There is an enormous amount of information available within modern organisations. Performance is measured, activity is monitored, risks are recorded and progress is reported. Management teams receive regular updates, dashboards provide visibility across operations and boards are presented with increasingly detailed information about the organisations they oversee.
Yet there is a distinction between knowing what is happening within an organisation and understanding what is happening.
Knowing provides awareness of events, activities and outcomes. Understanding requires a deeper appreciation of the relationships, circumstances and underlying conditions that produce them. It involves recognising how different parts of an organisation interact, how decisions influence behaviour and how individual outcomes relate to the wider operating environment.
The comfort of information
Information provides a sense of visibility. A management report can show revenue, margins, costs, productivity, customer retention and operational performance. Each measure provides an indication of how a particular part of the organisation is performing.
These measures can become embedded in management routines. Targets are established, variances are investigated, performance is discussed and actions are agreed. The organisation develops a rhythm around the information it collects and the measures it uses.
There is considerable value in this discipline. However, the interpretation of information depends on the context surrounding it.
A decline in gross margin may appear to be a pricing issue. Further examination might reveal a change in product mix, increased distribution costs, purchasing inefficiencies or a shift in customer behaviour. Each possibility carries different implications and requires a different response.
The reported outcome is the starting point for understanding.
Understanding requires context
Organisations are interconnected systems. Decisions made in one area can produce consequences elsewhere, sometimes in ways that are difficult to anticipate.
A purchasing decision can influence inventory levels, working capital, production scheduling and customer service. A change to an organisational structure can alter decision-making authority, communication routes and accountability. The consequences can extend well beyond the original decision.
Understanding requires an appreciation of these relationships.
It also requires an appreciation of time. Many organisational outcomes are the consequence of decisions made months or years earlier. Recruitment decisions, investment choices, changes to processes and commercial agreements can continue to influence performance long after the original decision has been made.
A management report generally presents a view of a particular period. Understanding requires consideration of the events, decisions and conditions that have shaped that period.
This is where leadership judgement becomes particularly important. Leaders need to recognise patterns, identify relationships and explore the significance of emerging information. An individual issue may be isolated, or it may be symptomatic of something developing across the wider organisation.
When the numbers become the explanation
There is a particular risk when measures become accepted explanations in their own right.
A business might report that employee turnover has increased by 15%. The figure establishes the scale of the movement and provides a basis for comparison. The underlying causes might include management behaviour, changes in working conditions, limited development opportunities, organisational uncertainty or increasing pressure within particular functions.
Each carries different implications.
Similarly, a business might report that customer satisfaction has improved. Understanding the movement requires further examination. Has the customer experience improved across the entire customer base? Have service expectations changed? Is the improvement sustainable?
Measures provide signals. Their significance emerges through interpretation.
Targets influence priorities, priorities influence behaviour and behaviour influences the information subsequently reported. Management attention can become concentrated around the indicators that determine performance assessments. The questions that sit outside those measures can gradually receive less attention.
The boardroom distinction
This has important implications for governance.
Boards depend on information provided by management. Financial reports, operational updates, risk registers, strategic plans and performance dashboards form the basis of much of their oversight.
The quality of that information matters enormously. Its interpretation matters equally.
A board can receive a comprehensive set of papers, review every reported measure and satisfy itself that appropriate discussions have taken place. The deeper question is whether directors have developed a sufficient understanding of the organisation to exercise meaningful judgement.
- What is driving the performance being reported?
- Which assumptions underpin the current strategy?
- Where are the dependencies between different parts of the business?
- What is changing within the organisation that might influence future performance?
These questions encourage directors to consider the organisation as a whole. They also help establish whether the information being presented is sufficient to support the decisions being made.
Management must develop the understanding required to lead the organisation effectively and communicate that understanding clearly. Directors must develop sufficient knowledge of the business to challenge, interpret and exercise independent judgement.
The responsibility of leadership
Developing organisational understanding takes time. It requires leaders to spend time with people, examine processes, understand customers, explore commercial relationships and appreciate the practical realities of how work is performed.
It also requires an interest in the things that are difficult to measure.
The experience of employees, the quality of management relationships, the effectiveness of communication and the informal ways in which decisions are made can all influence organisational performance. These factors may leave traces in management information, although their full significance often requires direct observation and conversation.
Leaders need to develop an understanding that extends beyond the formal reporting structure.
I think this is one of the most important responsibilities of leadership. Decisions are made within complex environments, and their consequences extend beyond the immediate issue being considered. The quality of those decisions is influenced by how well the people making them understand the organisation, its capabilities, its limitations and the environment in which it operates.
From information to understanding
Organisations will continue to invest in systems that provide greater visibility, more detailed reporting and increasingly sophisticated analysis. Technology will expand the volume of information available and the speed at which it can be processed.
The challenge for leadership will increasingly concern how that information is interpreted and applied.
A dashboard can tell us where performance has moved. A report can explain what has changed. Analysis can identify relationships and potential causes. Understanding brings these elements together within the context of the organisation and the decisions it needs to make.
I often think that one of the most useful questions a leader can ask when presented with information is:
What does this actually tell us about the organisation?
It is a deceptively simple question. It encourages examination beyond the immediate result and creates an opportunity to explore the circumstances that sit behind it.
Ultimately, organisations are shaped by the quality of the decisions made within them. Those decisions are shaped by the understanding of the people responsible for making them.
Knowing gives us information about the organisation. Understanding gives us the ability to interpret that information, recognise its significance and make better judgements about what comes next.
Leave a Reply