A while back I wrote a post titled, To Measure is to Know. That is only part of the story, so please read on.
The other side of the coin is that what you measure defines how people behave. This is an often forgotten aspect of Business Intelligence, Compensation Plans, Performance reviews, and other key areas in business. While many people view this topic as “common sense,” based on the numerous incentive plans that you run across as a consultant it seems that is not the case.
Is it a bad thing to have people respond by focusing on specific aspects of their job that they are being measured on? That is a tough question. This simple answer is, “sometimes.” This is ultimately the desired outcome of implementing specific key performance indicators (KPIs), but it doesn’t always work. So, let’s dig into this a bit deeper.
One prime example is something seemingly easy yet often anything but – Compensation Plans. When properly implemented these plans drive organic business growth through increased sales and revenue (both likely items being measured), as well as drive steady cash flow by constantly closing within certain periods (usually months or quarters). What could be better than that?
Salespeople focus on the areas where they have the greatest opportunity to make money. Presumably they are selling the products or services that you want them to based on their comp plans. Additionally, certain MBO (management by objective) goals are presumably focused on positive outcomes that are important to the business, such as bringing-on new reference accounts. Those are forward looking goals that increase future (as opposed to immediate) revenue. In a perfect world, with perfect comp plans, all of these business goals are codified and supported by motivational financial incentives.
Some of the most successful salespeople are the ones that primarily care only about themselves. They are in the game for one reason – to make money. Give them a plan that is well constructed and allows them to win and they will do so in a predictable manner. Paying large commission checks should be a goal for every business, because when they are doing that their own business is prospering.
But, give a salesperson a plan that is poorly constructed and they will likely find ways to personally win in ways that are inconsistent with company growth goals (e.g., paying commission based on deal size, but not factoring in the overall impact of excessive discounts). Even worse, give them a plan that doesn’t provide a chance to win and the results will be uncertain at best.
Just as most tasks tend to expand to use all time available, salespeople tend to book most of their deals at the end of whatever period is being used. With quarterly cycles most of the business tends to book in the final week or two of the quarter – something that is not ideal from a cash flow perspective. Using shorter monthly periods may increase business overhead, but the potential to significantly increase business from salespeople working harder for that immediate benefit will likely be a very worthwhile tradeoff.
What about motiving Services teams? What I did with my company was to provide quarterly bonuses based on overall company profitability and each individual’s contribution to our success that quarter. Most of our projects used task oriented billing where we billed 50% up-front and 50% at the time of the final deliverables. You needed to both start and complete a task within a quarter to maximize your personal financial contribution, so there was plenty of incentive to deliver and quickly move to the next task. As long as quality remains high this is a good thing.
We also factored-in salary costs (i.e., if you make more than you should be bringing-in more value to the company), the cost of re-work, and non-financial items that were beneficial to the company. For example, writing a white paper, giving a presentation, helping others, or even providing formal documentation on lessons learned added business value and would be rewarded. Everyone had the right motivation, performed work and delivered quality work products as needed, and made good money doing so.
This approach worked very well for me, and was continually validated over the course of several years. It also fostered innovation, because the team was always looking for ways to increase their value and earn more money. Many tools, processes and procedures came out of what would otherwise be routine engagements.
Mistakes with comp plans can be costly – due to excessive payouts and/or because they are not generating the expected results. Back testing is one form of validation as you build a plan. Short-term incentive programs are another. Remember, where there is not risk there is little reward, so accept the fact that some risk must be taken to find the point where the optimal behavior is fostered.
It can be challenging and time consuming to identify the right things to measure, the right number of things (measuring too many or too few will likely fall short of goals), and provide the incentives that will motivate people to do what you want or need. But it is definitely worthwhile work if you want your business to grow and be healthy.
This type of work isn’t rocket science, and therefore is well within everyone’s reach.
Let me preface this by saying both are important in business, and both are complementary roles. But, if you don’t recognize the difference it becomes much harder to execute and realize value / gain a competitive advantage. Having great ideas that are not understood or validated is pointless, just as being great at “filling in the gaps” to do amazing things does not accomplish much if what you are building achieves little. This post is about Dreaming Big, and then turning those dreams into actionable plans.
The visionary person has great ideas but doesn’t always create plans or follow-through on developing the idea. There are many reasons why this happens (distractions, new interests, frustration, lack of time), so it is good to be aware of that as this type of person can benefit by being paired with someone who is willing and able to understand a new idea or approach, and then take the next steps to flesh out a high-level plan to present that idea and potential benefits to key stakeholders.
The insightful person sees the potential in an idea, helps others to understand the benefits and gain their support, and often creates and executes a plan to prototype and validate the idea – killing it off early if the anticipated goals are unachievable. They document, learn from these experiences, and become more and more proficient with validation of the idea or approach and quantification of the potential benefits. Neither of these types of people are affected by loss aversion bias.
It’s amazing how frequently you hear someone referred to as being Visionary, only to see that the person in question was able to eliminate some of the noise and “see further down the road” than most other people. While this is a valuable skill to have, it is more akin to analytics and science than art. Insight usually comes from focus, understanding, intelligence, and being open minded. Those qualities are important in both business and personal settings.
On the other hand, someone who is visionary looks beyond what is already illuminated and can be detected or analyzed. It’s like a game of chess, and the visionary person is thinking six or seven moves ahead. They are connecting the dots while others are still thinking about their next move.
The interesting thing is that this can be very frustrating situation for everyone. The person with the good idea may become frustrated because they feel that they are misunderstood or ignored. The people around that visionary person become frustrated, wondering why that person isn’t able to focus on what is important or why they fail to see / understand the big picture. Those visionary ideas and suggestions are viewed as tangential or even irrelevant. It is only over time that the others understand what the visionary person was trying to show them – often after a competitor has started to execute on the idea. And, the insightful person that wants to make a difference can feel constrained in environments that are static and have little opportunity for change.
Both the insightful person and the visionary people feel that they are being strategic. Both are focused on doing the right thing. Both have similar goals. That’s what is truly ironic. They may view each other as the competition, rather than seeing the potential of collaborating. This is where a strong management team can have a positive impact by putting these people together and providing a small amount of time and resources to explore the idea. When I had my consulting company I sometimes joked, “What would Google do?”
The insightful person may see a payback on their ideas much sooner than the visionary person, and I believe that is due to their focus on what is already in front of them. It may be a year or more before what the visionary person has described shifts to the mainstream and into the realm of insight – hopefully before it reaches the realm of common sense (or worse yet, is completely passed by).
My recommendation is that people create a system to gather ideas, along with a description of what the purpose, goals, and advantages of those ideas are. Foster creative behavior by rewarding people for participation, whether or not the ideas are used. Then, review those ideas on a regular basis. With any luck you will find some good ideas – some insightful and possibly some even visionary. Look for commonalities and trends to identify the people who are able to cut through the noise or see beyond the periphery, and the areas with the greatest potential for innovation. This approach will help drive your business to the next level.
You never know where the next good idea will come from, and supporting efforts like these provide opportunities to grow – people, products, and profits.
In my last post I discussed the importance of proper pricing for profitability and success. As most people know, you increase profitability by increasing revenue and/or decreasing costs. But, cost reduction doesn’t have to mean slashing headcount, wages, benefits, or other factors that could negatively affect morale and ultimately quality and customer satisfaction. There is often a better way.
The best businesses generally focus on repeatability, realizing that the more that you do something – anything, the better you should get at doing it. You develop a compelling selling story based on past successes, develop a solid reference base, and have identified the sweet spot from a pricing perspective. People keep buying what you are selling, and if your pricing is right there is money available at the end of the month to fund organic growth and operational efficiency efforts.
Finding ways to increase operational efficiency is the ideal way to reduce costs, but it does take time and effort to accomplish. Sometimes this is realized through increases in experience and skill. But, often optimization occurs through standardization and automation. Developing a system that works well, consistently applying it, measuring and analyzing the results, and then making changes to improve the process. An added benefit is that this approach increases quality as well, making your offering even more attractive.
Metrics should be collected at a “work package” level or lower (e.g., task level), which means they are related tasks at the lowest level that produce a discrete deliverable. This is a project management concept, and it works whether you are manufacturing something, building something, or creating something. This allows you to accurately create and validate cost and time estimates. And, when you are analyzing work at this level of detail it becomes easier to identify ways to simplify or automate the process.
When I had my company we leveraged this approach to win more business with competitive fixed price project bids that provided healthy profit margins for us while minimizing risk for our clients. Larger profit margins allowed us to fund ongoing employee training and education, fund innovation efforts, fund international expansion, and experiment with new things (products, technology, methodology, etc.) that were fun and often taught us something valuable. It was only possible because of our focus on doing everything as efficiently and effectively as possible, learning from everything we did– good and bad, and having a tangible way to measure and prove that we were constantly improving.
Think like a CEO, act like a COO, and measure like a CFO. Do this and make a real difference in your own business!
Pricing is one of those things that can make or break a company. Doing it right takes an understanding of your business (cost structure and growth / profitability goals), the market, your competition, and more. Doing it wrong can mean the death of your business (fast or slow), not being able to attract and retain the best people, and not having the opportunity to work to your full potential. These problems apply to companies of all sizes – although large organizations can absorb bad pricing decisions or sustain an unprofitable business much easier than small ones.
When I started my consulting company in 1999 the plan was to win business by pricing our services 10%-15% lower than the competition. It was a bad plan and it didn’t work. Unfortunately, this approach is something you see all too often in businesses today. In our case we didn’t start to grow until we increased our prices (about 10% more than the competition) and focused on our expertise and value. We were (correctly) perceived as being a premium alternative, and that positioning helped us grow.
Several years ago I had a management consulting engagement with a small software company. The business owner told me that they were, “an overnight success that was 10 years in the making.” His concern was that they might not be able to capitalize on recent success so he was looking for an outside opinion.
I analyzed his business, product, customers, and competition. His largest competitor is the industry leader in this space, and products from both companies were evenly matched from a feature perspective. My client’s product even had a few key features that better for Healthcare and Union environments. So, why weren’t they growing faster?
What I found is that competition was priced 400% higher for the base product. When I asked the owner, he told me their goal was to be priced 75% – 80% less than the competition. He could not explain why he did this, other than to state that his customers would be unwilling to pay any more than that. In many cases he lost head-to-head competition against that competitor, but almost never on features. Areas of concern were generally on the size and profitability of the company, and the risk created by each.
I shared the graph (below) with this person, explaining how proper pricing would increase their profitability and annual revenue, and how both of those items would help provide customers and prospects with confidence. Moreover, this would allow the company to grow, eliminate single points of failure in key areas (Engineering and Customer Support), add features, and even spend money on marketing.
In another example I worked with the Product Manager of a larger software company who was responsible for producing quarterly product package distributions. This work was outsourced and each build cost approximately $50K. I asked a simple question, “What is the break-even point for each distribution?” That person replied, “There really isn’t a good way to tell.”
By the end of the day I provided a Cost-Volume-Profit (CVP) analysis spreadsheet that showed the break-even point. Even more important, it showed the contribution margin and demonstrated there was very little operating leverage provided these products (i.e., they weren’t very profitable even if you sold a lot of them). The recommendations made were to increase prices (which could negatively impact sales) and/or make fewer releases per year, or find a more cost-effective way of releasing products. Without this analysis “business as usual” would have likely continued for several years.
Companies are in business to make money – pure and simple. Everything you do as a business owner or leader needs to be focused on growth. Growth is the result of a combination of factors, such as uniqueness of product or services provided, quality, reputation, efficiency and repeatability. Many of these are the same factors that drive profitability. Pricing can help drive profitability, so as you can see pricing can significantly impact growth.
Some customers and prospects will do everything possible to whittle your profit margins down to nothing. They are focused on their own short-term gain, and not on their long-term risk. Companies that are not profitable generally lack longevity. Those same companies expect to make a profit on their business, so it is unreasonable to expect anything different from suppliers. My feeling is that, “Not all business is good business” so it is better to walk away from bad business and focus on the business that helps your company grow.
One of the best books on pricing that I’ve ever found is, “The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making” by Thomas T. Nagle and Reed K. Holden. This is an extremely comprehensive and practical book that I recommend to anyone responsible for pricing or who has P&L responsibility within an organization. This addresses the many complexities of pricing and is truly invaluable.
In a future post I will discuss the metrics that I use to understand efficiency and profitability. Metrics can be your best friend when it comes to finding ways to optimize pricing and maximizing profitability. This can help you create a systematic approach to business that increases efficiency, consistency, and quality.
At my company we developed a system where we know how long common tasks would take to complete, and had efficiency factors for each consultant. This allowed us to create estimates based on the type of work and the people most likely to work on the task, and fix bid the work. Our bids were competitive, and even when we were the highest priced bid we often won because we would be the only (or one of the few) companies to guarantee prices and results. Our level of effort estimates were +/- 4%, and that helped us maintain a 40%+ minimum gross margin for every project. This approach helped our business double in revenue without doubling in size.
There are many causes of poor pricing, which include: Lack of understanding of cost structure; Lack of understanding of the level of effort; and lack of concern for profitability (e.g., salespeople who are paid on the size of the deal, and not on margins or profitability). But, with a little understanding and effort you can make small adjustments to your pricing approach and models that can have a huge impact to the bottom line of your business.
When I started consulting an experienced consultant told me, “The best Consultants are experts at becoming Experts.” I started my consulting career with that goal in mind. After a few years realized that, “Good consults are people who can learn enough quickly to ask intelligent questions and connect the dots faster.” What you quickly learn in business is that this is a great skill for anyone to have.
It’s impossible to be an expert at everything. I believe that it is important to have great depth in a few areas (true expertise), and breadth of knowledge in many areas (enhancing context and insight). Both types of knowledge alone are valuable, but combined add a dimension that I believe allows a person to be more effective and potentially much more valuable. You develop the ability to pick-up on the dependencies and nuances that others miss.
Just think – How much more effective a salesperson is that understands technology and project management concepts when working to demonstrate fit and create a sense of urgency. Or, an Attorney that understands the complexity of service offerings and delivery – enhancing their ability to construct agreements that are highly protective yet not overly complex or onerous. Or, a programmer that thinks beyond the requirements and looks for ways to improve or simplify the process. Extra knowledge helps with the big picture understanding, and that often leads to providing more value. Additional knowledge and skills helps us become more effective, no matter what we may be doing.
Increased knowledge, combined with a desire to do amazing things, creates opportunities to make a huge impact. Sometimes it is because you are asking the questions that others may be thinking but cannot clearly and simply articulate. It helps you see the gaps and holes that others miss. And most importantly, it helps you “connect the dots” before others do (often many months before something obvious to you becomes obvious to others). A large consultancy once used the phrase “seeing around corners” as their attempt to make this concept tangible.
So, if you buy into the concept that knowledge is good, the next question is usually, “What is the best way to learn?” People learn in different ways so there really is no best way to learn. Understanding how you learn best helps you learn faster.
I’m a fan of reading. A good book may reinforce ideas you already know, introduce you to a few concepts or ideas that seem like they could help (giving you something to test), and often present many ideas that you know or feel just won’t work. Even bad books can have their value. Just don’t become one of those people who changes their beliefs and approach with every book they read.
I’m also a fan of hands-on learning. The experience of doing something the first time is important. Keeping detailed notes (what works, what doesn’t make sense and what you did to figure it out, work-arounds, etc.) enhances the value of that experience. It’s amazing what you can learn when you “get your hands dirty.”
What about formal education? I’ve never been a fan of the person who wants to get a degree in order to get a promotion. There are certainly some professions where education is critical to success (often through legitimacy as much as anything else). I believe that the best way to get ahead is to learn the position, innovate, optimize, and then deliver incredible results. You won’t “knock it out of the park” every time, but those “base hits” will help you score and ultimately win. My advice to people is to work towards a specific degree because it is important as a personal goal, and because it might help you get a different or better job in the future.
This is not to say that formal education is bad, because I don’t believe that at all. I was working on my MBA at the same time I was extending my consulting business from the US to the UK. I had a concentration in International Business, so I could apply many things I was learning right away. This lucky coincidence enhanced my learning experience and helped me make better decisions. I was actually working on that degree to raise the bar for my own kids, so to me this was just a bonus.
There are also other great ways to learn – ways that are only require an investment of time. There are many good free online courses. If there is something you want to learn about, or need to know more about, there is almost always a place to find free or inexpensive training. These are great investments in yourself and your future, and a chance to learn to connect those dots faster.
Below are links to a few of my personal favorite free learning websites. Do yourself a favor and check them out. And, if you know of others leave a comment and recommend them to others. Enjoy!
Lord William Thomson Kelvin was a pretty smart guy in the 1800’s. He didn’t get everything right (e.g., he supposedly stated, “X-rays will prove to be a hoax.”), but his success ratio was far better than most so he did have useful insight. I’m personally a fan of his quote, “If you can not measure it, you can not improve it.”
Business Intelligence (BI) systems can be very powerful, but only when they are embraced as a catalyst for change. What you often find in practice is that the systems are not actively used, or do not track the “right” metrics (i.e., those that provide insight into something important that you have the ability to adjust and impact the results), or provide the right information – only too late to make a difference.
The goal of any business is developing a profitable business model and then executing extremely well. So, you need to have something that people want, then need to be able to deliver high quality goods and/or services, and finally need to make sure that you can do that profitably (it’s amazing how many businesses fail to understand this last part). Developing a systematic approach that allows for repeatable success is important. Pricing at a level that is competitive and provides a healthy profit margin provides the means for growth and sustainability.
Every business is systemic in nature. Outputs from one area (such as a steady flow of qualified leads from Marketing) become inputs to another (Sales). Closed deals feed project teams, development teams, support teams, etc. Great jobs by those teams will generate referrals, expansion, and other growth – and the cycle continues. This is an important concept to understand because problems or deficiencies in one area can manifest themselves in other areas.
Next, understanding of cause and effect is important. For example, if your website is not getting traffic is it because of poor search engine optimization, or is it bad messaging and/or presentation? If people come to your website but don’t stay long do you know what they are doing? Some formatting is better for printing than reading on a screen (such as multi-column pages), so people tend to print and go. And, external links that do not open in a new window can hurt the “stickiness” of a website. Cause and effect is not always as simple as it would seem, but having data on as many areas as possible will help you understand which ones are really important.
When I had my company we gathered metrics on everything. We even had “efficiency factors” for every Consultant. That helped with estimating, pricing, and scheduling. We would break work down into repeatable components for estimating purposes. Over time we found that our estimates ranged between 4% under and 5% over the actual time required for nearly every work package within a project. This allowed us to fix bid projects to create confidence, and price at a level that was lean (we usually came-in about the middle of the pack from a price perspective, but the difference was that we could guarantee delivery for that price). More importantly, it allowed us to maintain a healthy profit margin that let us hire the best people, treat them well, invest in our business, and take some profit as well.
There are many standard metrics for all aspects of a business. Getting started can be as simple as creating some sample data based on estimates, “working the model” with that data, and seeing if this provides additional insight into business processes. Then ask, “When and where could I have made a change to positively impact the results?” Keep working and when you have something that seems to work gather some real data and re-work the model. You don’t need fancy dashboards (yet).
Within a few days it is often possible to identify the Key Performance Indicators (KPIs) that are most relevant for your business. Then, start consistently gathering data, systematically analyzing it, and present it in a way that is easy to understand and drill-into in a timely manner. To measure the right things really is to know.
One of the biggest changes to my professional perspective on business came during the seven years that I was running my own consulting business. Prior to that I had worked as an employee for midsize to large companies for ten years, and as one of the first hires at a start-up technology company. I felt that the combination of doing hands-on work, managing, selling, and helping establish a start-up (where I did not have an equity stake) provided everything needed to start my own business.
Well, guess what? I was only partially correct. I was prepared for the activities of running the business, but really was not prepared for the responsibility of running a business. While this seems like it should be obvious, what I’ve seen many times since then is that small business owners usually focus the majority of their efforts on growth / upside. That type of optimism is important for entrepreneurs – without it they would not bother putting so much at risk. I will write more posts about my business ownership experiences later.
People tend to adopt a different perspective on the decision making process once they realize that every action and decision can impact the money moving into and out of their own wallet. Even in a large business you can typically spot the people who have taken these risks and run their own business. It’s more than just striking out on your own as a contractor or sole proprietor. I’m talking about the people who have had employees, invested in capital equipment, and went all-in. These are the people thinking about the big picture.
What do these people do differently than people who have not had this type of experience?
One of the biggest things is they view business in terms of “good business” and “bad business.” Not all business is good business, and not all customers are good customers. There needs to be a fair commercial exchange where both sides receive value, mutual respect, and open communication. You know this is working when your customers treat you like a true partner (a real trusted advisor) instead of a vendor. A business is in business to make money, so if the work is not profitable it is very likely that you should not be doing it. And, if you are not delivering value to an organization it is very likely that you would be better off spending your time elsewhere – building your reputation and reference base.
When you are not thinking or acting like an owner it is all about the sale and your commission. Selling products and services that people don’t need, charging too little or too much, and making promises that you know will not be met are typical signs of a person who is not thinking like an owner. Their focus is on the short-term, and they often feel that someone else will fix this once it becomes their problem.
How you view and treat employees is another big difference. Unfortunately, even business owners do not always get this. My feeling is that employees are either viewed as Assets (to be managed for growth and long-term value) or Commodities (to be used-up and replaced as needed – usually viewed as fungible and treated as if they are easily replaceable). Your business is usually only as good as your employees, so treating them well and with respect creates loyalty and results in higher customer satisfaction. Successful business owners usually look for the best person out there, and not just the most affordable person who is “good enough” to do the job. The flipside is that you need to weed out the people who are not a good fit quickly. Making good decisions quickly and decisively is often a hallmark of a successful business owner.
Successful business owners are generally more innovative. They understand the need to find a niche where they can win and provide good and/or services that are different and often better than what larger vendors offer. Sometimes this means specialization and customization, and sometimes this means more attention and better support. Regardless of what is different, these people are observant of the small details, understand their target market, and are good at defining a message that articulates that difference. These are the people that seem to be able to see around corners and anticipate both problems and opportunities. They do this out of necessity.
Former business owners are usually more conscientious about money, taking a “my money” perspective on sales and expenses. Every dollar in the business provides safety and opportunity for growth. These usually are not the people who routinely spend hundreds or thousands of dollars on business meals, or who take unnecessary or questionable trips to nice places. Money saved on things like travel or training expenses can be invested in new products, features, or marketing for an organization.
While these are commonly traits found in successful business owners, it is possible to develop them even if you have never owned a business. Do you understand the big picture vision and mission of the company that you work at? Who is your competition and how are they different? How is their messaging different? When selling, are you focused on delivering value, developing a positive reputation within that organization, and profiting on the long-term relationship? When delivering services, is your focus on delivering what has been contracted – and doing so on time and within budget? Are your projects used as examples of how things should be done within other organizations? Are you spending money on the right things – not wasteful or extravagant?
These are all things that employees at all levels can do. They will make a difference and will help you stand out. That opens the door to career growth and change. And, it may get you thinking about starting that business you have always dreamed of. Awareness and understanding are the first steps to change and improvement.