Practice Management By Objective (MBO)

Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources.

It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback the process to reach objectives.

MBO managers focus on the result not the activity. They delegate tasks by "negotiating a contract of goals" with their subordinates without dictating a detailed roadmap for implementation. Management by Objectives (MBO) is about setting yourself objectives and then breaking these down into more specific goals or key results and measurable indicators.

It is called as Key Result Areas (KRAs) or Key Performance Indicators (KPIs) by different companies.

Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In the 90s, Peter Drucker was frustrated when he said: "It's just another tool. It is not the great cure for management inefficiency... Management by Objectives works if you know the objective, 90% of the time you don't."

I can sympathize with Drucker. How true he was in 90's.

In India, many Boards of Directors set the right goals for the enterprise and for the top management. But, it is NOT broken into right subordinate objectives for different functional heads and further down to the last employee in the hierarchy. Briefly, there is no alignment of goals achieved. This is because of lack of focus by CEO/ MD on such an important activity. It is generally delegated to HR department; they lack full functional knowledge to create right KRAs for each empowering employees and implement MBO in full.

MBO remains on paper and it is done for the heck of it just before the rewards to be decided as an annual routine. Most of the time, promotions and increments are drawn out first, based on whims and fancies of the supervisors and then performance appraisals are written to suit. Worst, KRAs are written just before the appraisal and when the timeline for performance is over.

Will efficiency improve? Can you retain best employees? Will company achieve the goal?

Practice MBO in letter and spirit; train all mangers on MBO. Turn organization ‘Goal oriented’.

Have The Right HR

Right Human Relations (HR) department will get the right people. The right people can make the right company. After all, what could be more important than people in the service industry and especially in the financial service industry?

In finance business, any wrong decision could put the company 3 years backwards, because the average term of any loan is about three years. To clean up any bad loan will take an average term of 5 years, given more attention to the problems consistently and continuously.

Bad decision is possible by even good people; wrong people can only take wrong decisions.

There was a company which wanted to get into truck finance business after achieving a leadership position in car finance market ( it is different story that the company had lent at an interest rate lower than its weighted cost of funds, to achieve the coveted position). HR was asked to hire people from the leader in truck finance (located in South India). HR was forced to quicken the process. They finally managed to get about 4 manager type people. They brought another set of people to which HR gave a free hand. All are from the same company. The company had to face huge losses from this portfolio because of bad policy and fraudulent transactions; culture of previous company may have to be probably blamed.

Moral is that the company can force HR to recruit quickly, but not insist on recruiting from one company. People who leave a good company are the ones who could not match the speed of the company or are misfit to its culture. HR needs to be careful when a group of people from a single company approach for employment.

HR people need to be highly knowledgeable about the business of the company. At least, they must have an attitude to learn quickly. I had a business relationship with a product head (from IIM) in a finance company and I was surprised to see him as an HR head a few years later in another finance company which had a Singapore partner in the recent past. I was too happy to find a line manager in HR. I have heard that he is doing a good job in terms of recruiting the right people and retaining good talent. Hope the company does better in near future.

HR people really set the culture for the company by doing the right kind of induction. Many a time, the very people were found to be with questionable integrity. They must not only be good but appear to be good.

Selection only based on telephone interview may have to stop; detailed personal interviews will only reveal the level of knowledge, skills and more importantly attitude. Additionally, more specialized, internet based,  professional skill and attitude tests may be conducted for mangers, to ensure the right fit.

My experience with another HR person is bothering; he has been honest with very high integrity. Over the years, I have seen this person turning flexible and today he is at ease with people with questionable integrity.

"Who is perfect?”, he asks.

If the current corporate culture can spoil such a regid and perfect person in about a decade, I have a reason to believe strongly that the culture and ethos in corporate world is getting worse at increasing rate.

Who will stem the rot but HR?

Mother Of All Losses

Losses contribute significantly to the closure of many organizations, especially banks, finance companies (NBFCs in India).

Losses are because of:

1.      Bad credit;

2.      Lower prices;

3.      Manipulation of accounts for varied reasons, including tax;

4.      Inefficient technology, wrong policies, bad processes; and

5.      Frauds.

Frauds are mother of all losses in any organization more so in banks and finance companies. Frauds emerge from external sources and in more cases with help of internal sources.

Internal source, we mean here, are employees. Human Resource (HR) contributes the most by recruiting and continuing with fraudulent employees.

Good, efficient and effective employees are rare; it applies to HR people as well. So, bad HR recruits bad employees. Even Good HR do compromise on reference check, etc., so necessary for employees in financial service companies, because of shortage of people. They come under pressure often, from the top management. Aren’t they expected to be professional? Is it fraud?

Interviewers are manipulated easily by these frauds; they are obviously smarter. It is easier with phone or web com interviews. There was a senior guy who can speak freely, only under influence of alcohol. He was recruited for #2 position of the company by a MNC, on an overseas call; he even hidden his heart ailment by resorting to a medical test in a hospital convenient to him. He went on to become the managing director, by default. He was dismissed unceremoniously when they found that he not only manipulated his resume and credentials, but also policies, processes and the worst, the people. Is it fraud?

The wrong policy and inefficient processes also contribute significantly and go to help frauds, leading to losses. Policies are set by the top management. They take policies which are at times are  high risk, just to achieve, in short term, some advantages over competitors in terms of TAT  = turn-around-time. Very rarely, even top management could orient policies just to facilitate achieving his main KRA/ KPI. Policy and process are commonly compromised when the top man is a sales guy. You cannot blame them, because a top man of any listed company in current times lives by quarters; they are under pressure to announce growth serially, QoQ and YoY.  Is it a fraud?

Major facilitator for fraud perpetrators are the decentralized credit underwriting, decentralized accounting and decentralized collateral storage. Common thread here is ‘decentralization’ and half the frauds can be stopped by having a centralized control on credit underwriting, customer accounts and collateral storage. With banks’ current service offerings and available technology on high speed Internet, centralization is cheap, efficient and effective. Branches and different regions cry foul for TAT (read ‘power’) and data. All are possible with advent of high technology, today. Inaccurate customer accounts are what all it starts with, in a decentralized environment. Is it fraud?

Credit underwriting is compromised quickly, when there is a pressure for numbers as month gets close. Many losses occur out of these end-of-month syndrome accounts. I knew a branch manager in Madurai, who would approve every file on the last days of any month while those were rejected by him at the beginning of the month. Fraudulent subordinates and the manager knew this too well, but this happened regularly every month till the company lasted. Is it a fraud?

Losses out of internal frauds are about 1% of assets under finance and run into a few thousand crores for India. Unfortunately, a fraction of it only goes to these internal frauds; remaining goes to facilitators.

What are they worth in terms of sales?