P&L is a common concept for managing and running a business. It’s the bottom line as they call it. If your profits exceed your losses, then you’re making a net return and that means you can stay in business. However, while this is a simple yet good tool for broadly measuring a business’s operations, it’s a horrible tool for managers understanding employees. And yet, this is what most managers worry about measuring. Instead, the real P&L measure that holds value is measuring productivity and learning.
I recently quit my job, and one of the fundamental reasons for leaving my position as Software Engineering and Design Manager was a conflict with my boss, the President, as he didn’t seem to view business and management as I did. As one of two owners, he viewed the business through the normal P&L lens. Nothing wrong with that, but he then applied pressure on the rest of the staff based on profit measurements and not productivity and quality (learning) measurements. Don’t misunderstand me, you should try and align your staff with how your business makes money, but as Product manager my ability to influence profits depended on my ability to increase productivity and quality of deliverables.
Misunderstanding this is a fundamental misunderstanding of how people operate, and that ultimately determines how a business functions. Every person strives to find flow in what they do. Most people find the most flow during work hours in contrast with leisure time which is sometimes more enjoyable and relaxing, but often lacking in flow, which is itself a sign of high enjoyment.
Finding flow is a balancing act that is different for every person and every team. Balancing the line between boredom and anxiety, or too little work with too much work, and not challenging enough with too much challenge is key to building a team that’s both productive and capable of streamlining the current business model. However, productivity is only worth so much. For example, China might produce a ton of widgets, appearing highly productive, but is the quality of each widget good enough. Americans might not produce as many widgets, but if you look at both quantity and quality, then you can get a true value of productivity and in turn Americans might be more productive.
After you measure productive, from a business perspective, cost then becomes a differentiating factor making up your standard P&L measurement. Of course, there a many factors beyond price that differentiate a business from its competitors, but often times, this seems to be where people stop, and that gets handed down from the top to senior, mid, and other levels of managers and employees.
To see the flaws in this mode of operating, consider my situation as the engineering manager. When managing you have to worry about capacity and capability of your team. Your team might only be capable of doing low level work, but they have the capacity to do a whole lot of it. Or, they might be capable of doing high level work, system architecture or feature design, but therefore have a lower capacity for that work (although, many times higher capable people also have high capacities for doing work). You need people at all levels to make a business function.
My team was mostly low capable staff, but they had decent capacity for work. My problem was that I lacked staff capable of doing high level work. So, I needed to incorporate a level of learning for the staff I had. Either through traditional learning like going to school, or I needed to figure out a way to do training through work, which usually means giving a person a task just beyond their threshold of knowledge or experience. Establishing this struggle generally encourages growth, and as the person internalized what they’ve learned, their quality generally increases with the challenges they overcome.
However, that’s only the case if that person has time to internalize what they’ve done. And this is where the traditional P&L causes conflict. Generally speaking, it assumes that more challenges overcome means more profits earned. In software development, losses are generally fixed in payroll, so increased quantity increases profits. However, there are losses involved in this process that tend to go unmeasured, or at least unmeasured as a real expense to the business. If quality is low, then work usually breaks and has to be reworked adding cost at a future date. The earlier you fix a problem, the less it’ll cost to fix, so high quality to start is a way of reducing future expenses.
You don’t improve quality without incorporating a training program for staff. If people aren’t learning and growing, then they aren’t going to produce quality outcomes or increase current levels of quality. In my job, the President was pushing the staff beyond capability and capacity, and because of this, quality was dropping and problems weren’t getting solved adequately. Additionally, there was not chance of learning from the challenges because there was no chance for internalization, or true learning and understanding. Staff wasn’t getting any more capable and yet demand was increasing.
To the owners, who only appeared to see profits and losses, they couldn’t reconcile my requests to alleviate problems with capacity and capability, which in turn is a function of productivity and learning. Clients were happy for the time being, but internally there was struggle that would only come out in time having a negative impact on clients. It’s a very serious challenge, and sometimes it’s OK to sacrifice a little of one for the other (keep clients happy to keep the cash coming in, but reducing your ability to respond and increasing maintenance costs internally). However, you have to have a long term plan of how to get out of that situation as any business should ultimate find a happy medium between challenges and ease. Flow is key in every business, and you destroy flow as my previous company did without an active, achievable plan for resolving the real underlying problems.
What does all of that mean? If you want to be a good manager, you need to worry about productivity and learning, or capability, capacity, and quality. Productivity is a measure of current capability and capacity, and learning is a method for increasing future capability and capacity (as well as establishing a environment for flow). And not to forget, quality hangs as an umbrella over this whole picture as a shield from future expenses, but also as a result from learning.