Numbers
by Margaret Heffernan

“How do you know when one of your businesses is thriving – or when it’s in trouble?” I asked this once of a CEO who ran a conglomerate that, at one time, comprised some 75 companies. How could he possibly understand them all, and keep track of them all?

He was a math whiz so I guess I should have anticipated his answer. “I look at the numbers. They tell me what I need to know.”

There was nothing remarkable about his confident reply. It’s what most Chief Executives will tell you – and most investment analysts. Go to any annual shareholders’ meeting and you’ll be regaled with p/e ratios, gross profit, net profit, ROI, EBITDA, GDP, output per capita, beta, market cap. All numbers. Business analysts call this “the hard stuff” – the hard, unflinching, stone cold data. They’re supposed to tell us something, and they do. But they don’t tell the whole story.

Why not? Well, in the first place, they don’t tell you everything because all numbers are history. They are what can be demonstrated about past performance. And, as we know, past performance is no guarantee of anything – except past performance. And even then they can be unreliable. All MDs know that there are a myriad different ways to present the numbers, some good, some bad and some downright illegal. It’s not the numbers themselves that are the problem: it’s the way they’re selected and connected that can hide a multitude of sins. Just ask Bernie Ebbers.

The Fidelity money manager, Peter Lynch, was a great one for numbers. He spent his life surrounded by data and by charts. But the reason he went down in history as the most successful manager ever was not because of his charts. It was because he left his messy little office and visited the companies he was thinking of investing in. Leaving historical numbers behind, he wanted to know how ritzy the headquarters were, how happy the staff looked, how the product tasted or felt. He’d regularly prowl around shopping malls, seeing where queues formed. He understood the hard stuff – but he made sure he absorbed the soft stuff too.

Why is this important to managers? Because it’s so easy to become captivated by the hard data and to minimize the importance of everything else: culture, morale, positioning, zeitgeist, style. Because the dirty little secret about this so-called soft stuff is that it is very, very difficult to get right – and even more difficult to correct. It’s the soft stuff that is hardest of all.

Last week, I ran into a numbers company. It hadn’t always been that way. It had started life as a brilliant innovator that had come from nowhere to become a market leader. But it had just been acquired by a new owner who came in and decided that he needed to ‘fix’ the numbers. According to his standard metrics, there were a few too many employees – so five were arbitrarily let go. In order to beef up quarterly numbers, July sales were shipped to customers in June – despite this inconveniencing loyal, blue chip customers. And, naturally enough, suppliers owed in June weren’t paid until July. The result? The numbers looked marvellous even as the new owners were destroying the heart and soul of the business – and its future.

We trust numbers because we think they represent the truth and we know that truth is something that is intensely difficult to find in business. Once you have a company of any size, it’s really tough to know what is really going on. Sure, you ask questions and get answers, but do you know whether your people are brown-nosing or sugar-coating or simply playing politics? You can be amazed at how contradictory reports of the same meeting are – now just apply those discrepancies to the whole business and try to figure out just where you stand. Why is it that you are always the last to know when a product fails or a key talent leaves?

The only way I’ve ever found of knowing what was happening inside my businesses was to observe how easy it was to get things done. Did initiatives fall between the cracks, fall victims to politics – or just happen? Did ideas get better or worse as they progressed from conception to execution? Did people help each other hit deadlines and stay late when those dates loomed? Did people care? If the answers I got were bad, it didn’t matter how good the numbers were: we were in trouble. And if the answers were fine, I knew we’d weather a few storms.

Culture will tell you a lot – sometimes far more than the numbers. Many of Enron’s dubious deals were pilloreed in company talent shows well before the auditors noticed anything was awry. The jokes, the quality of relationships, to nuance of conversation and the elegance of negotiation can tell you far more about the company’s future than the history contained in its numbers.

The most common reason people cite for not wanting to go into business is that they’re intimidated by finance. They think that’s all business is. But it isn’t. Business is about people: getting the right ones, getting rid of the wrong ones, inspiring them and enabling them to do greater work together than they could ever do alone. That is the hard stuff. As for numbers, it turns out they can be very squishy indeed.

© Margaret Heffernan

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