We need to get better at explaining variance

Written by
Dr Elsbeth Johnson, Senior Lecturer at MIT Sloan and Founder of SystemShift

12 May 2020

12 May 2020 • by Dr Elsbeth Johnson, Senior Lecturer at MIT Sloan and Founder of SystemShift

Focusing too much on business performance might lead to under-performance, argues Dr Elsbeth Johnson, a senior lecturer at MIT Sloan and founder of the consulting firm, SystemShift. Her book, Step Up, Step Back: How to Really Deliver Strategic Change in Your Organizationwas published in January. 

Working as an equity analyst more than a decade ago, I wondered why some companies seemed surprised by their own quarterly results. They had promised the market X and they had delivered Y. Frankly, their ability to explain this variance — the gap between X and Y — was patchy. 

Now, as someone who researches and teaches organisational science, I have a better sense of why that might be. These companies are spending too much time focusing on performance (trying to deliver X) and not enough focusing on understanding and learning why they’re only able to produce Y. 

Understand variance to reduce it

Research shows that companies that truly understand how and why their business works as it does – for example, why their customers buy from them and not from their competitors, or why a unit of investment produces a 10% return rather than a 12% return – are more likely to perform well and be able to deliver strategic change initiatives and are less likely to be disrupted. 

When your organisation can explain variance, it’s more likely to succeed in reducing it. That makes the business a less risky bet for employees and investors alike. 

So, how can organisations get better at explaining variance? For most, achieving the right balance between performance and learning means dialling up their orientation towards learning. As a leader, you can’t improve people’s understanding of why the business performs as it does by asking for more performance, but you can improve performance by asking for more learning. 

For leaders of businesses who face immediate performance issues, this can feel like a Faustian pact: “You mean you want me to improve performance by focusing less on performance?” 

The quick answer is ‘yes’. First, leaders need to cut short the descriptions that take up so much air-time in organisations, leaving more time for explanations. Too many business reporting cycles are dominated by lengthy PowerPoint decks that describe what the business has delivered, but are scant on analytical explanations of how and why. Leaders pushing for, and devoting time to, explanations (using questions that start with ‘how’ and ‘why’ rather than ‘what’) is a key part of changing this habit. 

Why leaders should honour high-quality explanations

Second, leaders need to become more intolerant of poor-quality explanations of variance. This goes beyond being tough on weak explanations that bring no real learning, requiring leaders to honour high-quality explanations by using these to make decisions that improve the business. 

An employee who shows they understand why something hasn’t worked should be rewarded with more budget or increased headcount for the next iteration of the learning loop where their insights are used to develop a better product or a cheaper service. Leaders must use their positional power to grant attention, resources, promotion and kudos to those who demonstrate the best understanding of their business. And to take it away from those who don’t.

By focusing more on understanding and learning, leaders can create a virtuous circle whereby the business becomes capable of performing and learning, with one reinforcing the other. But to kick-start that process — and make performance more likely and less risky –leaders need to focus less on the very thing they are trying to improve. 

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