Commendable ambition or carefree folly…which do your goals sound like?

No sooner have we hung up the new year’s calendar on our office walls than all those magazine articles and social media posts come out exhorting us to set ambitious goals so that we “crush it” (ugh) during the course of the coming year.

Henry Ford famously said “Whether you think you can do it, or whether you think you can’t, you’re right.”

And he’s right. If you don’t think you can do something, odds are you never will.

Less often taken into account, though, is the flipside of Henry Ford’s famous quote – just thinking you can do it doesn’t mean you will.

That’s important for your business because you need to know the difference between ambition and delusion. One makes your business into a worldwide success, the other takes it to the bankruptcy courts.

That’s not to say ambition is a bad thing. Quite the contrary.

I’ve long been a big fan of setting what Jim Collins and Jerry Porras called Big Hairy Audacious Goals (or BHAGs) in their book “Built To Last”. Their idea was that businesses should break out of the year-by-year planning cycle and set a long term direction.

Maybe you want to be the biggest company by sales turnover in your industry. Maybe you want to get 100% 5-star ratings on TripAdvisor. Maybe you want to join the Fortune 500.

Unless you’re already there, or pretty close, these achievements are likely to be Big Hairy Audacious Goals which will take several years to play out, and when you start on your journey, whilst you’ve got the ambition, you don’t know every single step that will take you from where you are, all the way to your destination. (And if you do, it’s not a BHAG, it’s just a business plan for what you’re already capable of delivering. By definition, for it to be a BHAG, you can’t know exactly how to achieve it in advance.)

The system can work well. I spent several happy years as a non-executive director at a business which used BHAGs very effectively to grow their sales income over a number of years.

What this business did well was to have a set of more detailed plans underneath the Big Hairy Audacious Goal…even though they couldn’t map out everything in detail. But if they had a pretty good view of how the next 18 months would play out in the context of a 10 year goal, they had a detailed plan for that and didn’t worry too much about the eight-and-a-half years to follow.

But I also worked for a business which talked about BHAGs and the importance of ambitious goals, but didn’t think things through properly.

One ambitious goal they had was to grow thousands of new customers in a market they had no experience of, and where entirely new channels to market would need to be developed from a standing start.

This wasn’t the world’s craziest idea with a 3-5 year planning horizon. But to the general astonishment of everyone else in the business, the CEO set a 1 year target for this to be achieved.

The rationale was often stated as “we’ve always set ambitious goals around here, and we’re always achieved them, even when people said we couldn’t”.

This wasn’t completely untrue. Company folklore had many examples of “taking on the world and winning” in the past as a result of the CEO’s decision-making.

The Chief Executive had every ounce of the self-belief Henry Ford thought was important, but by remaining completely convinced their vision would unfailingly manifest itself into reality, all they were doing is what financial advertisements say you should never do (“past experience is no guide to the future”).

It won’t surprise you to know that this plan didn’t go well at all. Within 12 months, the Chief Executive abruptly disappeared after missing sales targets for the year by around 80%. Income dried up and, as a result of hiking the cost base on the back of the “certainty” all this new business would turn up, the business quickly got into trouble.

The CEO’s Achilles heel was believing their own publicity. They’d been, in the words of Nassim Nicholas Taleb, “Fooled By Randomness” (the title of one of his earlier books, inexplicably less well-known than his later mega-bestseller “The Black Swan”).

Just because things always had worked, doesn’t mean they always will.

Sometimes, due to random effects…such as sheer good luck in stumbling across a key customer at the right time, a news story that changes people’s perceptions overnight or a key competitor shutting down…even pretty audacious goals can be achieved without much in the way of planning or insight.

Enjoy those moments when they happen, because they can, and do, happen to us all.

But never make the mistake of thinking that just because you set an ambitious goal or a BHAG and it was miraculously achieved in pretty short order that there was a huge amount of causation between you wishing it to happen and it actually happening.

And certainly don’t build your entire business on the assumption that because you benefited from massive good luck in the past, largely outside your control or influence, that you’ll unfailingly benefit from it in the future every time you dream up a new ambitious goal you’d like to achieve.

If you want to make substantial inroads into a completely new market in 12 months or less, involving several hundred thousand marketing touch-points, leading to tens of thousands of sales conversations, leading to a few thousand billable new customers without a specific plan to make that happen…together with suitably qualified, experienced and aligned staffing and resources…sooner or later your luck will run out.

As it did for this business. From headlining in the trade press one day, it ended up an economic basket case the next.

The tragedy was, this was all avoidable. The objective as a three to five year plan was probably achievable, as a one year plan it was suicidal.

If there had been some test marketing, perhaps some idea of how the metrics might work in this new marketplace, the business would have been able to model the resources it needed, and the marketing approach to deliver the ambition. (They still didn’t have enough cash to do it in 12 months, but at least they’d have realised why, on the basis of some reasonably sound information.)

If, rather than increasing the cost base to deal with the “certain” influx of new activity, the business had waited until significant inroads were being made in the customer sign-up process, that might have given the business some breathing room to realise their approach wasn’t working and regroup to start again before the ran out of cash.

In the end, the jacked-up cost base and the non-existent revenue increase was what did for the business…as it does for just about every business which tries this. It’s akin to putting everything the business has on a single spin of a roulette wheel, and there aren’t many people who think that’s much of a strategy for building value.

That said, don’t shy away from Big, Hairy, Audacious Goals, or BHAGs. I’ve seen them work really well.

But the bigger the goal, and the shorter timescale you’re trying to accomplish it in, the greater the risk it won’t happen. Just believing it will happen is no guarantee.

A BHAG for 10 years hence can afford to be a bit sketchy. You’ve got time to fine tune the details in light of experience. An ambitious target to be delivered in 12 months or less isn’t going to happen without a detailed plan, and the right resources in place.

The key for business leaders is to know the difference between commendable ambition and carefree folly. Get those mixed up and you may well not be around long enough to regret it.

(Picture credit: Heidi Sandstrom. on Unsplash )

We should fire him for not hitting his targets…or should we?

Being a Finance Director or CFO means you spend a lot of your time working out what people’s targets should be, tracking their performance against those targets, and reporting any under-performance.

While there are some intellectual challenges to the target setting process, those are generally within the control of the Finance Director or CFO as they are working on a model they built themselves.

What’s much harder to assess is what…if anything…it means when people don’t hit their targets and what…if anything…the business should do about it.

But wait, I hear you say, if someone doesn’t hit their targets, shouldn’t we send them on their way and find someone else who can deliver what we need instead?

If only life was that simple.

Firstly, there’s an underlying assumption here that the person you’ll bring in instead will do a better job than the person you get rid of. I’ve seen this hundreds, perhaps thousands, of times and all I can say is that in a significant number of those cases that assumption turns out to be wildly over-optimistic.

There’s also an assumption that the reason for under-performance is the fault of the individual. This is often overly simplistic. Yes, maybe you have other people who can hit their targets, which in your mind means it isn’t impossible for everyone to do so. But perhaps there are other factors which mean that in practice not everybody can.

In a surprising number of cases, a thorough investigation into the reasons for an apparent under-performance throws up some systems or process issues outside the control of the staff member which means they were never going to achieve the targets which had been set.

Of course, statistics cuts both ways, so just as there are people who vastly under-perform against some sort of average, there will be people who vastly out-perform. That, after all, is how calculating an average works – there will always be some people above the line as well as some people below the line.

So just not hitting a target (which is nearly always calculated as an average of some sort) doesn’t necessarily mean anything at all. I once heard a speaker say that at school he was in the 10% of the class that made the top 90% possible.

It was a matter of fact that he was below the class average, but statistics says that any time you measure the performance of a group of people, somewhere around 50% of them will probably be below the average of the group as a whole, and a broadly similar proportion will be above it.

The degree of variation is the key here.

W. Edwards Deming’s work on statistical control is the definitive manual on acceptable degrees of variation in work performance. I won’t go into the maths in detail here, but in Deming’s book “Out Of The Crisis” he shows how to calculate the level of acceptable variance in a stable system that’s operating under statistical process.

In our modern world full of “knowledge work” this is less obvious than when people are watching over car parts hurtling down a high-speed factory production line. But exactly the same principles apply.

In Deming’s world, the acceptable degree of performance around an average, or arithmetic mean if we’re being statistical about it, was +/- 3 times the square root of the average actual performance. (Please note that whatever you had set as a target isn’t relevant for this purpose as there may be factors affecting the group as a whole, either positively or negatively, which could make any target either too easy or too difficult to achieve.)

When you work through the maths, you’ll realise that the boundaries for acceptable performance are much wider than businesses typically allow in their performance management systems where amounts somewhere between 0% and 5% tend to be arbitrarily used to determine an acceptable degree of shortfall, if any, in meeting targets.

Deming’s view, as one of the foremost management thinkers of all time, is that the responsibility for under-performance is more often down to management’s poor understanding of the laws of statistics and unwillingness to improve the systems and processes used in the business which would raise the standards of everyone working in it.

And if you don’t think that’s possible, have a chat with your front line staff and your customers. I can guarantee they’ve got a long list of things that would help the business run more smoothly, even if you can’t immediately think of anything.

That’s not your fault. If you’re not working on the front line you’ve no way of knowing what that experience is like.

But it is your fault if you never ask the people who do work there how to make things better for them, and, in the long run, for the business too.

So next time someone isn’t meeting their targets what should you do?

Apply a bit of Deming’s thinking, even if just in concept without getting too deep into the statistical modelling, to work out whether the problem is really with the member of staff or with the systems and processes instead, even if other people are somehow able to achieve the targets.

Perhaps without realising it you just got lucky in the employee lottery and ended up hiring a bunch of people who happened to be unusually good performers who somehow managed to get the results you were hoping for in your initial planning assumptions.

More often than not firing people is a very expensive way of trying to solve a problem. Studies have shown that the cost of recruiting and training a new person to replace someone who’s left can equate to between six and twelve months’ salary.

And if all you end up with is someone the same or only slightly better…which statistically is a likely outcome…all you’re doing is loading cost into the business for no meaningful return.

So next time you’re wondering whether to fire someone who isn’t meeting their target, pause for breath. It’s probably not going to help solve whatever you think the problem is.

For sure, it’s harder work getting stuck into the issues and unpicking whatever is getting in the way of people hitting their targets. But it’s the only way to fix the problem for good.

Maybe a few exceptional performers can hit the targets anyway, even with less-than-perfect systems and processes to support them, Building your business model on the basis that every person you hire will turn out to be an exceptional performer is an assumption I’ve seen many business make, explicitly or implicitly. Although I’ve yet to see one where that superficially reasonable-sounding objective was ever their experience in reality.

Mostly those businesses were on a perpetual “hire ’em and fire ’em” cycle which led to enormous hidden costs within the business…bloated HR departments to handle all the hiring and firing, costs for advertising vacancies, reductions in customer loyalty and lifetime value as a result of putting rafts of under-trained, less-experienced new hires on the customer service front line and many other costs that dragged the business down, although they never appeared explicitly on anyone’s budget report. (If they had, someone would have done something about it long before now.)

Don’t be that business. Next time someone appears to be performing poorly, break out a calculator and see how the numbers stack up first. The staff member may well be doing their best in a difficult situation…the problem may, in reality, be something else.

I can’t claim statistics is always fun. But, done properly, I can claim that it helps prevent making the same mistake over and over again without realising it…which has got to be a good move for your business.

(Photo by Annie Spratt on Unsplash )