Where Does Value Come From?

In previous posts I have explained the importance of metrics for any company. One thing that is clear from how we generate and implement those metrics throughout an organization is where the value is really generated. You might be surprised at the answer!

Brief refresher – we work with the leadership of an organization to help them create a long-term vision of where they want to go, turn that vision into metrics, and translate and deploy those metrics throughout the organization. We call this a “decision support system,” since it supports decision-making that is aligned with the direction of the company at every management level.

But there is an interesting revelation that happens when this is done. The highest levels of the organization will be measuring the value that is produced, and will be holding themselves responsible for those metrics, but they are not the ones that directly produce the value of the organization.

If you follow the metrics from the top of the organization on down, you find where the value is actually created is right at the front-line worker, or individual contributor (IC). It is the IC who interacts with the customer to provide a service, or who runs the machine to produce the product that you get paid for. They are the ones who create the wealth generated by the organization. Every level of management, from their direct supervisors on up, are there to provide a service to the ICs – they are supporting them as they make the money that pays for everyone else.

This is dramatic empirical support for the so-called “inverted pyramid” model of management. In contrast, a lot of companies (and a lot of managers) follow the “hierarchy of ego.”

It is a tempting trap. This trap is something like this. Your ego whispers to your brain, “If I am really good at what I do, I get promoted over others. I get paid more. I get the keys to the executive washroom and a corner office. I talk every day to other important people, maybe even powerful people. I think that I am more important than those that I manage. I even talk about those ‘higher’ in the organization than me, and someday maybe I get promoted to the ‘top’ of the organization as a CEO.” Notice how our very language conspires to lure us into this trap.

Of course, if you take a moment to think about it, the reality is that every level above the IC exists to support ICs in their work to create the real value that is exchanged for the customers’ money. Direct supervisors should be seeking to leverage the knowledge and experience of the front line, as well as their own abilities, to continuously improve how they do their work. Middle managers look across their front-line managers’ areas for ways in which they can support these supervisors in doing that, and for systemic issues that the supervisors might not be able to see. All the way up to the CEO, whose job it is to look out to the future to do what is needed today to make sure the workers have the guidance, processes, and systems that they will need tomorrow.

Creating top-level metrics and cascading them down into the organization (see how the language betrays me?) by nature demonstrates that managers have metrics related to organization and support, whereas the front-line workers, (the IC’s), have metrics related to the creation of value. This is the “inverted pyramid” model of management.

By flipping the pyramid, we see the reality – every level of management supports the next level, and every level of management supports the individual contributors.

Now this is not to say that what managers do isn’t valuable, it certainly is, but it isn’t anything that you exchange for money from your customers. Management is overhead. The value of a manager is directly proportional to how well they support the ICs at the top of the pyramid to increase the rate of value-added per each IC. Managers who take the approach of “the beatings will continue until morale improves” or who make decisions based on their gut and observation instead of their brain and data, squander the very resource that makes the organization wealthy.

Now, there is a reason for hierarchy. I don’t suggest that front-line workers direct the company. Their job is to create value, but they don’t have the time, information, or possibly the skills or training to set the direction of the company. The whole point of the hierarchy is to free some people up from the day-to-day value creation in order to look out a little farther into the future, or a little further across the company for what needs to be done to support value creation now and into the future.

So, what does management do to create this value? I am going to give you a sneak preview of a table from my new book. Managers lead and managers manage (the latter often being neglected in training). Leading is taking the organization where it wouldn’t get by just doing its day-to-day work alone. Managing is supporting the continuous improvement of how the individual contributors can create value.

The point of all of this is not to denigrate management, but to place it in its proper, (and very important), role in a company. Management is a support function and doesn’t by itself create wealth. Good managers think of themselves as servants of the real wealth creators and constantly seek ways they can support them in doing so. As much as management might exhort employees to support the customer is exactly the same level they need to exhort themselves to support their employees.

A manager who does not do this, who treats employees as inferior, as replaceable cogs in the machine, is throwing bags of money out of the window. And should be treated as such.