Post by Moses on Mar 26, 2005 1:24:10 GMT -5
When Meeting Targets Becomes the Strategy, CEO Is on Wrong Path
The vice president of sales at a Silicon Valley technology company was on his hour-long commute home one evening last week when his boss called his cellphone. "Did you make your numbers today?" the boss asked. Before the vice president could respond, his boss continued, "And by the way, you're going to have to make more cuts."
Richard Hagberg, an organizational psychologist, recounted the conversation after meeting with the man later that night and listening to him vent about his job. "He's under enormous pressure to meet certain sales and profit targets on a daily basis now, and often the only way to do that is to keep cutting people and resources," says Mr. Hagberg, founder of Hagberg Consulting Group. The vice president, who supervises about 200 people, spends all his time on "day-to-day tactical stuff and trying to get more work out of fewer people," Mr. Hagberg says. The executive knows his company needs to streamline its product line and figure out ways to better compete against a bigger, more efficient rival. "But in the climate he's in, there's no time" to plan for the future, Mr. Hagberg says.
Global competition has never been fiercer, but investors still want ever higher returns. And CEOs know their jobs and compensation packages depend on delivering. So at many companies managers down the ranks are being given targets that can be met only by steep cost cutting.
But such an approach can easily backfire. For one thing, employee loyalty and teamwork erode quickly, along with innovation and risk taking. So, in some cases, do business ethics. Managers and employees who fear they'll lose their jobs if they don't deliver their assigned numbers are more inclined to fudge results.
And companies that become fixated on hitting quarterly and even daily targets often don't produce sustainable profit growth. "It's hard to capture employees' hearts, and best efforts, with numbers alone," says Mr. Hagberg. In a recent study of 31 corporations, his staff found that the highest returns were achieved at companies whose CEOs set challenging financial goals but also articulated a purpose beyond profit making, such as creating a great product, and convinced employees their work mattered.
Susan Annunzio, CEO of the Hudson Highland Center for High Performance in Chicago, found that the biggest impediment to high performance -- which she defined as making money for the company and developing new products, services and markets -- is short-term focus. She and her staff spent all of 2003 researching 3,000 managers and knowledge workers at such global companies as Microsoft, Intel and J.P. Morgan Chase. Just 10% said they worked in high-performing groups, and 38% said they worked in "nonperforming groups." But almost one-third of the nonperformers said their businesses used to be high performing. "We asked what had happened, and a lot of them said 'top management raised our targets, cut our budgets and staff, and we couldn't sustain results,' " Ms. Annunzio says.
A regional manager at an advertising agency told Ms. Annunzio how this happened at his highly profitable unit after the agency was acquired by a bigger global concern. His new boss first cut frills like Christmas parties and office plants, but then moved on to training budgets and staff. "So the most talented staff found new jobs, took clients with them and then there were more cuts," Ms. Annunzio says. After about a year, the regional manager figured the best thing he could do was meet his boss's targets by eliminating his position and walking away with a severance package. "He and his team were the best thing the acquiring company had purchased, and they destroyed it," Ms. Annunzio says.
A manager at a Dallas-based IT company who didn't want to be named for fear of jeopardizing his job -- a concern cited by many of the managers I talked to -- says he has seen some operating costs rise following the layoff of some talented and experienced employees. When his company outsourced its computer-support staff to India, it laid off an employee "who'd saved us tens of thousands of dollars when our hard drive crashed," the manager says. "The help desk said, 'Sorry, you lost everything,' the computer manufacturer said the same, and this guy, who was earning a smidgeon of what he saved, recovered it all. We don't have anyone nearly as talented to turn to now," he adds.
Other managers who meet targets fear that in the long run they'll be punished more than rewarded. When a plant manager at a manufacturing company was told to shave operating costs, he knew he could meet the target within a month by changing some production procedures, says Ms. Annunzio, who interviewed him for her study. But he worried that his bosses would then raise the bar to a level he couldn't meet, and he wouldn't get a raise at the end of the year. So he parceled out the cuts over 12 months.
What to do? Ms. Annunzio says more CEOs have to "have the guts to stand up to the investment community and tell them companies can't cut their way to sustainable profit growth." Instead, she says, they should differentiate their products and seize opportunities in new markets -- and value the employees who help them do it.
The vice president of sales at a Silicon Valley technology company was on his hour-long commute home one evening last week when his boss called his cellphone. "Did you make your numbers today?" the boss asked. Before the vice president could respond, his boss continued, "And by the way, you're going to have to make more cuts."
Richard Hagberg, an organizational psychologist, recounted the conversation after meeting with the man later that night and listening to him vent about his job. "He's under enormous pressure to meet certain sales and profit targets on a daily basis now, and often the only way to do that is to keep cutting people and resources," says Mr. Hagberg, founder of Hagberg Consulting Group. The vice president, who supervises about 200 people, spends all his time on "day-to-day tactical stuff and trying to get more work out of fewer people," Mr. Hagberg says. The executive knows his company needs to streamline its product line and figure out ways to better compete against a bigger, more efficient rival. "But in the climate he's in, there's no time" to plan for the future, Mr. Hagberg says.
Global competition has never been fiercer, but investors still want ever higher returns. And CEOs know their jobs and compensation packages depend on delivering. So at many companies managers down the ranks are being given targets that can be met only by steep cost cutting.
But such an approach can easily backfire. For one thing, employee loyalty and teamwork erode quickly, along with innovation and risk taking. So, in some cases, do business ethics. Managers and employees who fear they'll lose their jobs if they don't deliver their assigned numbers are more inclined to fudge results.
And companies that become fixated on hitting quarterly and even daily targets often don't produce sustainable profit growth. "It's hard to capture employees' hearts, and best efforts, with numbers alone," says Mr. Hagberg. In a recent study of 31 corporations, his staff found that the highest returns were achieved at companies whose CEOs set challenging financial goals but also articulated a purpose beyond profit making, such as creating a great product, and convinced employees their work mattered.
Susan Annunzio, CEO of the Hudson Highland Center for High Performance in Chicago, found that the biggest impediment to high performance -- which she defined as making money for the company and developing new products, services and markets -- is short-term focus. She and her staff spent all of 2003 researching 3,000 managers and knowledge workers at such global companies as Microsoft, Intel and J.P. Morgan Chase. Just 10% said they worked in high-performing groups, and 38% said they worked in "nonperforming groups." But almost one-third of the nonperformers said their businesses used to be high performing. "We asked what had happened, and a lot of them said 'top management raised our targets, cut our budgets and staff, and we couldn't sustain results,' " Ms. Annunzio says.
A regional manager at an advertising agency told Ms. Annunzio how this happened at his highly profitable unit after the agency was acquired by a bigger global concern. His new boss first cut frills like Christmas parties and office plants, but then moved on to training budgets and staff. "So the most talented staff found new jobs, took clients with them and then there were more cuts," Ms. Annunzio says. After about a year, the regional manager figured the best thing he could do was meet his boss's targets by eliminating his position and walking away with a severance package. "He and his team were the best thing the acquiring company had purchased, and they destroyed it," Ms. Annunzio says.
A manager at a Dallas-based IT company who didn't want to be named for fear of jeopardizing his job -- a concern cited by many of the managers I talked to -- says he has seen some operating costs rise following the layoff of some talented and experienced employees. When his company outsourced its computer-support staff to India, it laid off an employee "who'd saved us tens of thousands of dollars when our hard drive crashed," the manager says. "The help desk said, 'Sorry, you lost everything,' the computer manufacturer said the same, and this guy, who was earning a smidgeon of what he saved, recovered it all. We don't have anyone nearly as talented to turn to now," he adds.
Other managers who meet targets fear that in the long run they'll be punished more than rewarded. When a plant manager at a manufacturing company was told to shave operating costs, he knew he could meet the target within a month by changing some production procedures, says Ms. Annunzio, who interviewed him for her study. But he worried that his bosses would then raise the bar to a level he couldn't meet, and he wouldn't get a raise at the end of the year. So he parceled out the cuts over 12 months.
What to do? Ms. Annunzio says more CEOs have to "have the guts to stand up to the investment community and tell them companies can't cut their way to sustainable profit growth." Instead, she says, they should differentiate their products and seize opportunities in new markets -- and value the employees who help them do it.
