Leaders are rewarded for pushing ahead, executing and getting results. That linear drive is valuable, but it is also how well-intentioned decisions go wrong. These are the tools I have relied on for years to test a proposed solution before it reaches the people who have to live with it, whether I am running a company or deciding whether to buy one.
A case study: the incentive plan that backfired
Picture a familiar scenario. A new leadership team is asked to revitalize sales at a division hit hard by a difficult economy. Most of the sales staff are not qualifying for commission, and morale is low. The team says the plan is too complex, commissions are capped, and too few products count toward them.
Leadership responds quickly. The new plan pays a percentage of revenue on new sales across many products. It is simpler, more transparent and has higher caps. But because budgets are tight, leadership also raises the threshold to qualify. Employees can earn more, but they must sell more first. Management announces the plan at an all-staff meeting, expecting applause, and congratulates itself on a job well done.
The plan lands badly. Salespeople are more discouraged and see the new leaders as out of touch. Leadership starts to wonder whether it has the right people. The employees conclude management has no idea what it is doing, and ivory-tower syndrome is reinforced. Management was responsive, quick and well-intentioned. So what went wrong?
Inversion
Linear thinking only gets you so far. Leadership asked, “What can we do to make employees happy?” Inversion, a habit Charlie Munger famously championed, flips the question: “What could we do to upset our employees?” Asked honestly, that question would have produced a list like this:
- Raise quotas in the middle of a difficult market.
- Treat the incentive plan in isolation instead of as part of a complete solution grounded in the competitive landscape.
- Offer no added promotions or marketing support to help people meet the higher bar.
- Use the new transparency to show people a qualifying threshold far above their base salary, without thinking about how it will be received.
- Pay nothing at all until the threshold is met, so there is no reward for a closed deal until late in the period.
- Announce the plan with slides before any written plan exists for people to review.
- Take only clarifying questions, with no way to raise concerns or contribute ideas.
- Benchmark against competitors’ plans without accounting for their market position, marketing support or value proposition.
Run as a leadership brainstorm with real employee engagement, an exercise like this is revealing. Its power is that it roots out false assumptions. Everything looks different from another person’s perspective, and those perspectives carry assumptions of their own. Had this team used inversion, it could have avoided most of its missteps and been ready for the consequences it didn’t foresee.
Short to ground
I learned this one from Bill Swanson, then CEO of Raytheon, when I spent half a day with him during my MBA. From his engineering background, he thought of circuits, where the quickest path to ground tests the circuit. When an organization spends more effort on the bureaucracy of solving a problem than on the solution itself, short it to ground: find the quickest path from problem to solution and drop the steps that add no value.
Substitution: the highest and best use of resources
In large companies I have often heard “I think there’s value in this” used to justify a process or project. If the test of an action is merely whether it has some value, rather than whether it is the highest and best use of resources, expect a good dose of mediocrity. To find the best use, consider the substitutes for the proposed action.
I have used this personally to evaluate buying a business. If I am willing to pay a given price for a company, I should also ask whether I could build the same business, with less risk, for the same money. The answer works as a go/no-go test and as a gauge of whether the asking price deserves a premium or a discount.
Probability, including the probability of you
Leaders often decide with incomplete information. That resembles a card game: you don’t know the dealer’s cards, but by consistently working the odds you gain an advantage over time, while those who wing it don’t. Go further and learn how small risks compound when they are combined. Adding redundancy does not always mean more safety; sometimes it means more chances for failure.
Then apply logic to the odds. A broad statistic may not describe your situation. A one-in-a-million risk is little comfort if you have specific factors that change the odds for you. Before relying on an average, ask whether your circumstances are average.
Perspectives
To avoid surprises, step back and run a proposed solution past every stakeholder: customers, investors, purchasing, sales, finance and the rest. Say management wants a new point-of-sale system to speed up orders and collect cash sooner. Walk it through each perspective and you might find that faster billing pushes customers to buy on terms, which throws off finance’s projections and receivables staffing, which leads management to count on capital for expansion that investors expected to be held in reserve. Considering each perspective in advance lets the rollout happen with fewer unpleasant surprises.
What’s missing?
It is easy to focus on what is in front of you and rare to notice what isn’t. The next time someone presents to you, especially someone referred by a friend, when your guard may be down, ask yourself: What is the source of the data? Have the assumptions been validated, and how? What are the presenter’s credentials and motivations? Why haven’t I heard of this before? This is a private mental discipline, not a reason to confront anyone or make them lose face. It sounds obvious, but applying it deliberately is harder than it looks, and history’s great frauds show how much it matters.
Why this matters in a transaction
Buying or selling a company is a series of decisions under uncertainty, where false assumptions are expensive. I use these tools in diligence, in building a value-creation plan and in readiness work with owners, alongside checklists and decision matrices. They take little time and catch mistakes before they become problems.
See how these tools fit into Oak Stream’s consulting and transaction-readiness work, or read Strategy Is Resource Allocation.
