By BRIAN BABCOCK
First published in The Globe and Mail Friday, Sept. 26, 2003
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If a coach focuses exclusively on winning each game but ignores player development, fan support and long-term strategy, at best he risks the humdrum of ordinary performance. At worst, he could ruin the team and lose his job.

So why is it acceptable for a business manager to focus on short-term gains at the expense of long-term planning for sustainable growth? Why not create multiple winning streaks?

Unfortunately, one measurement in business -- making a profit -- has become the goal: Shareholders and chief executive officers zero in on quarterly growth; first-line managers focus exclusively on monthly budgetary gains; supervisors watch weekly productivity measures and service people keep an eye on hourly output.

This over attention to the bottom line can result in stripping a company's human capital -- ignoring, or at least playing down, the fundamentals of a great business: leadership development; market analysis and the identification of customers' needs; innovative solutions to customer problems; and listening to feedback about issues critical to the enterprise's success, to name just a few.

Instead of the bottom line growing from long-term strategy and planned earnings improvement in a sustainable fashion, it becomes the whole focus of the game.

Why does this happen? Because on the surface, the bottom line is easy to understand -- numbers are exact.For many of us, our brains are wired in a way that "hard" statistical data of accounting systems -- a third-quarter profit or loss, for example -- drive out "soft" conceptual notions of business fundamentals.

To avoid this dilemma, you first have to recognize that accounting systems are just one of the many tools needed to run a successful business. As management accounting expert Robert Anthony wrote: An accounting system "is of no use to management unless it results in action by human beings. . . . It may be worse than useless because management overemphasizes the importance of the figures and therefore takes unwise actions."

Second, you need to integrate your financial planning tools into the fundamentals of a great business. What does that mean?

There are elegant financial planning tools linking product expansion with appropriate debt levels. The sustainable growth equation identifies a "zone" of earnings growth that will prevail with time. It's a crucially important concept. Ambitious managers could save heartache for their customers, employees and shareholders if they would focus on the "zone" of sustainable growth to control expansion and debt.

But even here Gordon Donaldson, in Strategic Goals and Financial Consequences, signals a warning: "Unless managers make certain that all primary goals are consistent with each other . . . [the] sustainable growth equation will not serve as an effective discipline."

In the language of the street, that means: Leadership development matters; market analysis and the identification of customer needs is crucial; effective delivery of product through people is a basic imperative, and listening for feedback central to your company's critical successes should be your fanatical expectation.

Consider a third thought on your path to making a profit based on great fundamentals: All costs are variable in the long run. In other words, even fixed costs are less fixed than you imagine them to be.

For example, the fixed cost of vehicle amortization was dramatically reduced at our Ontario-based school bus company. How did that happen? All employees shared the goal of understanding customer needs, an important one being the safe delivery of kids. Employees were rewarded for specific and measurable safety achievements. They earned significant bonuses and, in turn, their extra caution reduced insurance costs, fuel costs, maintenance costs and, surprisingly, asset costs. As a result, vehicles had longer life spans.

The mutual gain for drivers and shareholders was that both improved their financial well being. Of course, the important and most significant gain was that the kids' risk of injury was reduced.

If you are creative, innovative, interactive and communicative with your people, similar cost reductions can be achieved in your business.

To meld "soft" concepts with "hard" measures, you have to use the hard measures of accounting results wisely, use the mathematical model of sustainable growth equations liberally and embrace the notion that even fixed costs are variable in the long run.

But through it all, never lose sight of the idea that strong fundamentals create the situation where earnings follow from those business basics. As a result, shareholder satisfaction rises over time.In an attempt to merge the hard and the soft concepts in your business, ask yourself:

  • Does the scorecard become the game at your company, or is the goal of the game to develop great business fundamentals and make wise use of a scorecard?

  • Is your accounting information "worse than useless" because you overemphasize its importance? Remember, it's of no use unless it results in action by human beings.

  • Can you refocus stakeholder attention through sustainable growth models that support more visionary goals?Can you de-emphasize quarterly results?

  • Do you understand the concept of the variability of all costs? After all, it's a matter of time.

  • Can you reduce even your fixed costs through employee actions? Do they understand the mutual gains of being rewarded for superior effort and the enhancement of shareholder value?

With these questions in hand, you can guide your company to self-sustaining, long-term superior results. An impressive looking scorecard will be the result.

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