Why_Best_Practices_Often_Fall_Short.pdf

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O R G A N I Z A T I O N A L B E H A V I O R

Why Best Practices
Often Fall Short
For many leaders, the allure of best practices is strong and their expectations
for results are unrealistic.
BY JÉRÔME BARTHÉLEMY

EXECUTIVES TEND TO take the value of best

practices as a given. We have an abiding

faith in the idea that the most direct route

to improved performance is to study what

successful companies do and copy them.

Best practices certainly do have their

benefits. In Bordeaux, France, for instance,

many wineries now follow practices recom-

mended to them by winemaking consultants,

such as micro-oxygenation, a technique that

involves injecting controlled doses of oxygen

into wines during fermentation. Micro-

oxygenation softens tannins, which mini-

mizes the need for long-term storage and

makes wines easier to drink young. For

most vintners, this leads to an improve-

ment in quality. But there is a downside:

Micro-oxygenation also makes wines taste

more similar, and thereby reduces brand

distinction and competitive advantage.

This phenomenon isn’t peculiar to

winemaking. After following the outsourc-

ing, franchising, and w ine industries

closely for the past 15 years, I’ve come to

the conclusion that adopting a best prac-

tice is a great way to achieve average results.

Not only that: Adopting a best practice

that is wrong for your company can de-

stroy value.

What’s Really the Best?
Managers often assume that everything a

successful company does is a best practice.

But many such practices aren’t actually

critical to the success of the organizations

that embrace them. For instance, a best-

selling author once claimed that creative

companies such as Pixar Animation Studios

all have centralized restrooms. He argued

that locating the restrooms in the middle

of a company’s offices fosters creativity be-

cause it leads to chance encounters among

employees from different departments who

might not otherwise mix with one another.

In reality, the practices that explain a com-

pany’s success are rarely that obvious. Nor

does correlation prove causation: Many an-

alysts believe that Pixar’s creativity owes

more to its nurturing peer culture, which

allows employees to get candid feedback on

their unfinished work, than to the location

of its restrooms.

Consider also a very different example:

In corporate finance, the use of stock op-

tions is often viewed as a best practice.

CEOs tend to be more risk-averse than

shareholders would like them to be, so the

boards of many organizations now offer

top executives a portion of their compen-

sation in the form of stock options. This

encourages leaders to take greater risks on

behalf of shareholders because they stand

to gain from increases in share price. By

being bolder, the theory goes, CEOs make

more money for the company (and its

shareholders). Research confirms that the

more CEOs are paid in stock options, the

more aggressively they invest in research

and development (R&D), capital expendi-

tures, and acquisitions. Bigger bets, in

turn, lead to bigger gains — but also bigger

losses. Risky practices that lead to extreme

performance — either big wins or big

losses — cannot really be considered best

practices at all. On the contrary, best prac-

tices are tried and tested practices that

consistently enhance performance.

Therefore, on a risk-adjusted basis,

copying practices that are just OK may be

a better bet than copying practices that

ostensibly promise a huge upside.

For instance, a team of researchers ex-

amined the impact that three standard

management practices — targets, incentives,

and monitoring — have on performance.

Using data on thousands of organizations

across several countries, they found that

implementing these standard manage-

ment techniques enhances productivity,

86 MIT SLOAN MANAGEMENT REVIEW SPRING 2018 SLOANREVIEW.MIT.EDU

O R G A N I Z A T I O N A L B E H A V I O R

profitability, and sales growth. It also

decreases the likelihood of bankruptcy.

Setting targets, rewarding employees

based on performance, and monitoring

what goes on within your company are

not particularly glamorous activities, but

they are generally more effective than

many best practices that are more highly

touted.

To reduce the risk of adopting the

wrong best practice, begin by considering

how similar your organization is to the

businesses that follow the practice. For

instance, because McDonald’s Corp. is

famous for using a policy of granting

geographically nonexclusive licenses to

franchisees, many new franchisers have

adopted this practice. However, research

has shown that granting nonexclusive li-

censes increases the likelihood that a new

franchiser will fail. Prospective franchi-

sees fear that the value of their license will

suffer if another unit of the same brand

opens nearby, and they look skeptically at

licenses that don’t have territorial exclu-

siv ity. Their objection is not a major

concern for established franchisers such

as McDonald’s that have enough resources

to open and operate their own outlets, but

new franchisers need franchisees in

to grow. Indeed, McDonald’s itself fol-

lowed an exclusivity policy in its early

years when it was still growing.

Most best practices are similarly situa-

tional. Should you outsource a process or

perform it in-house? My research suggests

that outsourcing is a best practice when

the activity is surrounded by a lot of un-

certainty, but not when it offers the potential

for competitive advantage and the sup-

plier is likely to behave opportunistically.

For instance, Apple Inc. outsources manu-

facturing because production does not

generate a competitive advantage in com-

puters and consumer electronics. On the

other hand, design is crucial to Apple’s

success, so the company performs that

activity in-house.

Hidden Costs
Finally, it’s important to understand the

hidden costs of a best practice. The imple-

mentation of a new practice often depresses

short-term performance because it disrupts

the company’s existing processes. The more

the new practice differs from the old one,

the greater the implementation cost.

One study of large U.S. companies ex-

amined the relationship between financial

performance and the adoption of eight IT

best practices (use of application service

providers, implementation of business pro-

cess reengineering projects, participation

in e-commerce, and use of customer rela-

tionship management, data warehouse,

enterprise resource planning, groupware,

or knowledge management systems) and

found that the implementation of IT best

practices leads to an initial performance

dip. According to the study, performance

starts to improve only after the third year of

adoption. Clearly, the stakes for implement-

ing a new practice — however “best” it may

appear — can be quite high.

Sometimes, in fact, adoption costs are so

high that switching to a likely better practice

can be worse than staying the course. For

instance, research on technology startups in

Silicon Valley found that of the five most

popular management models, the one that

is far and away the best is the so-called com-

mitment model, which focuses on hiring

employees based on cultural fit and devel-

oping strong emotional bonds with those

employees. Startups using the commitment

model are less likely to fail and more likely

to go public than startups that follow other

management models. However, the same

study found that switching management

models after launch triples the likelihood of

failure, even when the change is to the ad-

mittedly superior commitment model.

Best practices also often come with hid-

den long-term costs. In 2001, Jim McNerney

was appointed CEO of 3M Co. Within three

years, he converted the entire company to

Six Sigma, a system of best practices whose

goal is to boost operational quality and re-

duce errors. Six Sigma was developed at

Motorola Inc., and one of the most high-

profile companies to embrace its principles

was General Electric Co., McNerney’s

previous employer. Initially, Six Sigma gen-

erated substantial cost savings for 3M. But

there was a downside: By mid-2005, when

McNerney left 3M to become CEO of

Boeing Co., Six Sigma had contributed to

compromising 3M’s ability to innovate,

which had always been the company’s most

important competitive advantage. To limit

the damage, George Buckley, 3M’s next

CEO, largely discontinued the use of Six

Sigma in research and development (R&D).

As he explained: “You can’t put a Six Sigma

process into [R&D] and say, well, I’m get-

ting behind on invention, so I’m going to

schedule myself for three good ideas on

Wednesday and two on Friday. That’s not

how creativity works.”

The hidden costs of a new practice are

particularly large when its implementation

alters a company’s core pursuit (such as

3M’s focus on innovation). If your organiza-

tion is doing well, think twice about

adopting new practices. If you’re in trouble,

however, you may want to adopt a new ap-

proach temporarily. For instance, Six Sigma

was arguably the right prescription for 3M

in the short run, despite the nasty side ef-

fects. When McNerney first arrived, 3M’s

profitability was low and its stock price was

lagging. Thanks to Six Sigma, 3M’s effi-

ciency improved, and by 2005, it was in a

better position to focus on innovation again.

Finally, it is important to keep in mind

that even the best of best practices has

a limited shelf life. The more popular a

practice becomes, the less likely it is that

adopting it will enable you to outperform

your competitors. A similar dynamic often

occurs in sports. In football, for example,

when Bill Walsh became head coach of the

National Football League’s San Francisco

49ers in 1979, he implemented and popu-

larized an innovation known as the West

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Coast offense. With the West Coast offense,

Walsh led the 49ers to Super Bowl champi-

onships after the 1981, 1984, and 1988

seasons. The team went on to win two more

Super Bowls under George Seifert, but the

distinctiveness of the benefits associated

with the West Coast offense started declin-

ing after other teams began hiring coaches

who had worked as assistants to Walsh

and those coaches implemented similar

schemes with their new teams. As micro-

oxygenation is to wine, so the West Coast

offense was to football.

The key is to find a best practice early,

while it is still in use only by a small number

of organizations. For example, while most

mergers and acquisitions fail, research has

shown that a practice known as staged in-

vestment can significantly increase their

likelihood of success. Staged investment in-

volves entering into a strategic alliance with

the partner before eventually buying it.

Although this technique significantly

decreases the odds of merging with the

wrong company, only 1% of buyers are cur-

rently taking advantage of it. A potential

explanation is that staged investment delays

the synergy creation process. Therefore,

companies prefer to make outright acquisi-

tions — that often end up as failures.

As is the case with so many things, the

successful use of best practices is found in

moderation: Be selective about which

practices you choose to follow, and be real-

istic about the returns you will achieve. The

right best practices can help improve your

performance, but they alone cannot turn

you into an outstanding performer.

Jérôme Barthélemy is a professor of strategy
and management at ESSEC Business School
in Paris. His book Libérer la Compétitivité
(Unleash Your Company’s Competitive Spirit)
(Pearson, 2016) received France’s best
management book award in 2017. Comment
on this article at http://sloanreview.mit
.edu/x/59325.

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Spring 2018 Issue
Why Best Practices Often Fall Short
Why Best Practices Often Fall Short
What’s Really the Best?
Hidden Costs
About the Author