The story of the computer service company in Briefing 74 demonstrates common features of how psychological intangibles show up in organizations’ strategic performance. It is worth considering whether those same features arise in your case, how important each may be, and what you can do about them.

State of mind drives behavior. This is hardly news to the field of psychology, but our method makes explicit the link between some simple measures of how people feel and the rate at which they exhibit behaviors that are important to the wider business performance. We will never get the measurement exactly right, nor precisely specify the impact on behavior, but the frameworks give a good-enough understanding of what is happening in many cases.

Intangibles have considerable influence. In the case from Briefing 74, there was no possibility whatever of explaining the outcome without taking account of intangibles. Had the client growth initiative not been started, the outcomes would have been radically different, not just marginally better, and it was state-of- mind intangibles that caused that difference. The phenomenon extends right up to industry-wide cases, even affecting the whole economy. The dot-com boom-and-bust around 1990 and the banking-led collapse of 2007 were both driven to serious extremes by changes in a key intangible – ‘confidence‘.

Intangibles are affected by, and affect, the tangible system. The Briefing 74 problems were not caused by staff disrespecting the clients, by management failing to promote the firm’s reputation, or by leaders behaving badly towards their staff. They were caused by simple relationships between tangible factors – client numbers, staff, workload and capacity. If negative behaviors happened too, then they would of course also cause problems, but they are not the explanation here, nor in many real situations. People are doing their best, but poor strategy makes it impossible to do well.

Intangibles are manageable. A senior partner in a big consulting firm once remarked that their work for clients ignores intangibles because they are undetectable, unmeasurable and unmanageable. All three assertions are untrue. Sales people know when customers are annoyed, and managers know when staff are unhappy. These and other intangible factors can be measured, and often are. Finally, skilled managers often turn round low morale in teams and whole organizations, and repair their firm’s damaged reputation.

Managing the system can manage intangibles. The Briefing 74 problems were created by management, and could have been fixed by them. Had they not tried to grow faster in the first place, but continued on its previous, sound trajectory, they would have ended with more clients, and happy ones, and with more staff who were also contented. Even after the problem started, the situation could have been rescued. Had the firm stopped chasing new clients as soon as work overload hit 10 %, the growth in staff coming through the system would have brought down the client problems.

Problems can fix themselves — but not necessarily in a good way. If poor service due to overloaded staff causes customers to be lost, then the loss of those customers removes the overload and service improves! Don’t bet on this always working, though. If overload also drives staff to leave, then the problem could get still worse, rather than repairing itself. In any case, it is probably preferable to boost service capacity fast enough to fix the service quality problem without losing customers.

Persistent bad performance. In a huge number of organizations – perhaps even in most – this self-fixing of overload-driven problems becomes a persistent state. We win more customers than we can handle, so serve them badly, so they leave, to be replaced with more new customers we will disappoint. Preventing such chronic failure requires a degree of organizational “slack” — a little more capacity than you strictly need, just to be sure it never becomes a constraint. Our obsession with profitability ratios and cost control too often ensure this can’t happen. But would you prefer to make a return on sales of 15 % and struggle for ever to cope, or make 12 % and be able to develop strongly?

Negative factors vs. absence of positives. Not all of peoples’ feelings are positive. As shown in Briefing 74, “annoyance” is a realistic description of customers’ state of mind that drives an unwanted behavior [leaving us]. It is quite different from the absence of a positive emotion, such as “customer satisfaction,” which may indicate indifference but not explicit hostility.

Thresholds and tipping points. This same case shows the problems caused when factors move towards a threshold that triggers new behavior. The tipping point from growth to collapse at the computer service firm was caused simply by the crossing of two lines – when the amount of work exceeded what the staff could do well, and clients did not actually leave until annoyance crossed their tolerance limit. Note too that management could have anticipated when those points would arise and taken avoiding action.

Until next time…

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When success on the balanced scorecard is really failure

Many firms’ balanced scorecards include both targets for growth – in customer numbers and staff, for example – for efficiency measures like staff productivity, and for intangibles like quality of service or motivation. A sales manager hitting customer growth targets gets a green light. An operations manager achieving high staff utilization also gets a green light. But both assessments could be entirely wrong! If the sales department brings in demand that cannot be fulfilled, for example due to limited product availability or service support, the it will be a bad thing, not a good thing. And if high staff utilization leads to overload, poor service and staff losses, then that too will be a bad thing.

Few organizations have balanced scorecards so sophisticated as to say either “Exceeding target X gets green, but more than 1.2 times X gets red” or “Hitting target X gets green if factor Y is more than Z, but gets red if Y is less than Z“.

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 591-594.

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