Variance Management - the tail wagging the dog

​Companies driven by adherence to budgets and data and looking for upticks in shareholder value - in the absence of context - have the tail wagging the dog.  You end up with quality people stressed, frustrated and disillusioned from spending all their time producing ever more detailed information for the owners, instead of actual production.  It's also a nice analogy for personal leadership under stress.

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It happens predictably often and easily.  Owners/Senior management want a budget and a business model that works, they want a ‘realistic but aspirational’ budget.  The budget must demonstrate the Return on Investment, the capital value increase, that they in turn have promised their shareholders/funders.

The Business Development and Marketing people provide some top line numbers that are highly ambitious (you don’t become a senior Sales and Marketing Exec without being bullish in your sales predictions).  The production and operational teams then work out, usually based on the sales projections, how to produce the numbers at the lowest cost.  After the top line is inched up and the middle lines inched down - the bottom line looks good and the budget is signed-off.

Then all future conversations become a budget to actual.

Q: Why is your labour spend 5% over budget this month?
A: Well, because we have machine X breakdown and needed to spend some overtime to fix it and get production back up to target.
Q: Why did machine X breakdown?  
A: Because, remember that maintenance we postponed so we could meet last months budget?
Q: Don’t start !

Q: Why did you produce too many widgets this month?
A: Well, because next month we've got a large number of people on leave, we'll produce the scheduled amount over two months at a lower overall cost
Q: BUT - you budgeted for X and you produced X+20%
A: Yes, but like I said, we'll produce less next month while crews are on leave
Q: BUT - the BUDGET - Your production didn't match the BUDGET
A: Yes, but overall the business is better off, we've spent less across two months.
Q: BUT - BUDGET!!!!

When leaders are under pressure to produce month on month, week on week, the short term budget to actual becomes the driver and reactionary/panicked interpretations follow.  Planning horizons shorten, fixes become short term.  In businesses that require longer production and shipping schedules, this short term variance management can appear ad-hoc. 

From the owners point of view, when all you can see are the measures compared to budget, what else is there to talk about?  It becomes leadership by variance management.

Consciousness can be likened to this.  Your conscious attention is essentially drawn to variances.  When some signal from your sensory circuits seems different to expectation, your attention will be drawn to it.  Like a red entry in the PnL spreadsheet.  For example, if your shoulder and neck is a little cold (as mine is now writing this) my attention is drawn to the sensation and I need to make a conscious decision - get warmer or put up with it.  It’s the variances that get our attention.

And then, we tend to make short term, reactionary decisions.  Expectation to variance - we feel the need to remove the variance.  Warm up my shoulder.  Get back to normal - back to budget.  This is why habit change can be so tough, because variance to ‘normal’ for your body is still variance regardless whether the change is likely to be good or bad.

But what if the variance is actually indicating something important?  What if it is something strategic?  What if the best decision is to move the budget in the direction of the variance rather than bring the variance back to the budget?

The analogy goes further.  Leadership by variance management tends to be more acute when the pressure is high.  The more ‘stressed’ the strategic leadership feels, the more short-term the thinking can become.  It becomes about this month, this week, rather than the strategic position and capacity build over the next 3-5 years.  Admittedly, adhering to the budget can be in fact what builds/drives the strategic outcomes - it depends on the situation - which is the point of this piece.  Short term variance management in the absence of context is the tail wagging the dog.  

So too for our conscious decision making.  When we are under pressure our neuro-biological response is typically to do the same thing; to shorten our planning horizon, to overstate the significance of small variances to normal, to be highly reactionary.

Whenever you see yourself focused on short term variances, rather than longer term capacity growth, it is a sign that you’re under pressure.  When you see a business doing the same, not surprisingly, it is a sign that it is under pressure.  As a company is merely a collection of human beings making decisions - it could hardly be anything else.

Leadership by Variance Management in the absence of context is “Management” - not leadership - it is the tail wagging the dog.  This is true of personal leadership as much as it is true of companies.