Chapter 1 The Problem With Fiefdoms
There is a
potentially infectious condition inside virtually all organizations that can cause more damage than economic downturns, management upheavals, or global business shifts. Until now it has had no name. But this condition has been an enormous problem in all facets of business. It has impacted some of the world’s leading companies, including Procter & Gamble, IBM, Coca-Cola, and Microsoft.
I call it the “fiefdom syndrome,” and it happens to all organizations, large and small, profit and nonprofit. It occurs at the individual level as well. And it can significantly decrease an individual’s, and a company’s, effectiveness. In extreme cases, it has shaken entire industries and taken down major corporations.
The problem begins when individuals, groups, or divisions–out of fear–seek to make themselves vital to their organizations and unconsciously or sometimes deliberately try to protect their turf or reshape their environment to gain as much control as possible over what goes on.
It is a natural human tendency, probably dating back to the origin of our species. But if this human tendency isn’t managed properly, the damage caused by these “fiefdoms” can begin to undermine an organization. Left untouched, fiefdoms can toll the death knell of what should have been a strong and vital organization.
The fiefdom syndrome stems from the inclination of managers and employees to become fixated on their own activities, their own careers, their own territory or turf to the detriment of those around them.
People who create fiefdoms can become dangerously insular, losing perspective on what is happening in the world outside their own control. They also lose their ability to act consistently on behalf of the greater good, or in a way that enhances the effectiveness of the larger organization. They often resist new situations and change.
People who create fiefdoms tend to hoard resources. They are determined to do things their own way, often duplicating or complicating what should be streamlined throughout the company, leading to runaway costs, increased bureaucracy, and slower response times. Organizations infected with fiefdoms tend to kill off or stifle individual creativity, leading to what I call the “freeze factor”: when organizations become frozen or stuck in place, letting competitors pass them by.
The term “fiefdom” first arose in the Middle Ages. Back in the time of William the Conqueror, before the establishment of a strong monarch or central government in Europe, feudal lords controlled most territories and governed the lives of the people in those territories.
Today, organizational fiefdoms exist in companies large and small. Geographical and product-based divisions can grow into impenetrable fiefdoms. But fiefdoms also emerge in nonprofit organizations, government agencies (which today are almost synonymous with the word “fiefdom”), and franchises. Fiefdoms can be found all the way to the CEO’s office. Some are even sanctioned by top management, such as when an executive has a pet project or division he or she protects from reality. Motivated by self-interest or greed, fiefdoms can wittingly or unwittingly cause an organization and its shareholders great harm.
Because the fiefdom syndrome has its origins in basic human nature, the challenges it poses are universal. The fiefdom syndrome is not tied to good or bad economic conditions or to particular managerial approaches. It can emerge in any environment. But the good news for organizations and individuals is that there are ways to deal with the fiefdom syndrome. And deal with them you must. For fiefdoms can:
-Lead to inefficiency and ineffectiveness within a company, causing it to lose market share and reduce its profitability
-Stifle creativity and innovation
-Result in staleness and insularity
-Hinder execution or follow-through, which can lead to organizational mediocrityFiefdoms at Microsoft and IBM
In the early ’90s, Microsoft’s sales subsidiaries in most major countries were feeling very confident in their abilities to run their businesses. They enjoyed impressive revenue and profits. When Microsoft started these subsidiaries in the 1980s, they were intentionally made independent to ensure they could grow fast, unencumbered by directives from Redmond, Washington, headquarters. It was the perfect environment for fiefdoms to take hold.
By the early 1990s, these subsidiaries were growing quickly. This led them to argue for their own resources in a variety of areas.
-Microsoft’s Italian subsidiary, which was hiring a fair number of new employees each year, argued (successfully) that they needed additional human resources (HR) personnel to emphasize quality training, as well as several HR generalists to help manage the growing staff.
-At Microsoft UK, the company launched several creative marketing efforts that later were utilized successfully by other countries. Before long, the subsidiary had hired a surprising number of additional marketing people.
-In Germany,Microsoft was especially strong in information technology. Microsoft Germany set up a small data center designed to show customers how they could successfully use Microsoft software. It seemed like a great idea at the time. Over time, however, this evolved to a major data center, complete with its own information systems; the subsidiary felt these systems were necessary to run their business in their market.
What was going on in these Microsoft subsidiaries was the basic human tendency to take on more and more resources. Those additional resources may look worthwhile at the time. But as the divisions grow, they consume more manpower and balloon costs. By the mid-1990s, Microsoft’s German subsidiary had a staff of more than seventy IT professionals. Their data center and systems were extremely independent, duplicating countless resources already available at headquarters in Redmond, Washington.
Some countries “staffed up” in the technical public relations arena, since a key marketing tool in the information technology sector was making sure that the trade press reported on the performance of Microsoft software versus competition and on publicizing successful case studies of companies benefiting from the use of Microsoft software. The subsidiaries wanted publicity in their countries to properly reflect Microsoft’s achievements and perspective. So they hired additional staff to make sure that happened.
The same kind of thing happened in finance as well. Subsidiaries came up with their own ways to analyze their business, methods that tended to emphasize how well they were doing. They institutionalized those new measures and used them to report on their business. Spain, for example, might decide they need to develop their own general ledger, or “chart of accounts,” one that was different from that used by Microsoft’s corporate headquarters, in order to properly reflect the nuances of their particular business.
This sort of thing was happening to one extent or another in all of Microsoft’s subsidiaries. In one country, the managers decided that costs related to marketing materials directed to the distribution channel were sales costs; in another country, they were classified as marketing costs. In one country, employees’ personal computers might be charged to the department in which the employee works, while in another country, they might charge all PCs to the information technology group. In some countries, revenue was certified and officially booked on a weekly basis and each month started with the closest Monday to the start of the month and ended with the closest Friday to the end of the month. In another country, revenue might be booked on a monthly basis that began with the first day of the month and ended with the last day of the month. Comparing the performances of the subsidiaries was like comparing apples and oranges. Getting all of this data sorted out at the end of a quarter to form uniformly defined corporate financial figures was a nightmare.
What was going on at Microsoft in the early to mid-1990s was not that different from the experiences of most other multinational corporations. General managers of company subsidiaries of many corporations perceive themselves as “kings” in their countries. They want to act and be treated totally independently; each GM wants to be perceived as the CEO or president of the company in his or her country. They often argue that this puts them on par with their peers in other industries, as well as with the heads of competing companies in their country. The top executive in each country frequently argues that each market is different and that the “uniqueness” of their country requires that it have its own financial measures and systems. From the country’s perspective, this is not only logical but also incredibly efficient. After all, they reason, executives in the United States could not possibly understand the economic cycles and local nuances of conducting business in France, Germany, or whatever the specific country might be.
This kind of thinking was going on in most of the Microsoft subsidiaries, and it was resulting in some major challenges for the company. At the end of the quarter, the subsidiaries would send in their spreadsheets and reports, often defining terms differently than Microsoft’s corporate finance department. You can imagine what a mess this created for the corporate finance folks at the end of the quarter. The number of frantic phone calls and e-mail messages flying back and forth between the subsidiaries and the corporate controller and his department was phenomenal.
I remember during the first week of January 1995 walking into the office of one of the financial analysts who was trying to pull together all the European results. I had been at Microsoft for only a few months, and as the new chief operating officer, I was making the rounds to see how the place operated. The analyst was on a speakerphone in the midst of a screaming match with the Italian subsidiary about why they seemed to change each quarter how they categorized marketing costs for shipping promotion materials and what they classified as cost of goods sold. He was trying to pinpoint exactly what definitions they used this period so that the right cost could be put in the right financial bucket.
After listening in on this conversation between the Italians and Microsoft’s corporate finance people, it was clear to me that there was no discipline in the system. The Italians weren’t trying to be difficult–they felt that they were running their business smartly. The problem was that the corporate folks didn’t have a focused, disciplined approach toward the basic elements of the company’s financial structure.
It would drive Bill Gates nuts that it took weeks for the company to figure out what the quarter was going to look like. Not that Bill was overly interested in the short-term financial results. In fact, he absolutely wasn’t; he was focused on designing and developing great software. But he was very
concerned that we didn’t have the information systems in place to make the financials fall into place in a timely manner. After all, we were the world’s foremost software company. He expected the company to have superb systems.
A couple of weeks after the end of the October—December 1994 quarter, I was meeting in my office with Mike Brown, Microsoft’s chief financial officer. Bill stuck his head in and said, “So where are the results? I know you must have the raw data by now. Come on, guys, do you want me to go in there and figure out how to piece it all together myself? Do you want me to write the code? I’ll do it over the weekend.”
This undisciplined behavior on the part of Microsoft’s overseas subsidiaries was not unique to Microsoft. I saw the same kind of behavior at Procter & Gamble, where I had worked for twenty-six years. The heads of the sales organizations in the various countries eventually positioned themselves as president of the company in their respective countries. And clearly a president needs his own finance, HR, and IT personnel. Before long, they were developing their own marketing efforts, often out of sync with the overall strategic and marketing direction of Procter & Gamble’s products and services.
Shortly after I became head of marketing at Procter & Gamble, I recall sitting in the office of the general manager of Procter & Gamble Germany and listening to him describe how Procter & Gamble Germany ranked with respect to other companies in Germany. He explained in great detail all of the various components of his “company.” I sat there thinking that this man feels that he’s a stand-alone company, one that requires the full resources of a company in all functional areas, when he is actually a sales manager for Procter & Gamble Germany.
Human nature is such that we are always trying to convince ourselves that we are more important than the rest of the group, company, or world believes we are. It is not so surprising that the head of Procter & Gamble in Germany, after years of successfully running that business, inflated his role in his own mind in terms of what he represented to the larger company.
These are examples of fiefdoms at their most grandiose. They are expensive in that they can result in enormous duplication of people and equipment. And they can slow down or paralyze the inner workings of the company. They create turf wars and needless bureaucracy. They rob the organization of profitability by adding untold dollars to a company’s operating costs.
Fiefdoms spring up like weeds in all organizations. In his best-selling book Who Says Elephants Can’t Dance?,
retired IBM CEO Lou Gerstner wrote that when he joined the company in 1993, “the geographical regions, for the most part, protected their turf and attempted to own everything that went on in their region. The technology divisions dealt with what they thought could be built, or what they wanted to build, with little concern about customer needs or priorities.”
During Gerstner’s first few months as CEO, he paid a visit to IBM’s European operations.Upon returning, he said: “I returned home with a healthy appreciation of what I had been warned to expect: powerful geographical fiefdoms with duplicate infrastructure in each country. Of the 90,000 employees in Europe/Middle East/Africa, 23,000 were in support functions.”
Those fiefdoms had become rigid, and their financial systems were a mess: “Other IBMers practically had to ask permission to enter the territory of a country manager. Each country had its own independent systems. In Europe alone, we had 142 different financial systems. If we had a financial issue that required the cooperation of several business units to resolve, we had no common way of talking about it because we were maintaining 266 different general ledger systems.”
At Microsoft, the true impact of the geographical fiefdoms that had grown up over the years and the financial challenges they posed to the company hit home when Microsoft had to embarrassingly make excuses to its customers when they asked to see how Microsoft managed its financial systems. Our customers were expecting to learn the best practices from a global leader in information technology. After all, they reasoned, a totally networked high-tech company with offices throughout the world must have the most sophisticated financial reporting system on the planet, right? Later in this book, I’ll describe what Microsoft did (in record time) to break up its fiefdoms and truly turn itself into an incredible showcase of financial-systems excellence. Today the company can close its books each quarter in a couple of days.
**********From the Hardcover edition.
Excerpted from The Fiefdom Syndrome by Robert Herbold. Copyright © 2004 by Robert Herbold. Excerpted by permission of Crown Business, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.