Years ago, when I was a young salesman, I sold commercial loan software to major financial institutions. I was calling on a department in a very large bank, attempting to convince a department manager that my software program would make his loan processing operation more efficient and less costly. As part of my pitch, I stated that not only would this be a good deal for him, but once installed, this software could be used by other departments, reducing their costs and increasing their performance as well. He flatly stated that he wasn’t interested. His reasoning was that he would be spending money out of his budget, making it harder for him to hit his numbers that year, and in doing so, the other department managers would get the benefits at no cost to them. He wasn’t going to sacrifice his annual bonus so others could profit by it.
In an earlier article, I discussed goal displacement. What we see here in this bank, is simply another form of goal displacement known as suboptimization. This occurs when a business unit within the corporation optimizes its goal accomplishment to the detriment of other units (or the organization as a whole). Suboptimization will occur when a division, subsidiary, or functional unit (accounting, human resources, sales, production, etc.) begins to think of itself as a separate entity and chooses not to cooperate with other business units because that cooperation might have a negative impact on its performance measurement. An example would be when the sales department of a software company contractually commits to deliver the new version of a product early in order to win a big contract (even though the sales department knows that the product is not yet ready for delivery). Since the product is not finished, R&D must work overtime to test and debug the product to meet the deadline. The sales department is able to meet its sales quota (and its salespeople get their commissions) but it does so at the expense of the R&D department which has incurred significant labor and financial costs to meet the deadline. The sales department has optimized its goal accomplishment, but the corporation as a whole may have missed its profitability goals due to the increased costs in R&D.
Another example would be when the purchasing department buys in mass quantities that are overly aggressive, such as buying a year’s worth of raw materials at one time, in order to get a better deal, but forcing the warehouse to work overtime to handle the increased workload, or having to rent additional outside space to handle the increased storage requirements. Purchasing optimized its cost reduction goals at the expense of the warehousing department, which had to incur much greater costs.
How many times have you seen this kind of occurrence in your organization?
How often does one department do something to optimize its goals at the expense of other departments, or the company as a whole? It happens more often than you think, because a lot of it is never seen (or recognized). You may actually have key department managers sabotaging other departments, and it’s all your fault.
That’s right…point the finger of blame at yourself. After all, as CEO, you set up the conditions that fostered this attitude. Perhaps you set up an internal competitive environment that got out of hand. We all like competition, and a little healthy competition among our department heads seems to make sense. But when that competition begins to force managers to think of their departments as separate entities battling for resources and attention, the roots of suboptimization are being established.
Companies must also be careful about how they measure their business units and whether those measurements are exclusive of other business units’ performance. Emphasizing separate cost or profit centers can increase the tendency towards suboptimization.
So what do you do about it?
You can provide incentives that take into account other business units and the company’s performance. This can have some positive effect, but it also sets up a scenario where a failing business unit can hurt everyone else, even if suboptimization wasn’t involved.
You can create a less competitive and more cooperative environment.
Management and the department heads need to think of themselves as part of a team rather than individuals. You can do this by having regular staff meetings with all the relevant department heads. But these meetings need to be more than typical status meetings where each manager presents their key indicators and goes over their goals and weekly/monthly accomplishments. These meetings do nothing but “inform” people, and other than that, they are a waste of time. If you want to get people to think like a team, you have to conduct your meetings in a different way.
Try creating an environment of teamwork and cooperation.
You can do this by simply changing the way you hold your staff meetings. I recommend that at each meeting, go around the table and ask each manager to tell the other managers what opportunities they are pursuing, and more importantly, what issues they are struggling with. The first few meetings will be painful. No one wants to openly talk with their peers about where they are having problems, or even where they may have an opportunity. But after a couple of meetings, it becomes easier. You can encourage them by setting the example – by you going first. It’s easier for your staff to do this after they have seen you do it.
Once a manager tells the collective group about an opportunity or a problem, you ask the others to provide solutions, advice, and how they can help. You might be surprised at what begins to happen. When I have had CEOs implement this type of meeting, they soon find that it takes on a life of its own. After a while, the group begins to think more like a cooperative team, and the solutions and offers of help begin to flow on their own. It takes time, but the results are well worth the effort.