The Great Game of Business – Chapter 6 section 1 (part 9 of 17)

Chapter 6 – Setting Standards

Numbers have gotten a bad reputation in some quarters: no surprise when you look at how they’ve been used. Most companies use them as punishment – as tools to supervise, intimidate, or control. They don’t use numbers as tools to build – to teach people to be more productive.

KEY POINT: The payoff comes from getting the people who create the numbers to understand the numbers. When that happens, the communications between the bottom and the top of the organization is just phenomenal.

You can’t generate that quality of communication just by dumping numbers on people, however. You have to make the numbers both comprehensible and interesting. … The trick is to be able to evaluate those numbers, to make sense out of them, to know what to do with them. For that, you need standards.

A standardis the number to shoot for in any particular category you are measuring. It may be a ratio. It may be a percentage. It may be an absolute number over a period of time. All that depends on the category. … Some standards are obviously more important than others, if only because some categories are going to have a bigger impact on your ability to make money and generate cash.

The number and variety of standards will vary from person to person and from job to job, but everyone in the company needs some way of measuring how he or she is doing on a daily, weekly, and monthly basis. … Anyone who really gets into the Great Game of Business will compile a substantial list over time. But don’t overdo it in the beginning. You can start playing the Game with a couple of standards – say, one related to sales and another to productivity – and build from there. The whole idea is to throw a spotlight on some part of the action. Standards make the Game faster and more fun. They allow you to determine easily and quickly how you are contributing to the process of making money and generating cash.

KEY POINT: Numbers like these are no more complicated, and need be no more intimidating, than the calculations millions of baseball fans do whenever they want to figure out their favorite hitter’s batting average or their favorite pitcher’s ERA.  

In business, however, people don’t do the calculations because they don’t understand the rules. Standards help you teach them. They allow you to show people the equivalent in your business of batting .400.

Numbers Make the Team

Most important, numbers like these help everyone play the samegame. People need to have some way of keeping score. … So how should you go about developing and implementing standards at your company? By choosing a category, picking a target, and going after it. Pretty much any target will do, as long as you can explain why it’s worth aiming for. … Setting standards is a team effort and an ongoing process. Encourage people to debate each one. Let them negotiate. Over time, you’ll get it right. Just start, stick with it, and learn from your mistakes. That said, here are some tips about setting and using standards from someone who has already made just about every mistake there is.

Tip #1: Do You Know Your Critical Number?

Every company has one. It is the number that, at any given time, is going to have the biggest impact on what you’re doing and where you want to go. Exactly what it is will depend on a variety of factors. … Whether you’re aware of it or not, it will make or break your company. It is the number you haveto do well on if you are going to succeed, or maybe even survive. So it’s vital that you identify it and come up with standards people can use to go after it.

The good news is that it’s generally pretty easy to track down your Critical Number, assuming you know your business reasonably well. Pay attention to what keeps you up at night. Better yet, ask your people what keepsthemup at night.

Tip #2: Build a Standard Cost System

Sooner or later, your Critical Number will have to do with costs, and by then you’d better have a standard cost system in place. It’s the only way of making sure that your costs are in line with the marketplace, that they aren’t so high as to undermine your ability to compete. Remember, you can only make money in business by being the least-cost producer or by having something no one else has, and even in the second case you’d be foolish not to keep your costs down. To do that effectively, you must have a standard cost system that tells you what your costs should be in every aspect of your operation. Without it, you’re going to have a hard time getting your people involved in controlling costs, mainly because they won’t know what to do. In fact, they probably won’t believe you if you tell them the company’s costs are too high. And you’ll find it almost impossible to teach them how to follow the basic rules of business: make money and generate cash.

Most companies use what I would call an average cost system. They look at what they paid the year before and set that as the cost. Systems like that seldom are specific enough and never provide targets. … That kind of cost accounting is really an obstacle to improving productivity because it accepts and rewards inefficiency. If you are going to improve, you need to know how much you should be spending, not just how much you’ve spent in the past. That means going over every product, looking at every part, examining every process and operation, breaking each down into its individual components, and then coming up with standard costs for everything you do.

CHECKLIST FOR STANDARDIZING COSTS

  • Is anything going to happen in the next twelve months to affect these costs?
  • Am I overlooking any outside sources of information, such as industry groups or competitive wage surveys, that could assure me these costs are reasonable?
  • Am I purchasing supplies in the right quantities? Using the right suppliers? Checking other sources?
  • Is this specific operation really necessary? What would happen if I didn’t do it?
  • Have I created ways for people to contribute their ideas about reducing costs? Do people feel they are part of the process?
  • Most important, will people buy into these standards? Have I given them every opportunity to debate the standards? Do people think the standards are theirs? This is where ownership starts. Do people own these standards?

Tip #3: Look for the Reality Behind the Numbers

More than work, it takes creativity and imagination to develop good standards. There is a whole art to quantifying these things, and it’s one that’s worth learning because the more quantifiable something is, the more you can do with it. But before you can be an effective quantifier, you have to develop an eye for the reality behind the numbers. You have to learn how to recognize what the numbers really represent, what sort of behavior produces the numbers, and what people can do differently to change the numbers.

WARNING: DON’T ACCEPT ANY NUMBER AT FACE VALUE

Numbers are not magical, and they aren’t sacred. They are important only as cluse to the reality that produces them. To use numbers effectively, you have to strive constantly to understand that reality – to move from the abstract to the specific. Many a profitable company has gone out of business because people neglected to find out the reality behind the numbers on the bottom line. You can’t pay your creditors with money that’s tied up in stale inventory or uncollected receivables.

To develop useful standards, on the other hand, you almost have to reverse this process. You have to understand what really happens in the workplace, how people go about their jobs, and then come up with tools they can use to measure their individual contributions to the common goals. That involves moving from the specific to the abstract. The trick is to do it in a way that does not confuse people, or disorient them, or send them mixed messages. The best kind of standard is one that makes so much sense to becomes second nature.