TALKING HEADS
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We need to get better at explaining variance
W
Dr Elsbeth Johnson
Focusing too much on
business performance
might lead to
under-performance.
orking as an equity analyst
more than a decade ago, I
wo n d e re d w hy s o m e
companies seemed
surprised by their own quarterly results.
They had promised the market X and
they had delivered Y. Frankly, their ability
to explain this variance — the gap
between X and Y — was patchy.
Now, as someone who researches
and teaches organisational science, I
have a better sense of why that might
be. These companies are spending too
much time focusing on performance
(trying to deliver X) and not enough
focusing on understanding and learning
why they’re only able to produce Y.
Research shows that companies
that truly understand how and why
their business works as it does — for
example, why their customers buy from
them and not from their competitors,
or why a unit of investment produces a
10% return rather than a 12% return — are
more likely to perform well and be able
to deliver strategic change initiatives
and are less likely to be disrupted. When
your organisation can explain variance,
it’s more likely to succeed in reducing
it. That makes the business a less risky
bet for employees and investors alike.
So, how can organisations get
better at explaining variance? For
most, achieving the right balance
between performance and learning
means dialling up their orientation
towards learning. As a leader, you can’t
improve people’s understanding of
why the business performs as it does
by asking for more performance, but you
can improve performance by asking for
more learning.
For leaders of businesses who face
immediate performance issues, this can
feel like a Faustian pact: “You mean you
want me to improve performance by
focusing less on performance?”
The quick answer is ‘yes’. First, leaders
need to cut short the descriptions that
take up so much air-time in organisations,
leaving more time for explanations.
Too many business reporting cycles
are dominated by lengthy PowerPoint
decks that describe what the business
has delivered, but are scant on analytical
explanations of how and why. Leaders
pushing for, and devoting time to,
explanations (using questions that start
with ‘how’ and ‘why’ rather than ‘what’)
is a key part of changing this habit.
Second, leaders need to become
more intolerant of poor-qualit y
explanations of variance. This goes
b eyo nd b e i n g to u g h o n we a k
explanations that bring no real learning,
requiring leaders to honour high-quality
explanations by using these to make
decisions that improve the business.
“Leaders need
to become
more intolerant
of poor-quality
explanations
of variance”
An employee who shows they
understand why something hasn’t
worked should be rewarded with more
budget or increased headcount for
the next iteration of the learning loop
where their insights are used to develop
a better product or a cheaper service.
Leaders must use their positional power
to grant attention, resources, promotion
and kudos to those who demonstrate
the best understanding of their
business. And to take it away from
those who don’t.
By focusing more on understanding
and learning, leaders can create a
virtuous circle whereby the business
becomes capable of performing and
learning, with one reinforcing the other.
But to kick-start that process — and
make performance more likely and less
risky — leaders need to focus less on the
very thing they are trying to improve.
Dr Elsbeth Johnson is a senior lecturer at
MIT Sloan and founder of the consulting
firm, SystemShift. Her book, Step
Up, Step Back: How to Really Deliver
Strategic Change in Your Organization
was published in January.
February – May 2020 // 63