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Accurate Problem Identification is Difficult and Failure to do so is Dangerous

March 3rd, 2019

In business the symptoms of problems are not difficult to see but for the most part they are assumed to be the problem. This is also one of the reasons why KPIs can often result in “corrective” action being misdirected.

It’s incredibly hard to manage a business when you can’t see, or don’t want to see, the underlying cause of a problem or don’t even realize a problem is in a formation stage. For example, your market share may be falling even though your sales revenue is increasing. If your revenue KPI is framed in terms of Revenue Growth % (measures as a % of budget or year-on-year growth) you will not even see the problem. You may not even be concerned about market share if your revenue and profit goals are being met until someone points out that if a competitor is growing faster than you there will come a time when it will likely be too late for you to do anything about  

And what about when you see sales revenue falling? In this case your KPI will suggest a problem exists but it will not point to why that’s happening. There are two, and only two, reasons for this: your average transaction value is falling (due to pricing, transaction size, or product mix) and/or your physical sales volume is declining (due to customer defection to your competition and/or a reduction in buying frequency and/or a customer switch to substitute products or non-consumption).  So, the first thing you need to do when your KPI alerts you to an emerging problem is to test each of these hypotheses (some will be easier to test than others) but even then, you may be still miss identifying the underlying problem

The typical knee-jerk reaction to this situation is to question the performance of your sales and marketing. This, again typically, leads to a conversation on the need to invest more in these areas, or replace team members, hire consultants or external specialists to help. For example, in one case I’m aware of the slow down in sales was diagnosed as a website SEO problem – there just weren’t enough people visiting the site. And expensive marketing consultancy proved this to be the case with benchmarking data and was retained at a substantial fee to fix the problem. Which it did. The site analytics indicated a substantial increase in visitors (so the SEO objective was clearly met, and the consultant got paid) and there was a slight uptick in revenue but not enough to conclude the problem had been “solved.”

It turned out the problem was essentially a management problem that was reflected in a culture characterized by exceptionally low levels of employee engagement (read indifference) that manifested itself in late deliveries, incorrect order quantities and product mix, invoicing errors, slow (or no) response to customer inquiries and the list continues.

It would be easy to stop there and fire all the employees although there was no need to fire them because they were resigning on their own.  Management was quickly able to explain why it was good to see them go. In other words, management believed they were the problem. Here’s the vicious circle in play, when people are not engaged, they under-perform, when people under-perform it’s good that they leave and make way for a better fit for the organization. But guess what? This circle of life plays out again and again.

The problem in this case and most is management. In small businesses where the owners are usually the managers it is an endemic problem. So many people who own and manage a business start od very much hands-on. They are very good at what they do which is why the business grows to a size where a bunch of employees are required. Unfortunately, the managers can’t keep their hands off the products or processes, they are chronic micro-managers, they abuse people who don’t “do it they way it should be done”, they give half-baked instructions, and very little training.  Again, the list goes on.

When I’m told by a manager that revenue has flatlined and people are leaving but fortunately they are people we need to leave I immediately jump to the conclusion there’s a management challenge in this organization. And this is one of the most difficult challenges to address because it involves the person who is also the solution. The only way I know how to fix it is finding a way to get the managers to embrace what Ralph Stayer learnt and shared in his book The Flight of the Buffalo that everything changed he said when “he realised he was the problem.”

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