Nearly one in three people is arrested by the age of 23. When they apply for jobs at your company, try not to hold it against them.
Consultants and executives can’t give up corporate-speak—even when it has real-world consequences.
Too much expert advice is unfalsifiable, meaning that we’ll never know whether it was good or bad.
Recent reads that caught our attention.
More knowledge workers have nothing to hold up at the end of the week—and little incentive to maintain quality.
Focusing on financials can be bad for business.
By Vadim Liberman
What does it mean to say something is good for business? Imagine you’re a diversity executive. You’re used to answering that question before it’s even asked—unless, perhaps, your CFO is the one doing the asking. So you explain to her that diversity impacts employee engagement, which motivates workers, spurring them to collaborate on new ideas for—
Wait—what’s with the weird look on the CFO’s face?
You know the answer. It’s not that she doubts you. It’s that she wants to know not why but how diversity is good for business. Engagement and motivation data are nice, but the main numbers in which she’s interested follow dollar signs. In other words, she insists you make a business case.
You need not be a director of diversity—or marketing or product development or social media or any specific division—to find yourself in the daunting position of having to use Excel and PowerPoint to justify your activities. And it’s not only accounting heads whipping out their calculators. Making and judging business cases is increasingly part of all our jobs, so much so that the process is almost meaningless: “business case” is nowadays so often invoked, so broadly applied, that we’ve stripped the term of any significance. If something—anything—boosts customer satisfaction, sales, productivity, media impressions, worker retention, you name it, then it satisfies a business case. Here’s what’s unsatisfying: When there are as many versions of as there are people making business cases, the joke’s on us.
Let’s be real. At some deeper level, when we say “business case,” we really mean a financial, measureable rationale. Increasingly, corporations agree. Similar to what happens regarding executive pay, when times are good, fewer people complain, but the moment the economy wobbles, out come the magnifying lenses. These days, searing scrutiny is forcing everyone to move beyond simply stating that efforts are somehow, someway, somewhere, somewhat good for the bottom line. Now you have to prove it.
This article isn’t titled “How to Make a Business Case”—calculating ROI, revenue, profits, losses, etc. You have accountants to write that story. Rather, it’s about pondering the situational importance of applying a cost-benefit analysis to making financial cost-benefit analyses. And so the real questions become: How do you determine which initiatives should demand greater financial focus? Should any require less? And what if you cannot, or should not, or do not want to prove pecuniary benefits? What then?
Wouldn’t it be great to squeeze the answers neatly into a graph?
We’re manic for metrics. They help us make sense of the world, even when they don’t make sense themselves. “We see numbers as ‘hard’ outputs: objective, reliable, repeatable, verifiable,” wrote Susan Webber in “Management’s Great Addiction” in this magazine’s May/June 2006 issue. “But most management data is softer than, say, your company’s stock price at the close of trading. Even if we understand those limitations intellectually, we somehow lose that perspective when we wrestle with figures.”
Webber, a management consultant, had in mind metrics in general, but when she referenced stock price, intentionally or not, she tapped into our collective belief that we don’t measure all measures equally. We get high off of the apparent definiteness and definitiveness of financials in ways that we do not off of other data. We forget that numerals don’t actually speak—people do. It’s someone’s (sometimes our own) interpretation of numbers that stirs head nods or eye rolls.
Nonetheless, money remains the international language of business. The trouble is, sometimes we get lost in translation of financial data into a business case.
Speaking of, what is your business case for office supplies? No, this isn’t satire—you’re not reading The Onion. Legal pads aren’t free, so your company must have held executive-committee meetings to validate their procurement, right? Ernst & Young presumably computed expected ROIs, and after months of deep reflection, you conceived a solid business case for your walk over to Office Depot.
If this seems absurd, the point is not: Somewhere between purchasing a paperclip and opening an overseas plant, cost-benefit reviews become important. But where?
“Oftentimes, the money is already sitting in the budget. It’s not something that a manager has to ask for, so he isn’t forced to make a business case,” explains Mike Bourne, director of the Centre for Business Performance at Cranfield University in England and co-author of the Handbook of Corporate Performance Management. For most sizeable capital expenses, however, large corporations commonly draw a cost-based line—with pens and pencils that obviously fall below that line. What’s mainly relevant is not where but that companies do this to avoid plundering resources that could exceed those actually related to the investment. To use an extreme example: “We’ve all been in a situation where someone in Accounting goes berserk over a cab fare or because you had an extra French fry,” says David Larcker, the James Irvin Miller Professor of Accounting at Stanford’s Graduate School of Business. “Going back and forth about business cases for such things is not worth it. Just pay it. Otherwise, you’ll piss off people.” Worse, you may waste time and effort struggling to make business cases for business cases.
Choosing a fiscal threshold is the easiest decision regarding when to make a business case. So easy, in fact, that it deceives us by presupposing the answer to a central, underpinning question: Can we subject everything to a business case?
“Everything can be valued financially,” claims Bourne. To a degree, that’s true. You can slap a price tag on anything. Training programs cost this; IT equipment costs that. But knowing the price of everything and the value of nothing risks stumbling to a point of no returns, where a marketing campaign that costs $1 million might be worth no more than $1. To mull over whether something will actually merit its cost, you must consider how—if—you’ll eventually evaluate financial results.
Cause and No Effect
While a proxy statement shows the financial health of an organization, it does not explain it. “Accounting is really great at telling you if you made money,” Larcker says, “but it’s not so great at saying: Here’s the procedure or process that made you that money.” Actually, it may not tell you whether an activity generated income at all!
You may waste time and effort struggling to make business cases for business cases.
Take corporate philanthropy. Companies gave over $15 billion to causes in 2010, according to trackers at the GivingUSA Foundation, perhaps due to a positive association between social and financial performance. But does more giving lead to higher profits or vice versa? Or neither?
The point is that no one should confuse an association with causation, especially for non-capital investments such as advertising, marketing, sustainability, diversity, public relations, and anything that reallocates people’s time and effort. A variety of variables blocks a direct causal route from A to B, or more like a twisting road to Z where an entire alphabet of suppositions looms to bump you off. The smog especially thickens with long-term-evaluation timelines. For instance, while Macy’s can track product performance quarterly, Boeing may take years to assess its investments. By then, innumerable variables can litter the path to clear correlations.
“As you start piling on assumptions, it becomes more difficult to have complete faith in the numbers, which become purely subjective based on underlying assumptions,” explains J.P. Eggers, assistant professor of management and operations at NYU’s Stern School of Business. So the next time a consultant beguiles you with wild algorithms showing a social-media campaign’s profits, es como leer Español cuando no sabe el idioma. Puede leer las palabras pero no reconsceras el significado. It’s like reading Spanish when you don’t know the language. You can sound out the words, but you won’t comprehend their meaning.
Meanwhile, according to Larcker, fewer than 30 percent of companies have developed models making causal connections to long-term economic performance. Even if you could somehow demonstrate basic causality, you’d still be unlikely to show the extent to which a specific activity impacted financial performance. For example, can you convincingly argue that a few extra hours of customer-service training added a certain amount to the bottom line?
Some years back, Larcker, along with Wharton accounting professor Christopher Ittner, studied a telecommunications company that sought to achieve a 100 percent customer-satisfaction rate. However, the organization didn’t attempt to find out whether a customer’s level of satisfaction correlated with profits that customer generated. In fact, such a relationship existed, but only to a degree: Customers who were 100 percent satisfied spent no more money than those who were only 80 percent satisfied.
Hold on, you might be thinking. Doesn’t this prove that you can link nonfinancial to financial performance?
Not exactly. You don’t invest in customer satisfaction. You invest in training or technology or workers or any number of factors that you hope will bolster customer satisfaction. The relationship that matters most is not between a customer-service score and profits but between the actual investment and revenues. Sure, other factors being equal, you can use a nonfinancial measure to fill the gap—except that nothing is ever equal. The road to revenue blurs with ever-changing variables, the impacts of which smear across your accounting numbers.
Who cares, right? You made money. Yes, but just because business isn’t a hard science doesn’t mean it should be a casino. Rolling your performance results onto a craps table won’t likely increase your odds of future success. Drilling down to identify the sources of your profits will. Moreover, you’re still left with the dilemma of deciding among investments in projects that increase customer service, employee engagement, marketing, and other intangibles.
Messier still, if you’re unable to make a single tight fiscal argument for one initiative, how do you compare multiple murky financial cases? For example, dollars devoted to developing a new product may yield high returns, but higher than the same amount spent on, say, customer-service training? As your decision-making basket grows heavier with more possible investments, each with its own unique assumptions, a look inside it reveals not just apples and oranges but many other fruits, vegetables, and legumes that makes comparing them a sour burden.
From the Archives