Zero Tolerance OR Materiality
Clayton (who runs Capital Camp) emailed me after I wrote about the fine line between having a zero tolerance policy towards errors versus focusing on material issues only. What, he asked, is a tolerable amount of slippage in a situation and what variables should go into making that case by case decision?
It’s a good question because there’s no good answer, but here are some considerations…
If you see a small problem, whether you address it or not probably depends on how fast it is likely to get worse and what the ultimate downside is when it does. In my previous example of small, questionable credit card charges turning into full-scale fraud if they’re not caught early, the rate of decay of the problem is exponential and the downside tremendous. Because when the thieves see that they can get away with something small, their next gambit is likely to max out the card, so zero tolerance applies.
But if a small problem is ring-fenced i.e., even if it does get bigger, it can't escape or become material, let it fester. This applies a lot in parenting where by letting a small problem persist, your kiddo usually learns how to solve it on their own terms. And does it really matter if yours is the one never wearing shoes?
A third way is to let a problem linger, but watch it like a hawk so you can intervene if it runs the risk of becoming material and spilling over. This is more time-consuming than either a zero tolerance or materiality approach, but you get some of the benefits of both. Of course, this approach can be dangerous in that it’s also egotistical. If you adopt it, it means that you think you will know the right time to step-in and be able to put something back on the rails which, you know, is the entire premise of Jurassic Park.
And a fourth is that you allow a problem to continue because you are deriving a benefit from it somewhere else and therefore are tolerating a material issue because the entire equation of variables nets to immateriality. A classic example of this is the employee that contributes greatly to the P&L and is a drag on culture…like a copywriter I once worked with who authored high ROI campaigns but also diminished the brand and berated coworkers. This one is difficult to manage because by solving the problem you are creating another problem. I think the tactic here is to celebrate the good but set benchmarks around the bad and cut bait if the negative side of the equation doesn’t show signs of improving.
But you need to decide for yourself what is and isn’t worth it.
– By Tim Hanson
