The crazy practice of managing by numbers

The crazy practice of managing by numbers

Benito L. Teehankee

The View From Taft, BusinessWorld

October 6, 2016

Last June, the German car company Volkswagen admitted to cheating on emissions tests by equipping 11 million of its vehicles, from 2009 to 2015, with software that showed fake low emission numbers during government testing. The fraud was caught in 2015 by researchers from West Virginia University who found that when tested on the road, some Volkswagen cars emitted almost 40 times the permitted levels of nitrogen oxides. The company has since agreed to pay almost $15 billion to settle claims in the US. James Robert Liang, a Volkswagen veteran engineer, recently pleaded guilty to conspiring to defraud regulators and car owners. Further criminal investigations may implicate higher management with Liang’s cooperation even though resigned president Martin Winterkorn claimed that he was shocked by the revelations.

Meanwhile, the news in recent weeks was all about US-based banking giant Wells Fargo and how it had created 2 million fake accounts in the names of its customers. While the bank fired more than 2,000 employees over the scandal, it turned out that management had imposed aggressive sales quotas on them. Not surprisingly, many of them cheated customers to meet the targets, keep their jobs, and earn incentives. The bank paid a $185 million fine without admitting fault. The board, after considerable public pressure, retired Carrie L. Tolstedt, the former senior executive vice president of the unit where the fake accounts were created. She lost $19 million in stock grants, her bonus, and severance.

Why are reputable companies committing such frauds? In simplest terms, it’s obsession with numbers. The use of operational and financial quantitative targets, which are often tied to incentives, produces short-term tunnel vision that leads companies down the path of scandal.

But wait a minute. Isn’t it a timeless management principle from Peter Drucker himself that “if you can’t measure it, you can’t manage it”? But Drucker never said this. Although he supported management by objectives, the importance of accountability, deadlines, and the measurement of results, Drucker never intended numbers to be the main concern of managers.

Drucker knew that the good manager always pays attention to the often non-measurable – and actually more important – realities behind the numbers. Paul Zak of the Drucker Institute quotes Drucker’s advice to management: “It is the relationship with people, the development of mutual confidence, the identification of people, the creation of a community. This is something only you can do. It cannot be measured or easily defined. But it is not only a key function. It is one only you can perform.”

Another management guru who was strongly against executives’ obsession with numbers was W. Edwards Deming, the American statistician who educated Japanese managers on quality in the 50’s and thus helped fuel Japan’s legendary reputation for manufacturing quality. He said that “it is wrong to suppose that if you can’t measure it, you can’t manage it.”

Deming opposed the use of quotas and numerical goals because they made managers ignore quality and the process of achieving such targets. Given the Volkswagen case, Deming’s objection makes perfect sense – employees pressured to meet numbers will meet them, at all costs.

Should managers throw out numbers then? Do companies’ financial data systems, business analytics, and balanced scorecard performance indicators have no use? Hardly, but good management requires that such measurement systems are used in a balanced way.

First of all, tone at the top and the company’s culture should emphasize that the soundness of the process of achieving numeric results is more important than the numbers themselves. Numbers are important, but they can be achieved through unethical means, as the Volkswagen case shows.

Secondly, managers have to be hands-on in understanding how the business actually achieves business goals and number targets. “Looking good by the numbers” must give way to developing real process capability in creating value for customers. Unfortunately, as the Volkswagen case shows, not all managers want to spend the time to really know these day-to-day matters. Worse, short tenures tempt managers to take short-cuts – to manage the complex relationships in the business by simply looking at numbers during meetings and then issuing orders and promising incentives to drive performance.

Let’s hope that when managers set and monitor goals, they will remember that numbers can never fully capture the true aspirations of a company nor tell a meaningful story of what’s happening in the business. They need to pay closer attention to the customers they serve and the people, relationships, and processes that deliver results for these customers. As Deming once said: “the most important figures that one needs for management are unknown or unknowable but successful management must nevertheless take account of them.”

Dr. Teehankee is professor of management and organization at De La Salle University and vice-chair of the corporate social responsibility committee of the Management Association of the Philippines.