First: Principles

[This post was originally drafted as an article for the IAIDQ’s Quarterly Newsletter, but I felt it might be more suited to the blog instead]

Introduction

As we continue to stagger shell shocked through the unfolding economic crisis, increasingly commentators are looking at what can be changed or done differently in the financial services industry to ensure that “this can never happen again”. A lot of this comment has tagged the short term focus of the key performance metrics of the financial service industry as a factor in the financial crisis. One commentator, writing in the OECDObserver , puts it very simply:

“This crisis is a product of the short-term focus of financial firms on Wall Street, in the City of London and elsewhere, which is entirely concentrated on the next quarter’s earnings and other short-term financial measures.”

He goes on to say that:

“The breakdown in trust between banks was linked to poor short-term lending practices, a vacuum of accountability and a lack of attention to the needs of their owners and customers.”

The Secretary-General of the OECD, writing in the same magazine, sums it up eloquently:
“We are in our current fix because of an excess of financial innovation, driven by ever-increasing thirst for short-term profit.”

This short-term financial focus relied on visible numbers to drive the reporting of company performance on a quarter by quarter basis, which in turn fed into the reward and compensation schemes of these companies, which created a drive to push up those self same short term measures as much as possible. Often that drive was at the expense of a focus on the real needs of the customer or other stakeholders in the organization.

Often this meant that companies flitted ‘dynamically’ from strategic priority to strategic priority to catch the prevailing winds of growth, with the focus on the true objective of the business being diluted by the short term needs for growth in the bottom line to match stock market analyst forecasts.

But as everyone was making lots of money that quarter, people didn’t mind that much.

Unfortunately, the fallout from the short term financial focus of the Financial Services industry spread through other industries. To get institutional investment, companies had to adopt the same short term thinking and it became ingrained in how we do business.  Accordingly, the focus of managers in other industries shifted to short term growth and financial performance, and a tracking of those things using visible numbers in the organization.

Not news to Quality professionals

However, as quality management professionals we should not be surprised by this. This disaster was foretold.

In his 1983 book The Next American Frontier, Robert B. Reich wrote that:

“Paper entrepreneurialism is both cause and consequence of America’s faltering economy. Paper profits are the only ones easily available to professional managers who sit isolated atop organizations designed for a form of production that is no longer appropriate to America’s place in the world economy. At the same time, the relentless drive for paper profits has diverted attention and resources away from the difficult job of transforming the productive base. It has retarded the transition that must occur, and made change more difficult in the future. Paper entrepreneurialism thus has a self-perpetuating quality that, if left unchecked, will drive the nation in to further decline.”

(emphasis is mine)

Reich was quoted with approval by W.Edwards Deming in his 1986 magnum opus on Quality Management, Out of the Crisis.

Deming identified seven “deadly diseases” which afflict modern management practice and which needed to be eradicated. These are:

1. Lack of constancy of purpose (flitting from priority to priority)
2. Emphasis on short-term profits
3. Performance appraisals that emphasise short-term thinking and performance
4. Job hopping (which increases focus on short-term gains and short term time scales)
5. Running a company on visible figures only (which becomes more frequent as a company’s performance falters)
6. Excessive medical costs
7. Excessive costs of liability

So, if short-term focus, fanatical attention to the end of quarter bottom line, measurement of performance against the yard-stick of Wall Street analyst expectations, and reward of management for achieving short-term goals at all costs are key contributors to the current global financial crisis is it fair to say that Deming warned us? And what can we take from Quality Management practice and principles to help us reinvent management to ensure a sustainable recovery?
Of course, as information quality professionals in the trenches you’ll probably remind me that we’ve been trying to change management’s view on these things since the dawn of the Quality revolution with limited success. However I would argue that this was because the voices that Executive management heard loudest were the voices of the investors who were pushing for the short-term profits and returns on investment in the shortest time possible. The golden rule is that he (or she) who has the gold makes the rules. As we lacked gold, we were unable to make the rules and had to struggle to achieve our gains by playing the hand we were dealt.
Thankfully, the insanity of short-termism is becoming clear through the impact of the global financial crisis and some investors are shifting their emphasis towards sustainability over a longer term.

Towards Leadership?
President Obama appears to be showing some of the leadership example that is needed. He has set a clear set of objectives that he will meet and has started working to meet them. He has recently taken a beating in some parts of the US media for the short term performance of the US stock market since he took office.
Perhaps they think that like the CEO of a large company he should react immediately with a change of strategy and approach when the Dow Jones says he should? I could write more words about why that would be a bad idea, but I’ll point you to the Daily Show’s analysis of this news trend in the US . Jon Stewart says it better than I can.
Obama also stressed in his inauguration speech the priority of the objectives of government as opposed to the ‘visible numbers’ represented by the size of government.  I would hope that that shift in emphasis back to the objective and purpose of an organization and away from its visible measures can be infused back into businesses as well.
As Quality Management professionals this crisis presents us with the opportunity to lead and to influence our leaders. Our influence and leadership must be grounded on a clear understanding of the principles of quality management to identify what change to make at least as much as, if not more than, on our ability to manage the tools and technology required to make that change.

The fundamental change that is required, however, is in the way in which we think about, measure, and reward performance in companies so that longer-term thinking becomes the norm and not the exception. External pressures from investors for change in management approaches will be among our strongest allies here and we should reach out to these influencers.
In Out of the Crisis Deming advises that the eradication of the “Seven Deadly diseases” will require a total rethink and reinvention of Western management practice. Perhaps historians might look back on this financial crisis as the fever that burned out the contagion in our management approaches and restored us to more balanced and long term thinking about our company objectives and how to achieve them in way that is grounded on quality and principles.
That change will, however, require leadership and a return to the first principles of quality management.