After more than three decades in the working world I can strongly state that MBA thinking can ruin a business. I say this as a proud MBA myself (go CU Buffs!). What leads me to say this?

You Can Only Manage What You Can Measure is Bollocks

Almost all graduate business school programs teach MBAs how to extract additional value out of existing businesses through management. Management of what? Generally speaking, the “numbers.” I have heard – and I bet that you have, too – numerous business leaders over the years tout, “You can only manage what you can measure.” And it is this that is the crux of my thesis. Namely, that this assumption is bollocks, and that it leads to an overemphasis of a particular type of analysis and decision-making. In short, I liken MBA thinking to the classic yarn of the person looking for lost keys under streetlight after losing them at night, not because that is where they lost them, but because that is where the light is.

Where is MBA Thinking Damaging?

1. Qualities are undervalued by MBAs.

It is my belief that a typical MBA net present value analysis is likely to undervalue most qualities. Anyone who has ever managed people knows that quantities only some of the time measure the qualities of the people with whom you work and whom you manage. Some employees have a knack for boosting the morale of an entire team. Some are the folks on your team that come up with most of the innovative ideas. Some are the ones that anticipate what is missing from a line of dialogue and raise the issues before they become problems.

These may ultimately show up in the team’s performance, but on an individual basis they are difficult to measure. So, if a business is struggling during an economic downturn it is easy to overlook the value of the intuition of a team member when weighed against her or his salary.

This is also true of goods that are difficult to value. For example, what is the value of clean air and water to someone? Or asked slightly differently, how much unclean air and water is someone likely to tolerate? Taken out of the realm of externalities, what is the value of a product like the smiles on the faces of your family when you have taken them to a theme park?

2. Expenses can only be reduced so far.

Expenses are measured very precisely at most businesses. They know the cost of the products they sell. They know how much money it takes to keep the lights and computers on. They know the prices of different internet service providers. They know the rent expense of the office furniture. And so on.

MBAs obsess over and excel at wringing out efficiency in a business. After all, their tools work best when numbers are explicit as they are with most expenses. To the company, often led by a MBA reduced expenses look like higher net profits, higher earnings per share ceteris paribus.

But here is the problem, expenses can only be reduced so far. Employees do need electricity. They do need computers. Oh, and a business needs at least one employee. Efficiency gains wrung out by an MBA can approach $0.00 in some categories, but in others they cannot.

If expense cutting is taken too far morale may collapse. Customers may notice the shoddy quality in new products made with poorer raw materials. They may also notice that customer service has declined over the years. Thus, the EPS boost that was rewarded from expense savings several years ago now is hurting performance. Also, now that several years have passed is it as easy to excavate the causes of decline? Probably not.

3. Revenues are why you are in the business.

Don’t get me wrong. I think the razor sharp analysis done by MBAs in many domains makes sense. I like wringing out marginal profit dollars from expense savings. I like keeping the eye on performance and believe it is necessary. But I also know that the tools wielded by most MBAs are not designed to increase revenues.

How to keep and win customers and log an increase in revenues year after year is the real art of managing a business. By comparison, expense savings is easy. Ultimately, the customer is the primary reason that businesses exist. No customers = no business. And, by the way, this is exactly why an income statement’s first line is revenues and not an expense.

But MBA thinking is mostly about saying ‘no’ to uncertain things and ‘yes’ to certain things. Yet, next year’s revenue is not as certain as the cost of an ad campaign running on social media. To maintain the bottom line, the MBA is likely to want to dial back ad spending because its benefits are indirectly felt and not directly measured. Want to know where the most savvy statisticians are within most firms? They are in the marking department. Why? Because they have for decades had to convince MBAs of the value of their work.

My colleague Michael Falk, CFA, CRC and I have had the third episode of our podcast From the Research Chair – Portfolio Construction last week. Check it out on our YouTube channel, and subscribe.

4. Competing over the long term is a future looking activity.

I have for 10 years now (see my book The Intuitive Investor) said that there is no such thing as a future fact. Facts, by definition, are things that occurred in the past. But, also by definition, all of the results of the business that we care about occur in the future. What this means is that if MBA thinking has come to dominate your culture that likely there is an obsession with what has occurred in the past, as opposed to what needs to, or just might occur in the future. Successfully competing over the long term is a future looking activity for businesses. Said succinctly, when driving a car we cannot get to where we want to go by looking in the rearview mirror. CRASH.

5. Frequently anti-innovation.

It should be obvious by now that MBA thinking can also be the death knell for innovation at a firm. If all of the powers of imagination are spent imagining what might go wrong, or how much things cost, rather than what might go right, or how much revenues may materialize, then it is a prescription for being an also-ran company.

Ditto for the research and development department what I said about the marketing department. If the lead time on new products extends beyond the budgeting and earnings cycle then R&D efforts are likely vulnerable to being axed at the first sign of earnings-decline smoke, rather than in the presence of a full on fire. Not surprisingly, R&D departments also employ teams of capable statisticians to keep at bay the MBA.

There are other arenas where MBA thinking is also damaging to business. However, one of them specifically is a $billion secret and I will not surrender it for free in a blog post.

What Can Be Done?

To keep in check MBA thinking and to get the most benefit from it, what can be done?

Listen

For starters, listen. In meetings listen for ideas that make you, a team, or others in the organization uncomfortable. Chances are these discomfiting ideas have identified the nebulous squelching forces that are the purview of MBA thinking. If, in response to this idea, the weight of the discussion is on what can go wrong, and if you are a leader, demand that energies be spent imagining what could go right, too.

Measure Qualities, Too

Qualities may also be measured, but many organizations have not spent as much time identifying the qualities they prefer in employees or in outcomes. Consequently, qualities also are poorly measured, or not at all. Psychographics is the marriage of statistics with psychological qualities. Hire those trained in psychographics in your human resources department, as well as in the finance department. Insist that quality also factor into decision making.

Hire the Right MBAs

MBAs can be a valuable asset to a firm. Just know what you are getting. There are MBAs who wield their tools robotically, and often authoritatively (after all, data is authoritative). Then there are those MBAs that have this skill set, but humbly recognize that the real world is a bit more complicated. Interview for this when hiring MBAs. Ask them their philosophy of business. Listen for how they incorporate uncertainty into their thinking. If their answers do not directly address uncertainty count that as a strike against them. If you want to give them another chance, then ask them specifically how uncertainty factors into their decision making. If the answer mentions probabilistic equations and such, then you know that, again, you are about to hire an android, not a human.

Contact me so that I can help your investment firm. I make my living as a consultant, not as a writer. My job is to help you and your investment team get better.