Beauty and the Beast, Part 1: The Beast
The Shapes of Things to Come
There are two curves that changed my mindset on strategic operational management and caused me to question my organization’s senior leadership. I call them The Beauty and The Beast.
Part 1 covers The Beast. Part 2 covers The Beauty. Part 3 discusses what these curves mean.
The Beast
The first time I saw The Beast, I recognized it instantly. It felt familiar. I had been living this curve each and every year since I had begun participating in my organization’s long-range business planning activities.
The Beast actually goes under a different name, “Hockey Stick Dreams, Hairy Back Reality,” developed by Chris Bradley and others at McKinsey & Company. The curve is based on behavioral economists Kahneman and Lovallo’s work showing errors people make with bold forecasts and timid decisions.
Adapted from McKinsey & Co. Hockey Stick Dreams, Hairy Back Reality
In this earnings over time chart, we see in each year a plan indicating a distinct uptick, known as a hockey stick, in expected future net earnings. Yet actual results don’t achieve those ambitious goals. This results in a hairy back appearance. Why?
The hairy back feature is a manifestation of the planning fallacy. This phenomenon refers to a set of biases that produce optimistic future expectations even when it does not align with our experiences.
When I was manager of long-range planning in a large utility I lived this chart every year. This organization, and many others like it, based their planning on earnings targets set by finance to meet the organization’s strategic objectives. There’s nothing wrong with that. Where it falls apart is how the organization reacted in creating and executing operational plans to meet those objectives.
Every year we would blow up the previous years’ plan. We had spent months creating a 20-year plan while scrubbing the first five years of that plan. We threw the current plan in the garbage and started over. Strike one.
Next, we did goal seeking. We created a technical plan of all the maintenance, sustaining capital and improvement initiatives that were initially unconstrained which vastly exceeded the organization’s spend constraints. Then we would diligently and methodically review those gaps to reduce the scope in the technical plan to meet the spending constraints while keeping a notional eye on targeted performance and acceptable risk. This ground everyone involved into a fine dust. In the end, we all just hoped the final scope would deliver the desired performance. Hope is not a good strategy. Strike two.
Finally, we executed the plan, or at least we tried. Remember, we blew up the plan every year. I had my team go back over the past five years and audit how much of that five-year plan we actually executed. The answer was not surprising. We had executed a fraction of the intended plan. We allowed significant change to creep into our long-range plans, each annual budget plan and each turnaround plan. Our processes assured change while having the audacity to call it optimization! We didn’t do everything we said we’d do. Risks accrued. Strike three.
We managed for cost, hoped for performance and accepted risk. Pure fallacy. You’re out!
My boss called this whole approach, fetch. He recognized the problem but couldn’t do much about it. Finance would throw a bone — the earnings requirements. Operations would do their best to fetch the bone — sometimes they got it, often they did not.
Finance was clearly driving the bus in this organization. Finance had the CEO’s ear, Operations did not. To their credit, Finance had their ducks in a row. They had a clear strategic plan linked to the company's objectives. Operations, by contrast, was chaos. They couldn’t produce a compelling alternate strategic plan even if they felt Finance’s targets were optimistic.
It boils down to this: Finance set bold aspirations. Operational leaders signed up for the hockey stick every year. Finance was writing cheques on behalf of our assets that Operations couldn’t deliver. Mediocrity, disappointment and our hairy back reality ensued.
The Beast haunts me.
For more information on Hockey Stick Dreams, Hairy Back Reality check out the McKinsey & Co. book and podcast on the topic.