Profiting from Evidence-based Management by Jeffrey Pfeffer and Robert Sutton
This book is a timely reminder that management should be based on sound scientific principles yet in the real world it is anything but. Evidence Based Management (the authors’ rebranding of ‘scientific management’) is a loud wake-up call to senior executives and their consultants to apply scientific thinking whenever they launch a new business initiative.
The authors, both professors at Stanford, present an interesting yet remarkably chaotic collection of evidence, case studies and advice about the crazy things that managers (and their consultants) believe and implement, often in the face of overwhelming evidence.
Here is an attempt to untangle the advice given in this book and provide some examples of the many excellent ‘dangerous half-truths’ it explores:
How to Apply Evidence Based Management (EBM)
Managers and their consultants often implement initiatives that destroy value big time for two main reasons:
- They believe in false management practices
- They poorly apply good practice that has worked elsewhere
In both cases they are not using their critical thinking skills properly. Here is a useful checklist of questions to ask before tackling any major initiative:
- Is the practice better than what you are doing right now?
- Are you already doing it under another banner?
- How often does it succeed elsewhere?
- Can you test it in your organization first?
- Is the change really worth the time, disruption and money?
- Are your timescales and budget realistic?
- Do the promoters have incentives to underestimate the costs?
- Is it best to make only symbolic changes rather than core changes?
- Will this change actually hurt the organization’s performance?
- Are powerful stakeholders clamouring for this change?
- Is doing the change good for you but bad for the organization?
- Will doing it increase your fame, prestige or pay?
- Will doing it mean that someone powerful owes you a favour?
- Will it make your job easier and everyone else’s harder?
- Do you have enough power to make the change happen?
- Internal support and resources?
- Are your allies powerful enough?
- Do you have a strategy to strengthen supporters and weaken opponents?
- Are people already overwhelmed by too many changes?
- Do people believe that this change will stick or is it just a flavour of the month?
- Are people still digesting the last change initiative?
- Will people be able to learn and update as the change unfolds?
- Will you be able to pull the plug?
- How will you know it is failing?
- How will you know when it is time to quit?
- Who will judge it a failure and pull the plug?
Other advice from the authors’ on how to apply EMB includes:
- Identify and gather relevant evidence and options (‘show me the evidence’)
- Ask the following questions before implementation:
- What assumptions does the idea make about people and organizations? What would have to be true about people and organizations for the idea to work?
- Which of these assumptions seem reasonable and correct to you and your colleagues? Which seem wrong or suspect?
- Could this idea still succeed if the assumptions turned out to be wrong?
- How might you and your colleagues quickly and inexpensively gather some data to test the underlying assumptions?
- What other ideas or management practices can you think of that would address the same issue and be more consistent with what you believe is true about people and organizations?
- Practice ‘wise management’:
- Act with knowledge / evidence (while doubting what you know)
- Understand the limits of your knowledge / evidence
- Have humility about your knowledge / evidence
- Ask for and accept help from others
- Give help to others
- Be curious – ask questions, listen, constantly strive to learn new things from the events, information and people around you
- Avoid succumbing to a management belief or ideology by asking:
- Is my preference for a particular management practice solely or mostly because it fits with my intuitions about people and organizations?
- Am I requiring the same level of proof and the same amount of data regardless of whether or not the issue is one I believe in?
- Are my colleagues and I allowing our beliefs to cloud our willingness to gather and consider data that may be pertinent to our choices?
As you can see, the above is hardly earth shattering and I do think it needs further refinement. I can’t make up my mind whether the authors ploy to scatter it randomly throughout the book was intentional (i.e. “this is pretty weak so let’s try and hide it”) or chaotic (i.e. “wouldn’t it be cool to stick this particular nugget in here”. This is a poor way to make a series of useful points about management.
However don’t let these remarks put you off. The rest of the book is a terrific romp through the bone-headed behaviour of some the highest paid executives on the planet.
Acquisitions Create Shareholder Value
One of the most spectacular ways to destroy shareholder value is through misguided acquisitions. RBS/ABN Amro, Lloyds TSB/HBOS, Daimler/Crysler, AOL/Time Warner, HP/Compaq and hundreds of others litter the economic landscape. Yet power-bent CEOs and their advisers continue to cheerfully leap into this particular ‘valley of death’.
Skilful acquisitions can add a great deal of value yet few organizations have perfected how to do them. Based on a careful study of their own skills, the characteristics of their target companies and the historical carnage, Cisco has made dozens of successful acquisitions. This book does not spell Cisco’s recipe for success in full but provides a useful indication of the different ways synergy can be realised:
- There must be multiple real synergies
- The target company must be significantly smaller than Cisco
- The target company is geographically proximate making integration and collaboration much easier
- Compatible organizational culture
- Use a structured merger integration process to ensure key staff stay
- Continues to strengthen its acquisition process
The authors conclude that Cisco is using EBM and profiting from it.
Casual Benchmarking
Benchmarking can add a great deal of value yet it is often poorly done and destroys shareholder value. The book gives the example of how United Airlines unsuccessfully aped Southwest Airlines in the mid 1990s. It also describes how the US automakers copied Toyota and failed. Both of these failed because they failed to adopt the culture which underpinned both approaches.
As one executive put it “Instead of copying what others do, we ought to also copy how they think.” Before you benchmark you need to ask:
- Is the benchmarking target’s success because of the practice you seek to emulate? e.g. Herb Kelleher CEO of Southwest Airlines drinks a lot of Wild Turkey bourbon. Should your CEO do the same?
- Why does a particular practice improve performance? If you can’t evidence this you are engaging in superstitious learning and may be copying something that is damaging.
- What are the risks / disadvantages of implementing the management practice? Are there ways of mitigating these that we are missing?
Doing What Seemed to Work in the Past
Al Dunlap (aka ‘Chainsaw Al’) was notorious for attempting to ‘turnaround’ companies via massive layoffs. This one-size-fits-all approach did not work in many cases (along with the accounting fraud that allegedly accompanied it). Before implementing a management practice the following questions should be asked:
- Is the practice you are about to implement closely linked to past success? Don’t confuse success that has happened in spite of an action with success that has occurred because of that action
- Is the new situation so similar to past situations that what worked in the past will work in the new setting?
- Why do you think the past practice worked? If you cannot analyse the logic it is unlikely you will be able to determine whether or not it will work this time.
Implementing New Enterprise Software
This is normally far more expensive and time consuming than expected. Botched implementattions are linked to serious setbacks and failed organizations. A survey of 232 IT exectutives found that 51% viewed their ERP implementations as unsuccessful. A survey of 365 IT executives showed that a typical major software project took twice as long and cost about twice as much as originally planned and over 30% were cancelled before completion.
Switching to Better HR Practices
Changing to the ‘best’ HR practices may be so disruptive that it isn’t worth it. A study of 181 Silicon Valley start-ups between 1995 and 2001 found that changing people management systems after the firm had been founded was linked to increaseed staff turnover, reduced performance and double the failure rate.
Quality Improvement Efforts
Six Sigma and TQM efforts can increase quality and incremental innovation. But focusing on tiny improvements in old systems can detract from the big picture. Also many qualify initiatives are all talk and no action. Harvard studies of the paint and photography industries show that a focus on morcess improvement is linked to less radical innovation. Studies of TQM implementations show that companies talk about it but often actually do very little.
Business Process Re-engineering (BPR)
In 1994 CSC Index “State of Re-engineering Report” of 99 completed re-engineering initiatives found that 67% were seen as producing mediocre, marginal or failed results. Michael Hammer the main promotor of BPR now admits that only about 30% of BPR projects achieve their goals.
Layoffs
Layoffs alone can’t help companies improve profits or long-term performance. They have hidden costs like lawsuits and lost skills, damage surviving employees’ morale, commitment and health. A University of Colorado of S&P 500 firms between 1982 and 2000 showed no link between downsizing and subsequent return on assets. Other studies suggest that layoffs are focused on workers rather than managers – a process called featherbedding – so the relative cost of administration goes up.
Launching a New Product
Less than 1% of chemical compounds developed by pharma firms are ever sold and only 30% of those tested on people are ever marketed. A study of 151 companies showed that the new product failure rate was 40% in food processing and 30% in medical instrument firms. A study of 700 firms found that nearly all the money invested in R&D was devoted to failed products.
Starting a New Organization
The death rates of new and young organizations are substantially higher than for established organizations. Dun & Bradstreet say that only 1/3 of retail and service businesses live longer than 5 years.
Other Dangerous Half-Truths:
These beliefs are often rooted in ideology or in cultural values and are quite ‘sticky’, i.e. difficult to recognise:
- Share options motivate employees. This can work in smaller companies but tends to act as a perverse incentive and time waster in larger companies.
- First mover advantage is crucial to success. Note how Microsoft and Apple are usually not the first movers into new markets.
- Paying teachers bonuses based on child performance works. Research shows that it normally does not. Teachers are not in it for the money. Better to harness parental influence.
- Work should be separated from the rest of life – leave your personal life at home. This is very interesting and gets an entire chapter on its own. The upshot is that there are potentially big gains if personal life can be skilfully woven into business activities. Too long to do justice here. However, Southwest Airlines skilfully integrates work and private lives (i.e. friends & family become fare paying passengers, people’s ‘genuine’ behaviour attracts customers, etc.)
- The best organizations have the best people – you need to have an aggressive ‘talent management system’. Again too long to give it justice here. The upshot of this is that a large organization with great systems and effective teamworking will often outperform the one that ruthless hires the best and prunes the rest.
- Do financial incentives drive company performance? The principle points in this chapter are how ‘Perverse Incentives’ potentially attract the wrong kind of employee, get them motivated to do the wrong thing and create a divisive environment which ultimately saps performance. The recent collapse of the banking system is strong evidence for this.
- Strategy is destiny? i.e. does the traditional ‘business school’ approach to strategy work? The answer (and we run a 3 day course on this) is that it helps understand the competitive environment but that it can be highly limiting and damage agility. This is a highly complex issue and is highly context specific. One size does not fit all.
- Change or Die? The book lists a range of dangerous organizational changes, identifies the main risks and provides evidence supporting this position. It also asks what to ask before launching a major organizational change initiative.
- Are great leaders in control of their companies? This is complex but the short answer is that leadership is more about projecting a positive future and achieving through others than control freakery.
Conclusion
A leading medical statistician recently told me that less than 20% of medicine was evidence based. I shudder to think what the equivalent percentage is for management. I think the following quote from the book deftly sums it up:
“If doctors practiced medicine the way many companies practice management, there would be far more sick and dead patients, and many more doctors would be in jail.”
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