Sometimes rules lead to unintended consequences that cause more damage than the problem they were designed to prevent. Here’s a classic example, and advice on what to do about it.
Phil Renshaw is a consultant and coach for financial executives at Circulus in Buckinghamshire, England. Having spent seventeen years in corporate finance himself, he’s personally seen the downside of relying too heavily on rules. One of his favorite examples is escalating the level of manager authorized to approve expenses, thinking it’s a good way to reduce spending. It may succeed in reducing spending. But that doesn’t mean it was a good idea.
According to Phil, here’s how that typically plays out. A company has just entered the final quarter of the fiscal year, and is woefully behind its earnings target. In order to save money, a temporary rule is put in place for the rest of the year. A senior executive, such as a vice president, must approve all expenses, no matter how small. The result is an absurd set of consequences.
Absurdity #1: The first is a result of the fact that such a leader might have hundreds, or even thousands, of people working for them. Personally approving all those expenses could take several hours a day, distracting the V.P. from more important duties. He or she tries to keep up for a few days or weeks, but their work suffers because of it.
Absurdity #2: Eventually they delegate the task to their administrator, which is the second absurdity. Expense approval has now been delegated to an administrator less qualified to review them than the original managers that would have done so in the absence of the new rule.
Absurdity #3: The third and most malicious absurdity is that this rule robs mid-level managers of their ability to keep the organization productive and motivated. For example, let’s say for the last week, three employees have worked fifteen-hour days on an urgent project, and complete it in record time. At ten o’clock in the evening on the last night, when the project is finalized and submitted, the manager wants to take the employees out to dinner in appreciation. But then she remembers the new rule. Only the V.P. can approve this meal expense now. It would require a lengthy explanation to justify, and the V.P. may not approve it. She decides not to take the risk, and just thanks them for their hard work, and sends them home.
Yes, money was saved. But at what cost? Demoralizing the employees, and emasculating the manager.
Phil’s advice is that if you can’t trust your managers to make good decisions, you shouldn’t have them. Instead, he advises companies to embed the quarterly cost or profit requirements in performance incentives like bonuses, or options, or even extra days off work. Then let individual managers decide which expenses are worth spending anyway and which are not. You’ll have just as good a chance at hitting your earnings target, but without the absurd set of unintended consequences.
If you ever find yourself considering instituting a new rule, consider the unintended consequences first. Ask yourself what Phil Renshaw would make of your rule. And if you happen to be one of the innocent victims of an equally toxic rule from upper management, tell them Phil’s story. You might just get them to reconsider.
[You can find this and over 100 other inspiring leadership stories in my book, Lead with a Story.]
Paul Smith is one of the world’s leading experts on business storytelling. He’s a keynote speaker, storytelling coach, and bestselling author of the books Lead with a Story and Parenting with a Story.
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