When everyone gets it right and the company still loses

Here is a case that will probably sound familiar. Quarterly margin is below plan and the management committee cannot pin down exactly why. Each manager explains their part and all the progress looks reasonable: buying terms were slightly better, sales were up, production recorded no significant incidents and spending is where it was supposed to be. Every figure matches the plan, and every report sums up why things went reasonably well. The problem is that the margin says otherwise.

What comes next is almost always the same search: maybe coordination is missing, maybe the processes need reviewing, maybe the objectives are not fully aligned. But the variance is spread across many decisions taken further down, each one with a cross-cutting effect and each one analysed vertically, inside the area it was taken in.

A decision can be right for whoever takes it and not be good for the company. They are not the same thing and we hardly ever separate them, because the person deciding is doing it well within the frame they are looking from: their objectives and their part of the business. What does not fit in that frame is what everyone else is doing in parallel. And money has a bad habit of crossing the org chart: a decision can create a benefit where it is taken and send the invoice to another part of the business, weeks or months later. Growing does not create that phenomenon, but it hugely increases the distance between whoever decides and the place where the effect eventually shows up.

Objectives hold. Routes do not

The usual explanation is that the objectives were not aligned, and there I disagree. Aligning objectives is the leadership’s responsibility, and a company with a well-defined strategy has the mechanisms to do it. The problem shows up afterwards, when one of the conditions they were set under changes. Faced with that change, revising the objective should not be the first response. What has to be revised first is the strategy defined to reach it, and that adjustment rarely stays inside a single vertical.

Take a sales target split across four markets. One of the four gets complicated and the target stays the same: what has stopped being valid is the split. But the split is what the person accountable for that number committed to, and what they will be measured against, so the first thing they do is try to hold it.

The problem is that rewriting that split is not in their hands. Taking from the other three markets what has been lost in the fourth means a different product mix, different lead times and perhaps a different price, and that is no longer their decision: it lands squarely on whoever is responsible for delivering it and whoever is responsible for cash. The person who has to sell sees it for what it is, an opportunity that makes up for what has been lost, even if it adds uncertainty to delivery. The person who has to deliver understands that motivation perfectly and considers, at the same time, that serving it under those conditions wrecks the result. Both are right, and getting them in a room again does not remove the conflict, because understanding someone else’s problem does not make your own disappear.

The right forum at the wrong altitude

That is what management committees are for, and it is worth saying so before it sounds like the opposite: they are exactly where these things should be decided. The problem is not the forum. It is the altitude it sits at and how often it meets. A committee reviews the month just closed, and that split is being re-decided this week, two or three levels below, between two people who are not going to take it anywhere. Not out of opacity: because from where they are it does not look like a committee decision. It looks like an adjustment, simple and automatic, when it is not.

Escalating is not always going up

There is a simple test, and it sorts decisions into two groups. If a decision changes what someone else has to do, or what they will be measured on, it cannot be resolved in one place. If it does not, there is no need for it to leave where it is: it gets resolved there and it gets resolved fast. It is quite easy to confuse the two groups, which is why companies often live with too many meetings and with decisions taken in the wrong place at the same time. It is not a matter of importance or size: there are small decisions that cut across half the company and big ones that never leave where they were born. Which is why escalating does not always mean going up. Very often it means going across.

With one condition, without which none of this works: the objective is not touched, but the means do have to be adjusted, reassigning priorities, resources and deadlines. If a new route is decided and that does not happen, the company has not arbitrated: it has handed the problem back to someone who cannot solve it.

The test is easy to state and considerably harder to put into practice. Objectives are set before anyone knows which problems are going to turn up, and the fact that they turn up is not bad luck interrupting the plan: it is the normal condition of any company. What sets one company apart from another is its ability to readjust means and decisions as things happen, without losing the coherence of the whole. The point is to get that ability to become a lever of value.

Because a company can be full of right decisions and lose profitability in the connections between them, and nobody finds that gap by looking inside the areas: inside the areas, everyone is right.