Karen Phelan is sorry. She really is. She tried to do business by the numbers—the management consultant way—developing measures, optimizing processes, and quantifying performance. The only problem is that businesses are run by people. And people can’t be plugged into formulas or summed up in scorecards.
Phelan dissects a whole range of consulting treatments for unhealthy companies and shows why they’re essentially fad diets: superficial would-be fixes that don’t result in lasting improvements and can cause serious damage. With a mix of clear-eyed business analysis, heart-wrenching stories, and hard-won lessons for both consultants and the people who hire them, this book is impossible to put down and impossible to ignore. Karen Phelan and other consultants may have “broken” your company, but she’s eager to make amends.
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About the Author
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I'm Sorry I Broke Your CompanyWhen Management Consultants Are the Problem, Not the Solution
By Karen Phelan
Berrett-Koehler Publishers, Inc.Copyright © 2013 Karen Phelan
All right reserved.
Chapter OneStrategic Planning Can't Predict the Future
Strategy Development Is a Vision Quest
* The downside of having a strategy is missed opportunities
In 1980, Michael Porter, a Harvard professor and founder of the Monitor Group consulting company, published a book called Competitive Strategy: Techniques for Analyzing Industries and Competitors and helped usher in the modern age of business strategy consultants that exploded in the '80s and '90s. While boutique consultancies, namely Bain and the Boston Consulting Group, were formed in the '60s, either their client base was limited or their models dealt with managing cash. Actually formulating a business strategy was something of a black art consisting of one part analysis, one part experience, and a whole lot of magic—kind of like a corporate version of the Native American drug-induced rite of self-discovery, the vision quest. However, businesses tend to prefer analysis, structure, and tangibility over magic, art, and lucid dreaming. Michael Porter's book not only codified how to create a strategy, with step-by-step instructions on how to do the analysis, it also codified what the strategies should be.
Besides embedding the phrase "competitive advantage" into the corporate psyche, Porter introduced two well-known models in his book. The first was the five-forces model, which showed the external and internal factors facing businesses: competitors, potential entrants, potential substitutes, buyers, and suppliers. This was the framework for performing the industry analysis and was introduced in chapter 1. The second chapter offered up Porter's second most famous item: the three generic business strategies of lost-cost producer, differentiation, and focused offering. Depending on your position in the industry, you would choose one of the three strategies to gain a competitive advantage. The rest of the book is an incredibly comprehensive blueprint for analyzing competitors, anticipating their potential responses, and dissecting industry structures to determine alternative strategies—all with a multitude of checklists to use. After several attempts at reading this book and eventually struggling through it, I came to realize that perhaps the reason why the five-forces model and the generic strategies were the only models to become part of the management lexicon was that few people were able to read beyond the first two chapters. With Porter's models and checklists, consultants had both a method and a set of answers that could be packaged and implemented by any reasonably smart college graduate. The art part of strategy formulation was replaced by a series of checklists and a multiple-choice option and made available to anyone.
When I was a consultant at Deloitte Haskins & Sells (DH&S) in the late '80s, Porter's book was required reading. DH&S was undergoing a major shift in its management consulting arm. When I joined, each office had its own local consulting practice and sold whatever work it was able to, usually small jobs to small local clients. After I had been in the New Jersey office about a year, the consulting leadership decided to develop a national consulting practice that would bring us more prestige, Fortune 500 clients, and bigger engagements with more revenues. It started with a strategic vision of organizing around industrial expertise, like banking and manufacturing, and developing service offerings. Local offices would be part of a national practice depending on the industries at their locations. New Jersey was a hotbed of pharmaceutical manufacturing, so we were part of the manufacturing practice. Because of our proximity to New York City, we also had a designated financial services practice. In addition to serving our local markets, we would also share resources nationally. This would provide a depth of experience often missing locally. At the time, this seemed like a good idea to me. Designated service offerings versus ad hoc services, national practice versus local, Fortune 500 clients versus smaller businesses—it seemed like a no-brainer. Who wouldn't want to be part of a strategic vision?
Part of this national practice vision required those of us in New Jersey to target some of the well-known pharmaceutical manufacturers. None of us had any pharmaceutical experience, so I, the most junior member, was tasked with doing a pharmaceutical industry analysis so that we could better position services to this very profitable industry. Using Porter's book, I had the step-by-step instruction guide for doing an industry analysis. What I remember most about doing this was how difficult it was to obtain the necessary information. This was before the Internet, and digging up information required both calling companies posing as a shareholder and making numerous trips to the library to sift through syndicated databases. Given my difficulties, I wondered how thorough and comprehensive any competitor analysis could really be. You would really have to work at a given company to get all its information. Despite having gaps in information, I managed to put together what looked like a comprehensive analysis of the industry with lots of graphs and charts and a summary of strengths, weaknesses, opportunities, and threats. I learned a great deal from this process and developed an in-depth knowledge of the pharmaceutical industry that I would use later in my career.
I wish I could say that my foray into developing a strategic analysis of the pharmaceutical industry was the beginning of a successful pharmaceutical practice, but shortly afterward, DH&S made the decision to merge with Touche Ross, and Touche took over the consulting practice, dissolving ours. Our strategy of becoming strategy consultants was foiled by external influences! If we had been any good, we would have seen that coming. At the time, I was astonished at this turn of events. Touche Ross was still using the local office, ad hoc model. We had a strategy! We had centers of expertise! Yet Touche Ross had more work. While we had been focusing internally to pursue bigger clients, our actual sales had been dropping. Touche Ross was still bringing in a steady stream of client engagements using the old model. As a result, most of the DH&S consultants were let go because we had no ongoing client accounts or important relationships to bring to the merged practice. While we had developed some expertise, some service offerings, and an organization structure, we hadn't developed the client base to go with them. In hindsight, I was spending a lot of time in the office doing analyses and not much time on billable client work.
Touche Ross had a much broader practice. It had numerous services I had never heard of in nonprofits, hospitals, and Medicare, Medicaid, and other government organizations, like conducting patient surveys and ferreting out fraudulent claims. While Deloitte was consolidating around financial services and manufacturing service offerings, Touche was just seizing whatever opportunities presented themselves.
To be fair, all the accounting firms did eventually develop more organized practices with service offerings, but these practices eventually emerged from the work they were doing. DH&S tried to use a top-down model dictated by a handful of managing partners based on their own experiences. Although it sounded good in theory, we missed a lot of opportunities, especially with the assumption that manufacturing would continue to be the bulk of the US economy. I learned that pursuing a strategy can actually have a downside, that of lost opportunities. Rather than responding to the marketplace by taking whatever client work presented itself, we tried to dictate the marketplace. With our single-minded focus, we ignored new markets and new services and focused on a vision we couldn't bring to fruition. I wish I could say that this was an isolated experience, but I would live through something similar two more times, with Gemini Consulting and Pfizer.
* Managing by the numbers only manages the numbers
In 1990, I joined the United Research Company, an operations and organization improvement consulting group, while it was undergoing a merger with the MAC Group, a strategy house, to be come Gemini Consulting. For a few short years, Gemini became the go-to consultants to drastically reduce the number of permanent employees and increase efficiencies under the banner "business process reengineering." Unlike other consulting companies of that time, we actually implemented the recommended changes and promised specific results in the form of cost savings. Every consulting engagement had a benefits case that detailed the savings we promised to deliver. During the economic downturn of this period, Gemini became very successful at helping companies downsize, and we grew rapidly. Our engagements also be came larger and larger, and in some cases we "transformed" entire divisions and even entire companies at one time.
Another entity famous for downsizing was General Electric. Under CEO Jack Welch, GE grew to become the largest company in the world through approximately one thousand acquisitions. However, he divested and laid off as much as he acquired, firing over one hundred thousand workers, almost 25 percent of the company, leaving empty buildings in his wake and earning him the name Neutron Jack. His philosophy was that a business should be number one or two in its industry in terms of market share or else be sold off. This was not an isolated or radical viewpoint. The Boston Consulting Group, one of the oldest and most prestigious strategy consulting companies, had long advocated for investing in business units that have a high market share and growth potential (stars) and divesting the "dogs" that don't. Because of GE's success, Welch's philosophy and methods were widely copied by other companies and deemed best practices.
One of his other much-admired and imitated philosophies was the concept of creating shareholder value, whereby a company ensures that shareholders get a better return from its stock than they could from other investments. A mathematical formula shows that shareholder value is a function of a company's return on its assets (ROA) and its investments (ROI). Together this is the return on equity, or ROE. This philosophy created a fixation on a bunch of financial measures—for example, ROE, ROA, ROI, and ROCE (return on capital employed). Managing these metrics would result in positive cash flows that would be reflected in the stock price, thus earning the shareholders better returns. (Of course, this is predicated on the efficient market hypothesis, which assumes rational entities buy stocks based on these types of calculations. This all falls apart if people purchase the stock because the logo looks pretty.) Hence, in addition to the traditional measures of revenues and profits, executives in the late '80s and early '90s became fixated on market share, share price, and a variety of financial metrics to determine how productive the company's assets and investments were. Management by the numbers and a focus on asset efficiency were in full swing.
I got my first taste of this mathematical approach to management on a very large business transformation project. Gemini was working at an underperforming business unit of a huge chemical manufacturer and tasked with improving its return on equity (ROE). An initial team of consultants had identified ROE as the weak point in the company's shareholder value drivers, so our main focus was to increase the "productivity of its assets," that is, cut costs, and to improve the returns on its investments. One of the first things we did was set up a huge war room where we hung charts and graphs showing our progress against our savings goals. One of the most impressive charts was a three-foot-wide bar chart labeled "Asset Productivity," which showed revenues generated per square foot for every facility. Of course, the least productive assets were the sprawling corporate headquarters and a massive research center. Realistically, we couldn't sell those off, but the chart did teach me an important lesson about consulting. Dividing one measure by another and then plotting the results on a fancy graph impresses clients. That and charting one measure along an x-axis and another along a y-axis, resulting in a quadrant chart, are probably two of the most important consulting skills you can have.
I led a team focused on improving the return on capital expenditures. In the company's current state, the business unit leaders had the decision-making authority to invest in capital as they saw fit. As part of our consulting intervention, my team put a standard portfolio review process in place where every business would use the same decision criteria and financial analyses to judge capital projects. The goal was to pool capital expenditures across all the business units and then to choose projects with the highest ROI. We developed a decision model that assigned a score based on the strategic value to the company and the financials of the proposed investment, and we implemented a new process for managing capital projects with a series of cross-business-unit meetings to act as gates for selecting the portfolio.
As a dry run, several of the current projects were put through the process. One project stood out like a sore thumb. The newest business unit had a very profitable product line and had been rapidly expanding its capacity. It had another capital project on the slate. Several executives at headquarters feared that this project would create an overcapacity situation and the profit margins would decrease. Given the rate of expansion in the past, it didn't make sense to build yet another plant. The accepted wisdom on the leadership team was that the business unit head was intent on building an empire at the expense of profits. Using the new capital projects decision model, we calculated the risks involved and the impact on margins and concluded that the plant would not meet the threshold ROI. Of course, the projected revenues were a best guess, but we based our projections on a straight-line increase in the current demand.
The head of this business unit was angry with our result. I considered this conflict to be a test of whether my client could exercise the discipline needed to judge the business units objectively or whether politics would win out, as it often does. I was disappointed to learn several months later that this project had gotten the go-ahead, and I assumed it was because of politics. Years later, though, I learned that my incremental projections for future demand were grossly inadequate. This particular field underwent an immense wave of innovation that spurred all sorts of new applications and end products that couldn't have been imagined at the time. The actual growth in demand was way off my charts. The company would need lots of additional capacity.
Another team on this project was devoted to developing a new strategy for generating revenue growth and improving market share. They were called the "Strategic Intent /Core Competence" team, based on a new trend in strategy from the Harvard Business School and elaborated on in a book called Competing for the Future, by Gary Hamel and C. K. Prahalad. The key point of the book was that companies needed to anticipate and shape the future of the industry by building core competencies, a collection of skills unique to that company. For example, Canon used its competencies in precision mechanics, fine optics, microelectronics, and electronic imaging to expand its product line from cameras into market leadership in copiers, fax machines, and printers. In many ways, the book was a much-needed anti thesis to Michael Porter and the warfare paradigm, where everyone fights over a limited market share. Competing for the Future was about creating new market opportunities and developing unique capabilities, not determining a position based on what your competitors were doing. By building core competencies, companies would have capabilities that their competitors couldn't replicate easily and would be in a position to control the future and not just react to it. To contrast, Porter's work said that the market forces and industry determined what kind of strategic course should be pursued, while Hamel and Prahalad said that internal capabilities should not only determine the strategy but shape the industry. The latter is a very appealing idea because it essentially means you can control your future.
The first step of the SICC team was to determine the client's unique core competencies. Unfortunately, the only area where the client significantly outperformed its competitors was in performing financial analyses. That couldn't be leveraged to create a strategy for a manufacturing company. Without finding unique capabilities to leverage into an overarching strategy that would shape the future, the team fell back upon Porter's methods and embarked on a "differentiation strategy." The differentiation would be to create a premium product and with it a whole new brand and a new sales channel.
Excerpted from I'm Sorry I Broke Your Company by Karen Phelan Copyright © 2013 by Karen Phelan. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of ContentsPreface
Why I Blame Management Consultants
About this book
Chapter 1. Strategic Planning can't Predict the Future: Strategy Development is a Vision Quest
The downside of having a strategy is missed opportunities
Managing by the numbers only manages the numbers
Predicting the future is risky business
Planning for the future and predicting the future are not the same thing
Chapter 2. Make Sure You Reengineer the People, too: Optimized Processes only Look Good on Paper
Having people to rely on for improvements is all you really need
People should manage the methods and not the methods manage the people
In a human-created world, most of the problems are created by humans
It’s hard to optimize a person 36
Chapter 3. Metrics Are the Means, not the Ends: Numerical Targets are Measure-mental
Everything gets measured all the time
It’s funny how the targets are always met
Measures create conflict where there normally is none
Take a goal you want and turn it into something you don’t
Chapter 4. Standardized Asset Management is a SHAM: How Performance Management Demoralizes the Performers
Performance management systems only enforce the strategic objective of implementing performance management systems
There’s so much effort to ensure fairness in a process that is inherently unfair
Let me tell you what I like and don’t like about you
We’re not only in it for the money
Chapter 5. I am a Manager, and So Can You: Why is the Manager's Handbook is 609 Pages Long?
There’s no shortage of management models and techniques
How I inadvertently managed to manage
Being a good manager isn’t all that different from being a good person
Chapter 6. Stop Perpetrating Talent Management on People: Albert Einstein Was NOT an A-player
Sorting out the A, B, Cs
Performance is situational
The problem with labels is that labels stick
Sometimes the A players are alienated by this system, too
The Peter Principle is not a joke
We are pushing people toward mediocrity
Fit the jobs to the people, not the people to the boxes
Chapter 7. Great Leaders Don't Fit the Models: Steve Jobs Failed My Leadership Competencies
The ongoing debate: What traits make a leader?
If traits don’t make a leader, what are leadership assessments assessing?
We use teams because one person can’t be good at everything
Trying to be good at everything is the way to achieve mediocrity
There is no recipe or checklist for self-actualization
Chapter 8: Out of the boxes, charts, and spreadsheets: How to think without consultants
Management is not a science
How to think better
How to think about working with consultants
Resources a. A Measure of Truth b. The Method of Truth
About the Author
What People are Saying About This
“Finally, an author challenging our broken management models who has credibility—she has been there. Karen Phelan not only explains why the emperor—our sacred ways of managing—has no clothes but provides us with insightful alternatives that promise to add real value to our organizations and the people that make them function.”
—Dean Schroeder, award-winning coauthor of Ideas Are Free
“Funny, irreverent, and outrageous, this book is making a deeply serious point: talking to actual people and figuring out how to help them work together better is what’s going to make organizations stronger, not another PowerPoint presentation.”
—Rosina L. Racioppi, President and CEO, Women Unlimited, Inc.