Friday, July 24, 2009

How Leaders Mismanage Paradox

ParadoxYinYangj0399023jpeg160x160 Not long ago, a bank manager in our leadership class lamented that the senior executives from her corporate office had implemented a new system to automate the bank’s credit scoring. The manager applauded their efforts to improve efficiency, but complained that the IT system was not flexible enough to adapt to her local needs.

"Why can't the IT folks get it right?" She moaned.

I replied, "Because they tried to solve an unsolvable problem. They standardized the process instead of designing a loan processing system that manages the tension between clarity (follow these standards) and flexibility (meet your unique needs). It's one of the many paradoxical issues that organizations mismanage that costs them millions of dollars."

How much time and money do you and your organization waste trying to solve problems that are in fact, “paradoxical issues?” You can answer that question by considering if you’ve ever seen:

1. Uniform/standard procedures too rigid to meet customized/individual needs.

2. Deep expense cuts that hurt productivity.

3. Mandates from the central office that fail to address local concerns.

4. Long-term goals sacrificed at the altar of short-term objectives.

5. Employees resist changes because they cling to the stability of the ‘good old days.’

6. Customer satisfaction slip because of an overemphasis on increasing sales.

7. Employee motivation drop due to a push to increase accountability.

8. Creative innovation hindered by creeping incrementalism.

9. Individual initiative get lost in a fog of teams or working groups.

10. Excessive work demands causing problems at home.

Do any of these sound familiar? Of course they do. Leaders struggle with paradoxical issues like these all the time. So the real question is not whether you deal with them, it’s how well do you manage them? Researchers tell us… not very well.

In a survey of 504 senior business and technology executives worldwide, David Shpilerg and his colleagues at Bain & Company found that only 7% believed that their IT organizations were both highly effective in delivering what was asked and tightly aligned with business strategy. (1) These top 7% recorded a compound annual growth rate over three years that was 35% higher than the survey average. Even more startling was the fact that IT spending in these companies was 6% less than the average. How could these companies perform better and spend less?

It turns out that most IT organizations attempt to help their business units align with corporate strategy by developing customized, best practice solutions. The problem is that the IT organizations create so many individualized software solutions that they generate enormous complexity within the overall IT infrastructure. This snowballs into higher support and programming costs, project delays, and legacy issues. Instead of over-focusing on meeting the individualized needs of each business unit, successful IT organizations (e.g., FedEx, Wal-Mart, Dell...) manage the tension between customized solutions and standardize offerings. (The opening story about the unhappy bank manager was concerned with the flip side of this paradox – too much standardization at the expense of customization.) It pays to manage these issues as a paradox.

Another example: Have you ever felt pressure to meet short-term needs (e.g., performance targets) at the expense of long-term success? In a study of 2,859 companies over five years, professors Mizak and Jacobsen discovered that 40% of the firms made short-term expense adjustments (they decreased spending in activities such as marketing and R&D) in order to inflate earnings at the time the firm offered additional stock (i.e., seasoned equity offerings or SEO). (2) Interestingly, this cost-cutting "myopic" group actually out-performed the “non-myopic” group (i.e., the 60% that did not cut expenses) by realizing an average positive stock return of 15.7% the year after the SEO was issued. A great short-term result, right? Yes, but a terrible long-term strategy; evidenced by an average return of -22.3% after four years compared to the non-myopic group firms returns of a +10.47%. Mismanagement of the short-term and long-term paradox is very costly.

This is why Geoffrey A. Moore admonishes us to "succeed in the long term by focusing on the middle term." (3) He points out that many former technology giants, such as Digital Equipment Corporation, Silicon Graphics, and Wang, lost their way by failing to develop effective strategies between today's budgets and tomorrow's long-term plan. In my view, his research is another expensive example of the failure to manage paradox.

Which paradoxes do you see at work? How are they mismanaged? At what cost?

I’ll discuss how to manage them well in future blogs.
Keep eXpanding,

"The issue all companies face is that
the corporate center wants every business unit to be the same,
but every business unit wants to be different."

Textron CEO, Lewis Campbell (4)

1. David Shpilerg, Steve Berez, Rudy Puryear, and Sachin Shah; Avoiding the Alignment Trap in Information Technology, MIT Sloan Management Review, Fall 2007, 51 -- 58.

2. Natalie Mizak and Robert Jacobsen; The Cost of Myopic Management, Harvard Business Review, July -- August 2007, 22 -- 24.

3. Geoffrey A. Moore; To Succeed in the Long Term, Focus on the Middle Term, Harvard Business Review, July -- August 2007, 84 -- 90.

4. Dodd, Dominic and Favaro, Ken, Managing the Right Tension, Harvard Business Review, December 2006, 62-74

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