Friday, June 15, 2012

Financial Indicators are not a sufficient reflection of organizational health

The findings may seem commonplace to some, but what is "uncommon" about it is the fact that there's really NO accurate "measurement" of how "good" a company is.

The classic definition has always been to look at P/L, Cash Flow and Balance Sheet. "Good" is defined as a predictably stable expansion, while "GREAT" is a highly positive rate of change.

Today I found that this is highly insufficient. And by using these KPIs, we are drumming in extremely negative opportunistic behaviours (negative KPIs).

A truly great company has a highly "repeatable" and "resilient" operating system. By operating system I mean the life force that keeps us (living organisms) alive. The heart beats, blood vessels carry oxygenated blood, kidneys process waste from the blood and so forth - Every component functions to keep the company alive, and knowingly do so without being told do so.

I posit that every employee in the organization needs to see that their actions and behaviours can be detrimental to the survival of the organization. A red blood cell does not ask the other red blood cell whether...

"....are you going to carry the oxygen?"

You bloody carry it where you're SUPPOSE TO! Because you know that if you don't; some organ is going to die and when one dies, the rest will follow VERY quickly. Every employee needs to know when its time to leave as well... when a cell is damaged, it dies.

So although the numbers may "look" good. It needs to stay "great" despite having people leave the company, or a bump in the economy, because the "body/company" is sufficiently resilient  to compensate. It loses some weight during lean times, but packs muscles during times of abundance.

Financial indicators are insufficient because you are only measuring the "physical" outcomes of the company. i.e. the person's height, weight, HDL, LDL levels, blood pressure and so forth. The body/company is scientifically deemed "healthy", just as financially; a perfect Cash flow, Balance Sheet and P/L ratios reflects a financially sound company.

But we're missing something -> The MENTAL STATE of the organization.

Are the behaviours consistent for long term survival? Can the company recruit, and mould new hires into individual components that can think on behalf of the organization such that the company SUCCEEDS PERPETUALLY!? And be able to repeatable succeed across multiple customer segments and market dynamics?

Your body might be great, but the risky adrenalin junky lifestyle means that one day, the company will fail in a very big way. And because companies are made up of multiple people, it suffers from inherent "schizophrenia"

Therein lies a better definition of health. If we can measure ORGANIZATIONAL MENTAL STATE versus measuring externalities and physical indicators, perhaps organizations can survive longer. As well as bring more value to the customer because their "values" necessitates the success of the customer too.

The positive "MENTAL STATE" needs to be perfectly transferable to the customer.

Anything less, and the business is "irrelevant"...

Worst. YOU; Mr. Customer, is served by a perfectly healthy raving mad man.