Five mistakes to avoid with simple rules

Simple rules are a practical tool to guide choices, balance flexibility with structure, and improve coordination in organizations. To implement the tool, managers create a set of rules to guide a key process. Simple in principle, but tricky in practice. Over the past decade I have worked with dozens of companies which adopted simple rules, and identified recurrent mistakes that derail simple rules. Managers who recognize these common pitfalls can avoid them.

• Too broad. Managers often confuse a company’s guiding principles with simple rules. HP’s core values, for example, include overarching principles like “we focus on a high level of achievement and contributions” and “we encourage flexibility and innovation.” These are worthy ideals to be sure, but they are not simple rules. These principles apply across every process within the company, from purchasing to customer service. Simple rules, in contrast, are tailored to a specific process. Rules to guide capital budgeting would not work for new product development or vice versa. Broad values may underpin a healthy culture, but they provide little concrete guidance for employees trying to evaluate a join-venture partner or decide whether to enter a new market.

• Too vague. Some rules apply to a single process, but lack the concreteness necessary to guide choices. Consider a Western bank that entered Russia after the Berlin Wall fell. Executives issued guidelines for screening investment proposals, that included: “all deals must be currently undervalued” and”all deals must offer potential for long-term capital appreciation.” Imagine the plight of a junior associate attempting to use these vague rules to screen investment proposals–all they have learned is to avoid investments that they know in advance are overpriced and lack upside. Another investment firm competing in Russia at the same time also relied on simple rules, but theirs provided concrete guidance. Target companies needed to have “at least $100 million in revenues,” and “if the typical Russian family had an extra $100 per month, they would spend it on this product or service.” These rules clearly delineated the minimum size of investment and focused attention on opportunities that served Russia’s pent-up consumer demand.

• Too many. The number of simple rules matters. Its best to have enough to guide a process while avoiding a proliferation of rules that squelch flexibility. In the late 1990s, one investment bank issued a handbook of rules for its professionals to guide interactions with clients. The booklet included several chapters including basic attire, appropriate conversations, telephone etiquette, elevator etiquette, basic hygiene, restroom behavior (don’t ask). The dozens of rules included ones stating that “dress shirts should always be neatly pressed, long sleeved, and made of an opaque fabric” and “seemingly innocuous habits, such as rocking back and forth, playing with hair, and constantly adjusting clothing–can be detrimental to professional image.” The number of simple rules that work typically range between three and seven.

• Too generic. Managers sometimes see that a set of rules works well in another company, and attempt to transplant those rules verbatim to their own organization. The best rules, however, are tailored to a specific process, within a specific company, at a distinct point in time. During the 1990s, both Cisco and Ispat International (the predecessor company to Mittal Steel), used simple rules to guide their acquisitions, but their rules reflected their very different contexts. Cisco looked for start-ups with approximately 75 employees, backed by credible venture capitalists, and located in Silicon Valley. Ispat’s rules favored established state-owned steel plants running at a loss, using direct reduced iron and electric arc technologies, anywhere in the world. Managers cannot blindly copy another firm’s successful formula.

• Too mindless. Employees often follow implicit rules of thumb when making choices. Leaving simple rules unexamined, however, often allows mindless ones to persist. The executives at one high tech company examined their historical partnership relationships to surface the implicit rules that guided pas decisions. To their chagrin, they learned that two rules seemed to guide their choice of partners: Always form partnerships with small, weak companies that we can dominate, and always team up with companies in decline. By surfacing implicit rules and examining them, managers can identify and upgrade dysfunctional ones.

This post concludes my series on simple rules.