Leaders—Be Wary of Magical Thinking
I talk quite a bit on the Saturday Morning Muse and my other show, The Balancing Act Podcast, about the underlying drivers of employee dissatisfaction and disengagement. In my experience, a top driver of disengagement is what we’ll call leadership magical thinking.
Magical thinking in business typically evidences itself as a disconnect between the capabilities, skills, and capacity of the teams that are actually doing the day-to-day work of the business, and what management believes are the capabilities, skills, and capacity of those same teams. I use the term ‘magical thinking’ because management’s belief structure regarding skill and capability is seldom rooted in facts, and is instead informed by gut feel, performance expectations that are grounded in what the leader believes they could do if they were still on the front lines, and inappropriate comparisons with team productivity from competitors and industry averages. For more on this “expectations trap,” see my Muses from December 9, 2023, and January 6, 2024.
One of the best examples of magical thinking I can provide is the age-old tussle between senior leadership and functional area leaders during the annual budgeting process. During budget season at many companies, functional area leaders build their budgets from the ground up to accomplish the goals that senior leadership determines as part of their annual long-range planning exercises. Functional area leaders are the best team members to lead this work because the know (or should know) their current-state capacity constraints, competency/skill portfolios, productivity metrics, and resource pools. They look carefully at market conditions, productivity, and expense/revenue run rates with the help of their work partners in finance, management accounting, sales/marketing and other departments to derive forecasts for the budget period under consideration. Put simply, functional area leaders are closest to the work at hand and know the most about the reality that surrounds it.
After a great deal of effort, functional area leaders submit these ground-up budgets to the office of the CFO, whose team then does a ‘roll-up’ of all such submissions across the entire organization. Robust discussions occur between functional area leaders and members of the c-suite to defend, cross-check, validate, and educate on each submission, and to request investment funds for new initiatives and innovations to support the long-range plan and expected organizational growth initiatives. After a period of intense negotiation and high-pressure presentations, the organic roll-up is evaluated by a subset of the c-suite (likely the executive committee) before it goes for final approval at the board level. This stage of the process is usually performed behind closed doors and these final validation discussions are a mystery to the functional area leaders who submitted the work.
Weeks go by—sometimes many weeks transpire—before functional area leaders learn about the final budget that was approved by the board and/or the executive committee. These approved budgets are then ‘handed down’ to functional area leaders and they seldom return to their source in the same condition in which they were submitted. The conversations regarding the changes that were made to the original submissions typically go something like this: “we believe your team can do better, so we increased your revenue projections by 5%,” or “industry standards from some completely unrelated industry tell us that your department can operate more efficiently, so we’ve cut your expense budget by 10% across the board,” or—and this one’s a doozy—”you submitted an operating income forecast for your division of $25 million, but we need $28 million from you. Go get it.” Ugh.
Upon hearing the news of these ‘do better’ admonishments, functional area leaders and their teams mutter under their breath “so you want us to innovate and grow, but how on earth are we supposed to do that with an expense budget that just got cut by 10%,” or “where’s the extra $3 million going to come from? Thin air?” In many cases, the magical thinking and demands of senior leadership put colleagues who are on bonus plans under water before the new year has even started, or create an environment where achieving their numbers to earn a bonus becomes significantly more difficult. When functional area leaders screw up the courage to push back and ask how they’re supposed to make a magical stretch goal happen, common responses include: “you’ll figure it out,” or “we have faith in you,” or “you’ve outperformed before, you can do it again!”
So how can we reduce the amount of magical thinking that occurs in business? Improve alignment and visibility up, down, and across the organization. Improving alignment is everyone’s responsibility. Functional area leaders must improve the transparency of their operations and ensure that senior leadership is getting the full picture of what’s going on—the good, bad, and the ugly. In many cases, senior leadership has been conditioned to ask for budget do-betters because functional area leaders routinely sandbag their numbers and/or prevent senior leadership from seeing what’s really going on in their part of the organization.
On the other side, senior leaders must go to the gemba—to where the work happens—to meet their people, review processes, ask questions, listen to challenges, be supportive and compassionate in driving positive change, and authentically connect with team members from all departments. They must also exhibit courage when the board asks for a do-better and they know from the data that’s been submitted that a do-better is highly unlikely. Be realistic. Push back and have the backs of your colleagues.
As a leader, do you want to foster a culture of trust balanced with accountability? Stop engaging in magical thinking. Believe in your people and stop second-guessing them. Managers, do you want to foster a culture of trust balanced with accountability? Take down the walls of obfuscation you’ve erected around your functional area, stop sandbagging the numbers, and let senior leadership see the full story—not just the rosy stories that are easy to tell.
