Hard Facts, Dangerous Half-Truths, and Total Nonsense

Profiting from Evidence-based Management

Jeffrey Pfeffer, Robert I. Sutton

• Publisher: Harvard Business Review Press
• Year: 2006
• ISBN:
  9781422154588
• Topic: Business
• Subtopic: Management
• Index: Business

The best organizations have the best talent... Financial incentives drive company performance... Firms must change or die. Popular axioms like these drive business decisions every day. Yet too much common management "wisdom” isn’t wise at all—but, instead, flawed knowledge based on "best practices” that are actually poor, incomplete, or outright obsolete. Worse, legions of managers use this dubious knowledge to make decisions that are hazardous to organizational health.Jeffrey Pfeffer and Robert I. Sutton show how companies can bolster performance and trump the competition through evidence-based management, an approach to decision-making and action that is driven by hard facts rather than half-truths or hype. This book guides managers in using this approach to dismantle six widely held—but ultimately flawed—management beliefs in core areas including leadership, strategy, change, talent, financial incentives, and work-life balance. The authors show managers how to find and apply the best practices for their companies, rather than blindly copy what seems to have worked elsewhere.This practical and candid book challenges leaders to commit to evidence-based management as a way of organizational life—and shows how to finally turn this common sense into common practice.

Part One

Setting the Stage

1

Why Every Company Needs Evidence-Based Management

ON THE DAY Synoptics and Wellfleet Communications merged to form Bay Networks, the company’s revenue was about equal to its major competitor, Cisco Systems. If you haven’t heard of Bay Networks, don’t be surprised. This merger between two firms, similar in size and headquartered on opposite coasts of the United States, failed by any measure. Bay Networks fell on hard times economically, was left in the dust technologically by Cisco and others, and was finally purchased by Nortel—another troubled networking company that suffered operating problems as a result of botched mergers. Mergers often come to a bad end. Remember Conseco—the insurance and financial services company that purchased Green Tree Lending, a company that financed the purchase of mobile homes by non-prime borrowers? Conseco wound up in bankruptcy and CEO Stephen Hilbert was fired. Or how about Mattel, the famous toy company? In an attempt to diversify beyond its Barbie franchise, Mattel made an ill-fated acquisition of the Learning Company, a technology-based education firm. The deal cost Mattel a lot of money, led to a substantial decline in its stock market value, and effectively ended the corporate career of CEO Jill Barad. And remember the ill-fated Daimler-Chrysler, American Online–Time Warner, and Hewlett-Packard–Compaq mergers?

This is not a new or surprising phenomenon—the list of failed mergers is long and provides fodder for much media attention.¹ Study after study shows that most mergers—some estimates are 70 percent or more—fail to deliver their intended benefits and destroy economic value in the process. A recent analysis of 93 studies covering more than 200,000 mergers published in peer-reviewed journals showed that, on average, the negative effects of a merger on shareholder value become evident less than a month after a merger is announced and persist thereafter.²

Corporate leaders who want to practice evidence-based management might begin by recognizing that the odds are against them in undertaking a merger and, as a consequence, resist the urge to merge. More thoughtful leaders might do what Cisco Systems has done—figure out the factors associated with successful and unsuccessful mergers and then actually use those insights to guide behavior. In 1993 Cisco CEO John Chambers and his senior team decided they needed to ramp up their growth and break into new and emerging networking technologies on a continuous basis, in part through acquisition. So Cisco embarked on a policy of aggressively acquiring new technologies and companies. Between 1993 and 1998, it acquired on average one firm per quarter, and since 1998 this pace has continued, if not intensified.³ Yet a Fortune article on bad mergers noted that “infrastructure giant Cisco has digested 57 companies without heartburn.”⁴

The difference between Cisco and so many other companies has little to do with either luck in finding the right things to buy or the charisma and charm of its senior management that somehow made the mergers work. Cisco’s success stems from its systematic examination of evidence about what went right and went wrong in other companies’ mergers, as well as its own. Cisco figured out that mergers between similar-sized companies rarely work, as there are frequently struggles about which team will control the combined entity (think Daimler-Chrysler or Dean Witter–Morgan Stanley). Cisco’s leaders also determined that mergers work best when companies are geographically proximate, making integration and collaboration much easier (think Synoptics and Wellfleet Communication, which were not only about equal in size, but 2,500 miles apart), and they also uncovered the importance of organizational cultural compatibility for merger success, a lesson lost on many other firms.

But Cisco, as we’ve noted, is an exception. Siebel, the customer relationship management software firm, is yet another company that has botched numerous acquisitions: for instance, purchasing an industrial sales training company and driving its revenues from about $75 million to $10 million in less than five years. Siebel’s business development executive admitted that all of the company’s acquisitions have failed and noted that an internal study indicated that “cultural conflicts” were the cause in every case.⁵ Cisco, by contrast, works relentlessly to understand the crucial dimensions of its culture versus its target’s to determine if there is a match. Cisco has walked away from deals when the requisite cultural fit was missing.

Finally, and perhaps most importantly, Cisco has developed and uses a merger integration process to ensure that the people (what they are really buying) stay with the company, feel at home, and can use their knowledge to make key contributions. Integration activities are carefully planned and rapidly implemented to help guarantee that problems do not have a chance to arise. The company also keeps refining its merger integration process as well as the business development process to identify merger candidates, learning over time how to make its already impressive acquisition capability even better.⁶

Cisco’s experience and its lessons, as well as lessons from other successful and unsuccessful acquisitions, are neither difficult to understand nor secret—they have been written about extensively. You might think companies would learn from all this experience and make fewer bad merger decisions. You also might think in a world of presumed “hypercompetition” where companies spend billions each year on consultants, more billions on intranets and chief knowledge officers, and more fortunes on training—all in an effort to acquire and use knowledge at a time when companies and their leaders are seeking every possible competitive edge and when business leaders are mightily rewarded with both money and status for success—that management decisions would be based on the best evidence, that managers would systematically learn from experience, and that organizational practices would reflect sound principles of thought and analysis.

But if you thought any of that, you would be wrong. Business decisions, as many of our colleagues in business and your own experience can attest, are frequently based on hope or fear, what others seem to be doing, what senior leaders have done and believe has worked in the past, and their dearly held ideologies—in short, on lots of things other than the facts. Although evidence-based practice may be coming to the field of medicine and, with more difficulty and delay, the world of education, it has had little impact on management or on how most companies operate. If doctors practiced medicine the way many companies practice management, there would be far more sick and dead patients, and many more doctors would be in jail.

Yet there is good news for leaders and companies in all this recalcitrance. As we will show you, practicing evidence-based management is neither arcane nor extraordinarily difficult—and it can produce superior results. It can also generate sustained competitive advantage, because since so few organizations and their leaders do it, the likelihood of imitation is not high.

Before we talk about what evidence-based management is and how to practice it, we need to show why and how you and your organization should halt some common ways of making decisions that are so accepted and widely recommended that they are rarely questioned—yet are deeply flawed. Even if you don’t otherwise adopt an evidence-based approach, your company will suffer less harm by putting aside these suspect practices. So, we begin by telling you what evidence-based management is not and what you should avoid doing, before we tell you what evidence-based management is and how to practice it.

Poor Decision Practices, and How to Recognize and Avoid Them

The catalogue of poor decision practices is immense, but we focus here on three of the most common and, in our experience, most harmful to companies.

Casual Benchmarking

There is nothing wrong with learning from others’ experience—vicarious learning, as contrasted with direct experience, is an important way for both people and organizations to learn how to navigate a path through the world. After all, it is a lot cheaper and easier to learn from the mistakes, setbacks, and successes of others than to treat every management challenge as something no organization has ever faced before. So benchmarking—using other companies’ performance and experience to set standards for your own company—makes a lot of sense. In the end, good or bad performance is defined and measured largely in relation to what others are doing.

The problem lies with the way that benchmarking is usually practiced: it is far too “casual.” The logic behind what works at top performers, why it works, and what will work elsewhere is barely unraveled, resulting in mindless imitation. Consider a pair of quick examples. When United Airlines decided in 1994 to compete with Southwest in the intra-California marketplace, the company tried to imitate Southwest. United put its gate staff and flight attendants in casual clothes; it flew only Boeing 737s; it gave the service a different name, “Shuttle by United,” and used separate planes and crews; it stopped serving food; it increased the frequency of its flights and reduced the scheduled time planes spent on the ground, copying Southwest’s legendary quick turnarounds. Southwest, however, wound up with a higher market share in California than it had before United launched its imitation.⁷ The Shuttle failed and is now shuttered.

When U.S. automobile companies decided to embrace total quality management and emulate Toyota, the world leader in automobile manufacturing, many copied its factory-floor practices. They installed pull-cords that stopped the assembly line if defects were noticed, just-in-time inventory systems, and statistical process control charts. Yet even today, decades later, U.S. automakers for the most part still lag behind Toyota in productivity—the hours required to assemble a car—and many trail in quality and design features as well. Similar failures have plagued retailers’ efforts to copy Nordstrom’s sales commission system to achieve higher service levels, and the numerous organizations that attempted to mimic General Electric’s forced-curve performance-ranking system.

In these and scores of other examples, a pair of fundamental problems render casual benchmarking ineffective. The first is that people copy the most visible, obvious, and frequently least important practices. Southwest’s success is based on its culture and management philosophy, the priority it places on its employees (Southwest did not lay off one person following the September 11 meltdown in the aviation industry), not on how it dresses its gate agents and flight attendants, which planes it flies, or how it schedules them. Similarly, the secret to Toyota’s success is not a set of techniques but its philosophy—the mind-set of total quality management and continuous improvement it has embraced—and the company’s relationship with workers that has enabled it to tap their deep knowledge. As a wise executive in one of our classes said about imitating others, “We have been benchmarking the wrong things. Instead of copying what others do, we ought to copy how they think.”

This executive was partly right but did not go far enough. The second problem is that companies often have different strategies, different competitive environments, and different business models—all of which make what they need to do to be successful different from what others are doing. Something that helps one organization can damage another. This is true particularly for companies that borrow practices from other industries, but often is true for organizations even within the same industry.

The fundamental problem is that few companies, in their urge to copy—an urge often stimulated by consultants who, much as bees spread pollen across flowers, take ideas from one place to the next—ever ask the basic question of why something might enhance performance. Before you run off to benchmark mindlessly, spending effort and money that results in no payoff, or worse yet, in problems that you never had before, ask yourself:

• Is the success you observe by the benchmarking target because of the practice you seek to emulate? Southwest Airlines is the most successful airline in the history of that industry. Herb Kelleher served as CEO during most of Southwest’s history and remains the chairman to this day. Kelleher drinks a lot of Wild Turkey bourbon. So does that mean that if your CEO starts drinking as much Wild Turkey as Kelleher, your company will dominate its industry? Get the point?
• Why is a particular practice linked to performance improvement—what is the logic? If you can’t explain the underlying logic or theory of why something should enhance performance, you are likely engaging in superstitious learning and may be copying something that is irrelevant or even damaging.
• What are the downsides and disadvantages to implementing the practice, even if it is a good idea? Are there ways of mitigating these problems, perhaps ways your target uses that you aren’t seeing?

Doing What (Seems to Have) Worked in the Past

Suppose you went to a doctor who said, “I’m going to do an appendectomy on you.” When you asked why, the doctor answered, “because I did one on my last patient and it made him better.” We suspect you would hightail it out of that office, because you know that the treatment ought to fit the disease, regardless of whether or not the treatment helped the previous patient. Strangely enough, that logical thought process happens less than we might care to admit in most companies.

Consider a couple of industry examples. In a compensation committee meeting of a small software company that we worked with, the committee chair, a successful and smart executive, recommended the compensation policies he had employed at his last firm. He even suggested that his former head of human resources call the head of HR at this company to facilitate precise imitation. The fact that the two companies were of dramatically different sizes, used different distribution methods, and sold to different markets and customers somehow didn’t faze him or many fellow committee members. This company isn’t alone: how many of you are using performance appraisal forms that your executives brought with them from another company? And then there is the case of the same strategy and approach being used regardless of the situation. Al Dunlap—the notorious Chainsaw Al—did layoffs (and it turns out, accounting fraud) in all of his companies, including Scott Paper and Sunbeam. Similarly, executives who believe that any unit that isn’t ran...