X we did.

This all sounds commendably data-orientated, doesn’t it…?

Except the person making these decisions – and engineer by trade, as it happened, who valued precision above all – had forgotten that, against a fixed cost base, the best way to turn around the organisation’s fortunes in the short term was to take every project which delivered a positive return over our “hard” costs.

It was fine to have £X as an objective. And obviously in the longer term there are other strategies you would want to deploy to enable the business to grow revenues and shrink costs. But in the short-term, turning down jobs which covered some of our fixed costs and threw in a contribution to our profits, however small, was just about the worst approach to take.

Let’s imagine the required £X was £10,000, and we could have sold a project which brought in £9,500. Under his rules, the threshold hadn’t been met, so it was an automatic “no”.

The reality is that £9,500 was still covering a big chunk of our fixed costs, making us a profit (albeit a slightly smaller one than we might have wanted), and providing some positive cash flow.

By turning down a £9,500 job, perhaps £8,000 of fixed costs were now not being covered at all, and also we missed out on £1,500 in extra profit. Less than we would ideally have liked, but still a none-too-shabby contribution on the bottom line.

What’s more, by not taking those £9,500 jobs, our production facilities stood idle for longer and longer each year. All in the name of “rigorous financial control”.

It won’t surprise you to learn that this organisation lost £millions in revenues due to this policy, couldn’t cover its fixed costs, and ended up in severe financial difficulties.

Mercifully, I was long gone by then. It was clear that this organisation would never be able to shift their thinking while that individual remained in charge.

Even as their ship was sinking fast, this organisation remained obsessed about whether individual projects achieved £X, and could never bring themselves to see that there might be another way of looking at their decisions. One which would result in the exact opposite decision.

Of course, it’s not always right to take on projects which don’t achieve whatever targets you’ve set for the business. It’s a complex issue which depends, amongst other things, on your sales and marketing approach, how you manage capacity in your business, and the split between fixed and variable costs on a typical piece of work.

All you need to take away from this story is that there was a way of looking at the numbers which nobody even considered, which would have given a completely different (and correct, in this case, as it happens) conclusion. The organisation was completely blind-sided because it didn’t even consider there might be another way to make decisions apart from “does it achieve £X?”

They didn’t challenge the underlying assumptions they were making rigorously enough. In this case, the underlying assumptions were the “garbage in” bit of the equation, so the “garbage out” in terms of poor decision-making were pretty much inevitable.

So what does this have to do with Miles Davis?

If you don’t know the name, Miles Davis was a famous jazz musician. Many commentators have described him as one of the coolest people who ever lived.

His 1959 album “Kind of Blue” remains an icon of 20th century music and one of the best-selling jazz albums of all time.

But Miles Davis’s outstanding composition and playing skills aren’t the issue here.

Rather, it’s something he said when asked about how to be a great musician.

“Don’t play what’s there; play what’s not there.”

Think of it like this. If you ask your computer to play a set of notes in sequence by reading a musical score, you’ll get each specific note played accurately enough. But you’re probably going to get bored of listening to that pretty quickly.

For two reasons.

Firstly, music, like business, is not just about the mechanical reproduction of a pre-determined outcome – whether that’s to play a B flat, or to build a new 3-series BMW.

While it’s especially true for jazz musicians like Miles Davis, particularly when playing live, all musicians improvise around the notes on the score, if for no other reason than to stop themselves getting bored playing the same tunes over and over again.

Even in classical music, a genre where compliance with the composer’s specific instructions is prized much more highly than in most other musical disciplines, musicians play ever so slightly differently to one another.

When a reviewer writes “so-and-so gave the best performance of Brahms I’ve ever seen”, it isn’t because this is the first time they’ve heard the notes played in the right order.

It’s because the performer they were listening to played “something that wasn’t there”.

The second way musicians play “something that isn’t there” is in how they put emotion into their playing.

Using the same musical note, you could be trying to convey happiness or sadness, get people up to dance or bring them solace in the midst of grief, send people off to war or celebrate the outbreak of peace.

The only difference between those very different scenarios comes down to how well a skilled musician conveys the emotions they want to evoke through their playing.

How you play a musical note is “what’s not there”. But you’ll never see how to play a note on a musical score. All you’ll see is what to play.

So accounting is cool after all… 😉

Although you might have trouble believing it, this is how accounting can be cool too.

Sure, you can just “follow the notes on the page” and you’ll produce something competent…if a little dull. That’s “playing what’s there”.

Or you can “play what’s not there”…work out what the other side of the argument might be and see if there’s any data for that…think about what’s not being talked about, like the story of the unprofitable, but fast-growing, customer above…or figure out what ingrained thinking is holding the organisation back instead of propelling it forward, like the guy with the fixed project target of £X.

That, for me, is the exciting bit about accounting. That’s how I’ve added value to the organisations I’ve worked for over the years, in both financial and non-financial roles.

And while I might not be quite as cool as Miles Davis, as accounting goes, this is about as cool as it gets.

The problem with the supposed science of measurement is that it’s really easy to measure trivialities and really difficult to measure whether or not you’re achieving the outcome you’re aiming for.

So the “more data must be a good thing” industry migrates towards measuring larger amounts of more and more trivial metrics.

Once they can get you to believe that “more data must be a good thing”, there’s almost no end of trivialities you can spend £millions tracking, measuring, and running performance management systems with.

Here’s the problem, though…

No amount data on of trivialities will help you measure what you need to achieve the outcomes you want. Quite the opposite – often a focus on the trivialities will take you away from the goal you’re actually trying to achieve.

So, even as everyone is congratulating themselves on a job well done for achieving whatever metric that is, the organisation’s real objective is moving further and further away into the distance.

Often, what gets measured is garbage

You’re almost certainly familiar with the management aphorism “what gets measured gets managed”.

That’s only partly true.

Often what gets measured is garbage. And managing garbage doesn’t make it anything other than garbage. It just becomes slightly better-organised garbage.

Think about this for a moment.

What would you rather have: 60% of the information you’d ideally like about the achievement of a significant goal in your life, or 100% of the information you could ever possibly get about a whole host of things that don’t matter in the slightest when it comes to achieving that significant goal?

It might not surprise you to learn that, when it comes to designing corporate information systems, the answer is often “the latter, please”.

Every day, people are doing the equivalent of tracking how many times in the week you put on your running shoes in the morning, but forgetting that your real goal is to run a marathon, not just to put your shoes on every morning.

OK, I won’t milk it

One of my favourite examples of this is in the dairy industry.

Specifically the prevalence of semi-skimmed milk.

I can’t say for sure it didn’t exist when I was little. But when my granny sent me to the shops to get a pint of milk for her, there was only one type – I never needed to have a debate with the shopkeeper about which variety I wanted. The only question was about how many bottles my granny needed.

As far as I can tell, the original impetus behind introducing semi-skimmed milk was to reduce the amount of fat in the average British diet, at a time when the amount of fat in people’s diets was seen as a major health issue.

Now, I’m an accountant, not a doctor, but I’m not sure about this.

Firstly, the French eat a diet with much more fat in it than the average Brit, and they don’t seem to do too badly in the health stakes.

And, just for good measure, whole milk is a fairly nutritious foodstuff – only marginally above the threshold for “low fat”. (The definition of “low fat” is anything with less than 3% fat.)

Whole milk has a fat content of about 3.5%, so relative to a plate of fish and chips, for example, or a sausage sandwich, the impact a drop of milk in your cuppa has on your fat intake is tiny.

What’s even more crazy is that most of the vitamins in milk are of the fat-soluble type which you find in…take a wild guess…about double the quantity in whole milk compared to semi-skimmed milk.

So, whatever the original well-intentioned purpose might have been, the widespread introduction of semi-skimmed milk has not only been an arguable-at-best solution to a problem we may not even have had originally, but it has also introduced a whole new range of problems we didn’t have before.

But, like all the half-assed metrics deployed inside many organisations, we persist with persuading people to drink semi-skimmed milk anyway.

That’s the power of a metric that gets managed. Even the bonkers stuff still gets managed, tweaked, enhanced, performance tracked and goodness knows what else.

And it’s all pointless

For me, at least, this is all a bit pointless.

When I put milk in things (tea, coffee, scrambled eggs, porridge) I’m doing so to get the “mouth feel” of a certain proportion of fat content in what I’m eating or drinking.

So, when there’s only semi-skimmed milk available, I just use twice as much of it to bring the fat content up to the level I like in my cuppa.

I’ve yet to encounter anyone who measures out exactly 10ml of semi-skimmed milk in place of the 10ml of whole milk they used to put in their tea before, which is what you’d need to do to get the benefit of semi-skimmed milk (assuming there are any actual benefits).

We all put a “glug” into our cuppa and if that cup of tea doesn’t have the optimum balance of fat to tea for our personal taste, that glug will be a bit bigger next time.

Even if you don’t do what I do, I’m prepared to bet that most people put more semi-skimmed milk into their drinks than the amount of whole milk they would have put in before. Even if it’s not twice the amount, it’s more than they used before because unless you’ve had a complete taste bud failure, it’s an entirely different taste.

(And don’t get me started on the heathens who make flat whites with semi-skimmed milk – a process that ought to land those responsible in jail for a few weeks at least.)

But the idiosyncrasies of my taste buds are the least of our problems here.

What do you think happens with the other “semi” of semi-skimmed milk – the half that’s removed from the original whole milk?

Well, amongst other things, that’s used to make cream, butter, and cheese. Often consumed by the very same people who gave up putting whole milk in their tea “for health reasons”.

And, again as a sample of 1, when I think back to my childhood, all those things were much rarer than they are today, especially cream. That was a real luxury product once upon a time, but now whenever I’m in Costa or Starbucks I see people getting drinks with a big pyramid of cream on top.

I’m no scientist, but I’d venture to suggest that making a drink with semi-skimmed milk and then dolloping several ounces of squirty cream on the top is unlikely to be healthier than just making a standard coffee using whole milk.

So, not only didn’t we solve the problem we had originally with this seemingly worthy-sounding objective (“let’s halve the amount of fat in milk”)…we’ve probably added in some new problems we didn’t have before.

Now people who would previously have consumed a few millilitres of whole milk in a cuppa are now spooning several ounces of 35% fat squirty cream from the top of their Frappuccino into their mouths instead of glugging down a tiny amount of 3.5% fat whole milk in a standard coffee.

Why this matters

In case you thought I had some weird obsession with milk, let me assure you that’s not the point of this article.

(Although my obsession about the way people make flat whites is a very genuine source of concern to me…)

My point is simply this.

It’s really easy to come up with an idea like “if we are concerned about the amount of fat in the British diet, let’s just halve the amount of fat we have in our milk”. It sounds like a simple solution to a problem you think you’ve got.

I’m sure there were some statistics at the time about how many gazillion gallons of milk the country drank at the time and some calculations about how many millions of tonnes of fat that would “save” the country.

But as a stand-alone measure, it’s poorly designed.

For people like me who just put twice the amount of milk in their tea, there are no benefits whatsoever.

However it means that there is now twice the amount of “spare” cream which will be made into cream, butter, yoghurt or something else and then sold back to me or to someone else. You can be pretty sure that the dairy industry isn’t just pouring the extra cream away. They’re doing something with it and selling it to someone.

Whether you’re eating a pound of cheese at a single sitting or loading up your Frappuccino with a gravity-defying dollop of squirty cream, that’s likely to be a good deal less healthy for you than just using whole milk in your tea in the first place.

The dairy industry has had to invest in new factory equipment to skim, separate and store all the extra cream they produce, and truck it to wherever they can sell it, increasing their costs and thereby increasing the prices consumers pay.

And, unless artificially fortified with extra vitamins, there’s only about half the amount of fat-soluble vitamins in semi-skimmed milk as there is in whole milk.

And an udder thing…

It doesn’t seem to me that semi-skimmed milk serves any useful purpose and yet we have whole industries dedicated to making it, promoting it and distributing it.

In fact, it may even be (on an end-to-end system basis) positively harmful to the overall objective of helping the average Brit consume less fat in their diet if we take some fat out of our milk but encourage more people to consume heart-stopping quantities of whipped cream instead, made from the 50% of the fat that was skimmed off the milk in the first place.

But apart from giving me the opportunity to squeeze a bunch of dairy-related wordplay into this article, why does any of this matter?

The real story here is that, inside your organisation, you’ll have a whole range of policies, procedures, and metrics which have come about in exactly the same way.

They were probably put in place once-upon-a-time by someone meaning well, as I’m sure semi-skimmed milk was.

But if you look at those policies, procedures and metrics today and fully consider all the knock-on effects they create for your organisation – many of which might be positively unhelpful in the context of achieving your organisation’s overall objective – then they might have outlived their usefulness.

When I’ve worked with organisations in real trouble in the past, one of the root causes was often their fixation with a metric or an approach which might have made sense at some point in the past, but no longer did by the time I joined the organisations.

However those organisations, over the years, had become so wedded to that metric that they couldn’t imagine life without it…even though that metric was slowly strangling the organisation and preventing it achieving its overall objectives.

Have a look – you might be surprised how many of those you’ll find inside your own organisation if you really try.

Trust me, this isn’t my first rodeo…

I’m always amused – and more than a little disconcerted – by people who claim to “manage by the numbers”.

Numbers without context mean very little and they’re often used by people who want you to believe what they believe – sometimes knowingly, like a politician drumming up support for their political views, sometimes unknowingly, when people just don’t understand the full picture.

I’ve never yet met an underperforming salesperson who didn’t have a raft of statistics to show how hard they were working and how their lack of results was always someone else’s fault. High-performing salespeople working in the same business, selling the same products, just hand in a note of their sales numbers at the end of the month and miraculously reach or exceed target while only needing a single number.

It’s the same for operations people, engineers, marketeers, accountants, HR people and any other profession you can think of.

Numbers are helpful – essential even – to track progress towards achieving the results the business needs. But any time someone presents a set of numbers to you, remember the numbers they give you are intended to serve one single purpose – to convince you that the person presenting the numbers is doing a great job.

They are highly likely to be “the truth” insofar as they go. I very rarely find people just making stuff up. But they are equally highly unlikely to also be “the whole truth and nothing but the truth”.

That’s why context matters. An example might help.

Pies

If we’ve met in real life, it probably wouldn’t surprise you to learn that I like a pie. Sweet or savoury – either is fine.

But let’s take this simple foodstuff and use it to illustrate the importance of context.

The last pie I bought needed to be heated in an oven for 20 minutes at 200C. And it was very nice, to be fair.

But what if I deep-fried it hot oil for 20 minutes at 200C? It’s the same temperature, and the same amount of time, right? Well, I’m not sure that would be anything like as nice to eat.

I could also pop it in a frying pan and use a temperature probe to make sure the insides were heated to 200C for 20 minutes, or do the same on a grill.

Perhaps I could heat it for 40 minutes at 100C – after all, exactly the same amount of heat gets into my pie, doesn’t it? Half the heat for twice the time sounds like the same thing to me.

Equally I could microwave it on an equivalent setting for 20 minutes, or stick it in a wok.

There are probably lots of other ways I could heat up a pie for 20 minutes at 200C, but without the context of knowing that it needs to go in an oven, and understanding that no other cooking method will produce a similarly tasty result, just knowing that the pie needs cooking for 200C for 20 minutes isn’t much help.

And that’s before we decide whether we’re serving the results with mashed potatoes and peas or ice cream.

That’s why numbers alone, shorn of their context, are of remarkably little use in making good decisions.

And if you’re only getting a partial picture of the numbers – because the person presenting them is only sharing the good stuff in the first place – you end up making decisions with only a tiny proportion of the information you’d ideally like.

Painting by numbers

Part of the problem is that a lot of business education and training in recent years has focused around running businesses like a painting-by-numbers kit. It’s all about extracting and manipulating numbers, loading up spreadsheets, cranking up Power BI, and making pretty charts.

There’s a role for that, of course, but mostly charts and graphs strip away nuance, they don’t add to it. Thousands of data points are turned into a single line on a graph, but that line is probably the least useful of any piece of management information: “the average”.

Knowing just the average of any data set is of very little help, and it can be dangerous because so many sub-optimal decisions are made on the back of that single number.

Consider this by way of context.

Let’s say the average of some performance metric in your business was 10.

In lots of organisations, that’s all they would use for budgets, financial plans, targets for the workforce, HR-led competency reviews, and so much more.

So ask yourself – would you do any of those things in the same way with this context added:

While the average is indeed 10, it’s made up of six separate people’s results. Their results are as follows:

0, 0, 0, 20, 20, 20

With that context, knowing the average is 10 is all-but meaningless. And it could be meaningless on both the high-side and the low-side.

What it I told you that the “zeros” had only started work today, and the “20s” had each worked for the business for 5 years plus?

In that scenario, you’d expect an average far higher than 10 in a few months’ time, so that would not be a sensible figure to base any future budgets and financial plans on.

Equally, what if I told you that two of the “20s” had just handed their notice in, but that everyone else had been with the business for at least a year? That average of 10 isn’t looking much like a solid basis for a forward financial plan to me.

Rather, it looks like you got lucky with a handful of good performers and probably don’t really understand what’s going on, or you wouldn’t have the three zeros.

But what about if the three “zeros” were the boss’s children…would that context make a difference to how you interpret the numbers above?

Or, indeed, if the “20s” were the owner and their two siblings who had worked in the business for over 30 years each?

The perils of science

I know it’s tempting to look at a set of numbers very simplistically and make the “obvious” decision. But that’s nearly always wrong.

In my experience, it’s especially likely to be wrong if numbers are compiled and reported to several decimal places. And that goes double if someone with a science or engineering background has prepared the numbers.

In those disciplines precision to the nth degree is always the objective – and rightly so under laboratory conditions.

But in a business setting, a lack of precision two or three decimal places in isn’t usually the problem – being more precise doesn’t bring any more of the context you need. It just gives more depth to the context you already have.

Knowing, for example, that one of our “20s” above actually scored 19.895 and one of the others scored 20.105 makes absolutely no difference to how we’d interpret the dataset above. (Or at least how I’d interpret it – hopefully by the end of this article you’ll see things the same way, if you don’t already.)

The big question really is “why do we have one group clustered around zero and another group of equal size clustered around 20?”. More precision in the measurement of each individual’s results won’t help solve that problem.

People who are used to working under laboratory conditions are especially susceptible to this thinking blind-spot because they often forget that laboratories are closed systems where pretty much every variable is controllable and extra precision can bring you greater insight.

Whereas anything any business does is, in reality, having to sit in a primordial soup of endless, seething humanity, the vast majority of whom don’t know and don’t care about the intricacies of the science. They just want your business to do whatever it’s supposed to do for them.

In a lab, everything is rational. In the real world, almost everything is irrational.

That’s why context matters. Not because it means you’ll have a guaranteed answer that you’ll be able to trot out in a mechanistic fashion across your whole business.

But because you’ll get an insight, a perspective, a sense of likely intention from that context which will help you make better decisions using the (necessarily imperfect) information you have available.

Size doesn’t matter as much as people think

And that’s true no matter how much data you have, how frequently you analyse it, how ferociously you chase down every umpteenth decimal place of results available through your company’s management information systems.

Sometimes the context-shift you need is to shift up a couple of levels from the “right at the coalface” level of data to the “helicopter view” level.

I can still remember a conversation with a salesperson who reported to me in a previous role.

He spent the best part of an hour in his performance review telling me how brilliant he was at every aspect of his job. He had stats, charts, and graphs to prove every point – every one of which was absolutely true in the very narrow context of the information presented.

On a “coalface level” he was right. At the helicopter view level he was miles behind his sales target.

The real problem here – the context if you like – was nothing to do with his activity level or anything in his stats. It was all about his mindset. That was the problem we had to solve.

Because things weren’t going well, he’d end up talking to any remotely potential customer who gave him the time of day. He did a poor job of qualifying his leads and wasted enormous amounts of time pursuing potential customers who were unlikely to give him any business – and almost certainly not at the sort of prices we charged.

And that’s why, despite being an accountant by profession, I’m not that obsessed with numbers. Numbers alone rarely give you the context you need to know what’s really going on.

Sure, they might tell you there’s a problem to solve. In the example earlier, knowing that, out of six people doing the same job, three get a 20 and three got a zero tells you there’s likely to be a problem to solve. It doesn’t tell you what the problem is or how to solve it.

In fact, in one of the scenarios above, I’d argue we didn’t even have a problem. If the three “zeros” had only started work today, I wouldn’t have a difficult agreeing that their performance was highly likely to trend towards the 20-mark over a period of time.

I might want to have some idea of the timescales, and I might want to track incremental improvements towards that point, but I’d argue there isn’t a problem at all here. We just have a situation that will solve itself over a period of time, assuming the right coaching and support is in place for them.

False positives for a problem

One of the biggest dangers of manging by numbers alone, especially if you have lots of data you use this way, is the way it can generate false positives (and false negatives) for the unwary.

In other words, the numbers can make it look like you’ve got a problem even when you haven’t, and vice versa.

Again you need context, but taking information at face value can easily lead people up the garden path.

Some years ago, I worked in a highly-regulated sector where it was normal to have league tables that collated performance across the industry and ranked each organisation against the sector as a whole, in which there were 200 or so organisations.

One year, the division I ran got an 82% (vs a >80% target) and showed an improvement on the previous year’s league table position.

The following year, we got 83% on the same metric, but dropped a few places in the league table because the rest of the industry had improved. To listen to my boss, it was like the end of the world.

The number of working groups, PowerPoint slides, strategy away days and goodness knows what else this spawned doesn’t bear thinking about, much less the cost incurred and time taken to endlessly strategise on the subject.

The fact we had improved year-on-year was barely noted due to an obsession about a single datapoint – the industry league table position.

And this was the case despite the fact that there was no way of knowing what any other organisation in the sector was doing until 12 months or so after each annual reporting period as that’s when all the industry stats were collated and published.

The year after, we got 83% again, but shot up the table by about 20 places. While my boss had castigated me over a modest drop the previous year, and liked to boast about the league table position to his boss and external stakeholders, he never once congratulated me on that massive achievement.

Not that I was expecting it, particularly, because I was disappointed that, despite all our hard work in the meantime, we had another year at 83%. But if a drop in a league table position is a bad thing, surely shooting up the league table is a great achievement?

Sounds improbable, but it’s true…

However the real context you need to know here is this:

1. The methodology by which this league table was compiled was fairly dodgy, and sampled entirely different groups of people year-on-year making any consistency in meeting expectations impossible and also leading to highly volatile results (within a range) as there was no consistency between last year and this year.
2. The results were all very tightly clustered around the same level. Pretty much everyone achieved “about 80%” on this metric. A few outliers apart, almost everyone was somewhere between 75% and 85%.
3. However, by the time it was taken out to two decimal places, someone on 80.03% would be higher up the league table than someone on 80.02%, even though I’d still defy a single customer to tell the difference. So tiny fractions of a percentage point increase, or decrease, in absolute terms would have you either rocketing up the league table or plummeting down it.

This led to a “feast or famine” situation, where a jump up the league tables led to champagne corks popping in the CEO’s office and drops down them resulted in a deeply funereal air at the next senior management team meeting.

The underlying reality – actually the only thing real customers cared about – was entirely capable of getting better in “down years” and getting worse in “up years”. The randomness baked into the methodology made this metric wildly unpredictable and almost impossible to interpret, so it was a pretty terrible metric all ways round.

But the bigger point here is that this was a metric which regularly presented both false positives and false negatives. It was easy to fool people into thinking they had a problem, when they didn’t. And into thinking they didn’t have a problem when they did.

If you just looked at the league table position and “managed by the numbers” you’d form one conclusion.

If you understood the context, you’d spend most of your time wondering why a methodology which was almost guaranteed to produce skittish, inconsistent results from one year to the next was used to manage anything at all, much less to treat it as one of the be-alls and end-alls for organisations working in this sector.

The context for context

That’s why the context matters when you’re dealing with numbers.

Whether you’re cooking pies, managing underperforming salespeople, or comparing sector-wide industry statistics from one year to another, numbers on their own mean very little.

Sometimes they at least let you know you’ve got a problem, but even that isn’t infallible. False positives and false negatives abound.

As do what I call disconnects, where a movement in metric A doesn’t necessarily mean the end result will be any different to what it is now. No matter how much you obsess about metric A, it might not move the needle in respect of the end-result you’re trying to achieve.

Add in some context, though, and the way forward becomes a lot clearer.

Not necessarily as clear as a freshly polished piece of glass, but those situations are rare in a business setting anyway. But clear enough.

You can see what you need to see well enough to make a decision and be fairly confident that your decision will have the desired effect on the end result.

So don’t just “manage by the numbers”, despite what the last training course you want on said, and the sounds of “what gets measured gets managed” ringing in your ears from all the times you’ve heard someone say that.

Often, managing purely by the numbers is little better than guessing.

Add some context first, then make your decision. It’s likely to be a vastly better decision if you do.

Back in the early part of the 20th Century the US railroads – the pre-eminent long-distance transport networks of their day – were offered opportunities to invest in fledgling airlines and automobile manufacturers.

They all declined and, in the next few decades, railroads became largely irrelevant to people who wanted to travel long distances across the US. Instead, they drove or jumped on a plane.

With 20/20 hindsight it’s easy to criticise the railway companies for missing an “obvious” opportunity…although I suspect the opportunity was a good deal less obvious in 1910 than it would be today.

Airlines and car companies back then were like hot tech stocks are today – mostly long on promise and short on the chances of surviving.

But at its heart, the railroad companies’ collective decision gives an insight into a something I call “fixing the system, not the problem”.

All aboard!

All the railroad companies competed with one another to take rail passengers to far-off destinations as quickly, comfortably, and conveniently as possible.

Which was fair enough when the railroads easily outpaced the experience of making same journey by mule train or covered wagon in all those respects.

Railroads worked hard to become the best railroad they could be, but along the way, they forgot that their customers weren’t just buying the best railroad experience, they were actually solving a “how to get from New York to LA as quickly as possible” problem.

It just so happened that, for most of the time between the invention of the steam locomotive and the inter-war years, a railroad was the quickest, most comfortable, most convenient way to get from New York to Los Angeles.

During that time, the railroads worked to improve the system of running a railroad but, although some gains were made, they did very little to improve solving the problem their customers had of getting from New York to LA as quickly as possible.

As a result, they ended up with a great system – according to its own narrow terms of reference as a purely railroad-based experience – but only the second or third-best way of solving the problem of how people could best make a long-distance journey across the United States.

Silos

The experience of the US railroad companies 100 years ago isn’t that dissimilar to the world we live in today.

Many organisations and tech solutions suffer from exactly the same problem as those railroad companies did.

They follow the biggest lie businesses have every swallowed lock, stock, and barrel, which is that the best way to solve any problem is to break it down into its component parts and then optimise each of those independently.

There are a couple of problems with this approach.

Firstly, it means you need to define what the system is supposed to achieve – for example, convey passengers as quickly as possible across the United States by railroad. Once you’ve inked that in as the objective, it’s very hard for any non-railroad options to get a look-in – even if some of those options would be a better for their customers.

Setting out to running the best railroad system might lead to better railroads but, after a while, the gains to be made from improving how a railroad conveys its passengers from the East Coast to the West Coast as quickly as possible becomes marginal the closer the railroads get to delivering their maximum potential under the laws of physics.

The second problem with this approach is that it shifts the focus to individual elements of the experience and takes it away from solving the customer’s problem.

(There is also the often under-appreciated side issue that improving aspect A in a system can lead to a deterioration in aspect G when there is undue focus on a system’s individual elements instead of the whole end-to-end system. This is usually phenomenally costly, but that’s for another day.)

You see this every day in customer service operations. Someone is optimising the website. Someone else is optimising the mobile phone app. Someone else is optimising social media messaging. Someone else is optimising responses in the call centre. Someone else is optimising the chatbot. Someone else is experimenting with AI…the list goes on and on.

Normally, the end result is a terrible customer experience even though in theory all this focus on the individual elements should have resulted in a much better system than whatever the organisation did before.

Focus on the customer

Whether we’re talking about 20th Century railroads or trying to sort out a problem with your bank in 2024, organisations get themselves into situations where they get worse results for their customers at a higher cost than they needed to incur all the time.

While, of course, you need to manage the details too, at a strategic level this is ultimately self-defeating.

There would be no such thing as “disruptive innovation” if existing solutions continued to solve customer problems in as efficient and cost-effective way as possible.

In the UK at the moment we have a swathe of “challenger banks” which are trying to tempt customers away from the legacy High Street banks, which have – not always fairly – acquired a reputation for poor service and high costs.

Challenger banks only exist because the people who set them up thought they could provide a service that’s twice as good as a legacy bank at half the cost, and still make a profit. Because if they can’t do at least that, their “challenge” is unlikely to move enough customers into switching for their new bank to be financially viable.

Time will tell how successful those challenger banks are. I have used both legacy banks and challenger banks in my days as a fractional CFO, and I’ve got to say there are some great legacy banks and some terrible challenger banks. The bank’s status is less of an indicator than the quality of the people working there.

And that’s generally because the banks who do things well – whether legacy or challenger – are at least trying to solve their customer’s problems first and foremost.

Their systems and processes, their whizzy tech (or lack of it), the authority they give their relationship managers, and 101 other things are all trying to solve their customer’s problems.

They’re not trying to blindly implement “the system” in a series of silos and thinking that, by doing so, they’ve automatically delighted their customers

It’s not just banks

I’ve used banks as an example, just because most people have a love-hate relationship with their bank and will recognise the problems.

But the exact same challenges pop up in all sorts of other places too.

We widen always-clogged, slow-moving motorways to let more traffic use them when a better solution might be to build a clean, efficient, reliable high-speed railway track alongside the 4 lanes of nose-to-tail traffic. That might be a better way for citizens of some of our major cities to solve their problem of how to get to work each morning as quickly and cheaply as possible than adding an extra couple of lanes to a motorway would be, even leaving aside the likely environmental benefits.

Government efforts to make the NHS more efficient have been hampered by the fact that people end up needing hospital treatment because a range of other issues, outside the control of the NHS, such as poor housing and poverty, have increased the NHS’s workload dramatically in recent years, to the point where people wait in ambulances outside hospitals because there aren’t enough hospital beds, doctors, and nurses to treat them.

That’s because “fixing the system” of the NHS has been the focus, and not nearly enough effort has gone into solving the problem of how to stop so many people getting sick in the first place.

Recently, one of the world’s largest aircraft manufacturers has had an unfortunate, and highly publicised, set of experiences where doors have fallen off their planes in mid-flight.

From press reports, a lot of the reason behind that is that there was a siloed focus on driving down costs to the point where component failure became slightly more likely than it was before. Not dramatically so, only marginally so.

But that was enough to tank that particular manufacturer’s reputation and knock $billions off their profits and market capitalisation. They were working on “their system” and not giving as much attention as they should have to how to solve their customer’s problem of flying from A to B without the doors of the plane they were flying on disappearing in mid-flight.

Systems thinking

While I’m a big fan of systems thinking, many organisations don’t define their “system” widely enough.

They conceptualise it as the jumble of policies, procedures and processes they use to run their business. But that’s not what a system is at all.

When systems thinking is deployed well – which mostly it isn’t – the system is defined in such a way as to solve the customer’s problem in the best way possible.

And that’s the key difference.

You can spend endless resources on fine-tuning details your customers don’t care about and convince yourself that you’re doing a great job.

But when an organisation thinks a system is just their internal structures and admin, and works purely within that frame of reference, it’s almost always a high-cost, poor service organisation.

When the organisation thinks their main job is to solve customer problems in the best way possible for the customer, and works back from there, that’s likely to be an extremely efficient, high-service operation that will be hard to disrupt.

If, 100 years ago, the US railroads had taken that approach, we might still be buying tickets from them today, even if those ticket might not be for railroad travel as someone in the 1920s would have recognised it.

These were some of the wisest words I ever heard when I worked in the call centre industry: “The cheapest call to handle is the one you never receive”.

It was one of the mantras our Operations Director, Paul, liked to trot out from time to time when budget pressures were at their highest.

While Paul and I didn’t always see eye-to-eye on everything, I respected him hugely, and on this he was absolutely right.

In most call centres, then as now, there’s a lot of pressure to reduce costs. For most businesses (wrongly, in my view) a call centre is seen as an overhead cost to be minimised, not a revenue-enhancing investment to be maximised. It’s a huge opportunity, frequently missed.

Now, Paul and I ran a really good call centre together. Almost 1,000 people strong, and operating in a relatively unfashionable sector, we achieved First Direct standards of telephone-based customer service – at the time, and largely still today, the gold medal standard for UK customer service operators.

This is largely because we did one thing really well.

Something that, for most call centres, was an either/or question.

We provided excellent service. And we did so at an extremely low cost.

Our phone lines weren’t “experiencing a higher than average volume of calls” for the 800th day in succession. We didn’t force people through those interminable “press 1 for this, press 2 for that” menu systems. We didn’t script every word an agent said to a caller in excruciating detail so customers felt they were talking to a disinterested robot instead of a human.

Now, in theory at least, all those decisions should have made our operation more expensive. But it didn’t. For one simple reason.

It’s not a given

Most call centre operators just deal as best they can with whatever volume of incoming calls makes their way through the telephone network on a given day.

They take the number of incoming calls as a given and, once they answer a call, try to cut corners on cost and/or service to get through as many calls as possible in each 24 hour period.

The little Jedi mind trick we did was to realise that the volume of incoming calls was not a given at all.

Sure, some of them were hard to do much about – delivery delays when there was unexpectedly bad weather for example. When that happened, we just had to roll with the punches.

But most of the time people called us for a reason. Mostly because something had gone wrong and our customers needed someone to put it right.

So – our reasoning went – if we could stop all those things going wrong, customers wouldn’t need to call us. And if customers weren’t calling us about those things, we could reinvest the same time and cost into providing exceptional service instead.

Which is exactly what we did.

Whether you run a call centre or not, fixing the root cause of any problem is nearly always vastly cheaper than handling the fallout from the problem after it hits Ground Zero and then either running around like a crazy person to pull some expensive, short-term, point solution together, or deciding that you don’t care about your customers all that much anyway, and that you’ll just get round to solving their problems when you feel like it.

For us, fixing the root cause meant we had fewer calls coming in on average – but it gets better than that.

Peaks and troughs

The problem with any call centre is that there are peaks and troughs in calls throughout the day. Typically for us 8am-10am was busy, there was a short blip around lunchtime, and then another busy peak about 4-6pm.

There should be no great surprise about that. Those are the times when people who work full-time are more likely to be able to call, and people who don’t work full time might be ticking items off on their to-do list at the start or end of the day.

That being the case, it should also be no surprise that the people who called in about things we could have fixed, but hadn’t, called us in broadly the same time zones as everyone else, for exactly the same reasons. It was convenient for our customers to call then.

So the incoming calls we could have prevented by fixing the root causes were doubly expensive – we had to pay staff to come in for a whole shift just so there were enough people on the phones for the peaks, even though there wouldn’t have been enough work for them to do until the next peak.

Every incoming call we “fixed before it happened” meant not only fewer calls in total, but crucially it also meant fewer calls at peak times, which in turn meant we could run our operation at a much lower costs while having more time to deliver better service. It was a win-win.

This approach doesn’t just work in call centres.

When I worked in manufacturing, we used to bank on the fact that any returns or rework from a customer would turn up at the exact same time the factory was already bursting at the seams, so fitting in rework that we had to cover the cost of didn’t just cost us money to produce, it also meant we were likely to let down another customer by not being able to turn their job around on time.

Either that, or everyone was working extra shifts at overtime rates, which meant our busy-ness would do very little for our bottom line, by the time we paid out the extra salary costs.

It always amused me that, at the time, there was pressure in the industry to deal with this by lowering the nationally-agreed overtime rates.

Of course, paying at time-and-a-half instead of double-time meant paying out a little bit less. But it did nothing to free up capacity for all the jobs we were at risk of not producing on time due to the rework coming back in.

At best, that strategy mitigated the losses. It didn’t build in the profits.

Feeling incapacitated

The reason all this matters is not just the cost of putting things right that go wrong – important though that is.

But that one of the tricks to running any business at the lowest possible cost is to manage its productive capacity as effectively as possible.

“Productive” might mean a literal production line in a manufacturing environment. Although it could also be the available hours of a hair stylist in a salon, the amount of chargeable time a lawyer or other professional can do in a 24-hour day, or the number of agent stations you have available in your call centre.

In every case, the point of maximum profitability is when every available minute is spent doing things that make your business money.

Every minute you spend not doing that – reworking something in a factory, redoing a contract a lawyer’s client is unhappy with, or answering customer calls about things that should never have gone wrong in the first place – your profits are on the slide.

And it doesn’t take much. While it depends on your margins, a business that makes a 5% operating margin, but spends 10% of its time in the factory fixing things that originally went out wrong, is likely to be struggling to break even.

In most sectors, there just aren’t the margins to run inefficiently.

But sometimes people misinterpret this.

They say things like. “We’re busy all the time in the factory and our customers won’t let us raise prices to cover our costs so we’re going to go out of business.”

However that’s not true at all.

More likely their competitors are managing their productive capacity better so they can afford to run a reasonably profitable business while selling at the prices customers are prepared to pay – prices too low for businesses which aren’t as good at managing their capacity to afford.

The route to maximum profitability

Often, the route to maximum profitability isn’t to do a slash-and-burn job across your cost base.

In fact, your problems may well stem from the last time someone did that in your organisation.

More likely, what you need to do is get the maximum output for each unit you sell – whether that’s based on machine hours in a factory, a lawyer’s time records, or the number of available agents in a call centre.

Do that well, and your costs will usually come down.

Leave problems to fester, and let your productive time get taken up with “rework-type” activities that you can’t charge any more for, and your costs will usually spiral up.

Managing costs well isn’t just about what you spend.

It’s at least as much about the output you get for whatever you spend.

Sometimes – perhaps often, even – the path to maximum profitability is more likely to be by leaving your cost base the same and putting more work into getting the amount of output up for a given level of cost.

Sure that’s a bit harder than reducing your cost base by only paying time-and-a-half for overtime instead of double-time. But it’s likely to cost less overall, and also to be considerably longer-lasting in its effect on your bottom line.

After all, there’s no cheaper call to handle than the call you never receive by not giving customers a reason to call into your call centre when it’s already busy.

In some ways, perfection is the Holy Grail of business. But as an accountant, I have a healthy level of scepticism about numbers of any sort…especially numbers which are “too perfect”.

There are two main reasons for being sceptical about the performance metrics in your business when they’re “too perfect” – one a good deal more innocent than the other.

The innocent explanation

The more innocent explanation is that the targets are soft. If I ran a call centre with a target of answering every phone call within 24 hours, I’d be on 100% all the way, with huge swathes of green all across my RAG-rated KPI sheet.

Of course, there would be reams of unhappy customers and the reputation of my business might be halfway to the sewage farm in no time. But what would I care, I’d have the only all-green KPI sheet in the business!

I grant you, most organisations are not quite that silly. But metrics are widely gamed in most companies – it’s one of the reasons why “managing by the numbers” tells you, at best, only half the story of what’s really going on.

A while ago I worked with a client whose customer services team were responsible for customer retention, and targeted and incentivised on retention metrics.

So far, so good.

However, their definition of “retention” was based on all the reasons a customer might stop buying from them that didn’t involve the level of service their customers received.

Take a wild guess as to how many of the retention metrics showed that losing a customer was the fault of something the customer service team had done or not done?

You’d be right. Zero.

By gaming the metrics so that pretty much nothing that happened was their fault, the customer service team became used to enjoying handsome customer retention bonuses, even though the retention rate was hardly stellar.

That’s the (relatively) innocent explanation.

And it’s why I’m deeply sceptical about most performance metrics. They are about as reliable as a politician’s promise at election time. Doubly so if the people reporting the metrics are “marking their own homework” and compiling the metrics themselves.

The less innocent explanation

Bernie Madoff had pretty much perfect performance metrics. But he also ran the biggest Ponzi scheme in history.

In fact, he wouldn’t have run the biggest Ponzi scheme in history if his performance metrics hadn’t been so perfect. Madoff’s promise of steadily rising investment returns for ever, with almost no variation year-on-year, and no down years, defied almost every rational analysis you could perform on an investment fund.

Of course, there was a reason for that perfect record. Madoff was making up the numbers, hoodwinking the auditors, lying to the regulators, and all manner of other skulduggery.

He was clearly very good at it, as the great and the good lined up to give him their hard-earned cash. But like every other Ponzi scheme since before they were even called Ponzi schemes, he would take the funds deposited by new investors to pay out people who wanted to sell their holdings in order to keep the con going for as long as possible.

In the end, all these schemes collapse when the inflow from new investors is less than the outflow from exiting investors, particularly when there’s a wider financial crisis which causes a high proportion of investors to all want their cash back at the same time.

And so it happened to Madoff, who died in a prison hospital in 2021 while serving a 150 year jail sentence for fraud.

The halfway house

Thankfully, crimes like Madoff’s are rare.

But arcane financial manipulation to get the bottom-line result a hard-driving CEO or an impatient board wanted or had promised to investors is more of a grey area.

It’s one reason why the business world needs honest accountants who exercise their detached professional judgement and aren’t just PR officers for the CEO or the wider board, reporting whatever results someone wants and finding reasons – with varying degrees of justification – to magically arrive at the desired answer.

Thankfully, people who do this are also rare, albeit a little less rare than the Madoff-types.

However the pressure is on when there’s a specific number to hit which unlocks a massive bonus pot or makes a firm hugely attractive to investors.

While I’m not suggesting anything untoward by anyone involved, I’m always surprised by the number of publicly quoted companies which come in pretty much bang-on investors’ expectations, especially when those expectations are based around numbers that might hide a lot of more murky decisions, like Earnings per Share (EPS).

EPS has been a fairly common performance metric for investors in recent years and it’s very much open to…shall we call it “interpretation”?…because it’s a mix of a lot of other factors.

EPS unpicked

For starters, the “per share” bit in “earnings per share” can be manipulated through stock buybacks, the accounting for staff share incentive schemes and a range of other strategies.

If you take the same amount of Earnings (which we can regard as the profit a business makes for all practical purposes here) and divide it by a larger or smaller number of shares, simple mathematics dictates it can be moved in one direction or the other.

Again, this is perfectly legal. And while sophisticated investors will spot most of the obvious tricks, less sophisticated investors reading the headlines in the financial press might not.

Then there’s the “Earnings” bit (or profit if you prefer).

A gazillion decisions go into determining the level of profit which gets reported in a set of company accounts. Often a relatively modest change in views on one of the bigger numbers in a company P&L can sway the bottom line quite significantly.

And while the auditors will pick up some of that, some of these decisions will be things that only a company management can take a view on and where there is very little external evidence an auditor can bring to bear to challenge the management’s view.

The importance of corroboration

Just like in all the TV detective dramas, the judge can’t convict without evidence. So if the case is based purely on one person’s view against another, the DA isn’t going to win that case in court.

Back when I was a boy auditor, we were taught to always look for corroboration (third-party proof, if you like) for all the numbers a client presented to us.

At a very simple level, if they company’s financial records claimed they had £10 million in the bank, with the client’s authorisation, we used to write to the bank to get an independent confirmation of the firm’s bank balance.

In essence, if a major bank like Barclays or NatWest said our client had £10 million in the bank, we were prepared to believe they probably did. The bank independently corroborated what the client was claiming, so we were as happy as we were ever likely to be.

So cash in the bank was a good number. Hard (but not impossible) to fiddle, and easy to get a third party proof for.

It’s slightly more complicated, and slightly less reliable, but even sales are a good number.

If our client had sent a sales invoice out, their customer had paid the balance due on that invoice, and we could see the cash receipt going into our client’s bank account, then it was highly likely that this was a genuine sale as people tend not to pay invoices they don’t accept are valid.

Again there are exceptions, and inflating numbers like these for nefarious ends isn’t unknown. But a lot of people need to be “in on the game” to do anything too dodgy and, most of the time, that’s hard to pull off at scale, so people tend not to do it.

Cash and sales are relatively simple numbers to prove because they are relatively one-dimensional and are easy candidates for external, third-party verification to a high degree of reliability.

Concepts like “profit” or “earnings” don’t work like that at all. There are too many decisions, too many things to prove, too many factors…many of them hard to corroborate with the same degree of assurance that a number like cash in the bank is.

This isn’t about auditing

However this isn’t an article about auditing. It’s an article about performance metrics…especially the ones that are “too perfect”. And double-especially when those numbers trigger bonuses or promotions or the next tranche of external investment.

Ask yourself – how many of your performance metrics could be independently verified if you wanted to?

In most organisations, the answer is “not many”, because those metrics come from the systems that the people feeding you the metrics probably designed in the first place.

Or they’re some AI-powered meta-analysis of goodness knows what lurking in a database somewhere, where a black box is giving you a “yea” or a “nay” and nobody knows how those judgements are arrived at in enough detail to challenge them. (Again, often designed by the same people who have an interest in you believing the numbers they give you.)

A particular risk is when metrics are based on inputs not outputs.

If some IT system is tracking that I make 20 prospecting calls a day that’s an input measure.

The people I call may not be likely customers for my business, or be good customers, or even be there on the other end of the line if I dial out and listen to their voicemail message over and over a couple of times.

But if I have to make one sale a week, that’s a lot harder to fake. I either do or I don’t.

There’s either a new customer contract or there isn’t.

It’s not impossible to fake, but generally an output measure like getting a signed customer contract is much more reliable than an input measure like how many prospecting calls I make a day.

Even that isn’t perfect

Although better, it isn’t perfect either.

A bit like the classic movie “Glengarry Glen Ross” if you set massive penalties for missing an output measure – in the film, the two salespeople who made the fewest sales would be fired – there is a strong temptation to “do what it takes” to hit the target numbers. Sometimes regardless of the consequences for a business, their investors, and the wider public.

Every few years something comes along that’s a good example of how an obsession on output measures with massive incentives for reaching a certain level…or massive penalties for not doing so…usually ends badly for all concerned.

Whatever type of organisation you run, it’s worth minimising the incentives (perverse or otherwise) for people to fiddle their numbers. Otherwise you’ll never really know what’s going on, and you won’t be able to change course in your business to account for your numbers changing over time because you won’t see those changes until it’s too late.

In an ideal world, performance metrics should be:

• prepared by people other than those who benefit from hitting a particular target or who would suffer from missing it
• output measures (eg contracts signed) not input measures (eg outbound prospecting calls made)
• capable of corroboration, at least to some extent – you won’t get something as solid as a letter from Barclays or NatWest confirming a bank account balance, but if you think about it, you can usually design systems with at least a degree of double-checking built in
• minimally incentivised – the bigger the incentive, the more compelling it is for people to get up to shady practices (that goes the other way round for disincentives too). Rather you should be clear on your business model and coach people towards achieving the targets which make your business model viable, or parting company with them if they can’t.
• measured and captured regularly – a daily PDF saved is less open to manipulation or innocent error than a massive Excel spreadsheet report which is only run at the end of every month. The PDF is a permanent daily record, the Excel spreadsheet is a transient one with poor audit trails for any adjustments made “on the fly” along the way.

This week, take a cold, hard look at the performance metrics your business runs on.

How reliable are they really?

For a significant number of businesses I’ve come across in my career, the answer is “not nearly reliable enough”.

That doesn’t always mean something untoward is going on. In fact, it very rarely means that. But it does mean that all manner of decisions are being made in the business based on numbers which are unreliable to varying degrees.

Most of the time, the business will keep going regardless but, every once in a while, something will go horribly wrong. When that happens, the most common reaction I’ve seen is “but all our performance metrics were pointing in the right direction – I don’t understand what went wrong”.

In reality the clues were there all along.

They were just hidden by the perfect performance metrics reported at the end of each month, so nobody picked up on the subtle clues which had been flashing red for some time before the crisis hit.

So check out your organisation’s performance metrics.

Tomorrow might be the day the crisis hits.

Most organisations will do almost anything to avoid running at the lowest possible cost. That might sound like it makes no sense, but bear with me.

I’ve worked in organisations across sectors like advertising agencies, financial services, engineering, manufacturing, high-tech, B2B services, utilities and more. And especially in the last couple of decades, I see the problem more and more.

There are very few organisations this mindset hasn’t penetrated…to the point where it’s mostly regarded as “just the way we have to run a business nowadays” and nobody even considers another way of doing things.

Sure, there might be a lot of time, money, and effort spent trying to make the current way of doing things better.

But that’s a bit like someone in 2024 spending a lot of time, money, and effort making a better coal-powered steam locomotive – it’s not that there isn’t some commendable intellectual challenge in trying to make coal-powered steam locomotives more efficient, it’s that nobody in 2024 is buying steam locomotives.

The model is wrong, even if the science might be interesting enough as far as it goes.

Why many organisations run at a much higher cost than they need to has its roots in a similar problem: one of perspective.

The impact of perspective

Perspective matters.

For example, if you were travelling from Rio do Janeiro in Brazil to Lima in Peru, you could hack your way through the Amazon jungle with a machete. It would take months. Along the way you would no doubt get much better at using your machete and you’d be likely to make faster progress through the dense undergrowth on Day 30 as you would on Day 1.

Or you could just jump on a plane in Rio and step off a few hours later in Lima without a layer of fresh calluses on your hands from all the machete-wielding.

The difference between those two decisions is one of perspective.

And an appreciation that no matter how good you get at machete-wielding, an aeroplane is by far the most sensible way of getting from one of those places to the other.

The importance of cost

Sometimes decisions are made in organisations allegedly on the grounds of cost. But often that means “cost” in a very narrow context where people who think they understand accounting force through sub-optimal decisions.

To continue with the example above, a machete might cost you $5. A plane ticket might cost you $400.

In many organisations, they’d be writing up the purchase order for that machete faster than you can say “Rio de Janeiro”. That’s because in the super-narrow context of “how little money can we spend today”, mathematically that’s the correct answer.

In the perspective of minimising spend today, it’s the logical decision. Commendable, even. Noble. Worthy of a bonus and a promotion.

But let’s look at the perspective of getting from Rio to Lima as quickly and cheaply as possible.

Then only a lunatic would be calling up their machete supplier.

OK, there’s an extra $395 to spend today. But now you can make the trip in a few hours, not several months.

The cost of someone’s salary for the extra 60/90 days will be vastly greater than the extra $395 you’re spending today.

You miss out on any productive output from the person while they’re hacking their way through the jungle.

And you have additional costs for food, lodging, healthcare, mosquito nets, and spider defences along the way.

The chances of all that coming to less than $395 is zero.

So, overall, both the cheapest and the best way of getting someone from Rio to Lima is to spend more money today.

Welcome to the jungle

The Amazonian jungle has nothing on the organisational jungle when it comes to the difficulty of making progress.

That’s because of a different problem of perspective. A problem directly caused by a lie that’s been drummed into most of us our entire working life.

It’s a lie that tech businesses are particularly keen on, but in fairness there were plenty of people in organisations before the tech era who operated in the same way. Tech has just turbocharged the underlying desire of some people who were already primed to believe that lie.

The lie is this: if a little bit of control is a good thing, a lot of control must be a brilliant idea.

Of course, if you’re spending company money there needs to be some control on who can spent what. If you’re hiring or firing someone there needs to be some structure. If you’re planning on launching an entirely new product or entering a completely new market, you’d want there to be some oversight of those pretty major decisions.

Over time, however, those perfectly reasonable structures to ensure the continuing financial health of a business have morphed into complex systems to control everything that happens inside the organisation. On the principle that if a little control is a good thing, a lot of control must be a brilliant idea.

This leads to two related consequences:

• organisations are doing the equivalent of taking people off aeroplanes and giving them machetes – guaranteeing at the outset everything will be harder and take longer, and
• the cost of operating in this way is vastly higher… ironically, when most of the reasons given for implementing more stringent control systems boil down to some version of “to manage cost better”

Now, if you’re a software company selling technology solutions, you can build a bazillion dollar business if you can persuade enough people that the need for total control is so mission-critical that they should pay you six figures in licence fees every year.

That’s why some pretty niche applications have become incredibly valuable businesses.

If you asked me 30 years ago if I ever thought that a software solution for 4-person sales teams which tracked their every move, made pretty dashboards, and automated some of their basic admin could become a $250billion company, I’d have wanted to know what you were smoking.

But, 30 years later, that’s Salesforce.

That’s not to have a downer on any one company. In finance, HR, marketing, logistics, manufacturing and pretty much every other area of company operations there’s some very similar tech solution promising your business the earth in return for a few $000s a month in recurring licence fees.

The need to control

Pretty much none of those products would sell a single copy unless their potential customers inside organisations thought that more control always had a positive impact on company performance and profitability.

It’s that perspective which is the root cause of the issue. The tech cos are just playing to an agenda that’s already deeply embedded in many organisational decision-makers’ minds – that more control is always better.

Often that’s not the case.

Recently my pal Christian Hunt shared his experience of an international bank which had issued a “how to dress for work” manual. It was, from memory, 50-odd pages long and included sections on how to tie your tie in the company-approved knot system.

As I said to Christian, if I’d been the bank’s CFO I’d have fired everyone in the department which had the time and resources to spend months on something so pointless.

While I understand dressing appropriately at work is important, I’d have thought a maximum of 10 bullet points, which could be written in about 10 minutes, would be more than adequate to achieve that.

You know, things like “you’re expected to wear a suit, keep your jacket on, and keep your tie done right up to your collar at all times”.

While I’m not necessarily saying even that is necessary, if you feel some dress code is appropriate for your business, it’s 10 bullet points, not a 50-page manual you need. Include it as part of your offer letter for new hires, and the job’s done.

You don’t need away-day briefing sessions, staff newsletter articles about it, regular all-company memos from HR about people not complying with the policy and threatening dire consequences if there’s anything less than 100% compliance, league tables for all the departments to show which ones (based on the opinion or some self-appointed adjudicator) are the most compliant, graphs, charts and dashboards to track results, and goodness knows what else.

Every single thing you do over and above 10 bullet points is an extra cost for almost no extra benefit to the organisation.

“But my boss/HR/the lawyers/the accountants say we have to”

In many organisations, people feel they have to put up with this high-cost way of getting to the same results because some authority figure says so.

And there may be cases where that’s exactly the right thing to do. In the UK, for example, lawyers and other professional advisors have very strict rules about how to make sure any money they transfer isn’t being used for money laundering or represents the proceeds of crime.

That’s necessarily an inflexible system where certain things need to be done in a particular way, and there isn’t much of a debate to have.

If that’s the situation you’re dealing with, then control that as much as you like.

But how to knot your tie…? C’mon…

Admittedly, how to knot your tie might be an extreme example of trivialities taking over, but let’s just debunk this boss/HR/lawyer/accountants myth.

What I’m sure the boss of the bank wanted was people dressed smartly for work. That’s not inherently unreasonable, although 10 bullet points in a job offer letter would be more than enough to do the job.

But what might a transgressor do that you couldn’t deal with already via existing company management structures?

Maybe one day they turned up without their tie. Well, if wearing a tie was one of the 10 bullet points in their offer letter and they don’t do that, the company has a disciplinary policy it can use to let the staff member know if they keep doing that, they might need to find a job somewhere else soon.

What about if they turn up to work, but the knot is halfway down their chest, like Cliff Richard used to wear his ties in the 1980s? Well if the bullet point says the knot has to be right up to the collar at all times, you can use the same pre-existing disciplinary policies to make it clear that’s not acceptable, and ultimately end their employment if they don’t do something about it.

Perhaps they turn up to work with a knot you don’t personally like the aesthetics of? Here you have two choices. You can either get a life, or you can provide some gentle coaching on your personal preferences when it comes to knot-tying. In neither scenario will the financial walls protecting your business tumble down because someone has turned up with a Windsor knot instead of a Four-in-Hand.

The reality is the principle of people dressing appropriately for work doesn’t take 50 page procedure manuals and dozens of dashboards. It just takes people doing their jobs as managers.

Which, by the way, they might have more time to do if they weren’t auditing another department’s compliance with the company’s approved tie-knotting policies and reporting what they found back to someone in HR.

Enough of the levity!

OK, I’ve had some fun with this. Hacking your way through the jungle and overly-prescriptive dress codes for work are just humorous examples, but they serve to make an important point.

Every time you add a control in your organisation, you add cost.

Working from the detail level – eg what type of tie-knots are approved by the business and tracking whether or not everyone is complying with those rules – is phenomenally expensive and takes your management away from their actual jobs of managing their teams.

It’s no better if you substitute tech for the manager’s role.

I’m sure that bank could have some camera-based system at the front door, like the face recognition scanners they have at airports, which could scan gentleman’s collars as they arrive and refuse to allow the doors to open unless their tie was in a company-approved knot.

The fact that it’s almost certainly technically possible, doesn’t mean you should do it.

Because what you’re doing would have a cost which far-outweighed any potential benefits.

Equally if you use tech to automate the process of sending a payment request to seven different people in sequence to approve, the problem here is not the need to automate that process, it’s the fact that you have far too many people involved in making simple things happen in your business.

It’s that (in addition to the licence fees for the pointless tech) which means your business is running at a much higher cost than it needs to.

The correct solution here is to throw out the tech, save the licence fees, and have a maximum of 2-3 people involved in the sign-off process unless it’s a wholly exceptional transaction which would have needed board approval to proceed, such as acquiring a competitor or building a new factory overseas.

“More control” in this scenario is an illusion. Assuming the first and the last person in the process are vaguely competent, all you’re adding is more cost for no additional benefit.

What’s more, there are diminishing returns at work here too.

By the time the approval has mustered 3 or 4 “OK’s” the likelihood of approvers 5, 6 and 7 being as diligent with their review reduces dramatically. If 4 people have already said it’s OK, their default setting of 5, 6, and 7 is that it’s probably going to be OK.

When I’ve been in situations like that in the past, and challenged the final decision, the reason I’m given most often by person 5, 6 and 7 signing off on something they shouldn’t have is that they thought if approvers 1, 2, 3, and 4 thought it was OK, then it probably was.

So the net result of more control is always more cost. Whether it’s tech or humans doing the control, there’s a cost to managing the process. And, in most businesses, you don’t want more cost that you absolutely need to carry.

Surprisingly often, the result is worse in a highly-controlled environment as well. One place I worked had such a convoluted process for approving overseas air travel that by the time you had approval and were able to book your flights, the cost you put on the approval form initially tended to be hundreds of pounds more expensive as the airlines had sold more of their seats in the meantime and hiked their prices accordingly.

When you control at the level of the principle (“dressing smartly is important”) your costs are lower and your outcomes tend to be as good or better.

When you feel the need to control at the nth level of detail (eg compiling a company approved 50-page “how to tie your tie” manual) you tend to get much worse results at a much higher cost.

Principles are much cheaper to manage with than details, so every unnecessary control you find and eliminate adds directly to your bottom line.

It’s the easiest money your business will ever make.

If there’s one common denominator between businesses I’ve seen in trouble over the years, it’s this.

They see “increasing profits” and “reducing costs” as the same thing.

But, in general, they aren’t.

That doesn’t mean you should spend recklessly and not care about your cost base. Very occasionally I’ve seen that in organisations too, and the outcomes tend to be no prettier.

However, by far the bigger problem is those organisations who mistake “reducing costs” for “increasing profits”, and think they are the same thing.

One doesn’t necessarily lead to the other. In fact, it’s not uncommon for reducing costs to also reduce profits. The exact opposite outcome the theory suggests.

I say “theory” because it’s just that. An unproven concept which has nonetheless received a remarkable amount of traction in the business world. It’s about as evidence-based as the Flat Earth Society, and its adherents are no less evangelical.

Yet, when you stand back and look at the big picture, in the same way as the Earth is clearly a ball-shape, the “cutting costs = increasing profits” belief system is built on no less flaky a foundation.

Broadly, there are three main reasons for cutting that mental umbilical cord between the “cutting costs” and “increasing profits” concepts.

1 – Revenue is not fixed

For the vast majority of businesses, revenues are not, in fact, fixed. They might be fixed in your mind – “oh, we can’t charge more than £X, because that’s what our competitors charge” or “there is no way anyone would pay more than £X for a product like ours”, for example – but that doesn’t mean what you can charge for your products is actually fixed.

Unless you work for a regulated monopoly with a legal price capping mechanism, you can charge what you like for what you sell. That’s free enterprise, baby.

Everything you buy, I guarantee you, has a more expensive version of the same thing being sold very successfully by someone else.

You can have own-brand Value cornflakes. Or Kellogg’s version of the same thing. And there’s probably a Harrods version too. And maybe even a more expensive version than that, for all I know…whatever movie stars buy in Beverly Hills, probably.

They’re all cornflakes. They all have different price points.

There is a little mental flip you need to make, though.

It’s reasonably likely, albeit by no means certain, that you’re getting paid as much as someone might want to pay for whatever you sell now in the way you sell it now.

So if you want to get paid more, you’ll need to do something different in your business – build in more value, provide a better service, or increase some element in your product that customers would particularly value.

But it can be done.

Take Skoda cars. In the 1980s they were seen as about the worst car you could buy (assuming you couldn’t find a Lada). Yet now, they are incredibly smart-looking, well-made cars that sell for many times what an equivalent Skoda family saloon would have cost in the 1980s.

They worked out a way to be able to boost their revenues by doing things differently – very differently, in their case…helped, admittedly, by the takeover from Volkswagen – and look at them now!

I’ll admit that took them 30+ years. But if you focus more on your customers, more on delivering value, and more on improving your services, odds are you can make changes much faster.

Within 3-6 months, depending on your business, you should start to see things move in the way you want them.

And the great thing about working on the revenue side of the equation, is that the sky’s the limit in terms of your ability to boost your bottom line. Whereas it’s mathematically impossible to cut your costs below zero no matter how hard you try.

Given a choice between spending time working out how to increase revenues by 5% or cutting costs by 5%, the former is likely to impact your bottom line much more positively than the latter. And it won’t necessarily take longer or cost more.

2 – “Cost shifting”

I don’t know if that’s a proper term or not, but I use “cost shifting” to describe the impact of cutting costs in one place which results in increased costs somewhere else in your business, often outweighing the original savings made.

Consider this. It is possible to shave a few pennies off the cost of the parts you buy to make the products you sell?

Of course. Those savings are easy to see and simple to “bank”. No doubt someone gets a bonus or a pay rise for the great job they’ve done.

But what if that decision made your products even just a little bit less reliable?

Soon, you’ll find yourself giving your customers their money back more often than you used to.

Your customer service team will need to expand to deal with the increased volume of complaints.

Your factory will lose productive time because they’ll be remaking, for free, products which have failed at the customer end and thereby missing out on the opportunity to use that time to make more products to sell and generate incremental revenues.

Your customers will be less likely to buy from you again, your online ratings will probably decline, you’ll get fewer referrals, and you’ll probably come under price pressure as your customers start to balance off their costs and compensate themselves for the extra hassle of buying from a less reliable supplier.

Almost always, the downstream consequences of this pile of dominos toppling over are vastly greater than any supposed up-front savings. There are very few more expensive ways of running a business than that.

Same applies if you’re a service business. If the cheaper hairdresser you employed makes a right mess of one of your regular customers’ hair, the consequences are exactly the same.

None of those outcomes are good options for your bottom line.

3 – Sometimes, spending more increases profits

I know this is very counterintuitive, and I’ve met people with fancy degrees who can’t wrap their heads around the concept, but sometimes spending more increases your profits rather than reducing them.

Take the example above and reverse the chain. If you increased spending on that component to buy a higher-quality part that didn’t fail so often, you’d save the customer credits, customer service calls, re-work costs in the factory, negative impact on your company’s reputation and so much more.

I did exactly that earlier in my career to turn a loss-making business into a sector leader in profitability.

But that’s not the only way spending more increases profits.

In the same business, we had a bottleneck in production part-way through the manufacturing process which meant the factory as a whole wasn’t producing at maximum capacity. We could only produce to the maximum amount we could get through the bottleneck.

So we spent money on extra equipment so that all stages of the production process had a broadly similar hourly throughput.

At a stroke, that increased the productive capacity of the business as a whole by 20-30%, so we could sell about 20-30% more product.

However, because we were already paying everyone’s salaries, machine costs, energy costs and so on – apart from the relatively modest extra cost of that new equipment – we had no extra production costs. Everything was already paid for.

The most profitable work we did every day was to make the extra 20-30% we got “for free” that had previously been impossible to produce.

But there are many other examples, not even as dramatic as this. You’d be surprised what sprucing up your “front of house” can do if customers come to visit your business. Or upgrading your coffee machine for visitors. Or putting a friendly, empathetic person on your reception desk instead of a soulless tablet that asks you to put your name in to notify the person you’ve come to see that you’ve arrived.

In a business that’s making profits, increasing revenues by 5% will almost always add more value to the bottom line than cutting costs by the same percentage.

The mystery

Why so many businesses don’t seem to get this is beyond me.

I will grant you that teaching people methodologies for cutting costs is really simple. Armed with a spreadsheet and a copy of a case study from Bain or Boston Consulting, it’s relatively easy to teach this and understand it.

But this is like saying that because it’s easier for 4 year-olds to learn to write in block letters, we should never teach them to write in cursive.

I’ve absolutely no problem with people “learning the basics” when it comes to managing costs in a business.

The issue I’ve got is that this consumes 90-95%+ of all the thinking time in most businesses because the really good stuff – the ways you can boost revenues – is given hardly a passing mention in our education system and in our corporate boardrooms.

As Abraham Maslow (the Hierarchy of Needs fellow) said, “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”

Cutting costs to the exclusion of looking at ways to boost revenues is just a race to the bottom. However cheap you can do anything, I guarantee someone else can work out how to do it cheaper, even if they’re not unscrupulous cutters of corners.

Working out where it makes sense to spend more to increase revenues and build your bottom line that way instead is a lot harder, I grant you.

Not harder to do intellectually. Often it’s easier.

But harder because you’ve got to overcome all the conditioning you’ve had throughout your education years and your working life which says cheaper is always better for your bottom line.

There’s rarely a more expensive way to run any business than to try to run it as cheaply as possible.

Efficiency sounds like a good thing, doesn’t it? Streamlining processes, reducing costs, getting everything screwed down as tight as possible.

Up to a point, of course, that’s true.

But that approach can also throw up no end of trouble for a business. Troubles people mostly don’t see coming until it’s too late.

Just about every underperforming business I worked with as a CFO was highly efficient – at least based on the metrics they chose to track. But it didn’t save them from teetering on the brink of disaster.

For one very simple reason.

Efficiency can only be measured with any degree of accuracy and meaningfulness in tiny silos, where “success” can be very narrowly defined, ideally in a single metric.

So you can, for example, run a highly efficient call centre, where every call is answered in 20 seconds or less.

And at the same time, that call centre can provide truly terrible customer service if the agents are unable to resolve queries, if the company’s internal processes are of byzantine complexity, and if the agents have no discretion to do the right thing for the customer.

This is why a singular focus on efficiency isn’t necessarily the best approach for your organisation. Paradoxically, it often increases costs rather than reducing them.

Which is how failing organisations can be highly “efficient” (by their definition) whilst running inexplicably (to them) high costs after many years of efficiency drives.

They might have hit their target, but they missed the point.

What should you do instead?

In a nutshell, you need to raise your sights up from the detail and focus on the big picture.

What’s the purpose of a call centre?

To resolve customer issues.

Anything an organisation does to make that more difficult, time-consuming, or awkward means fewer customer issues get resolved at all, and fewer still in a way that positively impacts on a customer’s experience of dealing with that organisation.

There’s a lot of cost involved in creating and policing handbooks of policies and procedures. A lot of overhead cost is required for a management structure to make sure the rules are strictly enforced.

All the time spent by an agent navigating the in-company bureaucracy isn’t time they’re spending sorting out customer issues which, after all, is what they were employed to do in the first place.

Furthermore, your customer attributes precisely no value to you having 200-page rulebooks and armies of bureaucrats to police all the things call centre agents aren’t allowed to do when you call up asking for help.

Often, the value they attribute to that process is negative. It’s a positive disincentive for them to choose your firm next time they want to buy products like the ones you sell.

It also means you need to spend a lot more on marketing to attract a fresh batch of customers you haven’t managed to cheese off yet, instead of selling more to your existing customers whose acquisition costs you already fully amortised in the first sale, which is highly profitable business for any organisation.

All of which is likely to be a lot harder than it needs to be as anyone who consults an online review site and sees a raft of uninspiring customer service experiences is unlikely to be beating a path to your door any time soon.

Unless, that is, you mark down your prices to a level where people are prepared to take a chance, in which case you’re taking money off your bottom line with every sale, locking you in a high-cost, low-profit business model.

In situations like that, after a while, organisations mostly start to get concerned about their customer attrition rate and institute some sort of “customer retention policy”. This is often dressed up in some way to make it sound more palatable to the board, but it generally boils down to giving away discounts to customers so they keep buying despite the organisations best attempts to stop them, which further depresses the bottom line results.

And that’s just one example of how pursuing efficiency can land you in all sorts of trouble.

All because someone thought their job was to make their call centre “efficient”, rather than remembering the call centre’s main role is to resolve customer issues in a timely, friendly, and helpful manner.

More cost-savings ignored

Two parts of your business give you the most valuable information about how well your company is performing – your call centre and your credit control department.

Spend an hour listening to calls in either of those places and you’ll discover all the ways in which your business is letting your customers down. Not only that, you’ll discover why, and what you can do about it, in order to stop those issues happening in the future.

Stop those issues arising, and guess what…? You’ve saved money and added to your bottom line. In fact you’ve probably saved a lot more than you could possibly ever save by making your call centre more “efficient”.

Imagine you’re listening to calls in your call centre for an hour and every third caller is complaining about a part of your product or service doesn’t work as it’s supposed to. As a result, you’re giving them money back, having to give them some extra “freebies” to keep them happy, or getting so many unflattering online reviews that it’s hard for your sales team to make new sales.

That’s a really expensive indulgence for your business.

However, if you fix the problem so it doesn’t happen again, you’re not giving customers some of their money back or trying to brazen your way through a raft of unflattering online reviews in your next sales meeting.

And if you’re wondering whether that makes sense financially, just remember the people who call a call centre to complain, or who refuse to pay their bill when the credit control department comes calling, are just the tip of the iceberg.

Most people won’t bother. They’ll just pay up and put up with a product that doesn’t do what your business claimed it did. They might not bother to call, but the chances are high they won’t buy from you again.

I remember legendary direct marketer Dan Kennedy saying that for every person who complains about something, there’s another 10 who think the same, but keep quiet about it.

Nowadays I suspect that number is more like 20 or 50, but the principle still stands. Whatever the precise number is, though, a lot more customers than the number who call your call centre think exactly the same as the people who do.

The inside track to cost savings

Here’s a simple way to reduce costs in your organisation.

Track the things people are calling your call centre about for a day, identify whatever issue has been mentioned the most times that day – a poor quality product, logistics problems, getting invoiced the wrong amount, or whatever – and fix that.

After you fix that, repeat the exercise and fix whatever the top item is next time.

Keep going until you’ve fixed all the major reasons people call.

You’ll never get that number down to zero. I used to run a large call centre and people called up about all sorts of random things, not necessarily even things we could do much about.

One time a lady called to complain about one of our engineers getting out a company van to relieve himself in the bushes, but couldn’t give us any details about the van, such as the type or registration number, so we could track him down for a counselling session on developing a better bladder control strategy.

But everything you hear customers complain about regularly needs fixing. And doing so will save you enormous amounts of money – far more than you’ll save by making your call centre more “efficient”.

You’ll also develop a better reputation for service, garner lots of highly-positive online reviews, and be seen by your customers as the natural choice for their money when they need products and services like the ones you provide.

Magically, you’ll also find that makes it easier to sell your products and services. Probably for higher prices. A virtuous cycle which started by taking the focus away from “efficiency” and looking at the big picture instead.

There’s a name for that

This article has been an example of what Peter Drucker described as effectiveness. As he put it:

“Efficiency is doing things right. Effectiveness is doing the right thing.”

By and large, you can only be efficient about measurable micro-activities. And in any organisation there are likely to be 100s of those.

It can take you all day to manage being more efficient. There’s no end of meetings and strategy sessions, KPIs to report and performance charts to update.

And, of course, there’s a role for all those things if you want to keep your business on track.

The mistake that’s often made is thinking that if all those things are doing well individually, then your business will automatically be a great success.

I’m sorry to say that not only is that untrue, it’s also likely that a focus on the micro-details at the expense of the big picture will increase costs in your business because you’re too busy being efficient in your call handling to stop and fix the problem your customers keep calling up about.

And AI won’t help. You might squeeze down the costs of your call centre a little, but one way or another, you’ll still be paying out heavily if your products or services don’t come up to scratch – that’ll cost a lot more than keeping your call centre staffed by humans and fixing the underlying problems.

An old colleague back in my call centre days used to say, “there’s no cheaper call to handle than the call we never get”. What he meant by this was that if everyone did their jobs properly so that no customer was inconvenienced, we wouldn’t get any calls, so the cost of our call centre would be £zero.

He was excellent at spotting the areas where we could be more effective, as well as the areas we could be more efficient. And he understood the difference between the two.

The cost of failure

That’s particularly true when you consider that the cost of failure is usually many times more than the cost of fixing the problem so it doesn’t happen in the first place.

That’s true whether you sell a physical product, a virtual product, or a service.

And failure doesn’t need to mean something dramatic, like aeroplanes dropping out of the sky (although that’s not a good thing either). It can just mean some element of your product or service not working as it should and giving rise to complaints or requests for refunds.

I have rarely found anything other than a compelling financial case to stop problems from happening than to keep on just fixing them when trouble strikes.

On very rare occasions, the best solution is to make sure your marketing and sales processes are designed to highlight that whatever your customer is wanting or expecting isn’t a feature of your product.

That way, at least you stop people buying a product they will ultimately end up complaining about, which keeps a lid on your costs (although at the expense of foregoing revenues you would otherwise have earned).

And if they buy regardless, while knowing in advance that you don’t offer free repairs, that your service teams are only available on a 72-hour call out, or that your aeroplanes are likely to drop out the sky without warning, then that’s their choice.

If fficiency sounds like a good thing, doesn’t it? Streamlining processes, reducing costs, getting everything screwed down as tight as possible.

Up to a point, of course, that’s true.

But that approach can also throw up no end of trouble for a business. Troubles people mostly don’t see coming until it’s too late.

Just about every underperforming business I worked with as a CFO was highly efficient – at least based on the metrics they chose to track. But it didn’t save them from teetering on the brink of disaster.

For one very simple reason.

Efficiency can only be measured with any degree of accuracy and meaningfulness in tiny silos, where “success” can be very narrowly defined, ideally in a single metric.

So you can, for example, run a highly efficient call centre, where every call is answered in 20 seconds or less.

And at the same time, that call centre can provide truly terrible customer service if the agents are unable to resolve queries, if the company’s internal processes are of byzantine complexity, and if the agents have no discretion to do the right thing for the customer.

This is why a singular focus on efficiency isn’t necessarily the best approach for your organisation. Paradoxically, it often increases costs rather than reducing them.

Which is how failing organisations can be highly “efficient” (by their definition) whilst running inexplicably (to them) high costs after many years of efficiency drives.

They might have hit their target, but they missed the point.

What should you do instead?

In a nutshell, you need to raise your sights up from the detail and focus on the big picture.

What’s the purpose of a call centre?

To resolve customer issues.

Anything an organisation does to make that more difficult, time-consuming, or awkward means fewer customer issues get resolved at all, and fewer still in a way that positively impacts on a customer’s experience of dealing with that organisation.

There’s a lot of cost involved in creating and policing handbooks of policies and procedures. A lot of overhead cost is required for a management structure to make sure the rules are strictly enforced.

All the time spent by an agent navigating the in-company bureaucracy isn’t time they’re spending sorting out customer issues which, after all, is what they were employed to do in the first place.

Furthermore, your customer attributes precisely no value to you having 200-page rulebooks and armies of bureaucrats to police all the things call centre agents aren’t allowed to do when you call up asking for help.

Often, the value they attribute to that process is negative. It’s a positive disincentive for them to choose your firm next time they want to buy products like the ones you sell.

It also means you need to spend a lot more on marketing to attract a fresh batch of customers you haven’t managed to cheese off yet, instead of selling more to your existing customers whose acquisition costs you already fully amortised in the first sale, which is highly profitable business for any organisation.

All of which is likely to be a lot harder than it needs to be as anyone who consults an online review site and sees a raft of uninspiring customer service experiences is unlikely to be beating a path to your door any time soon.

Unless, that is, you mark down your prices to a level where people are prepared to take a chance, in which case you’re taking money off your bottom line with every sale, locking you in a high-cost, low-profit business model.

In situations like that, after a while, organisations mostly start to get concerned about their customer attrition rate and institute some sort of “customer retention policy”. This is often dressed up in some way to make it sound more palatable to the board, but it generally boils down to giving away discounts to customers so they keep buying despite the organisations best attempts to stop them, which further depresses the bottom line results.

And that’s just one example of how pursuing efficiency can land you in all sorts of trouble.

All because someone thought their job was to make their call centre “efficient”, rather than remembering the call centre’s main role is to resolve customer issues in a timely, friendly, and helpful manner.

More cost-savings ignored

Two parts of your business give you the most valuable information about how well your company is performing – your call centre and your credit control department.

Spend an hour listening to calls in either of those places and you’ll discover all the ways in which your business is letting your customers down. Not only that, you’ll discover why, and what you can do about it, in order to stop those issues happening in the future.

Stop those issues arising, and guess what…? You’ve saved money and added to your bottom line. In fact you’ve probably saved a lot more than you could possibly ever save by making your call centre more “efficient”.

Imagine you’re listening to calls in your call centre for an hour and every third caller is complaining about a part of your product or service doesn’t work as it’s supposed to. As a result, you’re giving them money back, having to give them some extra “freebies” to keep them happy, or getting so many unflattering online reviews that it’s hard for your sales team to make new sales.

That’s a really expensive indulgence for your business.

However, if you fix the problem so it doesn’t happen again, you’re not giving customers some of their money back or trying to brazen your way through a raft of unflattering online reviews in your next sales meeting.

And if you’re wondering whether that makes sense financially, just remember the people who call a call centre to complain, or who refuse to pay their bill when the credit control department comes calling, are just the tip of the iceberg.

Most people won’t bother. They’ll just pay up and put up with a product that doesn’t do what your business claimed it did. They might not bother to call, but the chances are high they won’t buy from you again.

I remember legendary direct marketer Dan Kennedy saying that for every person who complains about something, there’s another 10 who think the same, but keep quiet about it.

Nowadays I suspect that number is more like 20 or 50, but the principle still stands. Whatever the precise number is, though, a lot more customers than the number who call your call centre think exactly the same as the people who do.

The inside track to cost savings

Here’s a simple way to reduce costs in your organisation.

Track the things people are calling your call centre about for a day, identify whatever issue has been mentioned the most times that day – a poor quality product, logistics problems, getting invoiced the wrong amount, or whatever – and fix that.

After you fix that, repeat the exercise and fix whatever the top item is next time.

Keep going until you’ve fixed all the major reasons people call.

You’ll never get that number down to zero. I used to run a large call centre and people called up about all sorts of random things, not necessarily even things we could do much about.

One time a lady called to complain about one of our engineers getting out a company van to relieve himself in the bushes, but couldn’t give us any details about the van, such as the type or registration number, so we could track him down for a counselling session on developing a better bladder control strategy.

But everything you hear customers complain about regularly needs fixing. And doing so will save you enormous amounts of money – far more than you’ll save by making your call centre more “efficient”.

You’ll also develop a better reputation for service, garner lots of highly-positive online reviews, and be seen by your customers as the natural choice for their money when they need products and services like the ones you provide.

Magically, you’ll also find that makes it easier to sell your products and services. Probably for higher prices. A virtuous cycle which started by taking the focus away from “efficiency” and looking at the big picture instead.

There’s a name for that

This article has been an example of what Peter Drucker described as effectiveness. As he put it:

“Efficiency is doing things right. Effectiveness is doing the right thing.”

By and large, you can only be efficient about measurable micro-activities. And in any organisation there are likely to be 100s of those.

It can take you all day to manage being more efficient. There’s no end of meetings and strategy sessions, KPIs to report and performance charts to update.

And, of course, there’s a role for all those things if you want to keep your business on track.

The mistake that’s often made is thinking that if all those things are doing well individually, then your business will automatically be a great success.

I’m sorry to say that not only is that untrue, it’s also likely that a focus on the micro-details at the expense of the big picture will increase costs in your business because you’re too busy being efficient in your call handling to stop and fix the problem your customers keep calling up about.

And AI won’t help. You might squeeze down the costs of your call centre a little, but one way or another, you’ll still be paying out heavily if your products or services don’t come up to scratch – that’ll cost a lot more than keeping your call centre staffed by humans and fixing the underlying problems.

An old colleague back in my call centre days used to say, “there’s no cheaper call to handle than the call we never get”. What he meant by this was that if everyone did their jobs properly so that no customer was inconvenienced, we wouldn’t get any calls, so the cost of our call centre would be £zero.

He was excellent at spotting the areas where we could be more effective, as well as the areas we could be more efficient. And he understood the difference between the two.

The cost of failure

That’s particularly true when you consider that the cost of failure is usually many times more than the cost of fixing the problem so it doesn’t happen in the first place.

That’s true whether you sell a physical product, a virtual product, or a service.

And failure doesn’t need to mean something dramatic, like aeroplanes dropping out of the sky (although that’s not a good thing either). It can just mean some element of your product or service not working as it should and giving rise to complaints or requests for refunds.

I have rarely found anything other than a compelling financial case to stop problems from happening than to keep on just fixing them when trouble strikes.

On very rare occasions, the best solution is to make sure your marketing and sales processes are designed to highlight that whatever your customer is wanting or expecting isn’t a feature of your product.

That way, at least you stop people buying a product they will ultimately end up complaining about, which keeps a lid on your costs (although at the expense of foregoing revenues you would otherwise have earned).

And if they buy regardless, while knowing in advance that you don’t offer free repairs, that your service teams are only available on a 72-hour call out, or that your aeroplanes are likely to drop out the sky without warning, then that’s their choice.

If that’s plastered all over your marketing materials and contracts, then any issues are easy to deal with. When someone calls to complain, just politely direct them to the contract they signed, and courteously end the call. That costs you virtually nothing.

But if you claim to have “the best service in the business” even though none of your engineers are available until the weekend after next, expect a lot of customer complaints and, one way or another, a significant amount of extra cost in your business.

It’s your choice.

You can be efficient, or you can be effective.

Which would you choose?that’s plastered all over your marketing materials and contracts, then any issues are easy to deal with. When someone calls to complain, just politely direct them to the contract they signed, and courteously end the call. That costs you virtually nothing.

But if you claim to have “the best service in the business” even though none of your engineers are available until the weekend after next, expect a lot of customer complaints and, one way or another, a significant amount of extra cost in your business.

It’s your choice.

You can be efficient, or you can be effective.

Which would you choose?

Most businesses, most of the time, deploy one of two metaphors in their internal and external comms.

Either it’s war: “we’ll fight them on the beaches”, “no surrender”, “the competition is the enemy”.

Or it’s sport: “getting it across the finishing line”, the “podium finish” at the industry awards dinner, “let’s knock it out of the park”.

The problem with those metaphors is that they are two-dimensional approaches in a multi-dimensional world.

Nowadays, you don’t have one competitor, you have a hundred.

Your competition isn’t on the other side of your town, they’re on the other side of the world.

You and your competition aren’t just trying to see who can make the best widget anymore. You’re also working to create the best advertising, the keenest pricing, the most agile logistics, and a host of other things too.

War and sports metaphors are too simplistic. When there’s only one other team on the field and they’re standing right opposite you, it doesn’t take a genius to work out who the competition is.

Today, your biggest competitive threat might be someone working on a laptop in their spare room to develop a technology that makes your products and services redundant.

It’s no wonder those tired old metaphors so often lead to sub-optimal outcomes.

There’s a reason it’s simple

War and sports-based metaphors are appealing because they’re simple.

And, much like your primary school maths teacher not trying to teach you advanced calculus before you’ve got your head around the basics, there is a role for uber-simple metaphors in the early stages of a business education.

But by the time you’re running a business of any size, you need to grow beyond that superficially-appealing simplicity and recognise that we live in a complex world.

In the same way as you probably wouldn’t try to fix every problem on a brand new BMW with only a 1/8th inch Phillips screwdriver, you can’t fix every business problem with a two-dimensional war or sports-based metaphor either

Actually, rather than fixing problems, being too fully bought into a two-dimensional metaphor can make things worse.

The time, energy, and money that goes into beating the competition takes away investment, focus, and energy that should be going into making your own business the best it can be.

A different metaphor might help

Imagine, if you will, that you operate in the “short, punchy song lyrics which paint a picture” market.

And let’s say that you wrote these lyrics:

“Back in black

I hit the sack

I’ve been too long

I’m glad to be back”

I guess most of you will get that one – it’s the opening lines of the AC/DC classic “Back in Black”, and it’s a classic example of the “short, punchy song lyrics which paint a picture” style of lyric writing.

But then, so is this:

“Oh, oh, oh

Go totally crazy

Forget I’m a lady

Men’s shirts, short skirts

Oh, oh, oh

Really go wild, yeah

Doin’ it in style”

That’s from Shania Twain’s “Man! I Feel Like A Woman!” Now, even if you’re not much of a music fan, you’ll probably recognise that this is a considerably different type of song than “Back In Black”.

Yet it’s also from the “short, punchy song lyrics which paint a picture” style of lyric writing.

As is this:

“Hot town

Summer in the city

Back of my neck getting dirty and gritty

Been down

Isn’t it a pity?

Doesn’t seem to be a shadow in the city”

This is a slightly older example, but those words are from the opening verse of The Lovin’ Spoonful’s 1966 chart-topper, “Summer In The City”.

Are you getting to the point any time soon?

Why, yes, I am.

AC/DC didn’t see The Lovin’ Spoonful as the competition. Even though they had shown the world how to write a Gold Record-winning, US number one single a decade or so earlier, AC/DC did their own thing to the very best of their ability.

Their track is no less iconic than The Lovin’ Spoonful’s and was immensely successful in its own right. Even though both tracks have short, punchy lyrics sung over some music, they are very different songs.

The same could be said for “Man! I Feel Like A Woman!”. An iconic track in its own right – and certainly the most iconic video of the three – it achieved multi-platinum status in the late 1990s.

Now, I’m not really suggesting there’s such a thing as a market for short, punchy song lyrics that paint a picture. (Although I rather like them.)

But if there was, a two-dimensional metaphor for “beating the competition” or “taking the fight to the enemy” would have had AC/DC putting flowers in their hair and introducing traffic noises into their songs because that’s what The Lovin’ Spoonful had done.

By the same token, Shania Twain didn’t dress up as a schoolboy (probably just as well…) just because someone in AC/DC had done that on their journey to selling a bazillion records.

The Arts give much better metaphors

To succeed in any artistic endeavour, you rarely succeed by doing what someone else has already done, but just a bit better or a bit cheaper.

You don’t play the same game on the same playing field to the same rules.

You don’t fight someone else to take the same strategically important bridge in a war zone.

If that is all you’re doing, maybe being a little bit cheaper or a little bit better is enough to win at those very narrowly-defined tasks. Maybe two-dimensional thinking is all you need to deliver a limited ambition.

But for an ambition of any size, you’ll need a multi-dimensional approach. Something that goes far beyond making a pale copy of something that someone else has already made.

If you play on the same playing field to the same rules as a well-established incumbent, it’s very unlikely you’re going to win anything.

Look at West Bromwich Albion. They haven’t won the League since 1920. Yet Manchester City has topped the Premier League 8 times in the last 13 years. West Brom’s only route to success is out “Man City-ing” Man City.

In the Arts, though, that’s not how it works. Anyone can become an “overnight success” (albeit usually after years of hard, under-appreciated graft).

Complete unknowns can write a song, or a play, or a film that takes the world by storm. And they rarely do it by playing the same game on the same field to the same rules as established artists.

Or, to put that in business language, minnows can take on giants and make them irrelevant in next to no time, provided they don’t try to copy the giants or just do what they do a little bit cheaper or a little bit better.

Some success stories

In the UK, we talk about “hoovering” rather than “vacuuming” our carpets, so ubiquitous was the Hoover brand of vacuum cleaners up until James Dyson sold his first vacuum cleaner in the early 1990s.

I don’t even know if the Hoover brand still exists, but it’s gone from market leader and part of the British national psyche to an also-ran in just the last couple of decades.

Jeff Bezos didn’t try to sell books the same way everyone else did when he set up Amazon. But inside a couple of decades he’d pretty much driven traditional book retailers out of business.

And Elon Musk decided that electric cars were the way forward when established manufacturers were still trying to make internal combustion engines a little bit better and a little bit cheaper than the other big automakers.

Although we mostly think of those people as engineers or tech wizards, they all applied the rules of the Arts to business. They didn’t try to play the same game by the same rules on the same field as well-established incumbents. That would have been economic suicide.

Rather, those comparative unknowns became “overnight successes” by concentrating on their own style and developing their own unique approach to solving problems people were prepared to pay for.

They didn’t just play the same game, to the same rules, on the same field as the people who went before them.

A bit like the songwriters we took a look at earlier.

AC/DC didn’t try to “out-spoonful” The Lovin’ Spoonful. They did something entirely different and developed their own way of selling millions of records.

And Shania Twain didn’t try to out-AC/DC either. She did something entirely different and sold millions of records too.

You’re not trying to beat the competition

You see, you’re not trying to beat your competition. At least not if you’re dreaming big.

If you’re dreaming big you can’t play on your competitor’s playing field to their rules. They’ll have you sewn up in no time.

And you can’t fight a battle on territory controlled by a well-armed, well-trained opponent and expect to win all that often.

That’s why war metaphors and sports metaphors in business are screwing with the minds of business leaders.

It’s been a long time since business was as simple as two teams on a football pitch slogging it out until the final whistle, or two armies lined up facing one another, muskets at the ready.

Yet those two-dimensional settings are where a large proportion of the metaphors you hear most in the business world come from.

If you’re serious about succeeding, maybe it’s time to stop thinking like a general or a football manager. Maybe it’s time to start thinking like a songwriter instead.