Is your company paying a “dysfunction tax”?

The business world is masterful in the art of financial analysis — slicing and dicing balance sheets, stock performance charts, and profit-and-loss statements into dozens of arcane metrics (Omega ratio, anyone?) to assess a company’s performance, unlock hidden potential, and spot pockets of strengths and weaknesses.

I’d like to propose another metric: a company’s dysfunction tax.

There’s no need to reach for your calculator just yet, as the basic idea is pretty simple: For every dollar of revenue that your company brings in, figure out how many cents are being frittered away to cover the cost of dysfunction — the self-inflicted wounds of bad strategy, poor execution, and ineffective communication, among other things, within your organization. The hard part, of course, is knowing how to value the impact.

To set a baseline, let’s assume your company is paying some level of dysfunction tax, given that anytime you bring a bunch of people together to accomplish a goal, there is going to be dysfunction, because human beings are, well, complicated. The only question then is: How big is the dysfunction tax? How much time and energy are spent on internal matters that have little to do with creating value for customers and clients?

First, we need to identify the biggest drivers of a dysfunction tax. What are the activities that create the appearance of busy-ness but in fact are not producing anything valuable or concrete?

That list could be long, of course, but here are three big ones.

1. Lack of clarity around strategy. This is a common trap for leaders: The strategy may be clear in their own head, but it is murky to everyone else in the company. Without a shared understanding of the goal, employees will create their own narratives about how their individual efforts are helping the company, which leads to siloed behavior. For example, a CEO may launch a digital transformation project but fail to provide enough specificity on the questions of what, why, and how. After six months, each department may have decided for itself what the transformation should look like, leading to wasted time and resources.

“The CEO might be passionate about some idea or vision, but they’re actually not very clear on the destination,” says Chris Brody, president of the investment management firm Vantage Partners, who has deep experience with boards at companies of all sizes. “And if they can’t describe it to anybody else, they are going to dissipate a lot of valuable resources getting there. I often see too much passion for an amorphous outcome, which confuses people.”

2. Life in the matrix. Many companies have attempted to restructure themselves, looking to become more agile and to ensure that their work reflects the input of cross-functional disciplines, rather than moving through the system as if it were on an assembly line. That makes sense in theory, but these frameworks often add complexity rather than reduce it. The divisional silos still exist, and now have a latticework of reporting lines overlaid on top. The result — unclear reporting lines, endless meetings, and unclear decision rights — can slow companies down.

A simple test for organizations is to conduct a kind of “meeting audit”: Did the number of meetings rise markedly after the restructuring, undermining the promise of a more structured approach and thereby raising the dysfunction tax?

3. The wrong people in the wrong chairs. In popular culture, businesspeople are often portrayed as heartless, Machiavellian characters. In fact, many (most?) of them are just as softhearted and conflict-averse as the broader population. As a result, underperformers are kept around too long in senior teams, or they are put in jobs that are misaligned with their skill set. It’s the Peter Principle in action.

How much time and energy are spent on internal matters that have little to do with creating value for customers and clients?

“The problem I generally see is that the CEO is hanging on to people too long, or they don’t have the right people in the right chairs,” said Greg Brenneman, chairman of CCMP Capital, a private equity firm. “People are very reluctant to change. The really good CEOs and management teams I’ve seen are not all that reluctant to morph themselves over time to do that. Even in really good companies, you’ll find you only have 75 percent of the right people. In really bad ones, it’s probably 25 percent.”

Yes, other dysfunctions could be added to the list. Strategy+business recently wrote about how the frozen middle tier of management can make introducing new strategies harder. (The layer at more senior levels is also frozen more often than you might think.) If leaders are not walking the talk on their company’s stated values, it can focus energy inward, creating strong headwinds of internal politics as one person’s or team’s interpretation of what the boss meant may differ from another’s. Employees on the front lines may also keep bad news to themselves, not wanting to tell their manager because they fear a shoot-the-messenger response.

All of these forces can add up to a considerable tax on companies, one that is entirely self-imposed. It’s a problem that’s never considered in any of the financial reviews, or else it’s dismissed as “just the way things are done here.” So one way to sharpen attention on why companies are dysfunctional could be to create a financial metric to measure the cost of this tax.

With all the tremendous financial expertise in the business world for devising metrics, I’m betting that someone could come up with a workable formula for calculating a company’s dysfunction tax. Businesses would certainly focus attention on the underlying problems if there were dollar signs attached to them. So, for all the talented analysts and academics out there, amateurs and pros, alike: Any suggestions?

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