Consulting

It’s not Rocket Science – What you Measure Defines how People Behave

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A while back I wrote a post titled, “To Measure is to Know.”  

Picture showing an astronaut floating in space above Earth

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, as well as compensation plans that you submit as a Manager, 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 KPIs (key performance indicators) and MBOs (Management by Objectives), but it doesn’t always work. 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, revenue, and profits (three related items that should be measured). This can also drive steady cash flow by constantly closing within certain periods (usually months or quarters) and focusing on models that create the desired revenue stream (e.g., perpetual license sales versus subscription license sales). What could be better than that?

Successful salespeople focus on the areas of their comp plan where they have the greatest opportunity to make money. Presumably they are selling the products or services that you want them to based on that plan. MBO goals can be incorporated into plans as a way to drive towards 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 with properly constructed compensation plans that means their own business is prospering. It needs to be a win-win setup.

But, give a salesperson a plan that is poorly constructed and they will likely find the ways to personally win with deals that are inconsistent with company growth goals (e.g., paying commission based on deal size, but not factoring in profitability and 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 was motivated to deliver quality work products in a timely manner, help each other, and do things that promoted growth of the company. The company prospered and my team made good money making that happen. Another win-win scenario.

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. Those tools and procedures increased efficiency, consistency, and quality. They also made it easier to on-board new employees and to incorporate an outsourced team for larger projects.

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, without some risk there is usually little reward, so accept the fact that some risk must be taken to find the point where the optimal behavior is fostered and then make plan adjustments accordingly.

It can be challenging and time consuming to identify the right things to measure, the proper 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, if you want your business to grow and be healthy it is something that needs to be done well.

This type of work isn’t rocket science, and therefore is well within everyone’s reach.

Are you Visionary or Insightful?

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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 towards your goals. This post is about Dreaming Big, and then turning those dreams into actionable plans.

Let me preface this post by stating that both are important, and both are complementary roles. But, when you don’t recognize the difference between the two it becomes much harder to successfully execute and realize value/gain a competitive advantage.

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.

A picture of a road at night, with headlights illuminating the center of the road. The part of the road closest to the viewer is marked common sense, because it is right in front of you. Further down, in the center, the road is marked insight. It requires focus to be insightful. To the upper left in a darkened section just off the road there is writing that states,

I find it 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 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 truly visionary looks beyond what is already illuminated and can therefore be detected or analyzed. It’s like a game of chess where the visionary person is thinking six or seven moves ahead. They are connecting the dots for the various future possibilities while their competitor is 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 often 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.
  • The insightful person that wants to make a difference can feel constrained in environments that are static and offer little opportunity for change and improvement.

Both Insightful and 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 fostering a culture of innovation and placing these people together to work towards a common goal. Providing a small amount of time and resources to explore an idea can lead to amazing outcomes. 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 having 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. Supporting efforts like these provide opportunities to grow – people, products, and profits.

The Importance of Proper Pricing

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picture showing several bundles of money

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), the inability to attract and retain the best talent, as well as creating a situation where you will no longer have the opportunity to reach your full potential.

These problems apply to companies of all sizes – although large organizations are often in a better position to absorb the impact of bad pricing decisions or sustain an unprofitable business unit. Understanding all possible outcomes is an important aspect of pricing as it related to risk and risk tolerance.

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 that didn’t work. Unfortunately, this approach is something you see all too often in businesses today.

In our case we only began to grow once we increased our prices (about 10% more than the competition) and focused on justifying that with our expertise and the value provided. 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 management and compliance in Healthcare and Union environments that his larger and more popular competitor lacked. 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 he believed that his customers would be unwilling to pay any more than that. His lack of confidence with his own product became evident to companies interested in his solution.

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 for prospects considering his product.

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. Success breeds success!

Graph showing revenue relative to the life cycle stages of a successful business venture
Source: Entrepreneurial Finance by Leach and Melicher (3rd Ed.)

In another example I worked with the Product Manager of a large 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.”

Graph showing cost volume profit analysis
Sample cost-volume-profit (CVP) analysis

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).

My recommendations included increasing prices (which could negatively impact sales), invest in fewer releases per year, or find a more cost-effective way of releasing those products. Without this analysis their “business as usual” approach 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 also drive profitability. Proper pricing can help drive profitability, and having excess profits to invest 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 the long-term risk created for their suppliers. Those same “frugal” companies expect to make a profit on their own business, so it is unreasonable to expect anything less from own suppliers.

My feeling is that, “Not all business is good business” so it is better to walk away from bad business in order to focus on the business that helps your company grow and be successful.

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. It addresses the many complexities of pricing and is truly an invaluable reference.

In a future posts I will write about 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 analytical approach helped our business double in revenue without doubling in size.

There are many causes of poor pricing, including: Lack of understanding of cost structure; Lack of understanding of the value provided by a product or service; Lack of understanding of the level of effort to create, maintain, deliver, and improve a product or service; 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.

Connecting the Dots Faster

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Picture of bridge with many lights representing dots.

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 then connect the dots faster.” This is a great skill for anyone to have regardless of the industry or business.

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 they add a dimension that I believe allows a person to be far more effective and potentially much more valuable because it leads to having 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 by “thinking outside the box.” Additional knowledge and skills almost always help us become more effective, regardless of what we may be doing.

Increased knowledge, combined with a desire to do amazing things, creates opportunities to make a huge and immediate impact. Sometimes it is because you are asking the questions that others may be thinking but simply cannot articulate in a clear manner. 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 one single best way to learn. Understanding how you learn best will help you learn faster.

I’m a fan of reading. A good book may reinforce ideas you already know, may 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. Just don’t become one of those people who changes their beliefs and approach with every book they read (or what I refer to as “The book of the month club manager.“)

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). My advice to people is to work towards a specific degree because it is important as a personal goal, and because it could possibly help you get a different or better job in the future. I will never criticize anyone for learning, going to school, or getting another certification or degree.

My personal belief is 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.

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 expanding 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 bit of serendipity both enhanced my learning experience and helped me make better decisions that had real implications to my business. The funny thing was that I was actually working on that degree to raise the bar for my own children, so for me this was just a bonus.

There are also other great ways to learn – ways that are only require an investment of your time. There are many good free online courses. If there is something you are interested in learning or need to know more about, there is almost always a place to find free or low cost training. These are great investments in yourself and your future, and may help you learn to connect those dots faster.

Below are links to a few good 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!

edX

Khan Academy

OpenCulture (directory with content from multiple sources)

Open Education Database (directory with content from multiple sources

Alison

To Measure is to Know

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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.