FYI: Closing the Gap
Why your company's performance never lives up to your expectations.
In all the years I've been at Inc, I've never met a CEO who went into a new year forecasting revenue growth of 3%. Of course, that's how much our economy grows in a good year, but somehow the people responsible for generating the additional output always expect their revenues will increase 12% to 15%.
As a result, we all become actors in an annual drama that is playing itself out even as you read this. At companies whose fiscal year coincides with the calendar year, Act I opens in the fall, when the sales force submits its forecast. Suspecting sandbagging by people who have a vested interest in keeping expectations (and sales quotas) low, the CEO summarily rejects the numbers. Then the revisions begin and continue until the CEO finally gets an acceptable forecast for top-line growth. Invariably, it's in the 12%-to-15% range -- which is precisely what the CEO had in mind before even seeing the first round of projections. We call this pageant bottom-up forecasting.
Act II begins in the spring, with the preliminary results of the first quarter. They confirm that performance is way below forecast. The CEO pulls the management team together and announces: "Things are bad. We have to do some tough reforecasting." The managers nod, grim-faced, and head back to their offices, where they call up the file containing the forecast they started with way back at the beginning of Act I. Eventually, a new, more realistic budget emerges; sales quotas and incentive targets are renegotiated; and everyone gets to go back to work. End of Act II.
All this would be somewhat comical if it weren't so frustrating for everyone involved. The salespeople look on it as a ridiculous charade foisted on them by a leader who is out of touch with the market. The CEO thinks that the organization has lost its entrepreneurial edge. After all, nobody builds a successful business from scratch by growing 3% a year. If the company can't maintain a double-digit growth rate, it must be because people aren't trying hard enough. They've grown complacent.
But a very different explanation is suggested by Inc contributor Jack Stack, CEO of SRC Holdings Corp., in this month's article "The Innovator's Rule Book," adapted from the new book he has coauthored with editor at large Bo Burlingham. Stack contends that the real problem lies in the way we've learned to manage.
He even has a term for it: optimization. Virtually all our time and energy go into "the process of taking something you already do and figuring out how to do it better, cheaper, and faster" by making incremental improvements. That's fine as far it goes, Stack says, but what gets left out is the type of activity that leads to major improvements -- namely, innovation.
In other words, the persistent gap between our expectations and our performance is built into the way we run companies. The only way to close that gap is to innovate.
Stack's observation is not, in itself, revolutionary or even new. On one level it just reinforces a point made by Peter Drucker 17 years ago in his book Innovation and Entrepreneurship. There Drucker argued that it was not enough for companies to wait for innovation to happen randomly. With the emergence of new competitive challenges, company leaders had to start thinking about innovation as an integral component of the regular management process. In effect, they had to systematize innovation. They had to figure out how to make it happen again and again.
Drucker's advice is even more relevant today. Never before has it taken so much effort to squeeze out the incremental improvements we need just to remain competitive. The managerial tools we grew up with are inadequate for producing the kind of growth that we want and expect -- and that each fall we optimistically include in our forecasts for the coming year.
That's where Stack comes in. He and his colleagues have developed a new set of managerial tools that ensure that in Stack's organization innovation happens in good times and bad. Inc readers, many of whom have built at least one business from the ground up, will have no trouble recognizing the mechanism that SRC has used to expand from a small, two-division manufacturing company into a $160-million miniconglomerate with 22 separate businesses.
So check it out. You may get some ideas about how to avoid playing out your own version of the reforecasting drama this time next year.
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