All Economics Is Local

March 26, 2015 — Leave a comment

By Bill Fotsch

Years ago, former House speaker Tip O’Neill uttered the famous phrase, “All politics is local.”  You don’t have to share Tip’s political views to know that he was on to something. In business, there’s a parallel truth: what matters most are the local economics. 

In a small company, everyone can pretty much understand the company’s basic economics, meaning how it makes money and how they contribute to that goal. But as a company gets bigger, the economics vanish into a haze. It’s hard for a product designer or financial analyst at General Motors really to see how what they do matters to the company’s performance.

But that doesn’t mean that you can’t engage people in understanding and driving the local economics.

Take General Motors again. GM’s Dayton, Ohio, brake plant has about 300 employees. It’s not hard for those employees to understand the economics of their plant and how they can improve them. By improving their local economics, they contribute to the company’s performance. It’s much the same with every unit or function in the company.

I got a great lesson in the importance of local economics when I was working with the Zambian Consolidated Copper Mine in Zambia. The company needed to generate more cash from the mine, and it needed employees to come up with ideas about how to do so. But it wasn’t immediately obvious how to get 50,000 union miners thinking and acting like owners.

So we started with five initial pilots: the concentrator, the smelter, a mine development project, a maintenance department, and the Mufulira mine. Each pilot was charged with creating initiatives that would increase the company’s cash. 

Four of the five were phenomenally successful. But the Mufulira mine was a failure. The difference? Each of the successful pilots had between 50 and 500 employees, while Mufulira had 2,000. That was just too large for the team to understand the local economics. People couldn’t see how their individual efforts could make a difference.

I also worked with Carlson Wagonlit Travel to help the company improve its results. Carlson at the time had 27 offices, ranging in size from 40 to 350 employees. We selected three representative offices as pilots and helped employees at each one understand the local economics. The three exceeded budgeted profits by 10%, 17% and 20%, in a year when none of the other 24 offices was able to hit budget. Not surprisingly, Carlson chose to roll out open-book principles to the rest of its offices.

The challenge of applying local economics was harder at Capital One, the big bank and credit-card company. Our focus was on the back office. While it was a support organization—a “cost center”—we helped employees view their unit as an independent supplier contracting with Capital One. That mindset brought the local economics alive.

The idea that all economics is local has a big payoff: the same tools that work well with small and midsize companies can work well with larger corporations. In both cases, employees can learn to understand which numbers are important and to see how they can affect results. That’s how I came to believe, like Tip O’Neill, that what matters most is what happens locally.

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