It doesn’t matter how beautiful your theory is. If it disagrees with Principles, it’s wrong. - Richard Feynman
In that simple statement is the key to Principle Based Management of Other People’s money. †
Most business departments have a set of standard operating procedures or guidelines that govern how we should respond to standard and even some not-so-standard occurrences we face throughout our workday. But what about the things that come up that aren’t covered by a rule or regulation? How do we handle those situations?
There are two schools of thought on this. The first is, if things come up for which we don’t already have a rule, we’ll simply develop a new rule. This is called “fill in the name” approach to rules. Whoever did something stupid enough to warrant the need for a new rule gets the rule named after them.
The second school of thought involves “principle-based leadership/management”—that is, trusting people in leadership positions to make good decisions even without a rule to hide behind.
While this sounds like it couldn’t possibly work, surprisingly, it works very well. But for it to work there are some caveats.
Developing principle-based management processes doesn’t start with individuals. It starts with the organization and the governance practices and framework for that organization. If the organization doesn’t buy into this governance framework, it won’t work. The organization must be confident enough with their personnel to allow them to make solid decisions based on doing the right thing.
Here's How It Works
There are many principles that affect how business is properly run. A first principle is the proper stewardship of the funds provided to teams to produce value for the firm. This stewardship is the principle of...
Fiduciary responsibility - the management of the firms expendatures in a responsible manner, so as to maximize the return from those expendatures.
No intentional waste of time, talent, and treasure.
If we look at this principle, we quickly realize it’s the basis for everything we do when developing products or services in our business, and it starts with individuals recognizing personal responsibility for the time, talent, and treasure of themselves and of the firm.
For example: In Rules Based Management, responsibility is usually the avoidance of some outcome. If I don't properly control changes to the development products, I will be in violation of our Change Control Procedure.
In Principles Based Management, the responsibility of the management and the team is understood that it is important that any decision impacts the firm's ability to maintain the proper configuration of the products and their outcomes to assure the maintainability, reliability, and operability of the outcomes of those products or services.
The management perspective goes from following the rules so you don’t get punished - to making decisions based on what’s best for the team, the firm, the customers, and the balance sheet. When you think what's in the best interest of those elements, there will be a difference in how decisions are made.
Using principles instead of rules requires more work because those deciding must stand behind their decisions. When the firm allows managers and their staffs to make decisions based on principles, it creates the freedom to make an informed judgment, based on evidence or estimates of the outcomes of that decision.
It Takes Work To Make Principle Based Decisions
Changing from Rules-Based Management to Principles-Based Management culture takes work because people are going to make mistakes when using their own judgment. It is easier to insert a rule to protect the organization. As Jack Welch says ...
Bureaucracy protects the organization from the incompetent
Welch's GE Work Out process removed the Bureaucracy to reveal the incompetent.
Principle Based Management Framework
A framework is needed for Principle-Based Management. A framework of Principles. These can be regulatory principles that cannot be ignored. DO-178-C for our flight avionics. PCI for credit card processing, HIPPA rules for medical applications. GAAP rules for finance and account. ITIL policies and procedures for any publically traded firm.
Or even higher level principles - the fundamental Principle of Microeconomics of Decision making.
Since all business operates in the presence of uncertanty, estimates are needed to assess the impact of a decision.
This principle of the basis of other Principle-Based management decisions. To NOT Estimate is to willfully Ignore a fundamental principle of business management.
† Derived from Fire and Rescue Magazine, May 2010.
