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It Doesn't Work for Long When Managers 'Work the Numbers'

NEW YORK ( TheStreet) -- Many inexperienced (and even some experienced) managers and executives get caught up in the "management" of internal issues and "working the numbers." They forget that serving the customer is the objective. Let me tell you about a company we'll call CYA that got too caught up in getting the numbers to attain the year-end bonus, and forgot about the customer.

CYA's executive team was not concerned with the long-term impact of decisions. Their decision horizon was one year or less (the later in the year they operated, the less time something had to "pay back" the investment.) This time horizon and priority disconnect was most evident in making decisions on the maintenance and replacement of the key production lines.

The main production lines were running 24/7/365. Initially, the schedule included periodic maintenance such as oil, lubrication, cleaning and annual maintenance to replace parts and do major upkeep (e.g., gears, motors). Then production rejects and scrap rates began to increase. Management directed the scrap and rejects be "set aside" until customer orders were "caught up on." The production supervisor was directed to suspend maintenance and keep the lines working to "catch up." He argued against this, but lost.

Quality issues increased, one out of two, then two out of three and then three out of four items produced were rejected as either scrap or to be "reworked." And of course management did not believe that they could "afford" to do major repairs and maintenance to the production operation while everything was "behind." The CFO's solution? "Rework" the numbers.

You should be able to guess the result. It wasn't long before customer complaints became overwhelming. Over 90% of shipments were late, incomplete, or of poor quality, and customers began to go elsewhere. Would it surprise you to know that the financials still "looked good"?

Many organizations confuse using financial information and reporting as a tool for monitoring results with actually getting those results. When the focus is managing the "numbers" rather than managing the activities, processes, people and outcomes, well things can quickly get out of synch. No organization, regardless of size, can avoid facing reality when the numbers can no longer be "managed." When the dysfunction of internal management processes begin impacting delivery -- quality, timeliness, accuracy of orders, etc. -- to the customer, then the numbers will reveal what is really happening in the organization. What is working and what doesn't work ultimately flows into the financial statements.

Managing your organization is about the numbers: What is generating the revenues? How are funds being spent? Are the investments of people, time, equipment and other resources generating the desired result? Are you keeping the productive assets in shape to keep producing? Are customers satisfied? Is the quality of your product or service what it should be? Every organization's leadership, whether the company is large or small, needs to know the financial results they are getting and what activities, products, and people are producing them. Numbers are not just score cards, they are indicators of things going right . . . and things going wrong.

Another company that I have worked with had an interesting situation in which three different operating sites had very different results than expected. Each met their budget and performance goals; only one had not been expected to do so because of economic and industry issues. Facility A's results were reviewed and it was found that the manager had decided to forgo putting in a significant capital investment in order to meet the performance objectives.

The risk to the organization as a whole?

Much like those at CYA: production quality, delivery, and customer satisfaction were beginning to reflect less than satisfactory operations. But at year end, the numbers "looked good." The manager was reprimanded for failing to look at the long-term consequences of not making the investment. Customers and sales were being impacted at the beginning of the next operating period and would continue to be impacted until the capital investment could be made, ultimately at a higher cost; because of the delay additional expenditures would be required.

Facility B made its performance numbers and was found to have "creatively" managed the timing of sales and expenditures to meet the financial performance. The "leadership" team is no longer employed.

Facility C was reviewed and found that it had been using the financial results of each period to manage the activities, processes and staffing. By understanding the operations and where they were profitable and where they lost money, the facility's management shifted its focus to selling more of the profitable products and they removed incentives on selling products that were losing money. The manager and team at the facility learned how to control costs, increase margins and sell the profitable products. They improved delivery times to customers and achieved positive results. And by the way: Facility C was the site not expected to do well.

--By Lea Strickland

Lea Strickland, M.B.A., is the founder of Technovation Entrepreneur, a program that helps entrepreneurs turn their ideas into businesses. Strickland is the author of "Out of the Cubicle and Into Business" and "One Great Idea!" She has more than 20 years of experience in operational leadership in Fortune 500 and Global 100 companies, including Ford, Solectron and Newell.

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