Leading by Cause
Lessons throughout history inform us that cause precedes effect; actions create results. Plato explained the principle of causality, saying “everything that becomes or changes must do so owing to some cause; for nothing can come to be without a cause (Timaeus 28a).” In Codex Atlanticus, Leonardo DaVinci wrote, “No effect is in Nature without cause; you understand the cause and you do not need any experience.” And as every schoolchild learns, “for every action, there is an equal and opposite reaction,” per Sir Issac Newton’s third law.
With depth of affirmation around cause preceding effect, why do business leaders focus so heavily on analyzing their numbers, or, focus on the effect instead of the cause? A recent conversation with a community bank CEO focused on his vision for the company. He opened the dialogue, saying he and his leadership team had put a lot of thought into where they want to take their bank, and the vision they committed to was to deliver top decile ROE, ROA and topline revenue growth: a quintessential example of focusing on effect, not cause.
In their CFO Magazine piece, “How An Obsession with Metrics Is Killing Your Company,” authors Alexander Van Caeneghem and Jean-Marie Bequevort, write, “The quest for financial performance and the pressure to measure can corrode organizational cultures, narrow the focus of leadership, reduce intrinsic motivation, and support unethical behavior. With a similar theme, Michael Harris and Bill Taylor’s Harvard Business Review article, “Don’t Let Metrics Undermine Your Business” said, “A company can easily lose sight of its strategy and instead focus strictly on the metrics that are meant to represent it.”
Logic tells us we can manage cause, but only measure effect. Yet we often overlook the real story – the aggregation of activities that created the results reflected in our numbers. Leading by Cause is an approach that says – use results to understand activities, effectiveness, and efficiency in context of the organization’s vision and strategy. When results do not meet expectations, the root cause is embedded in one (or more) of these elements – choices of activities performed, performance effectiveness, and performance efficiency. Shifting to cause-based analysis of results positions leaders to laser-target interventions – coaching, guiding, managing or taking direct action – to change the trajectory of outcomes. There are three paradoxes to navigate in making the shift to Leading by Cause:
- Effect vs. Cause Conversations – Cause-based performance analysis requires understanding the composition of activities that created results. A common effect-based conversation among managers when results that don’t meet expectations starts out with, “Revenue is 5% below target, so let’s do everything we can to drive it up to make plan”. A cause-based conversation gets at the root – “What were the sales activities last month that created these results? Which customers did we focus on? How did we engage those customers? What was their reaction to what we have to offer? What is getting in the way of our new business development activities?”
- Appearance of Improvement vs. Improvement – In the effects domain, managers often look for steps to improve the appearance of their P&L results, yet no real, underlying change takes place. For example, a manager might delay travel or defer other expenses in the last weeks of a quarter to create the appearance of lower operating costs, thus a better bottom line. Results look better, but the root cause creating undesirable results has not been sleuthed out.
- Math vs. Behavior – Operating results presented in an organization’s P&L reflect an aggregation of activities. It’s easy to analyze operating results in a sterile manner, quantifying month-over-month changes and variance to plan; of course, numbers don’t lie! But every numeric result – product development, marketing, sales, manufacturing, and distribution – reflects human behavior. Cause-based analysis of results seeks to understand the behavioral factors contributing to outcomes reflected in the P&L – “What changed in our business development activities last quarter vs. the same period last year? What effect is our largest competitor’s new delivery strategy having on our sales? How effective is the collaboration between product management, manufacturing, and sales?”
Leading by Cause requires deconstruction of results into elements. Understanding the numbers is important; knowing what caused the numbers is empowering.