Tim McCarthy and the Business of Good

Newsletter: Balancing the Three-legged Stool

Jul 15, 2010 7:32:00 AM / by Tim McCarthy

All great businesses and organizations are built on three legs which must be equally balanced 1. decision rights, 2. incentives and 3. measurements. [more]

In MBA school a few years ago, the most valuable lesson I learned was about the three legged stool.

I still cannot give an academic explanation of it. I would leave that to Fisher (Ohio State) Business College Professor Jay Dial, one of my favorites, who taught the concept to us in our Organizational Behavior class.

It seems every firm, whether they know it or not, stands on three legs – Decision Rights, Incentives and Measurements. The stool analogy is used because any leg that is too short or too long will cause an imbalance. Here’s what each leg is about:

Decision Rights – Who is entitled to make what decisions?

This first issue resonated with me easily because I spent most of my career serving chain restaurants where the key to the firm’s success is in the hands of the lowest paid employees. That is, the person serving our customers directly: waiting the table or running the register or drive through window.

Allocating decision rights correctly, according to Dial, in any organization requires consideration of who can make the best decision. In the moment of customer interaction, obviously the person with the most information is the front line worker or the store manager. So the best decision in specific cases will be made by one of them.

On the other hand, if the decision regards policy on customer interaction, the front line person has very little information regarding costs, average transactions, profit drivers and customer satisfaction levels from all restaurants in the chain. Shared learning and planning is why management exists.

So, a chain properly in balance on decision rights makes customer policy decisions at a chain-wide level while leaving room for store personnel to make key “in the moment” customer service decisions.

Incentives – What does a decision maker get for making a good decision?

When the labor market was uneducated and the competition for good people was less formidable, the easy answer to this question was “they get to keep their job.” I actually remember a boss who told me that more than once.

But now we must consider much more and it’s not always monetary. One person’s desire to make a quick buck is offset by another person’s view of their long term career track. And today I’m finding many young people’s incentive is just happiness in the daily task, or literally wanting to go to work.

But most importantly, incentives must be designed in a way that is transparent to the decision maker. For example, in my company, our incentives were company-wide but each person – from the printer of the coupons to the computer people to the CEO – knew how their specific decisions could make them, and us, money.

Measurement – How do you know if the person made the right decision?

While third in chronological order, this may be the trickiest leg of the stool.

But good organizations find the means to measure the few things that count.

In 2002, I decided I’d like to exit the business before the end of the decade.

To prepare for this plan, I had consultants value the business with suggestions of what would make it more valuable. They came up with five key criteria that would enhance our value.

Three were financial, as you might expect: top line revenue, direct cost and labor. The other two were related to our having (at the time) too much client concentration. That is, 65% of our business was coming from 3 clients and 90% of our total business was coming from restaurant chains. So we developed measurements that were easy to read monthly, quarterly and annually that tied each person’s compensation to progress on each of the five criteria.

Less than five years after lining up the incentives and measurements of our stool, we sold the business at a very high valuation. But how did we fix the allocation of decision rights? That actually started happening a little earlier.

From 1997 to 2000, our company sales had flattened and we were not making profit. One night, when I was with a family friend who’d grown a huge business, I told him my problem and asked if I could present him with an organization and business plan to see if he could decipher what was wrong.

He said, “I’ll save you the presentation, Timmy, I can tell you what’s wrong right now.”

Shocked, I said, “How could you do that? You don’t even know what business I’m in.”

He said, “Yes, but I’ve been through the same problem several times as my companies grew.”

I said, “OK, tell me my problem.”

He said, “You haven’t learned how to get out of your own way.”

He was dead right. So I went back to my management team, told them the story and asked them to help me figure out where I should be included in decisions and where I should let go. It took a few years but eventually we became high functioning as to who had the right to make what decisions.

So why does this apply to your non-profit or your for-profit organization? Ask yourself the three questions while thinking of your organization:

Who makes what decisions?

What motivates them to make the right decision?

How do you know they have made the right decision?

As you come up with answers, it’s best to put them on a chart. It will be fascinating as well as instructive to see how the legs of your stool measure. Some will be too long and some too short. Seeing that, you can then work on evening them out.

Tags: Newsletter, Organizational Design, Decision making, Incentives, Measurement

Tim McCarthy

Written by Tim McCarthy

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