Every business leader faces the "make or buy" decision many times. He or she must answer: "what are our core competencies to be kept in-house, and what should we purchase or outsource?" Most technology businesses have evolved from the "vertically integrated" concepts of the 1960s and 1970s - where supplies were only materials and commodities -  to much more flexible and largely outsource-driven business models today. In the extreme, a few companies outsource almost everything, just taking orders and controlling the flow of finished goods from suppliers to customers.

I had an interesting debate recently with a colleague at a successful consulting firm. Their practice focuses on making management more accountable through “pay for performance,” which means if managers hit goals, they get a bigger bonus. His firm has prospered, yet the words of late quality guru W. Edwards Deming dogged me.

Let me be clear: I’m a huge proponent of accountability. Without it, nothing gets done. Yet, the most popular methods CEO’s choose today are ineffective, and often produce unintended and harmful consequences.

Management by Objective (MBO) has been widely used for years. The CEO requires the VP of sales to “grow sales by 10%,” manufacturing VP to “reduce costs by 5%,” and VP of finance to “reduce overdue accounts receivable by 7%.” Using MBO, the CEO concentrates on what, not how—the manager determines the latter. To provide incentive, the CEO promises fat bonuses for meeting goals. Management 101. Carrot and stick.

What happens next is predictable. The finance VP gets tough, demanding prompt payment and putting delinquent accounts up for collection. The VP of sales shouts as chronically late-paying but important customers get upset and cancel orders. The manufacturing VP based his production forecast on the higher sales goal and gets stuck with too much inventory at year-end. The VP of finance achieves her goal and gets her bonus, but at great expense. Tempers boil. Teamwork collapses. Sales are down and costs are up. Did the CEO get what he wanted?

Deming railed at MBO in his seminal work, Out of the Crisis. “The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good. The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.”